A debt restructuring deal is the first step towards financial rehabilitation. Iraq is now on this road following a Paris Club agreement to wipe out 80 per cent of $40bn of borrowings, mostly accumulated before 1990. It still has a further $80bn to sort out, much of it owed to Middle Eastern governments, but the Paris Club governments have set the parameters. If much better terms are given to others, the Paris Club might revise its own offer.

Another sovereign debt restructuring process is going less smoothly. The Bank of New York pulled out of its role to carry out a debt exchange for Argentina. Argentina, like Iraq, has defaulted on over $100bn owed to foreign lenders, but this was mostly accumulated in the 1990s. Its efforts to restructure continue to run into trouble. Argentina's economy minister has warned creditors that they may face indefinite debt default.

When Iraq borrowed, governments were the main source of loans. But financial markets have changed. For Argentina, private investors from large US bond funds to Italian grandmothers provided money through the growing capital markets. It can be a lot more difficult to restructure when thousands of individual investors are involved. With the pool of creditors to countries and companies becoming more diverse as lenders use credit derivatives to spread risks, the future of debt restructuring looks very complex indeed. The chances that these risks are priced into the international bond markets are extremely remote.

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