Restructuring the Debt-Restructuring Process
While the world has come a long way since the days when sovereign defaults where settled with gunboats, Argentina's recent restructuring shows that we still have not arrived at a sensible, orderly process. Beyond tweaks to the contractual framework, an entirely new governing mechanism is urgently needed.
LONDON – Sovereign default is common. Ecuador and Venezuela each defaulted ten times between 1800 and 2010, and Greece defaulted five times between its war of independence (1821-1830) and 1932. Russia, Ukraine, Ecuador, Uruguay, and Argentina have all defaulted since 1998.
There once was a time when gunboats were used to resolve such matters. After Venezuela defaulted in 1902, for example, European powers blockaded and shelled its ports. But such methods have been replaced by messy, often-delayed sovereign-debt restructurings that inflict economic pain on both debtors and creditors alike. Few observers doubt that the current method could be vastly improved.
In the more recent past, poorly designed contracts created an opening for so-called vulture firms to take advantage of debtors through the restructuring process. These firms would snatch up a country’s distressed debt at a bargain-bin price, hold out on rescheduling, and go to court to demand repayment in full, reaping fantastic returns if they won.