'bankruptocracy'

judge's interpretation of the legal small print in the disputed bond contracts has been roundly criticized by lawyers and legal scholars alike. Still, it has left the Argentinian government in a fix, unable to pay those creditors with whom it has reached an agreement and excluded from the international capital markets. Besides, "the extraordinary scale on which big banks have been rigging interest rates and foreign-exchange markets and ripping off customers is almost beyond comprehension", says John Plender, a columnist for the Financial Times, in his book Capitalism: Money, Morals and Markets.

Last September, the UN General Assembly adopted a resolution to negotiate a multilateral mechanism that could better deal with these and other sovereign debt problems. The ad hoc committee began negotiations in February and final deliberations ended last week with the adoption of a set of principles for sovereign debt restructuring, which will now go to the UNGA for endorsement. The nine principles include good faith, transparency, equitable treatment, sustainability, sovereign immunity and legitimacy. At the final round of negotiations, Stiglitz welcomed the initiative as an important first step to elaborating a muchneeded global bankruptcy procedure. Pope Francis has also endorsed the UN process.

All this reflects a growing consensus that the current system is fragmented, often inequitable and unduly arbitrary. These features compel countries to exit their debt prob- lem by returning to strong and inclusive growth. Supporters of the UN process have wondered why the IMF and the World Bank have, since the financial crises of the 1990s, been such strong proponents of bankruptcy laws in developing countries to facilitate an orderly and fast resolution of debt problems, but resist similar institutional arrangements at the international level. By contrast, those supporters have welcomed current IMF efforts to strengthen a market-based approach to international debt resolution, but argue that this is not enough. Not only would this leave $900 billion of bond contracts under existing modalities, it would concern a particular type of debt, namely government bonds, and anyway it ignores the ability of "vulture funds" to manipulate the legal process for their own speculative ends.

It is well established that most sovereign debt crises didn't begin with fiscal profligacy but with private-sector lending and borrowing. When lenders get nervous about their chances of being repaid and call in outstanding claims, much of the damage occurs in just a short period of time when rapid capital outflows are compounded by currency and banking crises, which trigger a vicious downward spiral that hits incomes and jobs, leaving the public sector to deal with the longer-term fallout and to face its own bond vigilantes. At this point, the absence of bankruptcy rules and procedures at the international level, to match what is commonplace at the national level, becomes obvious.