Argentina's Debt: A Conflict of Principles

The market believes that if Argentina were to clear up its holdout problems, a settlement could be achieved giving Argentina access to the international capital markets. Here capital Buenos Aires. (Photo: Victoria Rachitzky)

Antonia E. Stolper, head of the Capital Markets—Americas practice group and Latin America and Caribbean group at Shearman & Sterling. (Photo: Shearman & Sterling)

Why did Argentina lose the case? Do we have a rogue country or a rogue court?


The reverberations of Argentina’s loss in NML Capital Ltd. vs. Republic of Argentina continue.

The conflict stems from a 2012 decision by United States District Court for the Southern District of New York (SDNY) Judge Thomas Griesa in a case brought by the hedge fund NML Capital Ltd. and others (NML), over $1.3 billion of bonds they hold, issued by Argentina under a 1994 Fiscal Agency Agreement and governed under New York law, that Argentina defaulted on in 2001. Argentina conducted exchange offers in 2005 and 2010 that canceled approximately 93 percent of bonds governed by various foreign laws as well as Argentine-law governed U.S. dollar bonds. Subsequently, Argentina settled with some of its official sector creditors as well.

NML, which did not participate in these exchanges and still holds defaulted Argentine bonds, came up with a novel legal theory to try to collect from Argentina. Instead of just asking the judge to grant a money judgment (something NML already had done for other bonds it owns), it asked the judge to give it equal treatment on the grounds that when Argentina made payments to bondholders who had accepted the exchange, it was violating the pari passu clause (in other words, that all creditors get equal footing) of the 1994 Fiscal Agency Agreement. Judge Griesa agreed, and on February 23, 2012, Judge Griesa issued his equal treatment order, whereby Argentina, whenever it wanted to make a payment on the new bonds that the Argentina government had issued in the 2005 and 2010 exchange offers, would also have to make a “ratable payment” to NML and co-plaintiffs.

The “ratable” piece requires Argentina, when making full payment to the exchange bondholders of any amounts owed, to make full payment to NML, which in this case means 100 percent of NML’s claim.

What makes the equal treatment order so powerful is that not only does it prohibit Argentina from making the payments, but the order also prohibits any entity acting in concert with Argentina from aiding Argentina in making payments.

Judge Griesa’s order specifically mentioned Bank of New York Mellon (BNYM) as a trustee and paying agent under the new bonds, as well as The Depository Trust Company (DTC), and Euroclear and Clearstream, Luxembourg. The bonds that Judge Griesa made subject to the equal payment order were all issued under the exchange offers conducted in 2005 and 2010. Those exchange offers included three types of bonds plus new bonds tied to Argentina’s economic growth (GDP warrants).


In all, there are U.S. dollar-denominated New York law bonds, Eurodenominated English law bonds and U.S. Dollar Argentine law bonds.

The New York law bonds and the English law bonds are paid through DTC and Euroclear and Clearstream, Luxembourg, and the payments are funneled through BNYM, while the Argentine law bonds are paid in Argentina through the Caja de Valores S.A.

Since Argentina had not previously complied with past judgments on defaulted bonds, most observers knew it was not likely to comply with an order prohibiting it from paying the new bondholders without full payment to the holdouts. But Judge Griesa’s order had teeth because now entities subject to his jurisdiction were covered and could be held in contempt if they did not comply with his order.

The Second Circuit Court of Appeals upheld Judge Griesa’s order. When the U.S. Supreme Court refused to hear the case on June 16, 2014, the stay of Judge Griesa’s decision was lifted and the equal payment order went into effect.

The effect of the ruling was felt for the first time on June 30, 2014, when an interest payment came due on some of the exchange bonds. Argentina attempted to make the payment by depositing the amounts in BNYM’s account at the Central Bank of Argentina. When BNYM went to Judge Griesa to ask what it should do with the money, Judge Griesa determined that BNYM should just hold the money in its account in Argentina pending a negotiated settlement with the holdouts.

As a result, the exchange bondholders did not receive their June interest payment and the bonds went into default. The next interest payment came due on September 30, 2014. In lieu of giving the money to BNYM and having it trapped by the equal payment order, Argentina set up a trust account at Banco Nación and deposited the payments to that account.

Once again, however, the exchange bondholders did not receive their interest payments because to pay the exchange bonds, the payments had to reach BNYM as custodian for Cede & Co., which is the nominee for DTC or Bank of New York Depositary (Nominees) Limited, which is the common depository for Euroclear and Clearstream, Luxembourg. Since the equal payment order specifically prohibited either Bank of New York entity from helping Argentina evade the order, if Argentina had made the payments to them, the payments would be trapped as well. As a result, the rest of the exchange bonds went into payment default.

At the same time, “me-too” creditors have begun to approach Judge Griesa to plead their cases. These are other holdouts, some of whom hold New York law bonds issued under the same 1994 Fiscal Agency Agreement under which NML’s bonds were issued and others that hold bonds issued under other instruments not governed by New York law.

Judge Griesa has made comments in court sympathetic to the case of the other holders of Fiscal Agency Agreement bonds. The case for the holders of bonds not issued under New York law are less likely to receive a sympathetic hearing from Judge Griesa, since his court does not have jurisdiction over Argentina for those cases.

In the meantime, there is no definitive information in the market about how big the holdout community is. According to one estimate, approximately $7 billion (including amounts held by NML and the other plaintiffs) are owed under the 1994 Fiscal Agency Agreement; and perhaps the same amount is owed under other instruments.


