Amicus curiae France 26 juillet 2013

No. 12-1494

IN THE

Supreme Court of the United States

REPUBLIC OF ARGENTINA,Petitioner,

—v.—

NML CAPITAL, LTD., ET AL.Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATESCOURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF FOR THE REPUBLIC OF FRANCE AS AMICUS

CURIAE IN SUPPORT OF THE REPUBLIC OF

ARGENTINA’S PETITION FOR A WRIT OF CERTIORARI

d

ANDREW RHYS DAVIES

(Counsel of Record)MOLLY C. SPIECZNY

MICHAEL WESTFAL

ALLEN & OVERY LLP1221 Avenue of the AmericasNew York, New York 10020(212) [email protected]

Counsel for Amicus Curiae

July 26, 2013

DIANA BILLIK

ALLEN & OVERY LLP52 Avenue Hoche 75379 Paris Cedex 08France

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TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . iii

INTEREST OF THE AMICUS CURIAE . . . . 1

SUMMARY OF THE ARGUMENT . . . . . . . . . . 4

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

I. THE COURT OF APPEALS’ AFFIRM-ANCE OF AN INJUNCTION DESIGNED TO COMPEL PAYMENT OF PAST-DUESOVEREIGN DEBT DEVIATED FROM FUNDAMENTAL TENETS OF EQUITYJURISPRUDENCE . . . . . . . . . . . . . . . . . . . . . . . 6

II. THE DECISION OF THE COURT OFAPPEALS THREATENS WIDER PUBLIC INTERESTS. . . . . . . . . . . . . . . . . . . . 7

A. The Court Of Appeals’ Decision Will Have A Global Impact . . . . . . . . . 7

B. The Court Of Appeals’ DecisionJeopardizes The Ability Of SovereignDebtors To Achieve Orderly AndNegotiated Restructurings Of TheirExternal Debt . . . . . . . . . . . . . . . . . . . . . . . . 10

1. The Court Of Appeals’ DecisionCreates Disincentives For Creditors To Participate In Orderly Debt Restructurings . . . 10

TABLE OF CONTENTSPAGE

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2. The Court Of Appeals’ DecisionThreatens The Ad Hoc SovereignDebt Restructuring Process And Has Wide Implications For Inter-Creditor Equity . . . . . . 13

C. The Court Of Appeals’ Decision AlsoThreatens Sovereign Lending,Particularly Development Aid In The Form Of Loans To DevelopingCountries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

D. Contrary To The Court Of Appeals’ View, Collective Action Clauses Do Not Ameliorate The Problems Created By Its Ruling . . . . . . . . . . . . . . . 17

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21


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Great-West Life & Annuity Ins. Co. v. Knudson,534 U.S. 204 (2002) . . . . . . . . . . . . . . . . . . . . . . 6

Harrisonville v. W.S. Dickey Clay Mfg. Co., 289 U.S. 334 (1933) . . . . . . . . . . . . . . . . . . . . . . 7

Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992) . . . . . . . . . . . . . . . . . . . . . . 6

NML Capital, Ltd. v. Argentina,699 F.3d 246 (2d Cir. 2012) . . . . . . . . . . . .passim

O’Shea v. Littleton,414 U.S. 488 (1974) . . . . . . . . . . . . . . . . . . . . . . 6

Salazar v. Buono,130 S. Ct. 1803 (2010) . . . . . . . . . . . . . . . . . . . . 6

Weinberger v. Romero-Barcelo,456 U.S. 305 (1982) . . . . . . . . . . . . . . . . . . . . . . 7

Younger v. Harris,401 U.S. 37 (1971) . . . . . . . . . . . . . . . . . . . . . . . 6

Statutes and Rules

Sup. Ct. R. 37.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Sup. Ct. R. 37.6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Other Authorities:

Udaibir S. Das et al., Sovereign DebtRestructurings 1950-2010: LiteratureSurvey, Data, and Stylized Facts,International Monetary Fund Working Paper No. 12/203 (August 2012) . . . . . . . . .8, 11

TABLE OF AUTHORITIESPAGECases:


