Argentina, as everybody knew it would, has gone to the Supreme Court to appeal the bad (and ignoble) ruling against the country by New York's Second Circuit. The most likely final outcome, still, is that Argentina will default, for the reasons (but not with the timing) I gave last year. But, with this petition, Argentina now has three possible outs.
Call them sovereign immunity, pari passu, and the bondholders' ransom. None of them is particularly likely to happen - but add them all together, and there's still a glimmer of hope for Argentina.
1. Sovereign Immunity
The first one is, in a sense, the obvious one. Argentina has appealed the lower court ruling to the Supreme Court, and it is possible that the Supreme Court will accept the case, hear it, and find in favor of Argentina. (If that happens, the decision would come down some time between October 2014 and June 2015.)
The Supreme Court needs to rule on a matter of federal law, and Argentina has just such a matter: the Foreign Sovereign Immunities Act (FSIA). Sovereigns by their nature can't be bound by US courts - and there's federal legislation to that effect. Argentina has a long list of legal arguments surrounding FSIA, but at heart its case is simple: the judge in New York is trying to force Argentina to use its reserves to pay its holdout creditors. But the judge can't legally do that, because Argentina's reserves are immune assets. And if such assets can't be attached directly, they can't be requisitioned indirectly, either. As the petition says,
The whole point of the FSIA's two-part immunity scheme is that a foreign sovereign may "refuse to pay" immune assets to satisfy a money judgment, even when the sovereign is subject to a court's jurisdiction. That is the basic structure of the FSIA, not a defect that justifies an injunctive remedy.
(Emphasis, wonderfully, in the original.)
The sovereign-immunity argument has been well rehearsed in lower courts. Elliott will say that Argentina explicitly waived sovereign immunity in its bond documentation, and that the injunctions are, on their face, quite agnostic as to where Argentina finds the money to pay the holdouts - or even whether Argentina finds the money to pay the holdouts. They just want to put the holdouts on an equal footing (pari passu, you might say) with the existing bondholders, so that if the holdouts aren't being paid, then the bondholders won't be paid either.
Are the finer details of sovereign immunity and district-court discretion really something the Supreme Court wants to litigate? It's certainly possible that the Supremes will accept the case, especially since the US government supports Argentina on this narrow issue. Over the next few weeks we'll see a series of amici file briefs for and against Argentina in this case; if the US is one of them, along with other major international powers like the IMF and France, then that might persuade the Supremes to hear the case. That said, however, there's no very clear constitutional issue at stake - and neither has there been any disagreement between lower courts. At heart, this is a commercial issue, and the Southern District generally covers commercial issues very well. It's not clear that the Supreme Court has any particular need or appetite to strike the Southern District down.
2. Pari passu
The second out for Argentina is a kind of backup plan, in case the Supreme Court doesn't see anything it particularly wants to hear, but is still sympathetic to Argentina's cause. The bond documentation being litigated here - the notorious pari passu clause - was written under New York law, but so far all the judges interpreting it have been federal judges, not New York judges.
Argentina says - rightly, I think - that the federal courts' interpretation of the pari passu clause "is deeply flawed". What's more, it says, "no New York court has ever interpreted a pari passu clause in a sovereign debt contract". The federal courts have certainly been clear about what they think the clause means, but they're not in charge of New York law:
The New York Court of Appeals should have the final word on whether the pari passuclause prohibits a sovereign from continuing to service performing debt without servicing defaulted debt. If New York courts want New York law to upset settled expectations, impede restructurings, and endanger New York's status as the law of choice for sovereign debt, that is their prerogative. But they should not have those consequences thrust upon them.
Argentina is therefore giving the Supremes another out: if they don't want to hear the case themselves, they can send it down to the New York Court of Appeals, in the form of something called a certified question. (Basically, the Supreme Court would be asking the New York court to settle a question of New York law, rather than deciding the issue itself.) If the New York court then found that the federal courts' interpretation of the clause was indeed deeply flawed, then they would have the power to overrule it, and thereby vacate the federal court order. Clever!
This seems like a good idea to me. The interpretation of the law should not be done by people who are the victims of the law - and in many ways the federal courts here are the victims of what they consider to be Argentina's "contumacious" behavior. Basically, the federal courts have consistently awarded money judgments against Argentina, and Argentina has consistently ignored those judgments, and the federal courts have become highly annoyed and frustrated with Argentina as a result. And you don't want annoyed and frustrated judges making law; you want the law to be interpreted dispassionately. As Argentina puts it:
In reacting to the district court's injunctions, Argentina thus has not behaved like a contumacious litigant-it acted like a sovereign, displaying exactly the affront that Congress intended for the FSIA to prevent. Any sovereign would protest if a foreign court issued an extraterritorial order threatening its creditors and citizens and coercing it into turning over billions of dollars from its immune reserves.
