Learn­ing from Ar­gentina • The U.S. should deepen ties to South­east Asia

How to make the process of sov­er­eign-debt re­struc­tur­ing less messy and dam­ag­ing

Bloomberg Businessweek (Europe) - - CONTENTS -

Be­fore Ar­gentina’s debt cri­sis is re­solved—and prospects have been look­ing bet­ter lately—it’s worth paus­ing to ask why the stale­mate has gone on for more than a decade.

In­creas­ingly frus­trated by the South Amer­i­can na­tion’s re­fusal to heed court rul­ings, a U.S. fed­eral judge told Ar­gentina not to pay cred­i­tors who’d agreed to set­tle un­less it also paid the hold­outs. There was just one prob­lem with this se­vere ap­proach: The court couldn’t ac­tu­ally com­pel Ar­gentina to pay. In ad­di­tion, the de­ci­sion im­posed heavy costs on third par­ties, pun­ished bond­hold­ers who wanted to set­tle, and cre­ated the po­ten­tial for cas­cad­ing suits lodged by “hold­outs within hold­outs” seek­ing bet­ter terms.

Un­like its pre­de­ces­sor, Ar­gentina’s new govern­ment is will­ing to make a deal that’s rea­son­able. How­ever, the flaws in the sys­tem are ap­par­ent. When a com­pany is un­able to pay its debts, a bank­ruptcy pro­ce­dure forces its cred­i­tors to co­op­er­ate in sav­ing what can be saved and com­ing to a mu­tu­ally ben­e­fi­cial out­come. No such pro­ce­dure is avail­able when the debtor is a govern­ment.

No­body dis­putes that this gap needs to be filled, but there’s an ar­gu­ment over how to do it. Two ap­proaches are pos­si­ble. One re­lies on chang­ing the de­sign of con­tracts so hold­out cred­i­tors can be forced to set­tle more eas­ily. The other is to cre­ate an in­ter­na­tional pro­ce­dure akin to a cor­po­rate bank­ruptcy court.

Re­worked con­tract lan­guage can en­cour­age set­tle­ment by ma­jor­ity or su­per­ma­jor­ity vote, if the need arises. Th­ese kinds of pro­vi­sions—which will al­most cer­tainly be in­cluded in the bonds Ar­gentina even­tu­ally is­sues—have be­come the norm for emerg­ing-mar­ket sov­er­eign bor­row­ers. This sort of con­tract helps, but it might not be enough.

Col­lec­tive-ac­tion clauses haven’t al­ways worked like they’re sup­posed to. They failed to make the Greek debt cri­sis go smoothly, for in­stance. As that case shows, sov­er­eign-debt re­struc­tur­ing is al­most inevitably a dis­or­derly process. What

seemed straight­for­ward when the con­tracts were drafted sud­denly looks com­pli­cated—and a dam­ag­ing fight be­tween those who want to set­tle and those who don’t may fol­low.

Smarter con­tracts are good, but gov­ern­ments should also co­op­er­ate in cre­at­ing an in­ter­na­tional bank­ruptcy-like pro­ce­dure, ideally over­seen by the In­ter­na­tional Mon­e­tary Fund. The two to­gether wouldn’t be a panacea, but the pair­ing would fur­ther pro­mote co­op­er­a­tion in­stead of mu­tu­ally de­struc­tive con­fronta­tion.

This idea i sn’t pie-in-the- sky. An of­fi­cial plan for a sov­er­eign-debt re­struc­tur­ing mech­a­nism was drawn up al­most 15 years ago and at­tracted some sup­port, though not enough for the idea to go for­ward. It should be re­vived, prefer­ably be­fore the next big sov­er­eign-debt cri­sis and not af­ter.

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