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International Monetary Fund, Eligibility To Use The Fund’s Facilities ForConcessional Financing(March 15, 2013) . . . . . . . . . . . . . . . . . . . . . . . . . 15

International Monetary Fund, Sovereign Debt Restructuring—Recent Develop-ments and Implications for the Fund’s Legal and Policy Framework(April 26, 2013) . . . . . . . . . . . . . . . . . . . . . . . . .passim

Julian Schumacher et al., Sovereign Defaults in Court: The Rise of Creditor Litigation 1976-2010 (2013) . . . . . . . . . . . . . . . . . . . . . . . . . 11

Horatia Muir Watt, Private International Law Beyond the Schism, 2(3) Trans-national Legal Theory (2011) . . . . . . . . . . . 12

The World Bank, International Debt Statistics 2013 (2013). . . . . . . . . . . . . . . . . . . . 9

World Bank, World Development Indicators,available at http://databank.worldbank.org (last visited July 22, 2013) . . . . . . . . . 15

Jeromin Zettelmeyer et al., The Greek Debt Exchange: An Autopsy(September 11, 2012) . . . . . . . . . . . . . . . . . . . . 19


INTEREST OF THE AMICUS CURIAE 1

As an active and prominent participant in thefinancial community, the Republic of France has asubstantial interest in issues surrounding inter-national financial stability and global sovereignlending markets.

In its decision of October 26, 2012, the UnitedStates Court of Appeals for the Second Circuitheld that the Republic of Argentina’s decision topay only holders of the exchange bonds it issuedbut not holders of its old bonds (among which arethe plaintiffs) constituted a breach of the paripassu clause contained in the Republic’s 1994Fiscal Agency Agreement (the “FAA”). It furtheraffirmed the grant of an injunction providing thatwhenever Argentina pays any amount due underthe terms of the exchange bonds, it must concur-rently, or in advance, make a “ratable payment” tothe plaintiffs in respect of the old bonds. Thisdecision is based on an erroneous understandingof the meaning of pari passu clauses and contra-dicts the well-settled mainstream market under-standing that pari passu clauses do not covenantthat all payments will be made by a borrower rat-ably with the borrower’s other unsubordinated

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1 Pursuant to Rules 37.2 and 37.6, counsel of record forall parties received timely notice of amicus curiae’s intentionto file this brief. Amicus curiae files this brief with the writ-ten consent of all parties, and copies of the parties’ consentletters are being filed herewith. Amicus and its counsel statethat none of the parties to this case nor their counselauthored this brief in whole or in part, and that no personother than amicus or its counsel made a monetary contri-bution intended to fund the preparation or submission ofthis brief.

debts, but rather that such clauses provide protec-tion against legal subordination of claims.

In upholding the injunction, the Court ofAppeals rendered a decision threatening interna-tional financial stability:

First , France has extensive experience insovereign debt-related issues through its activeparticipation in the Paris Club, an informal groupof sovereign creditors that deals with the restruc-turing of official debt, i.e., intergovernmentaldebt.2 Although it does not speak here on behalf ofthe Paris Club, France, as a long-standing andactive member, has participated in the develop-ment and application of the Paris Club’s principlesguiding orderly sovereign restructurings since1956.3 France accordingly wishes to draw theCourt’s attention to the adverse consequences thatthe Court of Appeals’ decision will have in thisregard. As the decision effectively grants a veto

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2 The Paris Club is comprised of nineteen permanentmember states, which, in addition to the United States andFrance, include Australia, Austria, Belgium, Canada, Den-mark, Finland, Germany, Ireland, Italy, Japan, The Nether-lands, Norway, the Russian Federation, Spain, Sweden,Switzerland, and the United Kingdom. Other official sectorcreditors may also actively participate in Paris Club nego-tiations, subject to the agreement of permanent membersand of the sovereign debtor. The International MonetaryFund (“IMF”) and the World Bank are represented at theParis Club’s monthly meetings and participate in negotia-tions as observers.

