The confidential memo between New York lawyers Cleary Gottlieb and the Government of Argentina, reported yesterday in ValueWalk, did not specifically advise Argentina to disrespect any court ruling but rather just did what all good lawyers do: lay out a path of potential possibilities, according to a legal source close to the trial.

Argentina Flag

As we reported yesterday in ValueWalk, a memo from the New York office of he New York office of Cleary Gottlieb Steen and Hamilton LLP to the government of Argentina, marked PRIVILEGED AND CONFIDENTIAL ATTORNEY CLIENT COMMUNICATION, says the “best option for the Republic” is to default on the bonds and restructure the debt so the issue will “remain outside the reach of the US Courts.”

Argentina: No plan to evade any court ruling

“There is no plan to evade any court ruling,” the source said, noting that the Supreme Court’s ruling could have many shades of legal distinction. “Plans cannot be made until the Supreme Court ruling is known.”

The key statement in the May 30 courtroom drama, according to this source, was made by Cleary Gottlieb attorney Carmine D Boccuzzi at the top of the proceeding when he said:

There is no smoking gun and there is no plan.  The Supreme Court has our cert petition and our reply cert petition and is expected to issue some ruling on July 16. In our reply cert petition, we make very clear that the Republic will comply with the pari passu orders, but what that means, given the fact that the Republic does not have the resources to pay all of the holdouts is that there will likely be a default, an across-the-board default.  That is what we have said.  That is what is going on.  But there is no plan to  evade.  The status quo remains in effect.

Good lawyers outline various possibilities, default being one possibility

The authenticity of the memo or its contents were not in question, just the interpretation. “What the memo did is outline the possibilities that a client may face.  Default is one potential possibility,” the source said.

“It is scurrilous to charge that a lawyer is giving advice to a client to avoid any court ruling or filing petitions to deceive the court. Nothing in the memo contradicts the pari passu orders.”

After World War One, Germany was forced to pay debt that created social chaos

As the case to force Argentina to pay bondholders $15 billion in full winds down and the Supreme Court decision looms, it might be instructive to consider that Argentina might have limited options. If the US Supreme Court rules against it, it can pay the bondholders and potentially face a situation similar to that of Germany after the first World War – where debt repayment forced social chaos and hardship, ushering in the reign of Adolph Hitler. An alternative to social chaos is Argentina defaulting on its bonds and then agreeing to terms that it can repay without causing social chaos in the country. This might mean bondholders taking a haircut.

One of the interesting questions to be answered in this case is: do bond holders face any risk real risk of sovereign default?  This prospect, once considered unheard of, could soon be decided.