NML v. Republic of Argentina, now known as the Pari Passu Case, regards American corporations' attempt to force Argentina to pay its $3 billion bond debt, which was part of the country's total $81 billion default in 2001, the largest sovereign default ever. At Manhattan Contrarian, Francis Menton comments on the latest activity in the case:
As the battle between Argentina and its hold-out creditors continues to play out in the U.S. courts, currently in the Second Circuit Court of Appeals here in New York, the government gives more insights into the thinking of the people in charge by filing increasingly preposterous amicus briefs. The latest turned up on December 28. It is available on the Shearman & Sterling website here.
The problem starts from the fact that Argentina agreed on these bonds to be sued in New York and to be bound by the law of New York, which on the relevant points is no more complicated than "we will enforce your agreement to repay the loan." Perhaps you might think that the government of the United States would stand up for New York law on that point, but instead it has decided to stand up for the ability of deadbeats to find some way, any way to avoid payment. I previously commented here on this very odd choice of sides. But what possible thinking could get you to the idea that Argentina has the right side here? The amicus brief has the answers.
Here is the articulation of the main point:
[V]oluntary sovereign debt restructuring will become far more difficult if holdout creditors can use novel interpretations of boilerplate bond provisions to interfere with the performance of a restructuring plan accepted by most creditors, and to greatly tilt incentives away from voluntary debt exchanges and negotiated restructuring in the first place.
A sovereign’s potential resistance to paying non-exchanged debt is a critical tool in its efforts to negotiate broad creditor support for restructuring. This leverage will be lost if creditors believe that a holdout strategy will eventually result in substantial or full payment. If enough creditors adopt this strategy, foreign sovereign debt restructuring will become impossible.
Or to put it in simpler terms, if we want them to be able to stiff the creditors, we have to give them the right to stiff the creditors. I love the use of the Orwellian term "voluntary" restructurings. This was a take-it-or-leave-it offer of about 25 cents on the dollar; if you don't take it we will fight to the death to be sure you get nothing. The 25 cents was not picked out of the blue, but was carefully selected against the backdrop of the perceived difficulty of collecting from the defaulters. Does the U.S. government not understand that if its position is accepted, the next "voluntary" exchange offer will be at 10 cents, or maybe 1 cent?
Well, if the government's first point didn't make any sense, there's an even dumber one on the next page:
In addition, the decision could harm U.S. interests in promoting issuers’ use of New York law and preserving New York as a global financial jurisdiction. See Allied Bank v. Banco Credi- to Agricola, 757 F.2d 516, 521 (2d Cir. 1985) (“The United States has an interest in maintaining New York’s status as one of the foremost commercial centers in the world.”). The decision could encourage issuers to issue debt in non-U.S. currencies in order to avoid the U.S. payments system, causing a detrimental effect on the systemic role of the U.S. dollar.
They have no comprehension that the entire lending business only exists because the rule of law enforces repayment. Of course Argentina would prefer to borrow money in Argentina (or maybe Cuba?), where what passes for the rule of law is "we will stiff you if we feel like it"; but, oddly enough, no one will lend them the billions of dollars they want on those terms. The lending market is in New York, and governed by New York law, precisely because New York law enforces repayment. The way to keep the lending market in New York is to enhance the ability of lenders to get repaid, not to undermine it. Is it really possible that our top State and Justice Department officials and United States Attorneys are too dumb to know that? Yes, it is.
By the way, the top guys signing onto this are Harold Koh, Legal Advisor to the State Department (and former Dean of the Yale Law School, and committed orthodox thinker of the Manhattan variety on all essential points) and Preet Bharara, United States Attorney, otherwise known for wasting the vast resources of his office largely on the futile jihads against drugs and insider trading.
Where does this all lead? Argentina's current jefe, Christina Kirchner, gets to maintain her populist bona fides by playing tough with the American creditors, while her country continues its long, slow decline into poverty. What is worst about this is that the United States is helping the rulers of Argentina maintain power, while they slowly destroy the country.