Pari Passu and Bouillabaisse

I have always thought that “pari passu” and bouillabaisse a couple of the coolest things to say, but with the latest plan by the ECB to exchange their Greek bonds for new bonds only they would hold it is worth taking a closer look at “pari passu”.

This is not meant to be in any way legal advice, but as a credit market practitioner these are my thoughts about some potential problems with what the ECB and Greece are doing, and are worth digging into deeper with your lawyers, especially if you are motivated to slow the process down.

There have been some stories stating that the deal is already done.  That may be true, but so far Bloomberg has not updated notional amounts outstanding on existing bonds, so the deal may be done and they haven’t told the right people yet to get the data updated, or the deal is “done” as in agreed in principal but not actually done in a real world way.

Pari Passu

The bulk of Hellenic Republic debt is issued under Greek Law.  The documentation is flimsy and one-sided.  Here is a little section from the offering circular for the March 20^th, 2012 bonds.

Status:	Direct, unconditional, unsubordinated and unsecured obligations of the Republic.
Negative Pledge:	None.
Cross Default:	None.
Purchase:	The Republic may at any time purchase or otherwise acquire Bonds in the open market or otherwise.

Not a whole lot to rely on as a bond holder.  The bonds documented under English Law are a lot more interesting.  I am working from the offering circular for the 5.2% bonds due 2034 (funny how in 2004 no one thought 5.2% coupon for a 30 year bond was a bad deal or unsustainable).

2. STATUS OF THE BONDS AND NEGATIVE PLEDGE

The Bonds constitute direct, general, unconditional, unsubordinated and, subject to this Condition, unsecured obligations of the Republic. The Bonds rank pari passu with all other unsecured and unsubordinated obligations of the Republic outstanding on 30 April 2004 or issued thereafter without any preference granted by the Republic to one above the other by reason of priority of date of issue, currency of payment, or otherwise. The due and punctual payment of the Bonds and the performance of the obligations of the Republic with respect thereto is backed by the full faith and credit of the Republic.

So long as any Bond remains outstanding, the Republic shall not create or permit to subsist any mortgage, pledge, lien or charge upon any of its present or future revenues, properties or assets to secure any External Indebtedness, unless the Bonds shall also be secured by such mortgage, pledge, lien or charge equally and rateably with such External Indebtedness or by such other security as may be approved by an Extraordinary Resolution of the Bondholders (as described in Condition 10).

Until now, the pari passu language has largely been ignored.  While pari passu may be fun to say, I’m not sure it is particularly well defined in the legal sense and I am seeing some evidence that it has been interpreted dramatically differently by various courts.  The direct translation is “on equal footing” and Black’s defines it as “proportionally; at an equal pace; without preference”.

Do the actions of the Hellenic Republic and the ECB breach the pari passu condition?  The “terms” of the bonds the ECB is getting will be “identical” to the old bonds except they will be explicitly exempted from certain rule changes that may be made (collective action for example).  The intent is clearly to create a “superior” class of debt.  While the ECB isn’t getting collateral or breaking the negative pledge argument, these bonds no longer seem to me to be “pari passu with all other unsecured …”  The “without preference” clause of the Black’s definition seems the area to target, but again, how courts have determined it, will play a big role.

It is obvious that the new bonds held by the ECB are (or soon will be) superior to the old bonds, but is it in a way that breaches the “pari passu” covenant?  There are a few factors that make it easier to pursue the case.

Since the clause would be breached if any bond was “elevated” it doesn’t matter whether the ECB holds any English law bonds.  If the ECB held Greek law bonds and these English law bonds were deemed to no longer be pari passu with those new bonds, that breach would be sufficient to trigger this covenant.  So the fact that it doesn’t rely on the ECB holding any English bonds is a benefit since it makes it difficult for the ECB to work its way around this issue since they can’t just treat their English law bond holdings separately.

The other key reason this may be worth pursuing is that generally English law favors creditors.  Not only does English law generally give strong protection to creditors, but since England has not been a part of the “solution” in the way France and Germany have, their courts don’t have a bias to support their politicians over the law.  So you would get to litigate the case in a court system that tends to favor creditors and does not have a strong reason to support the decision at the expense of the law (unlike a Greek, or even French or German court).

So what does it all mean?  Now we move to the “Event of Default” section.

7. EVENTS OF DEFAULT

If any of the following events (each an “Event of Default”) occurs:

(a) the Republic defaults in any payment of interest in respect of any of the Bonds or Coupons and such default is not cured by payment thereof within 30 days from the due date for such payment; or

(b) the Republic is in default in the performance of any other covenant, condition or provision set out in the Bonds and continues to be in default for 30 days after written notice thereof shall have been given to the Republic by the holder of any Bond; or

(c) in respect of any other External Indebtedness in an amount equal to or exceeding U.S.$25,000,000 (or its equivalent), (i) such indebtedness is accelerated so that it becomes due and payable prior to the stated maturity thereof as a result of a default thereunder and such acceleration has not been rescinded or annulled or (ii) any payment obligation under such indebtedness is not paid as and when due and the applicable grace period, if any, has lapsed and such non-payment has not been cured; or

(d) a general moratorium is declared by the Republic or the Bank of Greece in respect of its External Indebtedness or the Republic or the Bank of Greece announces its inability to pay its External Indebtedness as it matures; or

(e) any government order, decree or enactment shall be made whereby the Republic is prevented from observing and performing in full its obligations contained in the Bonds

So part (b) would be the relevant section.  The pari passu covenant/condition would have been breached.  There is a cure period, but since they would have to reverse the decision not just on the English law bonds, but also the Greek law bonds, there is no easy workaround.  There are various procedures that bondholders have to follow, but the end would be acceleration of the payments.  That acceleration would likely derail the bailout plans, or just cost the taxpayers of the EU a lot more money.  Greek law bonds don’t have this right, so it is only the smaller (but still large) amount of English law bonds outstanding that can play this game.  You do run into the issue of having to collect from Greece in the end, which has been a problem all along with fighting Greece – even if you win a judgment, it is hard to enforce.  Any asset with cross default language would be triggered and CDS would almost certainly get triggered, unless the Troika paid off all the English law bonds in full.

