A Fair Hearing for Sovereign Debt

NEW YORK – Last July, when United States federal judge Thomas Griesa ruled that Argentina had to repay in full the so-called vulture funds that had bought its sovereign debt at rock-bottom prices, the country was forced into default, or “Griesafault." The decision reverberated far and wide, affecting bonds issued in a variety of jurisdictions, suggesting that US courts held sway over contracts executed in other countries.

Ever since, lawyers and economists have tried to untangle the befuddling implications of Griesa's decision. Does the authority of US courts really extend beyond America's borders?

Now, a court in the United Kingdom has finally brought some clarity to the issue, ruling that Argentina's interest payments on bonds issued under UK law are covered by UK law, not US judicial rulings. The decision – a welcome break from a series of decisions by American judges who do not seem to understand the complexities of global financial markets – conveys some important messages.

First and foremost, the fact that the Argentine debt negotiations were preempted by an American court – which was then contradicted by a British court – is a stark reminder that market-based solutions to sovereign-debt crises have a high potential for chaos. Before the Griesafault, it was often mistakenly assumed that solutions to sovereign-debt repayment problems could be achieved through decentralized negotiations, without a strong legal framework. Even afterwards, the financial community and the International Monetary Fund hoped to establish some order in sovereign-bond markets simply by tweaking debt contracts, particularly the terms of so-called collective-action clauses (which bind all creditors to a restructuring proposal approved by a supermajority).