Greece is not the only economy suffering from the absence of an effective international framework for dealing with sovereign debt problems. Over the past few months, the financial press has been tracking Argentina's travails as Buenos Aires struggles to deal with the legacy of its own December 2001 default. It was the largest sovereign default in history, at least up until this year's Greek record, and many observers have noted the parallels between the Greek and Argentine experiences.
In the aftermath of that 2001 default, Argentina restructured its debt through two debt exchanges, in 2005 and 2010, switching the defaulted bonds into new paper with lower face value and longer terms. Despite the punitive nature of the terms on offer, creditors owning about 93% of outstanding private external debt eventually accepted the deal. But a group of holdouts, led by hedge funds that specialise in chasing defaulting governments (so-called vulture funds), have pursued Argentina in the courts.
In October, the holdouts won a legal victory that has thrown the details of Argentina's debt restructuring into doubt. If upheld, this ruling will raise the possibility of another (technical) Argentine default and have potentially significant implications for other sovereign debtors.
It's true that many observers don't find Argentina a particularly sympathetic case right now: Buenos Aires is still in default to a bunch of foreign governments at the Paris Club, which undermines the willingness of other governments to intervene in the current situation. And actions such as the nationalisation of YPF have also ticked off foreign investors and officials.
Still, the current ruling threatens to disrupt long-standing precedents and make orderly debt restructurings even more difficult than they already are, although the legal manoeuvrings are still continuing.
The Greek and Argentine cases highlight the continuing absence of an international sovereign bankruptcy regime.
Back in the early 2000s, the IMF's Anne Krueger set out the case for a Sovereign Debt Restructuring Mechanism or SDRM, and the Fund did a lot of work on the idea. In the end, the SDRM proposal failed to get traction in the face of much opposition, particularly from Wall Street. But given the ongoing lessons from Greece and Argentina, not to mention the debt problems afflicting a range of other developed economies, maybe it's time to revisit the debate on whether our current framework is up to the task of dealing with sovereign debt distress.
