Poker with Judge Griesa, part one For the complete experience of Judge Griesa ordering Argentina to pay holdouts in full and, even more importantly, extending duties to comply with that order to a very wide range of third parties... Make sure to read his opinion on the pari passu basis; then the amended order to pay; and also - and a red rag to the bull for a government which is very unlikely to make that payment - a ruling that "threats of defiance" from Buenos Aires have pushed him to December 15, 2012 as the due date. No waiting around for the gavel to strike, here. The amendments now go back to the Second Circuit of the Court of Appeals to rule on. The December 15 date affects a sizable payment on Argentina's GDP warrants issued under its 2005 debt restructuring, and it could also affect a payment of coupons on a restructured bond, due on the last day of the year. This could create a CDS quandary if the government now opts not to pay restructured debt in order not to pay holdouts. The real story, nevertheless, is the sheer forcefulness of Judge Griesa's ruling. It's dynamite stuff. Anna Gelpern of Credit Slips says that "Christmas came early to Elliottville." Alternatively, here's the perspective of one holder of restructured Argentine debt on Thursday: "the court went the extra mile in interfering with the contracts of the third parties." Said investor finds the ruling so "over-reaching" that they're now looking to the Second Circuit - possibly in a full court, not the three-judge panel that affirmed Judge Griesa's original order to pay. The best hope of investors who took the restructuring now is that the Appeals Court also finds the ruling too forceful. Not everyone agrees it will. Nevermind Christmas: since Judge Griesa ruled the day before Thanksgiving, it's also worth pointing out how far the ruling, and Argentina's reaction, could make turkeys of the various third parties affected by this case. That would be Bank of New York and other key entities involved in the process whereby Argentina pays its restructured debt. It also affects the endpoint of that chain - the restructured holders themselves. And beyond that, the future sovereigns which have to issue pari passu debt, or restructure it, in similar circumstances. We're going to look at the situation with holders of the restructured debt in a second post, because it's complex and involves the third-party rule now set out by Judge Griesa. In this post, we'll look at two other (forcefully made) rulings by Judge Griesa. 1) Remember the fuss about what kind of payment formula should be made under the pari passu clause and would be equitable? The Second Circuit, when it sent the formula back to Judge Griesa to be clarified, originally suggested payment in full, but alternatively that if "a... payment to the exchange bondholders represented 1% of the principal and interest outstanding on the restructured debt, then Argentina must pay plaintiffs 1% of the amount owed to them." Beyond this, observers even argued that the formula should mean that Elliott et al effectively received the terms of the debt restructuring. That would not have brought Christmas early to Elliott Associates. Judge Griesa gives it all short shrift: The second hypothetical situation posed by the Court of Appeals, resulting in Argentina paying plaintiffs 1% of the amount owed to them, is based on a misinterpretation of the relevant language of the Injunctions... ...the court recognizes that the debt now owed to the exchange bondholders is of a different amount and of a different nature from what is owed to plaintiffs. What is owed in December 2012 to exchange bondholders are interest payments, which are part of a series which will go on being paid until the maturity of the Exchange Bonds. The debt owed to plaintiffs is accelerated principal plus accrued interest. But it is obvious that a Pari Passu Clause does not require that the debts in question be in the same amount or of the same nature. What is required is that the obligations under the various debts are complied with to the same extent, rather than having the obligations on one debt honored and the obligations on the other debt repudiated, as has occurred in the present case. Of course, what is being done here is not literally to carry out the Pari Passu Clause, as would be done in a normal commercial situation, but to provide a remedy for Argentina's violation of the Clause. It's that last sentence really. It's what Judge Griesa is here to do - provide remedy - but it's also where restructured bondholders are least happy. They think the chance of getting that remedy for holdouts is very low (readers may have clocked by now that Argentina has a thing about not paying holdouts), whereas chances of harm to them, via the interruption of payments on their bonds, is very high. More on that claim of harm shortly, in our second post. But one last thing on the payment formula and the December 15 deadline - an escrow account: Since the Court of Appeals has not finally spoken on the subject of the calculation of the payment to plaintiffs, such payment is to be made into an escrow account, so that any adjustments required by the final Court of Appeals" ruling can be