3 Since 1956, the Paris Club has reached 429 agree-ments with ninety sovereign debtors for a total amount ofmore than $570 billion of restructured sovereign debt. SeeCLUB DE PARIS, http://www.clubdeparis.org (last visitedJuly 23, 2013).

right to hold-out creditors over both a sovereign’svoluntary restructuring and over future paymentson restructured obligations, it will have a destabi-lizing effect on a sovereign debtor’s ability toengage in orderly and negotiated debt restructur-ing as a means of last resort to prevent defaultwhen the sovereign’s debt has been deemed unsus-tainable.

Second, in addition to the policy concerns out-lined above, France has a practical concern withthe effects of the Court of Appeals’ decision. Asone of the largest sovereign lenders in the interna-tional financial system, France has substantialexposure to sovereign borrowers, and particularlyto developing countries as part of its official devel-opment aid program. The Court of Appeals’ deci-sion will undoubtedly have a deleterious effect onthe ability of borrower states to honor their finan-cial commitments to lenders, including France, aswell as on the practicability of negotiated debt cri-sis resolution.

France strongly supports the fair treatment ofcreditors by borrowers and it does not intervene insupport of Argentina’s repayment decisions.Nonetheless, because the Court of Appeals’ deci-sion threatens wider societal and economic harm,France supports Argentina’s petition for a writ ofcertiorari. The Court of Appeals’ decision warrantsreview by this Court.

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SUMMARY OF THE ARGUMENT

In its petition, Argentina states that the Courtof Appeals’ decision raises issues that are of criti-cal importance to sovereigns and their creditors,including creditors that hold restructuredsovereign debt. See Petition for Writ of Certiorariat 17. This brief is respectfully submitted toexplain why France believes that analysis to becorrect, and to outline for this Court the harmfulimpacts that the Court of Appeals’ decision couldhave on sovereign debt markets.

As an initial matter, the injunctive remedyaffirmed by the Court of Appeals conflicts with thefundamental tenets of equity jurisprudence.Injunctive relief is not available when the plaintiffhas an adequate remedy at law and, as such,injunctive relief cannot be used to compel paymentof a debt. Any perceived difficulty of enforcingjudgments against sovereign debtors provides noexception to these principles.

This Court has also firmly established that afederal court may not grant injunctive reliefunless it first considers the effect on the publicinterest. The Court of Appeals simply failed toconsider the wide-ranging and significant harmsto various public interests caused by the injunc-tive remedy at issue. Indeed, the inordinate lever-age given to hold-out creditors by this remedy willhave a truly global impact.

This injunctive remedy threatens to disrupt theorderly restructuring of a distressed sovereign’sdebt. As an active participant in the Paris Club,France has extensive experience in the sovereigndebt restructuring process and with the complex

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balancing of interests of sovereign lenders, banklenders, bondholders and the sovereign debtor inthis process. This injunctive remedy threatens todisturb the balance of such interests that has beenachieved through a voluntary and orderly restruc-turing process, which takes place entirely outsideof any sovereign bankruptcy context.

This balance is disturbed by the powerful incen-tive that the injunctive remedy provides for pri-vate creditors to forgo participation in voluntaryrestructuring in order to enforce full payment oftheir debt against an already distressed sovereigndebtor. The Court of Appeals ’ decis ion wil linevitably lead to an increase in the number ofhold-out creditors and specifically “vulture funds”that will seek to leverage the Court of Appeals’decision in future restructurings. Other creditorssuch as sovereign and bank lenders that wouldhave otherwise participated in the restructuringprocess may then choose not to as long as any pay-ment on the restructured debt could be condi-tioned on a ratable payment to the hold-outcreditors and vulture funds. Such lenders mayalso, as a result, be less willing to extend loans tosovereign debtors in the first place.

Finally, although the Court of Appeals assumedthat the threat posed by the injunctive remedywould no longer be relevant in light of collectiveaction clauses included in newly issued sovereignbonds, France respectfully submits that suchclauses cannot and will not resolve the significantharms outlined above.