While we are in the “Events of Default” section, (d) and (e) are worth a quick glance.  I think they have been careful to avoid doing anything that would trigger this language (or they have just been lucky), but as the crisis and negotiations intensify, either of these seem to have a real possibility of being triggered.

Even the Greek law bonds have some similar protection (must have been included by accident) in their Event of Default section

(d)        any government order, decree or enactment shall be made whereby the Republic is prevented from observing and performing in full its obligations contained in the Bonds,

It is probably hard to trigger under those sorts of statements, but it will be interesting to watch the language that comes out in the “retroactive collective action” clauses.

Tender

There may also be some opportunities to fight the action based on the “tender” clause.  This will be specific to English law bonds and can be avoided just by not including English law bonds in the ECB’s deal (whether they have English law bonds or whether the deal is already “done” is still anybody’s guess).

(2) Purchases

The Republic may at any time purchase or otherwise acquire Bonds in the open market or otherwise. Bonds purchased or otherwise acquired by the Republic may be held or resold or, at the discretion of the Republic, surrendered to the Agent for cancellation (together with (in the case of definitive Bonds) any unmatured Coupons attached thereto or purchased therewith). If purchases are made by tender, tenders must be made available to all holders of Bonds alike.

So Greece can buy bonds in the open market.  They can then cancel bonds purchased that way or otherwise.  Okay, but can Greece do a deal to buy (or exchange) only the bonds held by the ECB and cancel them?  There is no way that is an open market purchase.  This clause specifically states that if purchases are made by tender, the tenders must be made available to ALL holders.  Is the exchange with the ECB actually a tender offer?  I think at best this is unclear.  There is no way it can be viewed as an open market purchase (even though the ECB originally acquired them that way), and there is the “otherwise acquired by” language that seems like a loophole.  But what is the tender language meant to pick up?  Are there times when a tender offer is mandatory?  Can they really just say this is something else?  Possibly, but what is the intention of this?  Aren’t tender offer rules designed specifically to ensure that certain holders don’t get preferential treatment?  If the position is big enough, why wouldn’t a court deem it necessary to do this as a tender offer rather than some made up term the ECB and Greece are going to try and use?

This can only be pursued if it turns out the ECB holds some English law bonds, and even then, only to the specific bonds they have.  That might be relatively easy for the ECB to work around, depending on their holdings, and is only an issue if the “exchange” they are doing would be deemed a tender.  Clearly more knowledge about when something has to be done by tender under English law is required.  If they breached the law and did this deal already, and it should have been done by a tender, can you also try and collect from the ECB as a party to the transaction?  That becomes interesting.  If you can get a claim on the ECB through this, then you finally get a shot at the deep pockets.

None of these ideas are obvious winners in litigation, but they don’t seem too stupid to explore in more depth.  Especially with March 20^th rapidly approaching, anything that can be used to convince them to pay you out at par rather than accepting PSI may be well worth the effort.  With the latest PSI rumors showing an even worse package, the downside from fighting, delaying, and possibly winning is higher, is marginal.  Will a settlement after a payment default really be that much worse than the PSI default settlement?

The Troika and Greece are trying to change the rules of the game on the fly.  Who knows what the long term consequences will be (probably bad), but they are also likely to create a lot of unintended short term consequences.

http://www.tfmarketadvisors.com/2012/02/19/pari-passu-and-bouillabaisse/

"The Shape Of The Next Crisis" - A Preview By Elliott's Paul Singer

Submitted by Tyler Durden on 12/09/2012 15:00 -0500

• Bear Market
 
• Ben Bernanke
 
• Ben Bernanke
 
• CDS
 
• Counterparties
 
• Credit Default Swaps
 
• Creditors
• default
 
• ETC
 
• European Central Bank
 
• Fail
 
• Federal Deposit Insurance Corporation
 
• France
 
• Germany
• Greece
 
• Japan
 
• Lehman
 
• Managing Money
 
• Middle East
 
• Monetary Policy
 
• Portugal
 
• Quantitative Easing
 
• recovery
 
• Risk Management
 
• Sovereign Debt
 
• Stop Trading
 
• Too Big To Fail
 
• Totalitarianism
• Twitter

Transcribed from a speech given by Paul Singer of Elliott Management

Investing is an art, more so than a science. And for me, what I get paid for is managing the “dark art,” if you will, of risk management and trying to be a visionary and having a dark vision at all times about what can go wrong.

It’s a particularly fruitful and impactful time to be thinking about risk management and the thing I want talk about today is what I’ve described as “The Shape of the Next Crisis.” That doesn’t mean we’re going to be talking about the timing of it or exactly what to short or how to make money from it. But it’s to provoke thought about what the elements are, the current landscape, the various aspects that will shape the timing, as well as the amplitude, the predictability, the suddenness of the next crisis.

It’s not something that I can talk about in any kind of hierarchical fashion. There are a number of elements that are in play, some of which are novel, completely new in virtually the human landscape.

But they combine in what I think of, when I’m thinking of risk management and how to hedge my portfolio, what I think of as kind of “an evil stew.”

But here they are, and it should be obvious when you really think about it, but you have to bring these elements from other facets of life to see how they impact trading and investing.

On Modern Communications and Information Processing

It is increasingly the case (and I’ll give you a couple of recent examples) that people coalesce, form, and reform ideas in a much more powerfully focused, and abrupt, and stark way than they ever have in the past.

One of the most interesting examples of this is the so-called “Arab Spring” where the forces underlying these societies – totalitarianism, security services, violence, oppression, etc. – have existed in the countries that have been affected for decades. All of the sudden it started in January with a singular small event in Tunisia. And now it’s a few months later and there are 11 countries in various stages of more or less similar wide-spread revolts.

And how did this happen? You speak to experts in the Middle East, you speak to experts in that area or in those particular countries, and you don’t get a satisfactory answer. You get “totalitarianism.” The answer, I believe, relates to social media and the way people are connected - it’s the Internet, it’s Facebook, it’s Twitter – and the way people process information enabling people to develop the same thoughts simultaneously and to act and coalesce physically as well as emotionally.