The standoff has left both the Argentine government and the plaintiffs in a bind, with uncertain consequences for Argentina’s tottering economy while setting an ambiguous precedent for resolving future restructurings. Why did Argentina lose the case? Do we have a rogue country or a rogue court?

There are strong arguments for both positions. Many commentators think Judge Griesa’s decision, which was unanimously upheld by the U.S. Court of Appeals for the Second Circuit, is just wrongly decided. These commentators argue that the pari passu—or equal footing—clause does not mean that holders of obligations who are not getting paid have a right to be paid whenever any other obligation that is pari passu is getting paid; rather it was designed to prevent legal subordination, meaning as a legal matter other obligations could not be favored.

As the argument goes, the injunction also violated the U.S. Foreign Sovereign Immunities Act (FSIA). The FSIA limits what U.S. courts can do regarding sovereign assets. It spells out what sovereign assets as a matter of U.S. law are immune from attachment.

Under this theory, the order has the effect of making Argentina pay the holdout creditors—regardless of whether they are subject to the jurisdiction of the U.S. court.

Finally, several observers have made the argument that even if making payments on the new bonds violated the pari passu clause of the 1994 Fiscal Agency Bonds, the only remedy was a money judgment —not an equal payment order.

NML maintained that this particular pari passu clause not only prohibited legal subordination but also had an “equal in right of payment clause.” This clause, the plaintiffs argued successfully, did not permit Argentina to pick and choose what debts it was going to pay. Argentina lost on the pari passu argument because both Judge Griesa and the Second Circuit focused intensely on Argentina’s aggressive approach to the holdouts. Argentina had adopted Law 26,017, the so-called Lock Law, in 2005 that prohibited any payments to holdout creditors.

In 2010, the Argentine government lifted the law to permit the re-opening of the exchange offer, and has lifted it again to permit offering the holdouts the 2010 exchange offer. This approach contrasted with the approach of most other sovereign restructurings in which holdouts generally have been paid quietly.

Argentina has maintained throughout that the only deal it could afford was the one on the table, and that it couldn’t—and was legally prohibited from—paying anything else. As a result, the Second Circuit concluded that Argentina had given favorable status to specific creditors with its Lock Law. It also concluded that the “equal in right of payment” clause gave the holdouts the right to be paid on an equal basis to the exchange bonds. At the same time, Argentina lost in the Second Circuit on the FSIA issue because the court reasoned that complying with an injunction was not the same as taking jurisdiction over exempt assets.

So, what began as an esoteric legal issue has resulted in a permanent standoff between Argentina and Judge Griesa. How did the situation deteriorate to this point?


The New York law bonds—and English law bonds—are currently in payment default because the interest payments due in June and September 2014 have not been paid, nor was the interest payment due in December expected to be paid.

To date, the Argentine law bonds have been paid pursuant to several rulings by Judge Griesa to temporarily permit Citibank to receive payments on the Argentine law bonds in Argentina and pass those payments to accounts outside of Argentina through the European clearing systems. These bonds, although technically covered by Judge Griesa’s original order, have been the subject of several hearings as Judge Griesa tries to determine whether they should be permanently excluded from the equal treatment order.

There also seems to be no progress in negotiating a deal with the holdout creditors. Speculation is rampant that the Argentine government is waiting for the expiration of the Rights Upon Future Offers clause (the Rufo clause) on December 31, 2014 (the provision of the exchange bonds that requires that if a better offer is made to holdouts, it needs to be made to holders of exchange bonds as well) to begin serious negotiations. But others believe that nothing will happen until a new government is sworn in in December 2015.

The market believes that if Argentina were to clear up its holdout problems, a settlement could be achieved giving Argentina access to the international capital markets. With the country’s low debt-to-GDP ratio, capital markets would likely be responsive and access to them would allow Argentina to service its external debt. In the meantime, the payment default has created an unstable situation in which it would take a vote of only 25 percent of the holders of any series of exchange bonds to accelerate the payment of principal and interest.

The other dilemma generated by the Argentina decision is what to do about other sovereign debt under New York law. Despite speculation, repeated endlessly by Argentina and its allies in the litigation, that Argentina’s loss would result in the end of New York law being used by countries for their debt, foreign sovereign bonds continue to be issued under New York law.

Nevertheless, the International Capital Markets Association (ICMA) and the International Monetary Fund (IMF) have issued papers calling on sovereign borrowers to change their pari passu clauses to ensure that the injunctive relief given by Judge Griesa is contractually not available to plaintiffs suing for judgments.

The ICMA and IMF papers also proposed changing the collective action clauses of future issuances of securities to aggregate different series of bonds into one vote. Mexico and Chile have already adopted both provisions in their recent offerings.

For Argentina, not paying the holdouts anything other than what the exchange bondholders got in the exchange offers is a matter of principle.

For Judge Griesa, ensuring the enforcement of his orders and the rule of law is also a matter of principle. A conflict of principles is the hardest kind of conflict to resolve.

Were this to become just a decision based on what’s best for Argentina and the Argentine economy, there is a deal to be made. Unfortunately, that does not seem to be where the parties have ended up, and as a result, a second default looms, with all of its perils.

Antonia E. Stolper is a partner at Shearman & Sterling LLP, where she heads the firm’s Capital Markets—Americas practice group as well as its Latin America and Caribbean group. She is a member of the board of the Council of the Americas and is vice chair of the Cyrus R. Vance Center for International Justice Initiatives of the New York City Bar Association.

A previous version of this article appeared in the Winter 2015 issue of Americas Quarterly (

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