By sending the case to the New York court, the Supremes would basically be appointing an impartial set of judges, who hadn't had their noses tweaked for a decade by an affronted sovereign, to decide the meaning of the pari passu clause. It's a clever idea, on the part of Argentina - but it's also, sadly, by all accounts, very unlikely to happen.
3. Bondholders' ransom
Which leaves just one other option for Argentina - and it's an option which doesn't involve the Supreme Court at all. The holdout creditors, led by Elliott Associates, say that they want a "negotiated settlement" - and it turns out that the bondholders want exactly the same thing. In public, they've called for "an inter-creditor transaction". In practice, what that means is that they're willing to give up some of their future coupon payments, if doing so will make the holdouts go away.
The idea is that over the next five years, Argentina is scheduled to pay its bondholders some $7.5 billion in coupon payments. The bondholders - or at least 23 of the biggest bondholders - are willing to see that number reduced by 20%, to $6 billion. And they would be willing to let the holdout creditors, led by Elliott Associates, pocket the other $1.5 billion, if it would help end this whole litigation nightmare.
I spoke to one of the bondholders last month, who said that "this is a hostage crisis, and we're asking to pay the ransom". And it's easy to see why. Argentina's bonds are trading at about 65 cents on the dollar right now. If Elliott forces a default, then those bonds will plunge in value to about 30 cents. If, on the other hand, the Elliott issue is resolved, then Argentina's bonds would probably start trading at well over par. So whatever the bondholders lose in terms of future coupon payments, they more than gain in terms of the increased value of their bonds. As the bondholder told me, "I will pay five cents to have a hundred-cent bond rather than a thirty-cent bond".
If you do the math on this proposal, it all makes a certain amount of sense. The bondholders, as we've seen, would make a substantial mark-to-market profit - while the holdout creditors would make even more. Take as an example a holdout creditor with $300 million, face value, of bonds. That creditor is asking, today, for some $700 million in principal and past-due interest. Argentina's official offer, which is to simply reopen the terms of the old restructuring, would give that creditor bonds worth about $225 million - that's less than face value.
But if the existing bondholders gave up 20% of their future coupons for the next five years, that would add a sweetener of about $150 million, in present value. On top of that, thanks to the rising tide of spread compression which would lift all the boats, the value of the exchange bonds would rise from $225 million to about $280 million. Add it all up, and the holdout is now being offered bonds worth $430 million or so - which is an extremely good deal, if those bonds were bought for about 25% of par, or $75 million.
The mechanics of such a deal would be complicated, to say the least. First, there would have to be a consent solicitation, where Argentina proposed a deal to all of its bondholders, asking them whether they would be willing to give 20% of their next five years' coupon payments to the holdouts. Such a deal would be contingent, of course, on the holdouts accepting the offer. The threshold here would be 75%: under Argentina's collective action clauses, 75% of its bondholders can, in principle, agree to do such a thing, and thereby bind everybody else.
Could Argentina, as well as Argentina's big bondholders, persuade 75% of the existing bondholder base to accept such a coupon reduction? Nothing like it has ever been tried in the past, and the whole thing does smell of rewarding the very vultures who have made bondholders' lives so tough for so long. So it wouldn't be easy. What's more, it's not even clear that Argentina wants to attempt such a thing. The country's powerful finance minister, Axel Kicillof, has come out against the idea, as part of his political infighting with Hernán Lorenzino, who's nominally in charge of the restructuring, and who likes the idea.
The next step would be to get the holdouts to accept the deal - and that step would, if anything, be even harder. Elliott has said that the idea is "beyond bizarre" and "a stunt" - and even if Elliott were persuaded to change its mind, there are other holdouts, too, like Ken Dart, who might be even harder to bring around.
I suspect that a negotiated deal between the holdouts, Argentina, and the bondholders is exactly what the Second Circuit wanted all along. My impression is that they hoped that if they were very tough, that would bring the various sides together and make a negotiated resolution more likely. But when you're dealing with individuals like Cristina Kirchner, Paul Singer, and Ken Dart, no one ever wants to budge. So even though many bondholders are willing to grease the negotiations to the tune of $1.5 billion, the chances are that a negotiated settlement is still not going to happen.
Despite the fact that there are now three ways out of this mess, then, I still reckon it's going to end in tears - that is, in Argentina defaulting on its bonds. The only real question is when.