The vector changes with something like this are virtually instantaneous. In 6 months, for 11 countries that have been more or less family run or totalitarian, to be in revolt is a very, very powerful illustration of this point.The Flash Crash about a year ago in stocks, where all of the sudden, the technology of the marketplace and the way the exchanges had their rules about processing orders in relationship with other exchanges, coalesced one afternoon, to have hundreds of stocks virtually evaporate all at once - within seconds or minutes or five minutes or half an hour.

This is a very powerful element and will serve as an accelerant in the next crisis so hold that one up on the blackboard, metaphorically speaking, while I talk about the next elements.

On The Financial System And Leverage

Let’s talk about financial institutions and the financial system. The major message that I want to give you (and I’ve invited challenge on both parts of my thesis here and I’ve never had anybody challenge it): The major financial institutions in the US and around the globe are utterly opaque; and The next financial crisis will happen faster, more suddenly.

We cannot (I have 110 investment professionals), and I surmise that you cannot, understand the financial condition of any bank, major financial institution. You can’t see the actual size of the balance sheet. You have no idea what that derivatives section means…it’s 10 to 100 times the size of the actual balance sheet.

So when people say, “Well, it used to be 40x leveraged,” (some of them were 90x leveraged) “but now they’re 15 to 20 times leveraged.” Well that’s just great. Except you go to the derivatives and see numbers in the trillions and trillions and trillions and there is no clue, you have no clue, no understanding, of what that is actually composed of. Is that composed of trades that are basically unwound where all you have is counterparty risk? Is that composed of actual hedges of upper tranches the way we would have in an admitted hedge fund?

So you are looking at balance sheets without any real understanding of how the balance sheets and the companies would perform in the event of a crisis. Which of these trades or trillions of dollars of trades, which in normal times oscillate like this [very small motion] and that’s why they’re so big, would in really bad times start going like this [large motion]. And if you actually have capital of only half a percent, or one percent or five percent of your actual footings, not just unwound trades that happen to still be on balance sheet, but actual footings, you’re in trouble.

The kind of thing that wound up the financial system three years ago is expected to be different in form than the kind of things that would unwind the financial system the next time. But I’m going to argue that the next time will be faster. If you think back to ’07 and ’08, it was episodic. It wasn’t just suddenly that in the second or third week in Sept that Lehman goes under and that’s the crisis and the whole world collapsed. No, there were several episodes leading up to that.

After that, what kept the entire financial system from coming to a grinding halt was quite simple. It wasn’t that all of the other firms were in much better shape than Lehman. It’s very simple, it’s that governments, here and in Europe, underwrote the entire system. Ben Bernanke, of whom I’m not a fan... at all, has been quoted as saying that in the absence of the government guarantee and underwriting, 12 of the 13 biggest banks in the world would have gone out of business following Lehman. Whether it’s 12/13, or 13/13, or 6 or 8 of 13, is completely imponderable, but the point is actually well-taken. In the absence of that guarantee there would have been a cascading collapse because of the opacity.

There are people in this room that are on trading desks or manage trading operations at investment banks. You know for a fact that you knew nothing about the financial condition of your five biggest counterparties. And so your relationships, and your willingness to trade, with those counterparties was dependent on rumor or credit spreads widening or not widening. And that’s a very terrible place for the financial system to be in.

So take the opacity, take the fact that you can’t really understand the financial condition, and take the fact that the leverage hasn’t really been rung out. And what you realize is that the lessons of ’08 will actually result in a much quicker process, a process that I would describe as a “black hole” if and when there is the next financial crisis.

The next financial crisis obviously can only happen if, believably, the governments either cut loose the major financial institutions - believably and credibly unwound the guarantee - or even more difficult and scary, if the government guarantee were not enough. And that’s one of the next elements in the shape of the next crisis. As you know, risk has migrated upward, it’s migrated from lenders and borrowers really to governments. It’s gone on the balance sheet of the US, the ECB (the various countries of Europe, particularly Germany, France, etc.). That the credit of Europe, the credit of America, is being called into question in the starkest way is part of what will shape the next crisis.

But before I get to that part, and explain how I think that impacts, I want to come back to the trader and trading part of this. The lesson of ’08, which is indelibly stamped upon every hedge fund forehead and trading desk head, is: Move your assets first, stop trading first, sell the paper first, and ask questions later. Those that moved from Lehman days or weeks before the end were happy. Those that sat there thinking that they were protected in prime brokerage accounts or protected in some other ways, or that firms like Lehman wouldn’t be allowed to go under were stuck in the company (of course Lehman is still in bankruptcy) with claims trading at 20-something cents on the dollar, depending on where you are in the capital structure.

On 'Orderly Liquidation' And How Dodd-Frank Has Made The System More Brittle

 So, I want to put one more element in place in the trading and financial institution part of the equation.

And that’s the law that was signed into law a few months ago, Dodd-Frank. I don’t know what it’s actually called, but it is the financial institution reform law and it is designed purportedly to make the system safer. “Safe” actually, not just “safer.”

In my opinion, what Dodd-Frank has actually done is to make the system more brittle and complete the picture, in my mind, of a black hole, meaning a very vicious, sharp and abrupt process if you put together all of the things that I’ve said so far.

So what is it about Dodd-Frank that contributes to this black hole, or contributes to this brittle, unsafe condition? It’s the “Orderly Liquidation Authority,” a very humorously named part of this law because what I think it actually represents is a very disorderly process. Under this authority, which was purportedly designed to provided a “not-Lehman” outcome (you know, no government bailout and a calm resolution of large financial institutions), under this process the FDIC has the authority, contrary to all US bankruptcy practice and law, to seize financial companies which are quote “in danger of default.”

Under previous bankruptcy law, companies had to default, actually default, or managements voluntarily put them in bankruptcy in order for them to be in bankruptcy.

