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The Trial of the Century?


The beauty and lasting power behind the US Constitution is mostly due to its simplicity and clarity. With high-school English comprehension, plus a bit of bedtime reading and everyday common sense, the mechanical clockwork that makes US governance tick comes to life. The US Constitution is shorter than many short-stories.

“The trial of the century”

Now fast forward to the “Argentina vs. Vulture Funds” litigation and the unfortunate high-profile involvement of the US judiciary in what the Financial Times has coined “the trial of the century”.  Such spectacular denomination surely obeys to the fact that we have now passed from previous UN-enforceability of sovereign debt (by definition) to potent help freely offered to rogue creditors (vulture funds) which will bring about negative consequences world-wide (of course).

As University of Georgia Prof. Tim Samples has exquisitely put it, the current situation establishes  “… a radical departure from the traditional unenforceability of sovereign debt in favor of the opposite extreme: potent injunctive remedies applicable to third parties… a landmark case in a trend that threatens destabilizing consequences for sovereign debt restructuring — a major concern for sovereigns as well as their creditors — and creates serious uncertainties for financial institutions”. The term “sovereign” is mentioned three times.

Size matters

The world’s global sovereign debt is close to USD 55 Trillion (three times larger than US GDP) and thus has enormous impact on financial markets and everyday economics, political stability and even national security. Credit Default Swaps (CDS), otherwise known as “insurance in case of default” leverage such impact with unfathomable counterparty risk worldwide.

Sovereign debt is not limited to emerging markets as the Eurozone holds its largest single portion with a very thick mesh of debtors and creditors intertwined in an unimaginable criss-cross matrix. Europe also matters.

Judicial footbal

Now then, with Judge Griesa (84) quarterbacking from his Manhattan office and/or his Montana ranch, the US judiciary team (with help from the US Supreme Court) has scored some historical ‘touchwrongs’ in the US governance game. Meanwhile the Executive Branch watches idly from the sidelines.

Actually,  Judge Griesa’s daring plays (including a couple of Hail Mary passes) have ‘touched-wrong’ both legal and diplomatic fundamentals which will serve as precedent for other (huge) cases of outstanding international sovereign debts.

Foul plays

(1) ) The US Supreme Court went far beyond the US Constitution thru its “exorbitant approval” of vulture funds’ full discovery (precise information) of Argentina’s seizable assets worldwide. That means letting vulture funds know exactly where Argentina has property that can be embargoed, so that they don’t waste time, money and energies finding that out. US Supreme Court Justice Ruth Bader Ginsburg enjoys plenty of fine company with her dissent on this issue. CHECK.

(2) The judiciary Code of Conduct forbids US judges from punishing parties with scorn and/or bias, let alone a sovereign nation state, however “recalcitrant” (sic) it may be deemed to be. CHECK.

(3) The US Constitution expects the Supreme Court to comply with its responsibility to oversee trascendental judgements with long-term consequences that visibly exceed the scope and authority of lower courts of law. CHECK.

(4) The Attorney General’s job description includes overseeing legal matters affecting long-lasting interests of the US. CHECK.

(5) The State Department and Congress are expected to oversee any foreign policy matter along the same lines. CHECK.

(6) ‘Pari passu’ is not a single clause. There are several ‘pari passu’ clauses and interpretation thereof  is, at the very least, highly ambiguous and deeply contentious worldwide, even in the US. CHECK.

(7) A New York judge cannot declare it “illegal”for a sovereign nation state to pay any of its creditors, nor force US trustee banks to withold such payments, let alone outside the US. CHECK

(8)  The US Constitution does not foresee any Judiciary Branch involvement in other nation states’ affairs as such fall squarely within the realm of the political branches of the US government (Congress and the President). CHECK.

The perfect storm

Sometimes Argentina’s unique manners are certainly not welcome and, true enough, most of the time its English skills are not a source of envy. But unprecedented US judiciary meddling shoving Argentina under a bus will definetly not solve the problem although it will surely rock the international financial boat while still navigating 2008 high-waves seas.
The last thing the financial world now needs is an unpredictable and uncertain sovereign debt market with rogue creditors supported by rogue courts.

However it’s sliced, the US judiciary’s blatant tinkering has enabled a tiny minority (1.6%) to thwart the world’s largest and most widely supported (92.4%) Sovereign Debt Default restructuring. Worse, it is all being done despite the glaring absence of internationally acknowledged legislation on sovereign bankruptcy to abide by.

As a matter of fact, it might readily trigger an international cascade of competing “legal” claims involving many other sovereign defaults besides Argentina’s.

By the way

Will the US continue to be viewed as a convenient place to issue sovereign debt ?

Is the US risking reciprocal adverse treatment from foreign courts, embassies or institutions?

Is the Federal Reserve aware of the near future requirements regarding all of the above?
Jorge Vilches writes about trade and finances.

Jorge Vilches is a financial op-ed columnist based in Buenos Aires, Argentina. He can be reached at:

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