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ARGUMENT

I. THE COURT OF APPEALS’ AFFIR-MANCE OF AN INJUNCTION DESIGNEDTO COMPEL PAYMENT OF PAST-DUESOVEREIGN DEBT DEVIATED FROMFUNDAMENTAL TENETS OF EQUITYJURISPRUDENCE

As this Court has long held, it is a fundamentaldoctrine of equity jurisprudence that injunctiverelief is unavailable when the plaintiff has an ade-quate remedy at law. See, e.g., Morales v. TransWorld Airlines, Inc., 504 U.S. 374, 381 (1992) (cit-ing O’Shea v. Littleton, 414 U.S. 488, 499 (1974);Younger v. Harris, 401 U.S. 37, 43-44 (1971)). Forthat reason, it is equally well-established thatinjunctive relief is unavailable to compel paymentof a debt. See Great-West Life & Annuity Ins. Co.v. Knudson, 534 U.S. 204, 210-11 (2002).

The Court of Appeals essentially crafted anexception to these fundamental tenets, based on aperceived difficulty of enforcing judgments againstsovereign debtors. NML Capital, Ltd. v. Argentina,699 F.3d 246, 262-63 (2d Cir. 2012). It did so,moreover, without considering the harm its deci-sion would cause to the sovereign debt markets.

In doing so, the Court of Appeals erred. ThisCourt has repeatedly held that a federal courtmust consider the public interest before it exer-cises its injunctive authority. See Salazar v.Buono, 130 S. Ct. 1803, 1816 (2010) (“An injunc-tion is an exercise of a court’s equitable authority,to be ordered only after taking into account all ofthe circumstances that bear on the need forprospective relief. . . . Equitable relief is not

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granted as a matter of course, and a court shouldbe particularly cautious when contemplating reliefthat implicates public interests.”) (citations omit-ted); Weinberger v. Romero-Barcelo, 456 U.S. 305,312 (1982) (“In exercising their sound discretion,courts of equity should pay particular regard forthe public consequences in employing the extraor-dinary remedy of injunction.”); Harrisonville v.W.S. Dickey Clay Mfg. Co., 289 U.S. 334, 338(1933) (“Where an important public interest wouldbe prejudiced, the reasons for denying the injunc-tion may be compelling.”).

As demonstrated below, in addition to overlook-ing the above-referenced principles of equityjurisprudence, the Court of Appeals’ decision over-looked the public harm that will result from mak-ing injunctive rel ief readi ly avai lable to asovereign debtor’s hold-out creditors.

II. THE DECISION OF THE COURT OFAPPEALS THREATENS WIDER PUBLICINTERESTS

A. The Court Of Appeals’ Decision WillHave A Global Impact

This case is not only about the named plaintiffsand Argentina. To the contrary, the Court ofAppeals’ decision, if upheld, will have a globalimpact.

Pari passu clauses such as the one set out in theFAA appear in virtually all sovereign bonds and inall loans made to sovereigns, whether on a syndi-cated or bilateral basis. These clauses are, ineffect, boilerplate provisions in most sovereignfinancing agreements.

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Moreover, New York law is so widely utilized inglobal finance that it is no exaggeration to charac-terize it as an international public utility. NewYork law applies in the large majority of outstand-ing emerging market sovereign bonds, followed byEnglish law. See Udaibir S. Das et al., SovereignDebt Restructurings 1950-2010: Literature Survey,Data, and Stylized Facts, International MonetaryFund Working Paper No. 12/203 (August 2012) at41, available at http://www.imf.org/external/pubs/ft/wp/2012/wp12203.pdf. For example, as of March2009, New York law was the governing law apply-ing to emerging market sovereign bonds in a totaloutstanding amount of $272 billion, out of a totalof $411 billion, representing 435 issuances out of atotal of 631 issuances. Id. Thus, New York lawplays a substantial role in sovereign borrowing inmany parts of the world, including in many of thelarge emerging markets and among low-incomeborrowers.

As a result, the Court of Appeals’ decision willconstitute a precedent in numerous cases involv-ing alleged breaches of pari passu clauses andNew York law.