“Danger of default,” if you think about that, plus with the other parts of this that I’ll describe, means that if a company is in trouble, and it’s large and opaque, then it’s in danger of default and can be seized any day. And if I say any moment it’s only a slight exaggeration, because by statute the process of throwing a company into the Orderly Liquidation Authority is about 48 hrs long, and is effectively unreviewable (even though there is an injunction attached to this process with the Treasury secretary and a couple of other people looking at it).

So companies can be seized that are in danger of default, and what is the FDIC ordered to do and what can it do? It is ordered to throw out management…quite bizarre. It is enabled to discriminate among classes of creditors similarly situated... strange. It’s enabled to move assets around and transfer assets to bridge companies. And it’s enabled to go against people in or out of the company who are quote “responsible for the financial condition.”

Let me define Systemically Important Financial Institutions first and then continue on. Under this legislation, the government is supposed to designate certain companies as “systemically important.”

I’ve been quoted as saying that I feel that’s nutty. It’s nutty because no financial institution should be too big to fail. All financial institutions should be governed by the same rules regarding leverage and risk. And companies can become systemically important, or un-become systemically important, extremely quickly in today’s world as a result of taking on leverage, changing their positions.

Let’s put that all together. If you are trading with a big company and that company or other companies have been identified as systemically important institutions, if you are observing a large company getting into trouble, what you know is that you have to pull your assets because those assets can be transferred (regardless of the financial condition of the subsidiary that your assets are a part of, whether it’s a prime brokerage subsidiary or otherwise). You don’t know how your claim will be treated, so you have to sell the bonds that you own; if the guy down the block, Bob’s Big Bank [is a similarly situated creditor and] has been designated as systemically important, that guy may be getting a priority recovery.

So the whole thing militates toward stepping away abruptly from any company that is designated as systemically important. So I think that the opacity, the lessons of ’08, the vicissitudes and thoughtlessness of Dodd-Frank, militate in favor of a very, very abrupt resolution.

On Japan And The Confidence-Destroying Implications Of Monetary Policy

There isn’t time to flesh out in detail the other accelerants of what the next financial crisis might look like, but let me just say a word or two on monetary policy. Monetary policy, which is now doing virtually all of the job creation work in the United States (in particular) and of course in Japan also, has created a very distorted recovery and some people think, including myself, that it’s been at least partially responsible for inflation in commodities and gold.

Quantitative easing which is this duration shortening mechanism, zero interest rates which is extraordinarily unusual and is now in the United States as well as Japan, as well as the long term entitlement insolvency in the United States, are platforms for a possible loss of confidence.

And In Conclusion

I think people who are managing money or investors who are trying to figure out what the next crisis may look like, should be processing these elements and thinking about how they can interact, together with the modalities of modern communications and the way people process information, to create something very sudden.

Nobody in America has actually seen, or most people probably can’t even contemplate, what an actual loss of confidence may look like. What I’m trying to struggle with as a money manager, who really seriously doesn’t like to lose money, is how to protect our capital and how to think about the next crisis.

If you think about some of these elements and how they might interact, you might come up with other paths of transmission or risk and pain. But I wouldn’t go about your business thinking it’s business as usual in a typical post-crisis, post bear market recovery.

Questions And Answers Section...

Q: [Thoughts on Europe]?

A: Yeah, that’s really important. My view about Europe starts with my view 15 yrs ago (and by the way, on Wall St if you’re early, you’re wrong). My view 15 yrs ago was that the Euro was an inappropriate backdoor experiment on quasi-sovereignty. And all it would take would be a stark variation in economic performance or geopolitical or military considerations or interests. And here we are and there’s been a stark divergence and the Euro is in the process of centrifugal force and breaking up.

Will it break up? It’s entirely unclear, and I’m not going to predict that it’s going to break up or whether Greece is going to actually leave it. What I will say is that it doesn’t make sense for the underperforming countries to actually be part of this. Everyone looked like they were getting benefits during the period of time when there was convergence. Exports for Germany, lower interest rates for Greece and Portugal and Spain and the rest.

Big risks were built up, big variations in performance, and now Germany in particular is writing out checks. As long as Germany keeps writing out checks, the euro can limp along, Greece can limp along.

But the answer to your question is the fixes to this, even if to kick the can down the road, are deflationary, they’re harmful to growth despite the fact that a breakup of the euro would fall upon Greece. Pulling out by Greece from the euro would trigger other consequences in several of these other countries, would create a banking crisis which would have to be dealt with.

So there is near term pain in doing, in my view, the right thing. But the medium- to longer-term pain of writing out checks to insolvent countries like Greece (insolvent, it’s not a liquidity crisis, insolvency), is ultimately something that’s going to be dampening growth in Europe, dampening global growth, possibly creating the transmission mechanism for the next banking crisis. So I think we’re watching it. And by the way, how do I think it’s going to actually happen that the situation is resolved? It’s going to be from the bottom up, the political process. It’s going to be on the streets, it’s going to be hundreds of thousands of Greeks, or hundreds of thousands of Germans demonstrating against the bailouts.

The elites want to keep writing the checks because their paradigms, their desire to have this experiment (because that’s what it is, it’s only 12 or 13 yrs old) continue. That’s what their dream was: one Europe - sovereign. And they were going to get to sovereignty through the back door. It isn’t working out at the moment; I don’t think it’s going to work out. And the fact that it’s not working out is quite painful and the way they’re doing it is stretching out the pain.

Q: [Insights on using CDS on sovereign debt to hedge your portfolio]?

A: Very good question. The question was about buying credit default swaps on countries or companies in order to hedge your positions, as a general risk management tool. I think that’s a really great question, it’s one that people like us really struggle with.

One of the things that 2008 (I had forgotten to say this before, so thanks for reminding me) showed us about risk management was that some of the tools that we thought that we had for risk management were actually tools that could be harmed or defeated by the actions of governments. And governments have shown an increasing inclination to push us around, us as a community. Meaning overnight bans on short selling, statements and the beginnings of action against credit default swaps, so-called “naked” credit default swaps.

Credit default swaps in the abstract, or actually in practice up till recently, are very effective at bringing liquid tools for taking judgments long and short about securities, and countries, companies that otherwise would be completely illiquid. Borrowing sovereign debt to sell short is not easy.

