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Argentina Can Make Its Problems The Snake's Problems

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Oh Argentina. Still a mess! Basically all the bad things happened on Wednesday: Judge Griesa ruled that (1) Argentina really can't pay holders of its exchange bonds without also paying off Elliott Associates on its old, unhaircut, defaulted bonds, and (2) neither can anyone else, including such luminaries as Bank of New York (the indenture trustee) and DTC (the clearing system for the bonds). These things are good for Elliott Associates and bad for various other people; you can read about some of the badness here or here or elsewhere.

Here is a note from JPMorgan's Vladimir Werning on what might happen next; my favorite outcome is this:

- Argentina deposits GDP [i.e., GDP warrants, the first thing that gets paid, but the same logic applies to actual bonds - ed.] by sending check to Cede,
- Argentina does not deposit money for holdouts in escrow
- Cede has property of funds on behalf of bond holders
- Cede does not transfer to DTC but its possession means Argentina has extinguished its obligation de Jure
- The funds for GDP sits idle in Cede - they cannot be attached by Court, but cannot be taken out by bond holders
- Holdouts claim Argentina has re-routed the payments and is not complying with injunction
- Argentina's lawyers claim payment to Cede is contemplated in the indenture and does not constitute re-routing
In Cede option there is no dispute, obligations have been extinguished de jure, no default, technical or otherwise.

Cede, of course, being the DTC nominee that is the registered holders of all of Argentina's bonds;1 Werning points out that, while the normal method of paying bondholders is by sending a check to BoNY to send to Cede, sending a check straight to Cede also fits the requirements of the indenture. And because Cede is the only holder of the bonds, if Argentina pays it, then it's paid the bonds, and there's no default, technical or otherwise, no triggering of CDS, and nothing bad has happened. Argentina-wise and bond-wise. Actual bond investors might disagree.

I assume there's something wrong with this because it's too easy, but it's not easy to see what is wrong. The document really does allow Argentina to send a check directly to the holder of the bond, viz., Cede.2 Cede really can't transfer the funds to DTC - the judge's order and opinion prohibit DTC from abetting "any violation of this ORDER, … such as any effort to make payments under the terms of the Exchange Bonds without also concurrently or in advance making a Ratable Payment to NML," but don't seem to contemplate actually taking money out of Cede's pockets if it somehow ends up there. (Cede is after all a good-faith transferee, though it might get in trouble as a transferor.) And there's no default because the only holder of the bonds - Cede - has been paid in full according to the terms of the bonds.

Of course the beneficial owners of the bonds might like this less, but their complaint is with DTC, not Argentina. Presumably their paying arrangements with DTC include provisions like "DTC will actually pay you the money due to you," but, again, that's an issue for DTC, who would be in the situation that BoNY was complaining about last week: on the one hand, they are legally obligated to pay out the money; on the other hand, doing so would be contempt of court.

Felix Salmon says "Elliot vs Argentina is a domestic Argentine issue" and I suppose it is, among other things. But those other things, man, are they things! The case is also a clusterfuck for the future of sovereign debt restructuring, and also sovereign debt generally, and also New York's status as a global center for sovereign debt and maybe private debt and oh everything.

But Argentina could make a lot of those things go away and turn them into a clusterfuck for DTC. Which, y'know, they're the biggest thing ever, so that's not trivial. If the thing that holds all securities for all Americans, and whose smooth functioning allows American securities markets to work, just stops paying people the money it owes them, that is ... troubling for the American financial system. But not so much for Argentina. You could imagine Argentina just paying off the one holder of its exchange bonds and walking away whistling while that one holder nervously explains to all of its participants why they can't have their money.3 And then maybe adding "hey next time buy our local-law bonds; at least our financial system works."

Part of me wants this to just be pure harmless abstraction. After all, having securities at DTC is exactly as good as having them in your personal vault - better, really - so why shouldn't having money at DTC be just as good as having money in your actual hands? (Isn't it kind of? Netting, etc.) But realistically money is money and a claim on money at DTC is not to actual money what a claim on securities at DTC is to "actual securities," whatever those are. So yeah, if you were a bondholder, you'd be pissed.

Also if you're just a person invested in the effective functioning of the U.S. financial system. Here's Anna Gelpern:

The heretofore half-hearted policy interventions on Argentina's behalf signal that the establishment is not all in. It would be interesting to see whether Judge Griesa's expansive opinion gets anyone off the fence, and whether muscular policy intervention now would be too little and too late.

The U.S. establishment can be half-hearted when its interventions are on behalf of Argentina, which whatever else you can say about it is after all a defaulted sovereign debtor. But Argentina isn't really on the hook here: it can just proceed normally, following the terms of its contracts (the new ones I mean) and making all of this DTC's problem. And when the problem is at the core of the US financial system, you can imagine a different outcome.

Pari Passu Wipeout in the Southern District [Credit Slips]
Why we might soon see another Argentine default [Reuters / Felix Salmon]
Argentina default looms [IFR]
Argentina: Set to appeal until it becomes necessary to offer investors (the now NPV positive!) off-shore payment option [JPMorgan]
Argentine Sovereign Debt [Shearman & Sterling]

1.Oh fine boring there's also a depository for some bonds for non-US clearing; the depository is Bank of New York Mellon, not to be confused with the bit of BoNY Mellon that is the paying agent. I'll ignore this for simplicity and rhetorical effect; you can do the same with BoNY depository as you do with Cede.

2.See page C-2 here, the form of note:

The Republic will make payments of principal of and interest on the Securities by providing the Trustee or trustee paying agent the amount of such payment, in [U.S. dollars] [euro] [Other Currency] in immediately available funds, not later than 1:00 P.M. local time on the Business Day prior to the Payment Date, and directing the Trustee to hold these funds in trust for the Trustee and the beneficial owners of the Securities in accordance with their respective interests and to make a wire transfer of such amount in [U.S. dollars] [euro] [Other Currency] to the [ ] as the registered owner of the Securities, which will receive the funds in trust for distribution to the beneficial owners of the Securities; provided that the Republic may, subject to applicable laws and regulations, make payments of principal of and interest on the Securities by mailing, or directing the Trustee to mail, from funds made available by the Republic for such purpose, a check to the person entitled thereto, on or before the due date for the payment at the address that appears on the security register maintained by the Registrar on the applicable record date.

3.IMPORTANT BONUS: no technical default means not only no awkwardness around "we've defaulted on our bonds," but also no triggering of CDS. (Probably?) Everyone thinks that Elliott is hedging3a with CDS so it would make money if Argentina defaults on its bonds, and lose if Argentina enters non-default limbo. If you hate Elliott - and if you're Argentina why wouldn't you? - that's a nice win too.

However, important non-bonus: if you're in the business of actually borrowing in international bond markets, you want your actual investors to actually be paid; telling them "well you got paid in theory" doesn't quite suffice. Thus Werning points to the likelihood of some sort of exchange or local-payment workaround where holders get the choice of (1) being paid into DTC according to the bonds' terms, uselessly, or (2) being paid in Buenos Aires, outside of the terms of the bonds, but with actual money.

3a.Oh yes: hedging. Elliott has won, so Argentina owes it $1.3bn. But Argentina doesn't have to pay them that as long as it pays zero dollars on its exchange bonds. So the rough outcomes are (1) Argentina pays Elliott $1.3bn and pays off exchange bonds or (2) Argentina pays Elliott $0 and defaults on exchange bonds. Buying CDS smoothes outcomes between those two states of the world. Unless there's a third state.