Argentina is famous for its defaults, financial crises, and bad habit of getting stuck in messy litigation in the U.S. courts. Of its many defaults over the last 200 years—nine and counting, the bond market pricing in a high probability of yet another—one stands above the rest for its size, the animosity it triggered, and the litigation that followed: Argentina’s default on about $100 billion of bonds in December 2001. Following bitter fights with the IMF and a group of creditor activists, Argentina restructured 76% of this debt in June 2005, giving investors only 34 cents-on-the-dollar in June 2005. Holders of about $20 billion of the defaulted bonds balked at these terms and sought redress in the courts, setting off an unprecedented decade of litigation.
During the decade of litigation that followed the Judge overseeing the hundreds of cases, Judge Thomas P. Griesa of the United States District Court for the Southern District of New York got increasingly angry at Argentina. The country at first refused to pay a penny to any of the $20 billion “holdout” investors, who had rejected its deal. And then, after offering them a second chance in 2010, refused to countenance settling with the remaining 8% of original holders on terms other than the investors took in 2005 and 2010.
Argentina told the District Court and later the Second Circuit: it’s my way or the highway. And this frustrated the court immensely. Argentina had issued tens of billions of dollars of bonds documented under the laws of the State of New York, had specifically agreed to the jurisdiction of the court, and had waived its sovereign immunity to the maximum extent provided by law. And now the country was—for years—steadfastly refusing to pay billions of dollars of judgments handed down by the court.
In response, the plaintiffs’ argument in court increasingly shifted from the traditional “contracts must be honored” argument to a “they are disrespecting the authority of the court” and “you can’t let them get away with it” argument.
Things came to a head at a hearing on Feb. 23, 2012, to consider a motion by lead plaintiff NML Capital, Ltd., an affiliate of New York hedge fund Elliott Associates, to impose an injunction on Argentina whose effect would be to block the country’s ability to pay the 92% of bonds that had already settled with the country. This was an extraordinary remedy for the hedge fund to ask for as it put continuing payments to other creditors who took a deep haircut at risk to compel repayment of their claims in full, but the firm’s bet, apparently, was the Judge Griesa would be mad enough to do it.
“So we have as we all know the most abnormal situation you can imagine as far as complying with legal obligations,” bellowed Judge Thomas P. Griesa in his lower Manhattan courtroom on Feb. 23, 2012. Argentina had gotten under his skin. Not only had the country been in default for over a decade and was refusing to pay billions of dollars of judgments, but the Argentine Congress had passed a law in 2005 saying that it would never negotiate and never pay its court judgments.
The question was what to do about Elliott’s proposed injunction, which would interfere with Argentina’s ability to finance itself in the international capital markets. Elliott’s injunction would order Argentina to not pay its other international bonds until it paid the plaintiffs in full. Because it would be a crime for financial intermediaries to process non-complying payments in the face of such a court order, Argentina’s New York-based paying agents could be relied upon to refuse to move any money from Argentina to its other bondholders. As a result, the injunction would act as a financing blockade, because without the ability to make normal payments on outstanding bonds, it would be very hard for Argentina to issue bonds in the international markets.
Academic experts and international policymakers were aghast at the possibility Judge Griesa would impose such an injunction. The court couldn’t just block payments to the 92% that had taken a loss to force payment in full to the 8%, they thought. Not only would such a ruling be commercially unfair, but it would promise great disruption in future sovereign debt restructurings as other hedge funds would certainly pile on to Elliott’s strategy in the future.
Yet Judge Griesa was facing a different kind of nightmare scenario: endless, mind-numbing litigation. Since 2002, hundreds of cases had been filed against Argentina in his court by a wide variety of plaintiffs: retail bondholders, banks, companies, asset managers, hedge funds, offshore vehicles, class action claimants. Processing the cases became a full-time job dealing with complaints, judgments, class action procedures, attachment motions, discovery, hearings, opinions, orders, appeals. By the time of the settlement of most of the litigation in 2016, over 270 suits had been filed, he had held over 150 hearings, and there had been over a dozen serious attachment efforts and more than 35 appeals, one even making it to the Supreme Court in 2014.
