MANHATTAN (CN) – Without a 2nd Circuit reversal, Citibank will have to choose whether to transfer funds to Argentina at the end of the month in violation of a federal court order, or open its Buenos Aires-based subsidiary and staff to possible criminal prosecution.
Citibank has a Sept. 30 deadline to transfer $5 million to bondholders owed money under Argentina’s 2005 and 2010 debt restructuring agreements.
U.S. District Judge Thomas Griesa in July endorsed a “one-time” transfer of funds from Citibank to Argentina. He ruled that all further transfers would be banned until Argentina paid off $1.3 billion it owed hedge funds NML Capital and Aurelius Capital Management for debts the companies bought during the nation’s default in 2001.
Argentina has described these companies, owned by Republican billionaire Paul Singer, as “vulture funds” for buying distressed debt for pennies on the dollar and then suing to enforce the original terms. Countries like Peru, the Congo and Argentina that have borne the brunt of Singer’s business model have vilified him, but U.S. courts have routinely found that he holds legally binding contracts.
As Citibank’s Sept. 30 payment deadline looms, Argentina’s President Cristina Kirchner openly supported legislation to sidestep what she called the “illegitimate and illegal” directive of the New York court. Her financial ministry has meanwhile threatened Citibank with criminal prosecution if it refuses to make the transfer.
An international audience filled the 2nd Circuit on Thursday to see how the federal appeals court would react.
Citibank’s lawyer Karen Wagner warned that maintaining the injunction would cause an “imminent catastrophe.”
Judge Reena Raggi, a George W. Bush-appointee, told Argentina’s lawyer Carmine Boccuzzi: “Your client is the entity holding the gun to Ms. Wagner’s head.”
“You are not offering here to remove the gun,” she added. “Your client is the person holding the gun.”
Turning the analogy on its head, Boccuzzi replied: “The so-called gun is [Argentina’s] laws and regulations.”
There are no signs that Argentina plans to back down, and the country has ignored previous orders from New York courts as an invasion of its sovereignty. The republic faced a panel of the same three judges that ruled against them last year and called the country “a uniquely recalcitrant debtor” in its ruling.
“We’re left to speculate about whether the orders that this court issues will be respected by your client,” Judge Barrington Parker, who ruled against them before, said Thursday.
Raggi wanted to know what would happen if the court again ruled for the hedge funds.
“If we don’t agree with you, and the injunction stands, is Argentina going to obey this one?” she asked Boccuzzi.
He replied that he did not have a “crystal ball.”
“It is not a happy situation,” he acknowledged. “It is an extremely fraught situation.”
Raggi ridiculed this position.
“Give us relief, and we’ll obey,” she said. “Don’t give us relief, and we’ll ignore it.”
At one point, Judge Rosemary Pooler floated the idea of staying Griesa’s order to “buy us three months,” thus giving Citibank more time to resolve the crisis.
Roy Englert, an attorney for the hedge funds with the Washington-based firm Robbins, Russell, Englert, Orseck, Untereiner & Sauber, said that any compromise would cause the injunction to “unravel.”
“There’s an old saying that a chain is only as strong as its weakest link,” he said.
Raggi asked what Citibank should do if it does not get relief.
Englert said Citibank should follow in the footsteps of the Bank of New York and pay the order.
Raggi noted that the Bank of New York was did not have a subsidiary subject to Argentine law.
“It’s a tough position,” Englert said. “It’s no question. It’s a tough position caused by the misconduct of Argentina.
Wagner said that Citibank would follow whatever decision the appellate court makes, but she said that forcing it payment of the “extremely small” $5 million in interest “will cause a large disaster for our client.”
“As Judge Raggi said, we have a gun to our head, and that gun will go off,” Wagner said. “[Upholding the injunction] won’t benefit anybody, but it will hurt us.”
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