Known Unknowns in Pari Passu ... and More to Come
The Friday decision in NML et al. v. Argentina has clearly shaken the sovereign universe. While I am normally more prone to panic than Felix Salmon or Vladimir Werning, these wise folks reasonably point out that the decision may spell the End of the World for sovereign immunity, sovereign debt as we know it, etc. "May" is the operative word in my view. We need more information and analysis (stay tuned) before we dash for the bunker.
Yes, it looks like previously unenforceable sovereign debt has suddenly become more enforceable. Zero to something. But how much? It depends on too many things to know for sure. Will the Second Circuit rehear the case en banc? Will the U.S. Government and those who sat on the sidelines in this round -- the IMF, the Federal Reserve, more intermediary banks -- pipe in? Will SCOTUS take the case? Will Judge Griesa pare back the effect of the injunction if Elliott wins the appeals? Vladimir is right that this will not go away. But we really do not know enough about what "this" is to say much more than that. We have a Second Circuit opinion that seems to disdain its own implications, and some history of SCOTUS slapping down Argentina when the U.S. Government was on the other side. Go figure. Ask your favorite court maven (I will).
Yes, Argentina's CDS have gone through the roof, correctly reflecting immense uncertainty about the near future of its foreign bond stock. But I doubt that either the courts or the policy establishment would find this fact compelling. Argentina has been a headache for too many for too long to elicit sympathy. What I really want to know -- consistent with the thrust of the U.S. brief -- is whether other sovereign and sovereign CDS spreads are going nuts, and if yes, which ones. The way Argentina wins here is by invoking the good of the system without overclaiming. No mean feat.
Yes, we seem to have a damagingly broad interpretation of pari passu out of the Second Circuit. Does it mean that a prospectus warning holdouts they might not get paid amounts to a subordination in violation of the pari passu clause, at least versions similar to Argentina's? Maybe. Will foreign courts adopt the Second Circuit's reading, exposing countries such as Italy to Argentina-scale uncertainty? Yikes. For what it's worth, this is where I feel most comfortable being worried. I will be looking for more data on just how many other countries have vulnerable formulations of the clause.
All this to say, there is a big difference between "mostly dead" and "all dead". And I suspect that Argentina -- and more so the broader universe of sovereign debt and sovereign immunity -- is "mostly dead" as far as pari passu goes. For now.