Lee C. Buchheit (Cleary Gottlieb Steen & Hamilton LLP)
The pari passu fallacy, first uncloaked in 2000, posits that when a sovereign borrower promises to maintain the equal ranking of a debt with the borrower’s other senior indebtedness, it thereby implicitly promises to pay all of those debts on a ratable basis. In its 18-year life span, the fallacy has caused considerable mischief in the sovereign debt market. It even prompted a wholesale change in the drafting of the pari passu clause in sovereign bonds expressly to disavow the ratable payment interpretation of the provision. Recent decisions of the US federal courts in New York have clarified the circumstances in which a sovereign borrower will be held to breach, and just as importantly when it will be held not to breach, a contractual pari passu undertaking. These cases confirm that a sovereign borrower will not breach a pari passu covenant merely by paying one creditor while not paying another, equally ranking, lender.
The full paper can be found here.