In fact, the reach of the Court of Appeals’ deci-sion is so wide that it may also impact creditorswhose bonds are not governed by New York law.If, for example, a sovereign borrower has bondsgoverned by New York law and also has bondsgoverned by another foreign law, then, followingthe Court of Appeals’ decision, a court could condi-tion payments of bonds governed by the foreignlaw upon the making of ratable payments on theNew York law governed bonds. The rights ofinvestors holding bonds governed by a different

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law would thereby be affected by the injunctiveremedy upheld by the Court of Appeals on thebasis of a New York law-governed contract towhich such investors are not a party.

This decision may also impact official bilateralloans contracted by a sovereign if it has a mix ofbond, bank and official bilateral borrowing—as domany sovereigns. See The World Bank,International Debt Statistics 2013 (2013) at 24-29,available at http: / /data.worldbank.org/sites/default/files/ids-2013.pdf. The mere existence of aNew York law-governed bond among a sovereign’sborrowing structure may expose payments underits loans to the Court of Appeals’ injunctive rem-edy if the bonds include a common pari passuclause that links the ranking of payments on loansand bonds within the scope of the sovereign’sexternal indebtedness.

In light of the reach that its decision will haveand the considerable amounts of money involvedinternationally, the Court of Appeals should haveaddressed the public interest implications of itsdecision; yet the court did not adequately do so,result ing in a rul ing that may exacerbatesovereign debt crises and in turn threaten inter-national financial stability.

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B. The Court Of Appeals’ Decision Jeop-ardizes The Ability Of SovereignDebtors To Achieve Orderly AndNegotiated Restructurings Of TheirExternal Debt

1. The Court Of Appeals’ DecisionCreates Disincentives For Credi-tors To Participate In OrderlyDebt Restructurings

The Court of Appeals’ decision, if it stands, willraise significant obstacles to good-faith negotia-tions and voluntary sovereign debt restructuringsprecisely because it grants disproportionate powerto a small group of hold-out bondholders, to thedetriment of the majority of bondholders, in theevent of a sovereign debt crisis. For instance, inthis case, less than ten percent of Argentina’s pre-2001 foreign bonds are held by the plaintiffs,while approximately ninety-two percent ofArgentina’s bondholders participated in its twoexchange offers. See NML Capital, 699 F.3d at 253.

Often, once a sovereign borrower is known to bein financial difficulty, distressed debt investorspurchase bonds from their original holders, eithershortly before or after the debt restructuringtakes place. In the instant case, the Court ofAppeals noted that plaintiffs had bought theirdefaulted bonds as recently as June 2010, i.e.,almost nine years after Argentina’s default. Seeid. at 251.

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Some of these investors, known as “vulturefunds,” purchase distressed sovereign debt obliga-tions in the secondary markets at deep discount totheir face value with the intent of blocking volun-tary restructuring of particular classes of debtobligations and also blocking broader debt restruc-turing carried out through cooperative processesas a means of last resort to restore debt sustain-ability.4 They deliberately adopt a non-cooperativestance during the restructuring process by bring-ing enforcement actions or seeking out-of-courtsettlements on their claims.

Although this behavior should be discouraged, itis decidedly encouraged and rewarded by theinjunctive remedy aff irmed by the Court ofAppeals. Prior to the Court of Appeals’ decision,the leverage of hold-out creditors over sovereigns’restructuring efforts had indeed been limited.International Monetary Fund, Sovereign DebtRestructuring–Recent Developments andImplications for the Fund’s Legal and PolicyFramework (April 26, 2013) at 31, available athttp://www.imf.org/external/np/pp/eng/2013/042613.pdf (hereinafter, the “IMF Report”). However,the Court of Appeals has now granted hold-outcreditors a powerful means of extracting full pay-ment on the un-restructured debt of the borrower.

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4 See generally Julian Schumacher et al., SovereignDefaults in Court: The Rise of Creditor Litigation 1976-2010(2013) at 3, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2189997 (“Vulture” funds haveaccounted for nearly ninety percent of all cases in sovereigndebt litigation, and are “particularly likely to initiate legaldisputes against Highly Indebted Poor Countries (HIPCs).Of the twenty cases filed against HIPCs, thirteen were filedby ‘vultures.’ ”).