When countries and companies get into trouble, it’s very easy and very standard to be blaming speculators and credit default swaps as one of the reasons, or the main reason why a spread is blowing out and why the country or company is in trouble (because when a spread blows out, financing opportunities and possibilities diminish, etc.). Who can say what portion of CDS trading is so big that it actually creates prices rather than just discovers prices?

But one of the very difficult parts about running a portfolio that is aimed to be absolute return or very risk conscious and trying to avoid the consequences of the next crisis, is that it’s very difficult to predict using tools like that, which of these tools will be left unimpaired, or which will be suddenly impaired or destroyed by government action.

One of the things that bothers me about running a gold position is (since gold is, really to me, a thermometer about how people think about real money versus fake money or versus paper money possibly for the first time in people’s lives of anybody in this room), if gold actually is starting to be priced at a price that would represent real fear about paper currencies, what will governments do to derivatives or actual gold to keep themselves from being subject to what they feel is inflation caused by speculators?

So I think everyone who is using these complicated instruments needs to understand that governments have sent out a shot across the bow that they are not in the mood to allow for free markets, when the free markets challenge the “everything-is-fine-and-we-can-kick-the-can-down-the-road” way of governing.

Today the House Foreign Affairs Committee's Subcommittee on the Western Hemisphere passed H.R. 1798, the Judgment Evading Foreign States Accountability Act of 2011 (JEFSA).

Today the House Foreign Affairs Committee's Subcommittee on the Western Hemisphere passed H.R. 1798, the Judgment Evading Foreign States Accountability Act of 2011 (JEFSA).

ATFA Co-Chairs Nancy Soderberg and Robert Shapiro Applaud Subcommittee Approval of Legislation Holding Argentina Accountable

WASHINGTON, D.C. (November 29, 2012) - Today the House Foreign Affairs Committee's Subcommittee on the Western Hemisphere passed H.R. 1798, the Judgment Evading Foreign States Accountability Act of 2011 (JEFSA).  The legislation would "prevent foreign states that do business, issue securities, or borrow money in the United States, and then fail to satisfy United States court judgments totaling $100 million or more" from hurting U.S. businesses and investors and flouting the rule of law.  The following statement should be attributed to Ambassador Nancy Soderberg and Hon. Robert J. Shapiro, co-chairs of American Task Force Argentina: Today's markup of JEFSA shows that Congress understands the importance of holding foreign governments accountable when they act in bad faith regarding U.S. citizens and the international community. We commend the Subcommittee on the Western Hemisphere and particularly Chairman Connie Mack for his leadership and support in this matter, along with the other members of the subcommittee. JEFSA would have a profound impact when it comes to situations such the recent actions of the Argentine government, which has disregarded more than 100 U.S. court judgments directing it to honor its obligations to U.S. lenders and investors.   It is our hope that the Congressional leadership will give this bill due consideration to show the Argentine and any other irresponsible governments that there are consequences to their actions.

About the American Task Force Argentina The American Task Force Argentina (ATFA) is an alliance of organizations united for a just and fair reconciliation of the Argentine government's 2001 debt default and subsequent restructuring. Our members work with lawmakers, the media, and other interested parties to encourage the United States government to vigorously pursue a negotiated settlement with the Argentine government in the interests of American stakeholders.  To contact us, email media@atfa.org or call 888-662-2382.

American Task Force Argentina PO Box 3197 Arlington VA 22203-0197

Updated: The procedure of litigating pari passu? posted by Mark Weidemaier

Updated: The procedure of litigating pari passu?

posted by Mark Weidemaier

Lots of activity in the pari passu litigation: The lawyers for the exchange bondholders have been working overtime, filing an emergency motion to stay Judge Griesa's injunction (just granted here!) and asking the Second Circuit to let them intervene in the appeal. And there has been some great analysis of the injunction and its implications for exchange bondholders (by Joseph Cotterill at FT Alphaville), discussion of theconsequences for future restructurings (by Felix Salmon), and consideration of Argentina's suggestion that it might be willing to re-open the exchange offer for holdouts (by Vladimir Werning).

In this post, I want to explore the pari passu litigation from a different angle - one that focuses on a question of procedure raised by the Second Circuit's interpretation of the clause. Here's the question: Let's assume that the pari passu clause entitles creditor A to receive a ratable share of any payment made to creditors with whom creditor A ranks equally: creditors B, C, D, etc. Creditor A sues borrower to enforce this right. Who else should participate in the lawsuit? And can the lawsuit really be structured in a way that will be fair to everyone affected by it? (The exchange bondholders raised these questions in their brief, but the district judge didn't address them.)

I hope civil procedure buffs can weigh in on this, but shouldn't other creditors have a seat at the litigation table? In US federal courts, third parties must be joined as litigants if they have an interest in the subject matter of a lawsuit and if the lawsuit may "as a practical matter impair" their ability to protect the interest. As always, there are exceptions, but the starting premise is that such third parties must be joined. Recall that the Second Circuit interpreted the clause as a promise not to pay exchange bondholders without paying holdouts. Perhaps Argentina can afford to pay everyone, but its potential willingness to default rather than pay NML etc. arguably amounts to a "practical impairment" of exchange bondholders' interests. Plus, the logic of the Second Circuit's interpretation would require a country to make ratable payments even if it couldn't afford to pay everyone in full. So it's easy to imagine a situation where a suit to enforce the pari passu obligation would effectively take money from a creditor's pocket.

If it is necessary to join other creditors - in this case, holders of restructured debt - how might that work? A defendant class action, in which one or more exchange bondholders is appointed to represent all the others on the question of the meaning of the pari passuclause? Perhaps, but such a process would be kind of ironic, given the increasing reluctance of courts to certify plaintiff class actions under US law. Indeed, it might prove impossible to join all relevant parties. In such cases, the rules allow (but do not require) courts to proceed with the lawsuit, but this would result in a process that significantly impacts the rights of people who are not effectively represented. Many pari passuaficionados won't need another reason to question the court's interpretation. But if you are keeping score, this seems like another. Given the clause's inherent ambiguity, why choose an interpretation that is so difficult to enforce in a collectively fair manner?