Judge Griesa’s problem was that it is easy to sue but hard to collect from a foreign government. First, foreign countries swipe all their assets out of the United States before they default. Second, the U.S. federal statute governing commercial claims against foreign countries, the Foreign Sovereign Immunities Act of 1976, sets a high bar to collecting from foreign countries. Under the act, creditors can’t take a country’s central bank assets, military assets, or assets being used for governmental activities. Meanwhile, diplomatic assets are protected under the Vienna Convention. Making matters more complex, foreign countries are not permitted to file for bankruptcy in U.S. courts, making it hard for the court to compel settlements or make them binding.
Elliott’s injunction proposal might be effective, but on Feb. 23, 2012, Judge Griesa’s repeatedly refused to impose it. Not long into Elliott’s lawyer’s argument, Judge Griesa interrupted: “Now look, this would indeed be a mechanism for enforcement but it also presents a very serious problem. So let me ask you this. Is there any legal authority, is there any legal basis for me…to interfere with the payment to the exchangers,” the 92% who had taken Argentina’s offers in 2005 and 2010. Arguing Elliott’s case was former U.S. Solicitor General Theodore Olson from Gibson Dunn, famous for his victories for the conservative side in Bush v. Gore (2000) and Citizens United (2010).
Judge Griesa was generally solicitous of Olson and his carefully honed arguments, but today he was curt: “I don’t think you are going to give up your position, but I have to say, and maybe I am wrong, but I have to say that the exchange offers are not new to me and I have in one way or another dealt with them to the extent it has come up before me as being something that the Republic had a right to do, the exchange offers had a right to exchange and get new obligations, and I have felt that it was not any province of mine at all to interfere with those exchange offers or rights acquired under them. I know again you are sticking very well to your argument, but I have to tell you I am sticking to my position. I think I cannot interfere with the rights of the exchange offers by putting conditions on them or impediments on them.”
Judge Griesa’s concern was that it might lead to the default on $30 billion of performing bonds if he did impose the injunction. Olson countered that Argentina could pay and would pay. Argentina’s foreign exchange reserves hovered around $50 billion dollars, while all the plaintiffs were collectively owed over $10 billion dollars and the injunction request was being made with respect to a subset of cases on which only a few billion dollars were owed. So Olson argued that Argentina had ample cash reserves to make the payment in full: “The amount we are talking about is two-thirds of the amount in December it paid to the exchange bondholders. So I submit to you that what’s going to happen if you sign this order is that Argentina is going to pay the exchange bondholders because it cannot afford not to. It will pay those bonds. But what it will also do is comply with your court’s order and when it does so, it will pay the NML bondholders and the other people here today, because it is obliged finally to do so in a way that it can no longer weasel out of. It will comply with these obligations. It will bring an end to this litigation.”
Ordinarily, Olson would have faced a strong counter. Yet, on this day he was essentially unopposed. First, the holders of the $30 billion of potentially blocked bonds were missing in action–not even bothering to intervene in the lawsuit until one year later, when it was too late to make a difference. Second, when Argentina lawyer Carmine Boccuzzi from Cleary Gottlieb argued, Judge Griesa barely listened.
Judge Griesa was deeply frustrated with Argentina in 2012. Yet he had strongly supported Argentina during its debt restructuring process during the prior decade, blocking multiple creditors who tried to interfere with the deal and giving the country verbal support. At a hearing in 2003, he told creditors: “What it could be is that the exchange offer looks better realistically than getting judgments and going around and trying to recovery with very little result…there are times that relatively low percentage of recovery is better than nothing.” Argentina couldn’t have helped for more from a federal judge sitting in New York.
But when Judge Griesa needed help ending the cases Argentina didn’t reciprocate. When Boccuzzi argued against the injunction on Feb. 23, 2012, Judge Griesa retorted: “The thing is the Republic has been in here for years saying ‘no’.” Now, you have done [a] pretty good job of it. But the ‘nos’ are always to prevent the plaintiffs from recovering. . . Now, if there was any belief that the Republic would honestly pay its obligations, there wouldn’t be any need for these kinds of paragraphs… The plaintiffs come in with difficult proposals, one after the other. Why? It isn’t because they are interested in difficult legal problems. It’s because your client defended by your firm persists in defying the court and in refusing deliberately to honor its obligations. I don’t see any sign of Cleary Gottlieb helping to lead us out of this. I don’t see any sign of the Republic helping to lead us out of this at all.”
