By Hilary Burke
BUENOS AIRES Dec 3 For the last decade,
Argentina and its holdout creditors have sparred in U.S. courts
over the country's 2002 debt default. The creditors are suing to
be repaid in full after spurning two debt swap offers accepted
by about 93 percent of bondholders.
The holdouts, including U.S. hedge fund Elliott Management,
have won several billion dollars in court-awarded damages. But
they have collected very little since Argentina refuses to pay
and U.S. sovereign immunity laws protect most of its assets from
President Cristina Fernandez, a combative center-leftist,
has vowed she will never pay the holdouts but will keep honoring
the bonds issued to other investors during the 2005 and 2010
This flies in the face of two U.S. court rulings, which say
Argentina must pay both sets of investors simultaneously.
Argentina says it will not comply because its own laws bar
it from paying the holdouts, which would put the onus on U.S.
banks and other third parties that process Argentine debt
payments to enforce the court orders. Argentina has appealed and
vowed to take its case to the U.S. Supreme Court if necessary.
The uncertainty over how this could play out has torpedoed
Argentine debt prices and raised fears that Latin America's No.
3 economy could default on its debt again.
Here are some facts about what is in dispute in this complex
Nearly a year ago, U.S. District Judge Thomas Griesa ruled
that Argentina violated the "pari passu" bond provision
requiring that it treat all creditors equally when it paid
investors who accepted the debt swaps while refusing to pay the
holdouts. He said they should all be paid simultaneously.
This ruling favored plaintiffs including Elliott affiliate
NML Capital Ltd and the Aurelius Capital Management funds, who
had sued over an estimated $1.33 billion in defaulted bonds.
Argentina appealed this ruling and most market analysts
thought it would prevail. But on Oct. 26, the 2nd U.S. Circuit
Court of Appeals largely upheld Griesa's decision and sent the
case back to him for clarification on two points.
The lawyers representing Argentina say the ruling would be
grossly unfair to creditors who got about 30 cents on the dollar
in the swaps.
They also say it could spark a new Argentine debt crisis by
jeopardizing payments on up to $24 billion of restructured debt
if third parties, including banks and clearinghouses, are forced
to disrupt these flows to comply with the court orders.
Finally, Argentina argues it could undermine the ability of
other governments to restructure debt in the future.
The U.S. government agreed, saying in a friend-of-the-court
brief that Griesa's ruling "could enable a single creditor to
thwart the implementation of an internationally supported
restructuring plan, and thereby undermine the decades of effort
the United States has expended to encourage a system of
cooperative resolution of sovereign debt crises."
But the 2nd Circuit Court of Appeals rejected that argument,
saying most new bonds include collective action clauses which
eliminate the threat of holdout litigation by requiring that all
creditors accept a restructuring if it is approved by a
The court also contended that countries like Spain and
Greece, plagued by debt problems, would not be affected by the
ruling since they have no bonds issued under New York law.
The panel of three judges said Argentina has enough money -
including over $40 billion in foreign currency reserves - to pay
the holdouts and the restructured debt. But Argentina says its
"Lock Law" passed in 2005 bars it from paying the holdouts
without prior congressional approval, making compliance with the
U.S. court ruling illegal under Argentine law.
The Lock Law was cited by the appeals court as evidence of
Argentina's discrimination against the holdouts under "pari
passu." In its latest filing, Argentina indicated it could
propose amending the law if the court agreed that the holdouts
should be paid on the terms of the 2010 debt swap.
Fernandez's allies control both houses of Congress and could
likely ensure the amendment gets approved.
Argentina petitioned for a rehearing on the pari passu issue
with either the same panel of 2nd Circuit judges that ruled in
October, or with the entire court. The court has yet to respond.
STAY ON GRIESA'S ORDERS
In February, Griesa first issued a payment order obligating
Argentina to pay the holdouts when it next paid the exchange
bondholders. But the following month he agreed to stay, or halt,
that order pending Argentina's appeal.
On Nov. 21, however, he lifted the stay, arguing that
Argentine officials had made statements showing they had no
intention of complying with the court ruling. He ordered that
Argentina deposit the $1.33 billion owed to holdouts in an
escrow account by Dec. 15.
On that same date, Argentina must pay about $3 billion on
its growth-linked GDP warrants, issued during the debt swaps.
Argentina sought to halt Griesa's Nov. 21 order and the
appeals court agreed to reinstate the stay until it resolves
appeals on the matter. It set a timeline for briefing and
scheduled a hearing in the case for Feb. 27.
The decision eased fears that Argentina could default in the
coming weeks, but the holdouts said it was too lenient and gave
the government more time to plot a way around the court rulings.
Their lawyers asked the appeals court to order that
Argentina post a security deposit of at least $250 million as a
condition for keeping the stay in place. It said if that were
not possible, the court should consider expediting the appeal so
it can be resolved this month.
The appeals court must respond to this latest emergency
petition, and weigh the appeal of Griesa's Nov. 21 orders by
Argentina and the bondholders who accepted the swaps.
In its Oct. 26 ruling, the appeals court asked Griesa to
clarify how the "ratable" or proportional payment that he
ordered would work.
The appeals court said it was not clear under his formula if
the holdouts should get paid 100 percent of what they are owed
when Argentina pays 100 percent of what it owes to exchange
bondholders on any given day, or if they should get paid a
smaller percentage if what the exchange bondholders get
represents a tiny fraction of the outstanding debt owed to them.
Griesa responded that Argentina would have to pay 100
percent of what it owes the holdouts, or about $1.33 billion, if
it pays 100 percent of what it owes to the exchange bondholders
on a given day - even if the latter sum is much smaller.
The appeals court has yet to review Griesa's clarification
on this point.
The appeals court also asked that Griesa explain more
precisely which third parties would be required to uphold the
court's ruling if Argentina refused to comply.
The judges said there was some confusion about how the
payment order would apply to third parties and to intermediary
banks specifically, which they said should not be subject to
court injunctions under U.S. law.
Argentina seized on this concern when asking the appeals
court to halt Griesa's Nov. 21 court order, saying it would
cause "extreme harm to numerous third parties," including Bank
of New York Mellon Corp, which acts as trustee for the
The appeals court agreed to let BNY Mellon and the exchange
bondholders themselves participate in the case as interested
The financial institutions that help process Argentina's
payments to exchange bondholders are loath to be placed in the
middle of this dispute since it could be costly for them and
could compromise their commitments to their clients.
In his Nov. 21 opinion, Griesa named the different
institutions along the payment chain used by Argentina to
service its restructured debt. He said intermediary banks would
be expressly excluded.
The appeals court has not reviewed this response yet either.