made... Again, it ups the ante for the Argentine government's policy of not paying heed to US courts. Argentina is being told not just to pay, but also to comply with an escrow account while remaining work by US courts is sorted out. 2) Clearing and present danger for third parties. Or in the words of the amended order, "those persons and entities who act in active concert or participation with the Republic..." Now, among the tide of briefs filed to Judge Griesa before this updated ruling - one amicus missive from the Federal Reserve Bank of New York, in a case in which (for now) official intervention has otherwise relatively waned. The Fed was naturally keen to protect the integrity of the Fedwire payment system (to "specifically exempt" it, no less) from any unpleasantness incurred by holdouts seeking to uphold the order of payment. But the Fed also asked the court to "reject Plaintiffs" invitation to broaden the reach of the Injunctions to clearing corporations and systems generally," when it comes to those who might be acting in concert with Argentina. Well, not much luck here at all. Judge Griesa's amended order largely takes the cue of the plaintiffs" proposal earlier submitted to him, and it names "the clearing corporations and systems, depositaries, operators of clearing systems." That's pretty interesting in itself, in terms of the wider ramifications of this case. But the real fireworks - and where the Judge really puts down the briefs filed to him by BNY and the restructured bondholders: the really important stuff when Argentine not paying holdouts would mean also not paying these bonds - come elsewhere. Here, we'll focus on BNY. BNY had argued that, as a trustee in the payments on restructured debt, "its duties are owed directly to those Exchange Holders, not to Argentina," and as an indenture trustee, its duties were limited to those within the trust indenture which forms an important part of the payment structure. "In addition, BNY Mellon alone has authority over any trustee paying agent as defined in the Indenture," it added. (BNY's argument here is revolving around Rule 65 (d) of the Federal Rules of Civil Procedure, incidentally. "Doesn't apply to us," is BNY's argument.) Now, for the holdouts" part, the plaintiffs" reply brief countered that the bank "fails to account for its pivotal role as a "Paying Agent" processing payments on the Exchange Bonds - functions upon which Argentina completely relies for payments to reach the beneficial holders of the Exchange Bonds." It continued: "BNY is wrong to suggest that an agency relationship, or even instructions from Argentina, are required for BNY to be bound by an injunction because, under well-settled law, BNY merely needs to be acting in concert with Argentina, regardless of its motivation for doing so." These are pretty complicated points of trustee law, but they are potentially important - not just in paying sovereign debt (where to tell the truth trust structures are relatively rare) but for the role of trusts in corporate debt, and in securitisation. Arguably. But here's Judge Griesa: Particularly BNY strenuously asserts that it has duties as indenture trustee, and these duties should be the beginning and the end of its responsibilities. These arguments miss the point. If Argentina complies with the rulings of the Court of Appeals, there will be no problem about funds destined for exchange bondholders being deposited with BNY and going up the chain until they arrive in the hands of such bondholders. But if Argentina attempts to make payments to the exchange bondholders, contrary to the ruling of the Court of Appeals and thus contrary to law, this would not involve the normal and proper situation dealt with by BNY under the indenture, and dealt with by others in the chain. Under these circumstances, these third parties should properly be held responsible for making sure that their actions are not steps to carry out a law violation, and they should avoid taking such steps. Certainly something to chew on. It's reminiscent of the Judge's dismissal of restructured bondholders" argument in this hearing that they were now "hostages." Go talk to Argentina about that, Judge Griesa said - it's the one that will decide not to pay you if it doesn't pay holdouts. As he seems to be saying here - if it does decide to pay you without the holdouts, defying an order of US courts along the way, then that changes the situation of the payment structure. (There has been speculation that Argentina will just decide to pay BNY in Argentina and leave it at that - a kind of "the cheque's in the mail" strategy. First it's not clear if the indenture is OK with that, but more to the point - from the Judge: "There is apparently a dispute as to whether this payment takes place in Argentina or the United States. However, BNY is surely a United States entity. The rest of the process, without question takes place in the United States.") So you can start to see why you might want to look beyond even BNY. And why, in fact, restructured holders have been left incandescent. More on that, in our second post. Related links: Cristina's long, hot summer - JP Rathbone Why we might soon see another Argentine default - Reuters