If the sovereign borrower is to avoid breaching theinjunction of a U.S. court, it must pay whatever isdemanded by hold-out creditors. Hold-out credi-tors thus have the leverage of seeking the injunc-tive remedy affirmed by the Court of Appeals andthereby blocking payments due to other creditorswho voluntarily took part in the restructuring, tothe detriment of the interests of the sovereigndebtor and of those other creditors. Id.; see alsoHoratia Muir Watt, Private International LawBeyond the Schism, 2(3) Transnational LegalTheory (2011) 347-427 (discussing the disruptiveeffect on sovereign funding of a private interna-tional law framework that empowers vulture fundhold-out creditors to seek enforcement againstdebtor states on the basis of erroneous interpreta-tions of pari passu clauses as ratable paymentclauses, without political accountability); Das etal., at 50 (describing vulture funds).

The legal enforcement advantages conferred tocreditors who refuse any restructuring effort, nomatter how small their holding of un-restructureddebt, are potentially enormous. Private creditorsother than the hold-out creditors, who otherwisewould be prepared to accede to a restructuring,may be discouraged from participating if theybelieve that hold-out creditors may block pay-ments on the debtors’ restructured obligations andmay thus choose to refrain from participating inthe restructuring.

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2. The Court Of Appeals’ DecisionThreatens The Ad Hoc SovereignDebt Restructuring Process AndHas Wide Implications For Inter-Creditor Equity

There is no international bankruptcy law toguide the restructuring of a distressed sovereign,as there is for a corporation, and the mechanismsof ad hoc sovereign debt restructurings haveevolved based on accepted practices among partici-pants. Broadly, these participants are sovereignlenders (primarily in the context of the ParisClub), bank lenders (often working through orga-nized creditor committees, and referred to as theLondon Club) and bondholders. Modern sovereignrestructuring depends on coordination, close dia-logue and fair negotiations among all creditorsand the sovereign debtor.

The Paris Club is a pivotal actor in orderlysovereign debt crisis resolution. Its restructuringframework provides each participating creditorState with guidelines that form the basis of subse-quent legal ly binding bi lateral agreements.Notably, Paris Club agreements include a “compa-rability of treatment” clause, which aims specifi-cal ly to ensure balanced treatment of thesovereign’s debt and fair burden-sharing amongall external creditors—sovereign lenders, banklenders and bondholders. As a general rule, theprinciple of comparability of treatment incorpo-rated in the Paris Club agreements is a crucialtouchstone for catalyzing the effective coordina-tion of private creditors and thereby enablingeffective, fair and orderly restructurings that willallow the sovereign to attain its objective of debt

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sustainability and meet payment obligations to allits cooperating creditors. Furthermore, as a mat-ter of equality of treatment, this c lause isdesigned to ensure that claims of taxpayers in thelender countries—for example, U.S. or French tax-payers—are not subordinated to those of other,private-sector creditors. Crucially, it facilitatesfair burden-sharing among sovereign creditors.

If private creditors are incentivized not to par-ticipate in sovereign debt restructuring, bilateralofficial creditors—and, therefore, their taxpay-ers—will bear an outsized share of the resultingdebt relief burden. As a result, sovereign lenderswill be less willing to grant debt relief, resultingin adverse consequences on broader official sectorparticipation in aiding low-income countries ineconomic distress.

As is clear from the above, the Court of Appeals’empowerment of hold-out creditors throughinjunctive relief, if upheld, will represent a strongdisincentive to any future sovereign debt restruc-turings: it will have a chilling effect on creditors’willingness to grant concessions in order to facili-tate voluntary and negotiated debt restructuringsas a means of last resort. The Court of Appeals’decision threatens the ability of concerned credi-tors and borrowers to address a sovereign debt cri-s is and consequently, to l imit r isks to theinternational financial system.

