Thursday, August 25, 2011

The nightmare world of Sovereign Debtors!

The IMF reportedly objects to the Finnish Collateral deal with Greece on the grounds that it might jeopardize their place at the head of the line for repayments by Sovereign Countries. All this goes back to the 1800s strangely enough also involving Greece. A working paper on the so-called PARI PASSU Clause in Sovereign Debt Instruments, is linked here, it is in pdf format, long and heavy reading, but marvellously illustrative of the minefield, through which the bunch of incompetents now running the Euro Group are trying to navigate, incredibly aided by former Olympic Synchronised French Swim Team member, Mme Christine Lagarde at the IMF! 

A. The Text
Here is a typical formulation of the pari passu clause in a modern cross-border credit instrument:
The Notes rank, and will rank, pari passu in right of payment with all other present and future unsecured and unsubordinated External Indebtedness of the Issuer.
The Latin phrase “pari passu” means “in equal step” or just “equally.” The phrase pari passu was often used in equity jurisprudence to express the ratable interest of parties in the disposition of equitable assets.1 As explained by an English commentator in 1900:
There is no special virtue in the words “pari passu,” “equally” would have the same effect, or any other words showing that the [debt instruments] were intended to stand on the same level footing without preference or priority among themselves, but the words pari passu are adopted as a general term well recognized in the administration of assets in courts of equity.”2

Hat tip FT Alphaville blog, linked here.

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