According to everybody, things are looking up all over. U.S. GDP numbers are up (with a 45% rise in inventories), Italian and Spanish yields are down with the Spanish economy looking terrible), the Greeks and the Euros have almost found the can to kick (whilst the Greeks announced that their buy-back of debt will have to be financed...how's that again?) Japan looks better and everyone has talked themselves into believing that the fiscal cliff is overdone. Don't look at me; who am I to question the wisdom of the ages.
On top of all of this, surely you remember the story surrounding the arrest of the good ship Liberdad as a result of the landmark decision against the Argies a couple of weeks ago? To the surprise of many the 2nd U.S. Circut Court of Appeals has stayed the decision of the District Court which sought to inforce the parri passu clause in the original Argie loan documation which would have resulted in the Argies putting up some $3 billion in escrow for the holders of non-restructured debt should the restructured bond holders receive a payment next week. The logic and reasoning of the Appelate Court seems to seems to be firmly planted in thin air not to mention the applicable law. To make matters worse the influential New York Times Bloggist Steven Davidoff has weighed in with an article that all at once demonstrates that he neither understand the business, doesn't understand the law, doesn't understand the Federal Court system and doesn't understand what goes on in the negotiation of sovereign loans. No reason why he should of course: He is a professor of law and finance at THE Ohio State University. I urge you to read his piece in the Times of yesterday.
Just to help, the Foreign Sovereign Immunities Act of 1976 does not exempt foreign states from litigation; on the contrary, it states the BASIS upon which Sovereigns CAN be sued. The general rule is that when a Sovereign commits sovereign acts it is generally cloked with immunity, BUT when the acts are inherintly commercial in nature, the cloke of immunity may well disappear. Might I suggest that signing an agreement to borrow money and subjecting itself as a basis to so do to the laws and jurisdiction of another sovereign state is an act commercial in nature. The Argies never raised the issue except as a throw-away line.
The Judge, Thomas Griesa, ruled that the Argies had to treat the holders of the unrestructured bonds in the same manner (but not as to amount) as the holders who restuctured, in accordance with the original contract terms, or to put it another way the full interest due on the original but not the restructured amount. The Argies screamed like pigs claiming
1. The original holders were gone having sold the bonds to "Vultures"
2. Parri passu only meant the holders were to be treated "legally" the same but not as to payment (?????)
3. Custom and practice in debt restructurings would be overturned and cited Greece as an example that never would have happened.
This is all pointed out in Prof. Davidoff's article. The arguments are all rubbish.
Under law, the "Vultures" are what we call holders in due course. As such, they have all the rights and privilages of the original holders.
As to the Argie argument, I have no idea what that is supposed to mean and I suspect that no one who spent 2 weeks in a class on contract law knows either. Speak to a banker and he will tell you the only thing legally important in a loan document or debenture is how he gets paid.
The "custom and practice" argument is a complete fabrication. It has never been part of any practice and to refer to Greece as did the Argies ( Prof. Davidoff does as well) is to ignore the fact that the debt restructured by Greece was subject to Greek law. As to the Greek obligations subject to (primarily) the Laws of England and subject to English jurisdiction, they were paid to the last penny with neither argument nor deduction. To not state this fact is either egregiously poor research or a deliberate attempt to decieve.
For the 2nd Circuit to fall for this crap and grant a stay is even worse. I am reminded of a battle royal that occurred many years ago between Wells Fargo and Citibank over the terms of the restructuring of the Philippines, being overseen by Citibank much to the dislike of the plaintiff.
Eventually, it reached the Supreme Court which sent it back for a rehearing but before that occured, the parties settled (with I am told, a suggestion from the Federal Reserve). Weeks later I was speaking to one of the Justices who was an acquaintance at the time.
"Remember the Wells/Citi case over the Philippines? You gentlemen realized of course that everything requested of the banks by the Philippines was drafted by Sherman & Sterling at the request of Citibank?" (Because that's the way it was done)
"WHAT! WHY DIDN'T WE KNOW THAT?!"
"Nobody told you I guess."
Prof Davidoff suggests that there is a danger in the Courts of the United States interfering in international affairs. Nonsense. When a sovereign willingly subjects itself to the oversight of this nation's judicial establishment in order to obtain the benefit of borrowing from the international community including American institutions, I would argue it is the DUTY and OBLIGATION of the courts to involve themselves. But Prof. Davidoff is correct when the courts are unaware as to either the true facts or the true nature of the transactions involved as too often is the case.
Oh yeah, Professor, one other thing. The Liberdad might have been a frigate 200 years ago; that's not what is is today. It's a training vessel. It moves by wind. It has sails. Not even sure it's a frigate as the classafication of frigate refers to a lightly armed ship of war. It may be a three-masted bark. We could research it together if you like?
Full disclosure: I avoided doing ANY business with Argentina, but that's another story
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