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C. The Court Of Appeals’ Decision AlsoThreatens Sovereign Lending, Partic-ularly Development Aid In The FormOf Loans To Developing Countries

Although private funding, notably in the form ofbonds, is a growing source of financing forsovereigns, financing by sovereigns remains alarge component of international financial flows,and is of particular relevance for the most vul-nerable countries, notably for the 72 countries eli-gible to use the concessional financing window ofthe IMF.5 While private funding for the most vul-nerable countries amounted to less than 10% ofthe total external public and publicly-guaranteeddebt stock of these countries as of 2011, bilateralsovereign loans accounted for close to 40%. Inaddition, sovereign bilateral disbursements rep-resent a steady share of new external financingfor these countries, at more than 35% of total dis-bursements in 2011.6

France is a major participant in this fundingmarket and ranks among the largest lenders tolow-income countries.7 France and its lending

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5 See International Monetary Fund, Eligibility To Use The Fund’s Facilities For Concessional Financing(March 15, 2013), available at http://www.imf.org/external/np/pp/eng/2013/031813a.pdf.

6 Percentages calculated based on data available atWorld Bank, World Development Indicators, available athttp://databank.worldbank.org (last visited July 22, 2013).

7 As of December 31, 2011, France had a total expo-sure of EUR 7 billion (including outstanding principal, over-due amounts, and penalty interest but excluding guaranteesnot called) to the 72 countries eligible to use the IMF’s con-cessional financing window. As of the same date, France’s

entities make lending decisions on the assumptionthat loans extended will be repaid by the bor-rower. In line with customary banking practice,France assesses the probability of default and lossgiven default in connection with these loans.Expectations relating to any restructuring thatmight arise in the future are based on an assumedorderly sovereign debt restructuring, in the con-text of an appropriate international forum, includ-ing the Paris Club, just as expectations relating toa private borrower would be assessed in light ofcorporate bankruptcy law.

The injunctive remedy upheld by the Court ofAppeals, if it stands, will increase significantlythe risk of default on bilateral sovereign loansextended by sovereign lenders, including France.

As a prominent official bilateral lender tosovereigns, France is concerned about the effectsof granting unintended rights to hold-out creditorsin sovereign debt restructuring, such as the rightto block payments on restructured debt obliga-tions, irrespective of the governing law of therestructured obligation.8

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total exposure to more than 100 sovereign debtors amountedto EUR 36 billion. See Encours des créances de la France surles États étrangers au 31 décembre 2011, http://www.tre-sor.economie.gouv.fr/5597_Encours-des-creances-de-la-France-sur-les-Etats-etrangers-au-31-decembre-2011 (lastvisited July 22, 2013).

8 The injunctive remedy upheld by the Court ofAppeals has already been relied upon by plaintiffs in otherpending cases. See, e.g., Memorandum of Law of The Export-Import Bank of the Republic of China in Opposition to

For France, as well as other sovereign lenders,the effects of the Court of Appeals’ decision couldhave a major impact on its policy of developmentaid in the form of loans. The heightened risk ofdefault on bilateral sovereign loans extended byFrance, as a result of impediments to orderlysovereign restructuring, would adversely affectthe external financing of sovereign borrowers, andof low-income countries in particular. Indeed, thisheightened risk of default could lead to a reduc-tion in international capital flows as a result ofnegative incentives for foreign lenders to extendnew loans, and to an increase in the cost for bor-rowers of external loans driven by a higher cost of risk.

D. Contrary To The Court Of Appeals’View, Collective Action Clauses DoNot Ameliorate The Problems CreatedBy Its Ruling

The Court of Appeals mistakenly determinedthat collective action clauses “effectively eliminatethe possibility of ‘holdout’ litigation,” and that,therefore, the deleterious effects of its decisionwould not impact future sovereign restructuringsbecause most sovereign bonds now contain suchclauses. See NML Capital, 699 F.3d at 264. To thecontrary, the Court of Appeals’ decision actuallyempowers hold-out creditors to threaten orderlysovereign debt restructurings, notwithstanding

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Grenada’s Motion for Judgment on the Pleadings Dismiss-ing Plaintiff’s Complaint and in Support of Ex-Im Bank’sCross-Motion for Judgment on the Pleadings, at 14, 23,Export-Import Bank of the Republic of China v. Grenada,Case No. 13 Civ. 1450 (HB) (S.D.N.Y. May 9, 2013) (ECF No.18).

the prevalence of collective action clauses in inter-national bond issues.