UPDATED to include a link to the stay order.

November 28, 2012 at 5:01 PM in Sovereign Debt

Comments

http://www.creditslips.org/creditslips/2012/11/the-procedure-of-litigating-pari-passu.html

It is hereby ORDERED that the November 21, 2012 orders of the district court entered in relation to this matter are all stayed pending further order of this Court.

MITTWOCH, 28. NOVEMBER 2012

It is hereby ORDERED that the November 21, 2012 orders of the district court entered in relation to this matter are all stayed pending further order of this Court.

UNITED STATES COURT OF APPEALS
FOR THE
SECOND CIRCUIT
_________________
At a Stated Term of the United States Court of Appeals for the Second Circuit, held at the
Daniel Patrick Moynihan United States Courthouse, 500 Pearl Street, in the City of New York, on
the 28th day of November, two thousand and twelve.
Present: Rosemary S. Pooler,
Barrington D. Parker,
Reena Raggi,
Circuit Judges.
_____________________________________________
NML Capital, Ltd., Aurelius Capital Master, Ltd.,
ACP Master, Ltd., Blue Angel Capital I LLC, Aurelius
Opportunities Fund II, LLC, Pablo Alberto Varela,
Lila Ines Burgueno, Mirta Susana Dieguez, Maria
Evangelina Carballo, Leandro Daniel Pomilio, Susana
Aquerreta, Maria Elena Corral, Teresa Munoz De
Corral, Norma Elsa Lavorato, Carmen Irma Lavorato,
Cesar Ruben Vazquez, Norma Haydee Gines, Marta
Azucena Vazquez, Olifant Fund, Ltd.,
Plaintiffs-Appellees,
v.
The Republic of Argentina,
Defendant-Appellant.
ORDER
Docket Nos. 12-105(L), 12-109(Con),
                     12-111(Con),12-157(Con),
                     12-158(Con), 12-163(Con),
                     12-164(Con), 12-170(Con),
                     12-176(Con), 12-185(Con),
                     12-189(Con), 12-214(Con),
                     12-909(Con), 12-914(Con),
                     12-916(Con), 12-919(Con),
                     12-920(Con), 12-923(Con),
                     12-924(Con), 12-926(Con),
                     12-939(Con), 12-943(Con),
                     12-951(Con), 12-968(Con),
                     12-971(Con).
_____________________________________________
 It is hereby ORDERED that the November 21, 2012 orders of the district court entered in relation
to this matter are all stayed pending further order of this Court. 
 It is further ORDERED that the appeal from the November 21, 2012 orders of the district court
is expediated nostra sponte, with appellant’s papers filed by December 28, 2012; opposition papers filed
by January 25, 2013; and reply papers filed by February 1, 2013.  Parties granted amicus or intervenor
status shall file their briefs by January 4, 2013.  Oral argument for appellant and appellees shall be at 2 p.m.
on February 27, 2013.
For the Court:
Catherine O’Hagan Wolfe,
Clerk of Court

Argentinien-Anleihen droht neuer Zahlungsausfall FAZ Print 27.11.2012 von Carl Moses

Argentinien-Anleihen droht neuer Zahlungsausfall FAZ Print 27.11.2012 von Carl Moses

Argentinien-Anleihen droht neuer Zahlungsausfall

FAZ Print 27.11.2012


Auch die mit der Abwicklung betraute
Bank of New York sowie andere beteiligte
Intermediäre sind von dem Verbot
betroffen.




