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January 6, 2013 7:58 pm
Argentina’s messy legal battle with hedge funds over its 2001 sovereign default has heightened calls to resurrect plans for a bankruptcy regime for countries, under the auspices of the International Monetary Fund.
Many senior lawyers, fund managers and former policy makers say recent court rulings against Argentina highlight the weaknesses of the current approach to government debt workouts, and argue that it is time to revisit the “sovereign debt restructuring mechanism” proposed by the IMF in 2002.
The SDRM, envisaged as a kind of voluntary Chapter 11 for countries, never took off after US opposition. The initiative has received renewed interest since the eurozone debt crisis highlighted the weaknesses of the current ad hoc, contractual approach to sovereign debt restructurings.
“Having a clear mechanism could have prevented all sorts of problems in the eurozone,” said Anne Krueger, a former chief economist at the World Bank, first deputy managing director of the IMF and architect of the aborted SDRM initiative.
The SDRM debate has become more heated since an unexpected legal victory of hedge funds led by Elliott Associates against Argentina.
Elliott has successfully argued that an obscure legal clause promising equal treatment to Argentina’s creditors meant the country could not continue to pay holders of its restructured debt while ignoring creditors that refused to sign up to the restructuring deal.
Important aspects of the judgment still need to be confirmed by the US Appeals Court, and the case could end up in the Supreme Court. But the ruling has already rattled many lawyers, restructuring advisers and fund managers, who argue it could make sovereign debt workouts tougher in the future.
“The ramifications could be huge,” said Vivienne Taberer of Investec Asset Management. The SDRM “should have happened when it was proposed, and it would be a good idea to look at it again”.
Creating an SDRM will face a formidable challenge in generating political will. Having been burnt by the rejection of its proposal 10 years ago, the IMF is unlikely to take the lead unless it has been assured of support by leading shareholder countries, particularly the US.
But to create such a mechanism, the US Treasury would have to seek congressional approval for the necessary change to the IMF’s articles of agreement. Capitol Hill is likely to be highly suspicious of allowing an international institution in effect to override US bankruptcy proceedings.
“The lesson of the SDRM debate last time is that a mechanism has to be comprehensive to be effective, and that will involve considerable change,” said Anna Gelpern, law professor at American University in Washington. “Whether the US has the enthusiasm for this is doubtful.”
The EU’s supranational nature would make it easier for it to adopt aspects of the SDRM, but the eurozone has taken a more moderate, contractual approach by mandating the inclusion of legal clauses that make restructurings easier in all future eurozone government bonds.
But some experts say some sort of euro-SDRM could be contemplated in the future if the crisis continues to fester.
“It should be revisited,” said Lee Buchheit of Cleary Gottlieb, the law firm that represents most governments when they restructure, including Greece and Argentina. “I’ve heard more and more talk in Europe about some sort of sovereign restructuring mechanism, and I think this case [Argentina] will push it further.”
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