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Judge Griesa's Impact Upon CDS, Derivatives, and Sovereign Bond Markets

Argentina’s Default, Vulture Funds and the US Courts

by JORGES VILCHES

In order to avoid a new default in less than three weeks, Argentina and all of the holdouts must reach an agreement that is acceptable to every restructured bondholder of Argentine debt and Judge Thomas Griesa.

Otherwise, some of the possible outcomes include:

(1) An international cascade of competing “legal” claims involving many other sovereign defaults besides Argentina’s

And/or…

(2) A pseudo-Lehman Brothers CDS and derivatives scenario, possibly with new 2008-type bail-outs

And/or…

(3) Deepening of the current de-dollarization of international finances, with markets, governments and the Federal Reserve befuddled and dysfunctional as in the 2008 limbo.

The setting

The glaring absence of internationally acknowledged legislation on sovereign bankruptcy to abide by forced common sense to prevail without the need for judicial intervention. Thus, the largest nation state default in history was successfully left behind, and by 2015, Argentina was expected to return to international credit markets after 13 years of ostracism.

Nobel Prize laureate Paul Krugman, in a front-page high-impact 2012 New York Times piece, praised Argentina’s “remarkable success story.” Many other world-renowned authorities agreed that the decades-long conundrum of debt traps had finally been solved, with implications of genuine growth.

Enter the US Judiciary and Vulture Funds

The US judiciary decided to treat a sovereign debt default as if it were a run-of-the-mill New York business bankruptcy. The minuscule (1.6 percent) albeit horribly powerful holdout vulture funds had taken advantage of the occasion to implement their cunning and fully vetted business model based on the purchase of defaulted Argentine debt that was handed over at dirt cheap prices.

This utterly suspicious class of “plaintiffs” had simultaneously engaged in swift and handsomely expensive lobbying.

Finally, they gained heavy-weight legal support, manifest namely in very “curious” US judiciary rulings in disdain of the very nature of a sovereign debt default.

Judicial overreach

Now, circumstances are pushing financial momentum for a brand new Argentine default with as of yet unfathomable “un-intended” consequences, including multi-multi-billion arithmetically unpayable new claims worldwide as the decisions of the US judiciary decisions would be taken as precedent.

The problem is that such sanctions were imposed on a nation state without internationally-acknowledged sovereign bankruptcy rules to back them up. As per sovereign immunity (something to which nation states cannot waiver) and also by definition, sovereign debt is unenforceable. The patient has died, and no miracle drug can revive the corpse. Debtors may have rights, but not remedies. US law, judges, and a “special master” do not apply to nation states. Judge Griesa’s “pari passu” interpretation has been hotly and widely contested worldwide, even in the US.

As a matter of fact, Judge Griesa’s own moaning for months along these lines is on record. The US Judiciary has overstepped the mark of common sense and violated several important clauses of the delicate, unwritten code that rules amicable foreign relations. The US judiciary should not establish US foreign policy, nor is it a world court. As per Justice Ruth Bader Ginsburg’s dissent, the Supreme Court should not “exorbitantly approve” vulture funds’ direct access to US listings of Argentina’s seizable assets worldwide.

Eyes wide shut

Obviously, in view of the default that is being actively pursued, financial terrorists worldwide may now surely “join the party” by filing additional multi-billion claims through CDS’ Credit Default Swaps.

As the IMF is painfully aware, all of the above is bound to fuel a worldwide cascade of competing “lega” claims from vulture funds, plus restructured sovereign bond creditors and CDS holders, all of which would severely affect counterparties and possibly trigger systemic events that were absolutely unimaginable only a week ago.

It?s worth mentioning that CDS counterparty risk is concentrated in only ten ultra-highly leveraged “too-big-to-fail” banks, which may have to be bailed out yet again depending upon how events unfold.

Thus, the international financial system could needlessly find itself running around in circles, clueless and deeply submerged in a J.K. Galbraith type of “Age of Uncertainty.”

The question is whether the Fed is ready for any of this.

Jorge Vilches writes about trade and finances.