Collective action clauses allow a defined major-ity of holders of a bond series to bind other holdersof that series to a restructuring of that series. In alimited number of cases, aggregation clauses—allowing a defined majority of holders to bind allholders of bonds issued by a sovereign and not justone series of bonds—may be included.

The Court of Appeals was incorrect to surmisethat the problem of hold-out creditors is resolvedby collective action clauses, and that, in thisrespect, “it is highly unlikely that in the futuresovereigns will find themselves in Argentina’spredicament.” NML Capital, 699 F.3d at 264.

First, collective action clauses are not universalin sovereign bonds. Even if the clauses were uni-versal in recently issued bonds, older classes ofbonds would still exist without the benefits ofsuch clause.

Second, the collective action clauses in mostinternational bonds do not have aggregationclauses and therefore, hold-out creditors can buyup small issues to block a resolution of a definedclass of instruments. IMF Report at 28.

Third, collective action clauses have had mixedresults in past restructurings and may thereforeoffer significantly less contractual certainty thanposited by the Court of Appeals. See JerominZettelmeyer et al., The Greek Debt Exchange: AnAutopsy (September 11, 2012) at 26, 33-34, avail-able at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2144932; Das et al., at 44-45. In somerestructurings, collective action clauses did not

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prevent serious hold-out problems. See, e.g., Daset al., at 45 (noting the cases of Dominica in 2004and Argentina in 2005). Thus, a collaborative pro-cess among different classes of creditors—bank,state and bondholders—remains crucial for suc-cessful restructurings.

The largest-ever sovereign debt restructuring, ofGreek public debt in 2012, has been cited byrespondents as an example where hold-out credi-tors did not have a detrimental effect on voluntaryrestructuring.9 This is not accurate, as free-rider,hold-out creditors actually blocked the restruc-turing of certain classes of Greece’s external debt.Of thirty-six bonds governed by foreign (English)law containing collective action clauses that wereeligible to participate in the debt exchange, onlyseventeen bonds were able to be successfullyrestructured using collective action clauses. IMFReport at 28. Hold-out creditors prevented theoperation of the collective action clauses in theremaining bonds, amounting to approximatelyEUR 6.5 billion in un-restructured claims, orthirty percent of the total value of bonds governedby foreign law. Id.

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9 See Joint Response Brief of Plaintiffs-Appellees NMLCapital, Ltd. and Olifant Fund, Ltd. at 39, NML Capital,Ltd. v. Republic of Argentina, No. 12-0105-cv(L) (2d Cir. Jan.25, 2013) (ECF No. 821), 2013 WL 388621 at *39. But seeZettelmeyer et al., at 26 (discussing the limitations of usingbond-by-bond collective action clauses, as well as the impor-tance of having a stock of debt governed by domestic law,which can unilaterally be used to change the terms of suchbonds).

Thus, the injunctive remedy affirmed by theCourt of Appeals constitutes a strong disincentivefor bondholders to participate in restructuring, ifthe creditor is holding a New York law-governedbond and can seek full payment with the aid of aninjunction, and the Court of Appeals was incorrectin its view that collective action clauses amelio-rate the problem.

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60175 • ALLEN: AMICUS • USSC • LKP 07/24/13

CONCLUSION

For the foregoing reasons, the petition for a writof certiorari should be granted and the Court ofAppeals’ decision should be reversed.

Respectfully submitted,

ANDREW RHYS DAVIES(Counsel of Record)

MOLLY C. SPIECZNYMICHAEL WESTFALALLEN & OVERY LLP1221 Avenue of the AmericasNew York, New York 10020Telephone: (212) 610-6300Facsimile: (212) [email protected] BILLIKALLEN & OVERY LLP52 Avenue Hoche CS9000575379 Paris Cedex 08FranceAttorneys for Amicus Curiae

July 26, 2013

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Amicus curiae France 26 juillet 2013