Die argentinische Regierung
kann und will zahlen - aber
nicht alles, was ein amerikanisches
Gericht vorschreibt.
mos. BUENOS AIRES, 26. November.
Knapp elf Jahre nach der Staatspleite
von 2001 steht Argentinien möglicherweise
abermals vor einem Zahlungsausfall.
Die Prämien für Kreditausfallversicherungen
(CDS) auf argentinische
Staatsanleihen schossen in den letzten
Tagen auf ein Rekordniveau, das weltweit
nur noch von Griechenland übertroffen
wird. Dabei kann und will Argentiniens
Regierung vermeintlich zahlen.
Mit einer sehr unpopulären Maßnahme
hat Argentiniens Staatspräsidentin Cristina
Kirchner sogar den Zugriff der Bürger
auf knappe Devisen beschränkt, um sicherzustellen,
dass die Zentralbank über
ausreichend Fremdwährung zur Bedienung
der Schulden verfügt.
Das Problem: Ein amerikanisches Gericht
verlangt von Argentinien die Begleichung
von Altschulden, deren Gläubiger
nach Ansicht der argentinischen Regierung
ihr Recht auf Bezahlung verwirkt
haben, weil sie frühere Umschuldungsangebote
nicht akzeptiert hatten. Zusätzlich
verbietet das Gericht Argentinien
und den im Zahlungsprozess involvierten
Banken, jedwede Schuldenzahlung
zu leisten, solange Argentinien nicht
gleichzeitig auch die umstrittenen Altschulden
bedient. Argentiniens Regierung
steckt in einer Zwickmühle. Folgt
sie dem Gerichtsurteil oder ihren Prinzipien?
Die Gläubiger müssen zittern.
Damit geht die Geschichte der bisher
größten Staatspleite in eine neue Etappe.
Argentinien hatte nach seinem Staatsbankrott
von 2001 in drei Umschuldungsrunden
2005 und 2010 insgesamt 93 Prozent
der Gläubiger von rund 100 Milliarden
Dollar dazu bewegen können, auf
mehr als zwei Drittel ihrer Ansprüche zu
verzichten. Alle bei diesen Umschuldungsrunden
ausgegebenen neuen
Staatspapiere hat Argentinien seither
pünktlich bedient.
Die Wirtschaft des Landes erholte sich
rasant. Viele der Gläubiger, die Argentiniens
harsche Umschuldungsbedingungen
seinerzeit nicht akzeptiert hatten, haben
das Land unterdessen vor Gerichten
in aller Welt auf die volle Zahlung ihrer
Ansprüche verklagt und in vielen Fällen
entsprechende Zahlungsurteile erstritAuch
ein Jahrzehnt nach der Verschuldungskrise sind die sozialen Nöte in Argentinien sichtbar.
ten. Bisher waren diese „Holdouts“ indes
kaum in der Lage, irgendwo auf der Welt
eine Vollstreckung ihrer Forderungen zu
erreichen. Mehr als zwei Dutzend Versuche
zur Pfändung von argentinischem
Staatseigentum wie dem Präsidentenflugzeug,
Botschafterresidenzen oder Zentralbankreserven
schlugen fehl.
Doch der Hedgefonds NML Capital
Ltd. aus dem Imperium des amerikanischen
Milliardärs Paul Singer, der notleidene
Argentinien-Anleihen zu Ramschpreisen
aufgekauft hatte, scheint nun einen
Weg gefunden zu haben, um Forderungen
von rund 1,33 Milliarden Dollar
gegen Argentinien durchzusetzen. Dass
es Singer gelang, in einer spektakulären
Aktion Anfang Oktober das Segelschulschiff
der argentinischen Marine in Ghana
festsetzen zu lassen, sorgte zwar für
weltweites Aufsehen, ist jedoch eher von
symbolischem Wert.
Wichtiger ist der Erfolg einer Klage
von NML in den Vereinigten Staaten.
Praktisch alle Schuldenzahlungen Argentiniens
an ausländische Gläubiger werden
über den Finanzplatz New York abgewickelt.
Vor einem Gericht in New York
klagte NML, Argentinien verstoße mit
seiner Schuldenpolitik, die umgeschuldete
Anleihen pünktlich bedient, Altschulden
jedoch ignoriert, gegen die in den
Anleihebedingungen zugesicherte
Gleichbehandlung der Gläubiger. Der
Distriktrichter Thomas Griesa gab NML
im Februar 2012 recht. Ein Berufungsgericht
bestätigte im Oktober die Ansprüche
von NML und einigen Nebenklägern.
Zu klären blieb lediglich die konkrete
Höhe und Modalität der von Argentinien
zu leistenden Zahlungen.
Argentiniens Staatschefin Kirchner erklärte
umgehend, ihr Land werde „nicht
einen einzigen Dollar an Geierfonds zahlen“.
In der Nacht zum Thanksgiving-
Fest am vergangenen Donnerstag reagierte
Richter Griesa mit einer für viele Beobachter
überraschend harten Verfügung.
Danach muss Argentinien NML den vollen
Nominalwert der Anleihen und alle
aufgelaufenen Zinsen ohne weiteren Verzug
zahlen. Vorbehaltlich einer neuen Revision
des Berufungsgerichts soll Argentinien
die 1,33 Milliarden Dollar auf einem
Treuhandkonto deponieren. Andernfalls
dürfe eine am 15. Dezember fällige
Zahlung von 3,5 Milliarden Dollar
auf Umschuldungspapiere nicht gezahlt
werden. Auch die mit der Abwicklung betraute
Bank of New York sowie andere beteiligte
Intermediäre sind von dem Verbot
betroffen.

Richter Griesa begründete sein harsches
Urteil mit den wiederholten Äußerungen
von Staatschefin Kirchner und anderen
Regierungsmitgliedern, wonach
Argentinien kein Urteil zur Zahlung an
Umschuldungsverweigerer befolgen werde.
Griesa hat Argentinien immer wieder
Aufschub gewährt und Pfändungsklagen
abgewiesen. Nun scheint der 82-Jährige
die Geduld zu verlieren.
„Nach zehn Jahren Rechtsstreit ist das
ein gerechtes Ergebnis“, begründete
Griesa sein Urteil. „Argentinien ist das
schuldig, und es schuldet das jetzt.“ Aufgrund
der erklärten Verweigerungshaltung
der Regierung müsse das Gericht sicherstellen,
dass Argentinien keine neuen
Wege finde, sich seinen Verpflichtungen
zu entziehen. Griesas Verfügung sei
„juristischer Kolonialismus“, empörte
sich Argentiniens Wirtschaftsminister
Hernán Lorenzino. „Es fehlt nur noch
dass sie die 5. Flotte in Gang setzen.“ Argentinien
will nun versuchen, vor dem
Berufungsgericht eine Revision des Zahlungsbefehls
zu erwirken. Eines hat das
Gericht hat in seinem Oktober-Urteil
freilich erkennen lassen. Es dürfte kaum
akzeptieren, dass Argentinien den
Holdouts gar nichts zahlt.

Griesa bügelt Ansinnen seine "Urteile" vs Argy zu Gunsten Elliott/NML auszusetzen/aufzuheben kurz angebunden ab !!!!

Griesa bügelt Ansinnen seine "Urteile" vs Argy zu Gunsten Elliott/NML auszusetzen/aufzuheben kurz angebunden ab !!!!

ORDER
The motion listed as document number 402 for case 08-CV -6978 - Motion to Appear
as Interested Non-Parties - is denied.
Dated:   New York, New York
~. ;J,0  ,2012
~p~
Thomas P. Griesa
U.S. District Judge



ORDER
The motion listed as document number 401  for case 08-CV-6978 - Motion to Vacate
- is denied.
Dated:  NewY~~NewYork
t,JrO  ,2012
~v~  Thomas P. Griesa
U.S. District Judge

Elliot vs Argentina is a domestic Argentine issue By Felix Salmon

Elliot vs Argentina is a domestic Argentine issue

By Felix Salmon

 

NOVEMBER 24, 2012

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ARGENTINA | SOVEREIGN DEBT

If you want to follow all the ins and outs of Elliott vs Argentina in the mainstream press, you’ll soon find something very interesting. It’s a US case, in a US court, which is very likely to have profound consequences for both US markets in general and for one of America’s most diplomatically important laws, the Foreign Sovereign Immunities Act. But to a first approximation, the US press simply hasn’t noticed.

Most US outlets have carried a single dry and dutiful report, buried on an inside page, somewhere; the NYT didn’t even manage that, relying instead on a wire report from the AP in Buenos Aires. The WSJ has not been much better, although its report is notable for getting notoriously reclusive fund manager David Martinez* on the record — a sign that if they put their mind to it, US journalists could really add some value here.

