Pari passu: The Nazi Gambit

As the ongoing court battle between the Republic of Argentina and NML Capital, Ltd. illustrates, the meaning of pari passu in sovereign debt contracts remains highly contested. This article presents what might be the clearest historical evidence of what the pari passu clause was understood to mean in the pre-war period. It examines Nazi Germany’s defaults of the Dawes and Young Loans during the 1930s. According to this historical evidence, the parties believed that the clause promised parity in payment across different creditor groups (in this context, the various tranches representing nationals of different countries) considered to be part of the same general undertaking. This article reports no evidence to support what may be the most commonly offered interpretation for the clause today—that the pari passu clause was intended to prohibit the sovereign from passing laws that would have the effect of involuntarily subordinating certain creditors. This article also finds no evidence to suggest that the pari passu clause was understood as entitling the aggrieved creditor to a unilateral right to block payments to bondholders who assented to a government’s restructuring proposal.

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