France Enters The Fray Over Argentina Bonds

On July 26, the Republic of France filed an amicus brief with the US Supreme Court over the Argentina bond default.

In October 2012 the U.S. Court of Appeals for the Second Circuit upheld (most of) an order by district judge Thomas Griesa that said that Argentina isn’t allowed to pay those of its bondholders it wants to pay (the kindlier ones who went along with its efforts at restructuring) unless it also pays the holdouts.

This ruling came about as an interpretation of the pari passu clause in the 1994 agreement pursuant to which the old bonds themselves had been issued.

The Second Circuit affirmed the grant of an injunction that provided that whenever Argentina pays anything on its exchange bonds it must make a ratable payment to the plaintiffs holding the old bonds.

The State of Play
Argentina is now petitioning the U.S. Supreme Court to take an appeal from that decision (the appellate jurisdiction of the Supreme Court is discretionary).

France maintains that the Second Circuit decision “is based on an erroneous understanding of the meaning of pari passu clauses and contradicts the mainstream market understanding….” Why is this important? It is not so much important what France has said (nothing other litigants haven’t said many times in the course of this developing case) but the fact that it is France that says it. France is a critical player in the restructuring of sovereign debt, and has been at least since 1956.

As it happens, there was a crisis over Argentine debt in 1956 too, and that crisis catalyzed the creation of what became known as the “Paris Club,” created in an extraordinary three-day meeting at that city in mid-May 1956. The Paris Club has continued to coordinate activities among creditor nations in their efforts to negotiate restructures with debtor nations on the lisp of default.

So, although France is not here speaking for the Paris Club, it is speaking as the country evoked by the very name of that club, a country with “extensive experience.”

How much does it matter that France has come in on Argentina’s side of this dispute?

The Briefs That Were Not Filed
There is some possibility that this represents a crack in a dam. Only a few days ago, circa July 16th, it seemed likely that both the International Monetary Fund and the U.S. government would file a brief with the Supreme Court supporting this same writ of certiorari. Christine Lagarde, the managing director of the IMF, sent a note to plaintiffs that day letting them know she was going to ask her executive board to file the friend-of-the-court brief.

But then (near as us outsiders can tell) someone in the U.S. government decided, “hey, we’re on the wrong side here” and both ended U.S.pro-Argentina intervention efforts and effectively nixed any such effort by the IMF as well.

The U.S. Treasury said that it understood “that the IMF has serious concerns about the impact of the ruling on its ability to meet some of its core responsibilities. The litigation, however, remains pending in the court of appeals.”

So the U.S. seemed to be saying that it was only urging the IMF to hold off any intervention, and it was holding off on any intervention itself, until some later and more propitious time. That is a somewhat misleading description of the situation, though. Although a certain aspect of the litigation – remedy for the wrong done to the holdouts — do remain before the appellate court, the 2d Circuit has decided enough, and decided it in a sufficiently decisive way against Argentina, in favor of the hold-out bond holders, that it would seem that now is a very good time to intervene.

Unless, of course, one is of the view that the Second Circuit was right: and that is the view that the U.S. seems to be both suggesting and disavowing at this point.

At any rate, if for whatever reason the U.S. is trying to dam up a potential flood of amici against the Second Circuit, the French action represents as aforesaid a crack in that dam.

As Anna Gelpern writes in Credit Slips, an oft-brilliant blog on credit and insolvency issues, the French brief might inspire the Supreme Court to ask the solicitor general to weigh in as a legal representative of the United States. If the U.S. is asked in that way, it will have to come in, and then “the logic of holding back the IMF disappears.”