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
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.