By contrast, the FT has been all over the story, in detail, from the very beginning, out of London and Buenos Aires. Alphaville’s Joseph Cotterill has created the invaluable Pari Passu Saga Series, the newspaper splashed the news all over its front page this morning, and the combination of Jude Webber in Buenos Aires and Robin Wigglesworth in London has proved to be incredibly powerful and astute. Even accounting for the Thanksgiving holiday in the US, the disparity is striking. The best US newspaper coverage — which has come, singlehandedly, from Michelle Celarier at the New York Post — doesn’t even come close to competing. (Michelle and I share more than an interest in sovereign debt: we’re both former correspondents for the UK’s Euromoney.)

But by far the most detailed and voluminous coverage has come from the Argentine press, which has been covering the New York court case in extreme detail. Every time that Judge Griesa releases an opinion, it’s immediately uploaded to a multitude of Argentine news sites, and thousands of Anglophone readers flock to download everything he has said, and argue about what it means. This story is huge in Argentina — and unlike the last time that Argentina defaulted, in 2001, everybody has the internet and is following what’s going on, in extreme detail, online.

Which makes the AP report that the NYT ran with particularly fascinating. Most of the time news stories are interesting when they tell you something you don’t know; in this case, we have a news story which is interesting because it tells us something which isn’t actually true at all.

As with so many other things involving Argentina, this case is rooted in the bloody dictatorship that ruled from 1976 to 1983. The military junta more than tripled the country’s foreign debts. By 2001, the burden had become unsustainable and the economy collapsed. Argentina’s $95 billion default still stands as a world record.

Sovereign debt is supposed to be paid no matter who runs a country, but President Fernández has always considered this defaulted debt to be illegitimate, forced onto the Argentines by dictators acting in concert with international financial speculators. She and her late husband and predecessor, Néstor Kirchner, who took office in 2003, have never made any payments on the defaulted bonds.

In fact, Argentina’s world record was broken by Greece, but never mind that. Much more interesting is the way in which the AP’s Buenos Aires reporter, Michael Warren, is reflecting a very common view of things in Argentina — that Elliott’s debt is odious and illegitimate.

Note that Argentina itself, in Griesa’s courtroom, has never made this argument. Quite the opposite: Argentina has always held, at least in New York court, that Elliott’s debt is entirely legitimate, and indeed is just as legitimate as the debt held by exchange bondholders. It’s up to Argentina, as a sovereign nation, which creditors it pays and which it doesn’t — but Argentina, at least as a matter of law, has never denied that it owes Elliott the full amount it’s being asked to pay.

What’s more, the debt that Elliott holds was not, in any real sense, “forced onto the Argentines by dictators”, and the case is not “rooted in the bloody dictatorship that ruled from 1976 to 1983″. Yes, the junta ran up a lot of debts — and Argentina restructured those debts in its big Brady deal of 1992. By the time the junta-era debts had been restructured, Argentina’s debt was an entirely manageable 30% of GDP; even two years later, in 1994, it was just 31.4% of GDP. It was only in the late 1990s that the democratically-elected Argentine government of Carlos Menem started running up the country’s debts to unsustainable levels.

Menem, of course, was a Peronist, just like Cristina Fernández and her late husband — and so it would be hard for her to blame Argentina’s current predicament on him. Somehow, she has managed to persuade the Argentine public — and even AP reporters — that paying off Elliott would be tantamount to ratifying the actions of the military junta which lost power before most Argentines were even born.

All of which helps explain why absolutely everybody is convinced that given the choice between paying all of its creditors and paying none of them — the choice which Griesa is giving Argentina — Cristina will choose the latter. Even Mitu Gulati tells Christopher Spink that “Argentina is likely to default on the exchange bonds” — and Gulati is the frequent co-author of Lee Buchheit, of Cleary Gottlieb, which represents Argentina.

Essentially, there are two choices here. Argentina can somehow win its appeals; or it will end up defaulting on its exchange bonds. The outcome Griesa is trying to order — where Argentina pays its exchange bondholders and its holdouts, in full — is simply politically impossible in Argentina.

Of course, another Argentine default wouldn’t be the end of the story. It’s hard to pay bond coupons in dollars, even if the bonds are issued under Argentine law, without going through some US-based intermediaries — and Griesa could always try and intercept those payments if Argentina thumbs its nose at him and simply ignores his order. What’s more, Elliott Associates will, everybody believes, make a large amount of money in the CDS market if Argentina does default, and the Argentine government would love to stop that from happening, somehow. (They can’t prevent the fact that Elliott has already made a large sum in the CDS market, on a mark-to-market basis.)

And there’s a decent case to be made that Argentina’s debt is undervalued right now even if it does end up defaulting. So long as exchange bondholders are happy getting paid out of Argentina rather than New York, they will probably end up with every penny they’re owed — in dollars. There might well be an uncomfortable interregnum, but ultimately they’re more likely than not to get their money. So if you have a strong stomach, maybe the exchange bonds are a buy right here — precisely because many institutional investors don’t have strong stomachs, and have no desire to be holding onto defaulted sovereign debt.

In any case, in order to really understand what’s going on with Argentina’s bonds, you need to be at least as well versed in Argentine politics as you are in the intricacies of New York law and pari passu clauses. Judge Griesa might have a surprising amount of power. But Cristina Fernández has more.

*Martinez, one of the world’s most successful distressed debt investors, is siding against Elliott Associates in this case. Similarly, David Boies is siding with the exchange bondholders against Elliott, despite the fact that his son, also called David Boies, founded Straus & Boies with Michael Straus, who represented Elliott in its last major sovereign battle, against Peru. Boies is representing Gramercy Advisors, who also made their name as a vulture fund. This is a case where everybody is pretending to be highly principled — but ultimately, as ever, it’s all about financial self-interest

http://blogs.reuters.com/felix-salmon/2012/11/23/elliot-vs-argentina-is-a-domestic-argentine-issue/