By Hilary Burke
BUENOS AIRES Feb 21 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 battle only really heated up late last year, when two
courts said Argentina was discriminating against the holdouts
and must pay them whenever it services the restructured bonds -
raising fears of a fresh default if Argentina refused to comply.
Argentina appealed and a hearing has been set for Feb. 27.
The rulings gave hope to the holdouts, including U.S. hedge
fund Elliott Management, who have won several billion dollars in
court-awarded damages but collected very little since Argentina
refuses to pay and U.S. sovereign immunity laws protect most
foreign assets from seizure.
Argentine President Cristina Fernandez, a combative
center-leftist, vows to never pay the holdouts but will honor
the bonds issued to other investors in the 2005 and 2010
Her government says it will take the case as far as the U.S.
Supreme Court, if necessary.
Uncertainty over how the case could play out sank Argentine
debt prices in November and could roil markets again if
investors believe it faces another default.
Here are some facts about the disputes in the complex case:
Last year, U.S. District Judge Thomas Griesa ruled that
Argentina violated the "pari passu" bond provision requiring it
to 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. The 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 and was widely expected to prevail but in
October, the 2nd U.S. Circuit Court of Appeals largely upheld
Griesa's decision and asked him for clarification on two points.
Argentina's lawyers say the ruling would be grossly unfair
to creditors who got about 30 cents on the dollar in the swaps.
They warn it could spark a new debt crisis by jeopardizing
payments on up to $24 billion of restructured debt if third
party banks and clearinghouses are forced to disrupt the
payments to comply with the court orders.
Argentina also 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 allow lone creditors to thwart
internationally-backed restructuring plans and undermine efforts
to encourage cooperative resolution of sovereign debt crises.
But the 2nd Circuit Court of Appeals rejected that, 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 supermajority.
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
both the holdouts and the restructured debt. 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.
However, in its latest filings, Argentina indicated it could
propose amending the law if the court ruled the holdouts should
be paid under the terms of the 2010 debt swap. Fernandez's
allies control both houses of Congress and could likely ensure
quick passage of any changes to the law.
In February 2012, Griesa first issued payment orders
obligating Argentina to pay the holdouts when it next paid the
exchange bondholders. But the following month he agreed to stay,
or halt, the orders pending Argentina's appeal.
On Nov. 21, however, he revised them and lifted the stay,
arguing that Argentine officials had made comments showing they
had no intention of complying with his ruling. He ordered that
Argentina deposit the $1.33 billion owed to holdouts in an
escrow account by Dec. 15, the day Argentina was due to pay more
than $3 billion on GDP warrants issued during the debt swaps.
The appeals court reinstated the stay on Nov. 28 and said it
would consider an expedited appeal of Griesa's orders. It set a
tight timeline for briefing and scheduled the Feb. 27 hearing.
It later agreed to allow exchange bondholders and Bank of
New York Mellon Corp, which acts as their trustee, to
participate in the case. They will explain their opposition to
Griesa's orders during oral arguments.
The appeals court's decision to halt the orders ended fears
that Argentina could default in December. The holdouts said it
was too lenient and gave Fernandez's government more time to
plot a way around the court rulings.
Argentina's next payment on restructured debt is on March
31, when it will pay $180 million in interest on its Par bonds.
On Oct. 26, the appeals court asked Griesa to explain more
precisely which third parties would be required to uphold the
rulings if Argentina refused to comply.
The judges said there was confusion about how the payment
orders 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 order, saying it would cause "extreme
harm" to third parties, including BNY Mellon.
The financial institutions that help process Argentina's
payments to exchange bondholders do not want to be placed in the
middle of this dispute since it could be costly for them and
could compromise their commitment to clients.
In his Nov. 21 opinion, Griesa named different institutions
on the payment chain used by Argentina to service restructured
debt. He said intermediary banks would be expressly excluded.
The appeals court will review Griesa's clarification on this
point in the context of Argentina's appeal of the orders.
The appeals court also asked Griesa to clarify how the
"ratable" or proportional payment that he ordered would work.
It said his formula did not make clear whether the holdouts
should be 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
exchange bondholders are getting a small fraction of the debt
owed to them.
Griesa replied that Argentina should pay 100 percent of what
it owes holdouts - about $1.33 billion - if it pays all of what
it owes to exchange bondholders on a given day - even if the sum
is much smaller. The appeals court is reviewing his response.