The IMF released its long-awaited paper on sovereign debt contract reform, advocating single-tier aggregated collective action (majority amendment) clauses and a clarification of the pari passu clause to preclude its future use to block payments on restrutured bonds, a la NML v. Argentina. An accessible summary of key points per IMF GC Sean Hagan is here. The recommendations were coordinated with ICMA (whose reform proposal is discussed here and here), as well as wealthy and emerging market governments.

Somewhat miraculously, Kazakhstan just issued a bond where it adopted the bulk of ICMA recommendations, which also puts it in line with the IMF's hot-off-the-press policy. The miracle is both in the issuer and in the timing. Kazakhstan's bond had been stop-and-go for some time (not the place one might expect experimentation). Moreover, the last time the IMF and its major shareholders advocated contract reform, it took YEARS for the first mover to emerge (Mexico). To be sure, first mover is no market shift, but a huge deal nonetheless.

I will have more on the whole subject of debt restructuring reform later, but for now, I just wonder why it was so hard the last time, and so not-nearly-as-hard this time. Is it that the market finally learned that CACs are an innocuous voting device, not the Trojan Horse of default? Is it that the Argentina mess has finally focused the minds? Is it that Kazakhstan balanced the new CACs with concessions to the creditors? Is it that none of it matters? Or that the relevant characters–government debtors, government creditors, market participants, lawyers, international organizations, and trade groups–have finally figured out how to work together?

Still thinking about the possibilities, but in all, indubitably a good thing.

Ding Dong! The Witch is Dead! We have a contract fix against holdouts in sovereign debt restructuring. Here are my two cents on the proposed reforms, as of last Friday. Bottom line is way positive. In my admittedly biased opinion, this is unusually meaningful change. That said, after three days of celebrating in the press and debt relief circles, it is time for a bit of perspective.

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President Cristina Fernandez de Kirchner has proposed a law authorizing the executive to reroute payments on the restructured bonds out of New York, and to offer all bondholders local-law bonds on 2010 exchange terms. All the buzz has been about the swap. But there is no swap on the table, no capacity to execute a swap, and no more details about the swap than there have been in the press for months. We have even had a hearing about this swap (no, Judge Griesa did not like the idea–though he will have more to say soon, I am sure).

Even if Argentina put a real proposal on the table and figured out a way to execute a swap without the help of any of the mainstream intermediaries worried about New York court orders, any new FX bonds issued in that swap would likely be covered by the same injunction that threatens Argentine-law FX bonds paid through Citi, pending appeal. (Would a swap announcement help or hurt the appeal? Hmmm….) In other words, miles to go from here to there, and nothing to act on for the bondholders just now.

On the other hand, Argentina has the capacity on its own to deposit the next bond payment at Banco Nacion. Sure, this would violate the various court orders and the indenture, but if you are a bondholder and want to get paid, you might just have a real choice come September. I still think few people will show up, for many of the same reasons that would gum up a swap–but there is a high probability of an action-forcing event here.

More to the point, any attempt at firing Bank of New York Mellon and unilateral action in contempt of court would present a real problem for BNYM, the various clearing houses, paying agents and advisers involved. I suspect more lawsuits and resignations will come before any swap is launched.

… which makes me think, again, that this was more about the 40-page retelling of the history and the politics of it all. Escalation is the message.

Here is the proposed law rerouting payments under the restructured, now-defaulted Argentine bonds away from New York. Contrary to reports, the big news is not the swap, but the unilateral attempt at firing Bank of New York Mellon and substituting Banco Nacion in Buenos Aires (or an alternative, if voted by the bondholders). Bondholders could then show up in Buenos Aires or wherever Nacion sends their money to get paid. The proposal would also reopen the 2010 swap to the restructured bondholders and the remaining holdouts.(HT Vladimir Werning, Katia Porzecanski) *Correction/Clarification*: Everyone would be invited to go into the swap on 2010 terms under Argentine law and jurisdiction. Since 2010 terms are old news and local law FX bonds are subject to the injunction pending appeals, I am not sure how this helps … not to mention the transaction costs.

Although the ultimate beneficial holders are not bound by the court orders, it is hard to see how most would get their hands on the FX without the help of entities that would either be clearly bound by or worried about New York court orders (banks, payment and clearing systems with a presence in New York). Some might show up in BA, but I am not holding my breath for a large turnout.

The move is obviously a violation of the court orders (so I guess that would be double contempt?), and not exactly in line with the indenture, which requires any replacement trustee to be a New York financial institution. But this is unremarkable–Argentina's actions so far have not exactly been about clever ways to comply (see full-page ads and ICJ lawsuit).

To me, the tone of the legislative proposal is much more remarkable than the content. It takes 40 pages to tell Argentina's version of the events, including the ways in which the U.S. court system and others have failed it. As an aggrieved sovereign, it has no choice but …

If ever there was a U.S. strategy, it is no more. Not now, not in January. I am not holding my breath for a RUFO sunrise. For now, I am watching Bank of New York Mellon (still sitting on $539 million in limbo from the June payment) and other agents and advisers in New York. One big mess just got messier.

From today's Washington Post editorial:

And the battle between Argentina and the hedgies has certainly clarified U.S. law, to wit: If you borrow money, sooner or later, you have to pay it back.

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If some or all of Argentina's Exchange Bond holders accelerate their bonds after last night's default, the amount Argentina owes NML et al. under the terms of Judge Griesa's injunction could plummet.

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The phrase "it depends" was invented 130 year ago by a small group of drunk lawyers from London and New York for the sole purpose of annoying first-year law students, nonlawyers, and people from civil law jurisdictions. Like all things annoying, "it depends" is enjoying a surge in popularity as tensions spike in the Argentine debt saga."It depends" is a magically useful phrase because it can cover up ignorance, describe uncertainty, or assign probabilities in a risky situation. If you are camping out in front of the Special Master's office in New York and hear "it depends" in response to a basic question, you might reasonably wonder which one it is. Here is a mini-guide: 

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It is too easy to miss poignant moments in the news avalanche of Argentina debt litigation. Here is one from Judge Griesa's monologue at the July 22 hearing:

I can't remember whether it was 2010 or 2011, but thereabouts, the attorneys for the plaintiffs requested the Court to recognize a provision which had been in the contractual documents all along but had not been relied on, and that is the pari passu provisions, essentially meaning if the republic paid certain kinds of debts, there had to be a recognition — and I'm not trying to get into the arithmetic — there had to be a recognition of the rights of people with judgments under the pari passu clauses, whatever they were.

Whatever they were indeed.

Kudos to Joseph Cotterill at FTAlphaville for an excellent post on the obsession with the Rights-Upon-Future-Offers (RUFO) clause in Argentina's restructured bonds, which seems to be driving Argentina to a payment default on those very bonds. Judge Griesa is not buying it, though –  at a hearing on July 22, he again denied the Republic's request for a stay of his orders blocking restructured bond payments, unless Argentina pays the holdouts pro rata. He also deferred the hugely consequential decisions on paying creditors under English and Argentine-law bonds; that mess is for another post.

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Extra! Extra!  Today is just another day in Argentina's bond saga. It may well come and go with no payments either to the NML plaintiffs or to the restructured bondholders. However, a Sunday filing by Argentina's Euro-denominated exchange bond holders might lead to substantive developments eclipsing the purely symbolic significance of a missed payment date and the start of a 30-day contractual grace period.  The Euro bond holders' move is a good place to start thinking about the next steps and beyond.

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