Friday, August 01, 2014

Today in the #GrieFault

The International Swaps and Derivatives Association (ISDA) has declared that Argentina is a condition of "failure to pay" due to the #GrieFault provoked by the decision of Nixon-appointed zombie federal judge Thomas Griesa. (Davide Scigliuzzo, Isda declares credit event on Argentina CDS Reuters 08/01/2014) This will allow credit default swaps (CDS) designed to pay in the case of an Argentine default to be paid out.

What is the ISDA, you may ask?

The Buenos Aires Herald article from before the ISDA meeting took place, gives us some description, Default insurance up in the air 08/01/2014:

The leader of Argentina’s holdout creditors, New York-based hedge fund Elliott Management, also sits on an industry committee that will determine whether investors who bought credit-swaps protection on the nation’s bonds are paid out.

Elliott Management, worth US$24.8 billion and directed by the billionaire Paul Singer, denied owning CDS in a US court last year, refuting the possession of such contracts that would allow it to profit if Argentina ceased repayments. Stephen Spruiell, Elliott’s spokesman, declined to comment for Bloomberg yesterday.

Ironically, JP Morgan, the bank that bought Argentine bonds from Spanish oil firm Repsol this year, was said to be negotiating to buy out the holdouts’ defaulted debt yesterday, is also part of the 15 dealers and investors on the ISDA committee. Citigroup is another member, and is also at the table with Elliot and Aurelius Management for their bonds. [my emphasis]
It stinks to high heaven to me. But then my nostrils probably don't work like those of a Nixon zombie judge.

Yes, Elliott Management and other vulture funds get an apparently badly confused, 84-year-old Nixon zombie judge to make a genuinely bizarre ruling that forces Argentina into the #GrieFault. Then the director of Elliott, Paul Singer, and several other potentially interested parties get to decide whether it really is a default for the purposes of paying out big bucks on the CDS insurance against an Argentine default. And if Elliott or the institutions of the other members of the committee does have such CDS's, their companies stand to make perhaps hundreds of millions on the outcome of the vote.

Abigail Moses et al in Argentine Bonds Decline as Default Triggers $1 Billion of Swaps Bloomberg News 08/01/2014 indicate, as the title suggests, that up to a billion dollars of swaps could pay out after the ISDA's decision.


It helps to have a crassly partisan judge on your side. I don't know whether the problem with the Nixon zombie judge is mental incapacity, some kind of moral or legal corruption, or if he's just an a*****e. Did I mention he was appointed to the federal bench by President Richard Nixon?

Mark Weidemaier was gobsmacked by some of the Nixon zombie judge's performance on Friday, as he recounts inWhere Do We Go Now? Credit Slips 08/01/2014

After making some initial remarks in which he pointedly refused to use the word "default" (despite having used it in the order setting the hearing), the judge excoriated Argentine officials for publicly saying that the country is willing to pay its debts, when the country really only wants to pay exchange bondholders and not holdouts. According to the judge: "The Republic has issued public statements that have been highly misleading and that must stop... [I]n those public statements, only one of the debts is talked about..." The judge continued, remarkably: "Any disclosure of facts about the obligations of the Republic of Argentina must talk about the two obligations..." The judge further noted that he is "counting on counsel for the Republic to take steps to stop... factual misrepresentations [by Argentina]..."

This is pretty extraordinary. First of all, factual misrepresentations? Argentina has not exactly kept it a secret that there are holdouts and that it considers their claims illegitimate. Its rhetoric might be disrespectful to the court, even petulant at times, but it isn't within shouting distance of misrepresentation. Second, the judge's comments come close to (but stop short of) ordering Argentine officials to acknowledge the legitimacy of holdout claims in their public statements. (See the italicized bit in the last paragraph.) He has no power to do that, but his tone and the content of his comments made clear the extent of his displeasure. [my emphasis]
The Nixon zombie judge on Friday refused to dismiss the mediator who had been working on the Argentina/vulture funds, rejecting Argentina's implied suggestion to do so after he displayed blatant support for the vulture funds over the question of whether the #GrieFault actually was a default in the normal sense. (US judge Griesa urges Argentina, vulture funds to resume negotiations; rejects replacing Special Master Pollack Buenos Aires Herald 08/01/2014)

According to Weidemaier's account, Argentina's counsel didn't specifically asks for the mediator's removal:

The real substance of counsel's comments, however, addressed the special master and the press release he issued on July 30. Now, the special master is basically a mediator, and it isn't exactly unheard of for mediators to issue public statements. But it isn't exactly routine, either. What is routine is for mediators to consult with the parties before disclosing anything about the mediation, and certainly before issuing a public statement. Especially a statement that directly contradicts one party's position on the merits of an important issue - say, by using the word "default" six times to characterize Argentina's status after failing to reach a settlement.
Weidemaier expresses his puzzlement at Argentine counsel's harsh criticism of the mediator/Special Master. He doesn't see what they hope to gain by it. "The judge was mad at Argentina before July 30 but seems madder now," he writes.

Sheelah Kolhatkar addresses the #GrieFault in Argentina Defaults: Three Points
Bloomberg Business Week 07/30/2014. Her first two points seem mainly express her sympathy for the vulture funds. But the third point is more substantial:

Overlooked is that this case may set a precedent with far-reaching global consequences.
I'm not sure who she thinks has overlooked those implications, since for anyone following the case that was likely to be very obvious. But:

It proves that a handful of hedge funds may be able to impede the ability of countries around the world both to borrow money and to renegotiate the terms of their loans if they fall into economic crisis. Considering how many nations in Africa, Latin America, and elsewhere are under the control of corrupt regimes that may borrow funds only to saddle their people with crippling debt, this is is an alarming development. [my emphasis]
It's worth remembering here that the military dictatorship of 1976-83 loaded their country up with debt, which was a major reason for the 2002 default.

But the more immediate concerns are the periphery countries of the eurozone like Greece, Portugal and Spain who actually need to write down a substantial portion of their debt right now.

Shannon O'Neil has a genuinely good analysis of the #GrieFault in Of Course Argentina Defaulted Foreign Policy 07/31/2014.

Anna Gelpern speculates about future contingencies in the case, particularly what claims the creditors on the renegotiated debt may make. Injunction Math: Acceleration and the Incredible Shrinking Payment Percentage Credit Slips 07/30/2014.

As I was wrapping up this post, I came across this remarkable editorial in the Washington Post, which was once a great newspaper, though that was decades ago now. That was still the case long ago, when Thomas Griesa was first appointed to the federal judiciary. It's called, Argentina’s default case offers clarity on sovereign debt 07/31/2014.

They must have hired their own Nixon zombie judge to write this editorial: "And the battle between Argentina and the hedgies has certainly clarified U.S. law." I guess that's so. Except for, you know, the overruling of several centuries' precedent and a judge that can barely remember what he said from one sentence to the next.

This is about the loopiest thing I've read on this case, except for the very strange rants of a writer for Business Insider, Linette Lopez, whose articles leave you knowing less about it than you did before you started reading.

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