UPDATE 3-U.S. judge says Argentine debt payment illegal, should be returned

Fri Jun 27, 2014 7:12pm EDT

(Adds Argentine government comment)

By Nate Raymond and Joseph Ax

NEW YORK, June 27 (Reuters) - A U.S. judge on Friday called Argentina's decision to make a sovereign debt payment in defiance of a court order an "explosive action" and told Bank of New York Mellon to return the money to the government.

U.S. District Judge Thomas Griesa in New York told lawyers representing Argentina and BNY Mellon that any attempt to make payment to bondholders without complying with his court is illegal.

"It cannot be done and it will not be permitted by this court. I want the banks and all concerned to know that... This payment cannot be made and anybody who attempts to make it will be in contempt of court," said Griesa, who was appointed to the court by U.S. President Richard Nixon in 1972.

On Thursday, Argentina deposited $539 million in BNY Mellon's account at the Central Bank of Argentina intended only for bondholders who participated in two sovereign debt exchanges in 2005 and 2010. In total the government transferred $832 million for payment to various bondholders.

In a statement, Argentina's government fired back, saying Griesa was abusing his power and going beyond his jurisdiction by blocking its attempt to pay holders of its restructured bonds. It said the transferred money no longer belonged to Argentina.

"He has tried to provoke our country to default," the government's statement said, calling Griesa's decision "senseless and unheard of."

Argentina said the deposit was made in order to meet a June 30 coupon payment deadline. There is a 30-day grace period, however, before a default can be declared if exchange bondholders do not receive their money.

Argentina was ordered by Griesa in 2012 to pay holdouts, who did not participate in the debt exchange, $1.33 billion plus interest on unrestructured bonds stemming from the country's $100 billion default in 2001-2002. The order was denied a hearing by the U.S. Supreme Court on June 16, effectively upholding the holdouts' victory in the U.S. 2nd Circuit Court of Appeals.

Holdout investors are led by Elliott Management's NML Capital Ltd and Aurelius Capital Management, two hedge funds that specialize in buying up deeply discounted or distressed debt and negotiating profitable settlements, often through the use of the courts.

BNY Mellon in court confirmed Thursday's deposit was made into its account and told Griesa it was seeking to comply with his orders.

"Those funds remain in that account. Nothing more has happened," BNY Mellon's lawyer, Eric Schaffer of Reed Smith, told Griesa. The firm offered no additional comment when asked what it would do with the money in its account.

Griesa's order says Argentina cannot pay exchange bondholders without also paying the holdouts at the same time under the pari passu, or equal treatment, clause in the original bond contract.

Schaffer suggested filing an action to let the judge decide what to do with the money. Griesa said that was not needed.

"The Republic had no business making any payment to your bank in the way and for the purpose that it did. It was improper. It was a violation of court orders binding on the Republic... Your bank didn't do anything wrong," Griesa said.

"But I would think that the money should simply be returned to the Republic, simple as that," the judge said.

Separately, Griesa granted a motion from Citigroup that permits it to pay its clients holding bonds governed by Argentine law over the objections from lawyers representing the holdouts.

It was unclear how much was transferred to Citigroup's Citibank Argentina subsidiary. Robert Cohen of Dechert, lead counsel for the holdouts, said that in addition to the money deposited with BNY Mellon, another $300 million was transferred to other banks. "Some of it may be with Citibank," he said.

Griesa put off for now signing orders providing five other bondholders with rights under the pari passu clause similar to NML and Aurelius.

"Their rights aren't going to go away," Griesa said, adding that he didn't want to complicate matters at the present time.

Holders of euro-denominated restructured bonds were denied a request exemption from the court's injunction because they say their payments are made outside of the U.S. banking system. Griesa said Argentina submitted to the jurisdiction of the court when it originally sold the bonds and therefore, so were its payments.

GET TO THE TABLE

Lawyers for both sides were repeatedly questioned why settlement talks were not under way, given the deadlines.

"Why aren't they going forward today instead of having us sit in court?" Griesa asked.

Earlier this week, the judge appointed New York financial trial lawyer Daniel Pollack as a special master to help facilitate a settlement between Argentina and the holdouts.

Pollack told Reuters via email he was in court during the hearing and said he was "making every effort to get the parties to the table."

The holdouts and Argentina have both said they want to negotiate in good faith, yet substantive meetings have not yet occurred.

Argentina's economy minister, Axel Kicillof, made a 10-hour visit to New York on Wednesday, raising hopes he might sit down to start negotiations. Instead, he took his argument to sympathetic diplomats at the United Nations, saying he did not meet with the holdouts.

Kicillof said the government needed Griesa to issue a suspension, or stay, on his orders, saying there was not enough time before the June 30 payment date to reach an agreement. However, he did not make reference to the fact that Argentina has a 30-day grace period before it could officially be declared in default.

Griesa denied the government's request for a stay on Thursday, about an hour after Kicillof said the deposit had been made to BNY Mellon's account in Argentina.

When Kicillof revealed the deposit, the government issued a statement mentioning "eventual judicial actions that would allow us to exercise our rights as a member of the international community ... before the International Criminal Court in the Hague."

Cohen, the holdouts' attorney, said this amounted to a warning to the United States, the lawyers in the case and Judge Griesa about the possibilities of future litigation.

"We can think of nothing that deserves a contempt citation more than that kind of behavior," Cohen said. (Reporting by Nate Raymond and Joseph Ax; additional reporting by Jonathan Stempel, David Henry, and Rodrigo Campos in New York, and; Hugh Bronstein in Buenos Aires; Writing by Daniel Bases; Editing by James Dalgleish, Tom Brown and Dan Grebler)

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Comments (3)
GermanHoldout wrote:
What could be the solution to solve immediately the Holdout problem?
Argentina owes to today about 230% to the Holdouts (capital + accrued interest since 2002)
If Argentina made a buyback offer of about 150-170%, it presumably would not violate the RUFO clause, because it would not be an exchange offer.
A buyback offer through a bank would definitiv not violate the RUFO clause.
Such a cash buyback would also give Argentina a debt relief ob about 60-80%.

Jun 27, 2014 6:50pm EDT  --  Report as abuse
Errata wrote:
The question of the century is why Judge Griesa has been so patient and has not yet found Argentina to be in contempt. The papers here in Argentina are already batting around DESACATO and speculating on when Griesa will bring the hammer down.

Jun 27, 2014 11:54pm EDT  --  Report as abuse
emassot wrote:
If you were an Argentine citizen you would expect your government to obtain the best payment conditions on your behalf–that is exactly what Nestor and Cristina Kirchner have been doing since 2003.
At the same time, they have achieved impressive growth rates, dramatic improvements for the most impoverished, and improved housing, health and education.
Only a tiny portion of creditors known as vulture funds bought distressed bonds for pennies, and have used the courts as their collection agencies.
By blindly siding with Paul Singer, Judge Thomas Griesa has now revealed the extent of his partiality. Argentina paid, in time as scheduled. Griesa is attempting to push Argentina’s official agent New York Mellon Bank to send the money back to the country.
This decision shows Griesa as holding hostage 92 of bondholders on behalf of 1 per cent of the holdout creditors (Singer). The other seven per cent of holdouts did not sue.

Jun 28, 2014 6:40pm EDT  --  Report as abuse
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