Sovereign Debt Update

The long-running dispute over the payment of Argentina's sovereign debt, on which the South American nation defaulted for the second time in July 2014, continues to be particularly active.

On February 13, 2015, the Chancery Division of the English High Court issued a ruling in a lawsuit brought by certain holders of euro-denominated exchange bonds issued by the Republic of Argentina during 2005 and 2010 debt restructurings seeking to gain access to €225 million ($257 million) in interest payments set aside to make payments on the bonds. The High Court held that such funds are governed by English law because the bonds and the governing trust indenture are governed by English law.

Back in February 2012, Judge Thomas Griesa of the U.S. District Court for the Southern District of New York ruled that Argentina was prohibited from making payments on exchange bonds without also making payments on bonds held by holdout bondholders. In his injunction, which was affirmed on appeal and declined review by the U.S. Supreme Court, Judge Griesa also prohibited any entity from "aiding and abetting" any violation of his order.

In his February 13, 2015, ruling, Mr. Justice David Richards made a declaration to the effect that the earmarked funds are held by the Bank of New York Mellon ("BNY Mellon") on trusts governed by English law. The judge declined, however, to declare that BNY Mellon's obligations and liabilities are unaffected by Judge Griesa's 2012 injunction.

The English High Court's ruling effectively shuts Argentina out of the international debt markets.

At a hearing held before Judge Griesa on February 17, 2015, Citibank, N.A. ("Citibank") claimed that the February 2012 injunction blocking it from making payments on $2.3 billion worth of dollar-denominated bonds governed by Argentine law would lead to "catastrophic" consequences—including criminal charges and potentially the loss of its banking license in the South American country. Both Argentina and the Clearing House Association LLC—an association of leading commercial banks dedicated to protecting the integrity of the banking system—supported Citibank's request for permission to service the debt, warning that continuation of the payment bar "would raise anew the question of whether bank customers can trust their own bank to comply with the most basic banking and custody obligation: paying customers their money." Holdout bondholders from Argentina's 2005 and 2010 debt restructurings countered that, far from being governed solely by Argentine law, the bonds in question were marketed and sold around the world and therefore should remain subject to the payment injunction.

Argentina's Minister of the Economy, Axel Kicillof, announced on March 3, 2015, that "me too" investors who want compensation for debt owed since the country's 2002 default have lodged claims for between $7 billion and $8 billion in the hope of gaining from Argentina's ongoing legal battle with other holdouts. Judge Griesa responded that he would deal with such claims filed by March 2 on the same schedule as those asserted by holdout bondholders.

On March 12, 2015, Judge Griesa denied a request by Citibank to vacate his July 28, 2014, order prohibiting Citibank from processing payments on certain Argentine law bonds. Citibank had argued that the bonds, which are denominated in U.S. dollars but governed by local Argentine law, do not constitute "external indebtedness" and therefore should not be subject to the court's injunctions. In his opinion, Judge Griesa wrote that "the operative paragraphs of the Injunction do not speak in terms of 'external indebtedness,' and as a result, Citibank's participation in making payments on exchange bonds is prohibited." According to the judge, "[the] Injunction prohibits 'participants in the payment process' from assisting the Republic in making payments on exchange bonds." 

In a March 13, 2015, response to Judge Griesa's ruling regarding future interest payments on the Argentine law bonds, Argentina's economy minister stated that the order violates basic legal principles and that Judge Griesa's decisions "are not based on law" but reflect an "apparent bias against Argentina." The statement was posted as counsel to the holdout bondholders responded to a March 12 letter from Citibank seeking a stay of the ruling. 

On March 16, 2015, Judge Griesa denied Citibank's request for a stay of his ruling blocking the bank from processing $2.3 billion in bond payments for the government of Argentina. Later that day, Citibank announced that its Argentina branch will exit the custody business following threats from the Argentine government. According to Citibank, it has been subjected to repeated threats that the government would revoke its operating license and bring civil and criminal charges if the bank does not pay holders of Argentine law exchange bonds.

On March 20, 2015, however, Judge Griesa authorized Citibank to make interest payments scheduled for March 31 and June 30 on $2.3 billion in Argentine law bonds. The judge also authorized Citibank to exit its custody business in Argentina.