Argentina and Its Creditors: Pari Passu Whiplash
The International Monetary Fund (IMF) will not ask the US Supreme Court to review lower courts' decisions against Argentina, blocking payments to restructured bond holders unless holdout creditors are paid proportionately (pari passu). The Fund's decision was the latest step in a legal battle dating from more than a dozen years ago, pitting Argentina against the holdout creditors. The IMF acted amid worries in the United States that a ruling against Argentina would make it more difficult to undertake debt restructurings in future financial crises.
The IMF's action would not have been news had the IMF's intent to file an amicus brief not been announced last week, causing a rally in Argentina's bonds.
By all press accounts, the brief was written and ready to go until US opposition killed it in a board meeting Tuesday morning. US opposition would not have been news either, had the United States not filed briefs in the case itself—twice—saying everything that the IMF was going to say, and much more. Besides, there is just no way that the brief would have been written and scheduled for board discussion without US approval. What changed?
I have no clue. This is a space rife with speculation and conspiracy theories. But here are some stray thoughts responding to some of the memes floating about.
- The None-of-Its-Business Meme.It is goofy to say that the IMF has no interest in the case. The outcome of a sovereign debt restructuring both bears on the success of the sovereign's IMF program, and (as both creditors and debt relief advocates like to point out) on the Fund's own chances of repayment. Inasmuch as the Second Circuit decision already sanctions an enforcement strategy that targets payment systems, clearing houses, trustees, and other creditors, it increases the chances of litigation and complicates sovereign debt restructuring. Promises that the new legal tool would never be used (except on super-bad-bad debtors like Argentina) strain credulity. The ink was barely dry on the Second Circuit opinion when Taiwan filed a copycat suit against Grenada.
- The First Time Meme.Just because the Fund has an interest does not mean it should file papers. In the past, the IMF was in the courtroom but relied on the United States to argue the position to the judges (including in a related case in 2006 where holdouts tried to attach central bank funds en route to the IMF). The Fund did offer a policy view in a case involving Jamaica decades ago, but in a pretty indirect way—giving Jamaica a statement to file with the court. It would have been a first before the Supreme Court. "First" is not an argument against the right course of action, but it is an optical and political barrier.
- The Neutrality Meme. It is incorrect to say that the IMF is not allowed to intervene in a dispute between a member (Argentina) and a private creditor. The IMF Articles of Agreement are generally understood to prohibit intervention in a dispute between two members, though they do not say it directly. Since the 1980s, IMF policy has been not to intervene in disputes between members and private creditors, because the Fund was worried that creditors' governments might end up opposing the IMF in court at a later date. This makes a lot of sense when the creditors are insured banks; not sure it is a good blanket presumption.
Of course the IMF should not file in the courts of a member state over the opposition of that member. But in this case, there seemed to be zero chance of US opposition, because the IMF was fixing to say exactly what the United States had been saying all along in this case. Except that the IMF's brief would have been even narrower—just saying that the Second Circuit ruling made restructurings hard. In contrast, the United States has expressed views on policy, on the meaning of pari passu, on sovereign immunity, and on and on.
- The Sick-of-Argentina Meme. Everyone is sick of this case. May I please be the first to declare my own sick-and-tiredness? But that is the sort of thing that makes officials decide not to file in the first place. There is nothing that Argentina did or did not do last week, or on Tuesday morning, that could have possibly caused a turnabout either by the United States, or by the IMF. In fact, both have sanctioned Argentina for different offenses, and have struggled for months to reconcile their disapproval of everything-Argentina with their unhappiness about the bad law from this case.
- The Tandem Meme. The United States decided to hold back its own intervention before the Supreme Court on Friday. Some interpret the Fund decision as flowing from the US decision. But this makes no sense for two reasons. First, the Supreme Court can and does invite the Solicitor General to intervene; the IMF cannot expect a similar invitation. For the United States, filing uninvited would have been a big step, and an awkward one: Argentina's brief requesting Supreme Court review was surgically limited to sovereign immunity; US briefs to date suggest a much broader set of policy concerns. Second, had there been a connection, the Fund brief would have been pulled last week. If press reports are right that all was full steam ahead Monday, the tandem theory does not wash.
- The Not Now Meme.Reading the US Treasury statement about the IMF pullout ("We do not think the IMF should file... at this time"), you might think the decision was all about timing. The Supreme Court may or may not take the case. The Second Circuit is still thinking about the pari passu formula and third parties. Whatever the judges decide will be appealed too. Why rush? First, the Supreme Court is highly unlikely to take the case. Second, whatever the Second Circuit decides is unlikely to fix the IMF's problem with the rulings so far: allowing holdouts to use pari passu clauses to block sovereign payments. Unless the judges eviscerate the effects of their first decision with a creative payment formula, it's a done deal. So waiting likely means forever holding your peace. And then there is the incentive effect: if you were Christine Lagarde, would you ever play amicus with the US Government after they just hung you out to dry?
- The SDRM Conspiracy Meme. Some awesome rumors have been flying about a "small group" within the IMF trying to bring back the long-defeated statutory sovereign bankruptcy proposal via the latest paper on sovereign debt restructuring and the failed amicus attempt. I have said my piece about the paper. On small groups, I find it implausible that the same people who were hugely burned in 2003 would stick their necks out again 10 years later, after being specifically told not to, and specifically highlighting this fact in IMF executive board papers. Moreover, the best way to bring back the Sovereign Debt Restructuring Mechanism (SDRM) would be to side with the creditors in this case and gin up a flood of pari passu lawsuits. Washington loves its conspiracy theories, and I find the idea of a lawyers' cabal quite fetching—so I kinda hope it keeps up.
- The Political Suicide Meme. Three possibilities follow from all of the above. First, the United States had a sudden epiphany about the merits of the case or the logic of IMF intervention, and simply changed its mind. This would be both weird and flaky. Second, someone senior who had not paid attention to this case before suddenly woke up to it, decided that it had been handled all wrong, and turned the ship around. This would be less weird, but still flaky and embarrassing.
Third, the intense (desperate?) lobbying campaign against Argentina has finally reached a tipping point. Important IMF legislation is pending in Congress, sometimes caricatured as a place where people do not know the IMF, do not care about the IMF, or do not like the IMF. If such people hear that the IMF is arguing against US creditors in the Supreme Court (never mind that US creditors are on both sides of this one), they might vote against the IMF. Intervention=political suicide. But is anyone going to vote for the IMF now that the brief is pulled? If they are, this is a great deal. If they are not, it is like telling a 10-year-old that he cannot drive a car if he does not clean up his room. It's not happening either way.
In sum: I could go either way on the merits of an IMF filing. Given just about any real political choice, I would give up pari passu any day. But is it—and should it be—a political choice? Should this case now turn into a lobbying war, where all the people who filed briefs start calling their elected representatives with their take on pari passu? Is this worth lawmakers' time and US political capital in a global institution? Be that as it may, the whiplash looks dreadful all around.
A prior version of this post appeared on CreditSlips.org.