How to Deal With a Bankrupt Government
It's payback time.
Argentina's government has agreed to terms with the country's main holdout creditors, and its 15-year saga of financial mismanagement seems to be ending. That's good news. It would be even better if the lessons of this fiasco could be learned, so that nothing similar happens again.
To be sure, the main lesson is "Don't borrow more than you can afford." But there's another as well. The long war between Argentina and its creditors points to a dangerous gap in the international financial system: When a government can't pay its debts, no bankruptcy court steps forward to supervise. Argentina is proof that some such arrangement is needed.
Argentina's new president, Mauricio Macri, broke the stalemate by choosing to make a deal. Elliott Management and other hedge funds bought Argentine debt on the cheap, then pressed for payment in full even though many other creditors had settled for partial repayment. As litigation dragged on, a U.S. court took the holdouts' side, partly because of Argentina's sustained intransigence. (At one point Macri's predecessor, Cristina Fernandez de Kirchner, called the judge "senile.")
Macri has agreed to pay 75 percent of what it owes the main holdouts, who appear to be satisfied. Argentina's Congress will have to act for the deal to go through, but this also looks to be in hand. The deal will renew Argentina's access to the international capital markets, and give Macri's economic reform program some chance of success. It's taken too long, but it's most welcome nonetheless.
Looking ahead, though, bear in mind that Elliott and the other creditors were within their rights -- and that their negotiating position was, in the end, vindicated. They profited, and the creditors who settled promptly didn't. Why is that a problem? Because a good bankruptcy procedure treats creditors equitably and minimizes economic damage by resolving things quickly. The war between Argentina and its holdouts will stand as the classic case of inequity among creditors combined with maximum economic harm.
Collective-action clauses make it harder to be a holdout and are nowadays included in most sovereign-debt contracts. They're useful, but as the Greek debt crisis showed, they won't always be enough. A sovereign-debt restructuring mechanism, preferably housed in the International Monetary Fund, is also needed. The idea once looked close to being implemented. It ought to be revived.
Debt default is bad news however you look at it, but the consequences needn't be as dismal as they've been in Argentina's case. Blame for the country's plight lies almost entirely with its leaders, but a better debt-resolution system would have helped both the country and its original creditors. Remember, Argentina's debt default won't be the world's last.
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