Still, Judge Griesa’s frustration with Argentina was not enough, by itself, to get him over his discomfort with the injunction proposed by Elliott. Olson’s opportunity came when Judge Griesa threw out a hypothetical question, asking what if the defendant was not Argentina but an asset-rich domestic corporation: “If you had a normal law-abiding, asset-holding [debtor] . . . you wouldn’t have to interfere with the rights of the first people. Do you see what I mean?”
“Yes, your honor,” Olson answered.
“So,” Judge Griesa continued, “the reason I go through all the cogitation I am going through is and the reason for the provisions in your proposed order is the suspicion that the Republic may not want to honor its obligations… and that the Republic may not abide by a court order and may not have any assets against which a court order could be recovered, something we have gone through for 10 years.”
Olson followed up on this, asking Judge Griesa what would happen if Judge Griesa imposed the injunction on an “honorable debtor.”
Judge Griesa got the point of the question. He said: “The thing is the order that you propose would be no problem if you had an honorable debtor in the form of the Republic, it would be no problem at all…The thing is I guess I have such a mindset after 10 years of history that I am assuming something that maybe I ought not to assume. I think that’s your point. I ought not to assume in making a ruling that the Republic will disobey the order of the court.
“Exactly, your Honor,” Olson responded.
In making his ruling to impose the injunction Judge Griesa admitted the injunction had problems and could be overturned on appeal, but to him, the bigger problem was the Republic’s behavior. He said: “I am going to sign the order. It’s not the first time that a court has signed an order that may have problems. But to me, the bigger overriding problem is the lawlessness of the Republic. When I say lawlessness I mean the deliberate, continued failure to honor the most clear-cut obligations in the debt instruments, the most clear-cut assurances in the debt instruments. Those have been turned into a dead letter by the Republic. Well, they are not a dead letter in this courtroom.”
However, Judge Griesa’s righteous indignation swerved into a naïve commercial analysis when he closed by saying that Argentina would pay the holdouts to avoid going back into default on its other bonds. He said, “It’s very simple and very basic and very uncomplicated. And this litigation will be over with.” This was naïve because when Argentina’s appeals ran out in June 2014, the country chose to not pay the holdout creditors and–under court order–went back into default on tens of billions of dollars of bonds.
Judge Griesa’s decision to impose the injunction on Argentina on Feb. 23, 2012, became a total nightmare. He thought Argentina would pay. Then, in June 2014, he brought in an old friend, lawyer Daniel Pollack from McCarter & English, to serve as a special master, a form of arbitrator to force a settlement of the litigation. But that effort failed, and Argentina wallowed in default–the worst-case scenario for Argentina, the plaintiffs, its exchange bondholders, and the court.
The situation was only cleaned up in April 2016, just a few months after representatives of the newly elected government of Mauricio Macri reached out to special master Pollack to commence bona fide settlement negotiations.
Judge Griesa’s 2012 ruling and Argentina’s 2014 re-default were watershed events for sovereign debt markets. Ironically, the events didn’t lead to a collapse in the practice of sovereign debt restructuring, but to a material improvement: The events convinced the market to accept powerful new quasi-bankruptcy voting clauses under which if 75% of the bondholders of a country vote to accept a restructuring offer 100% will be bound by the terms. Now sovereign debt litigation of the sort experienced by Argentina is much less likely to occur because potential holdouts will be forced into the deal accepted by the others.
Judge Griesa died at the age of 87 on Dec. 24, 2017. He will long be remembered for his historic ruling in the Argentina bond cases.
This is an adapted excerpt from Default: The Landmark Court Battle over Argentina’s $100 Billion Debt Restructuring by Gregory Makoff (Georgetown University Press, 2024).
Gregory Makoff is a Senior Fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School.
