Sovereign debt: Curing defaults

By Robin Wigglesworth and Elaine Moore – June 7, 2016

The Financial Times

At 8:13am in New York on April 22, about $2.4bn ticked into the bank account of Elliott Management, a fearsome hedge fund known for its dogged pursuit of countries that default on their debt.

The money came from Argentina, the final pay-off from Elliott’s 15-year legal crusade against the South American country. Elliott had led a band of creditors that sued Buenos Aires after it defaulted on $80bn of debt in 2001, culminating in a financial blockade of Argentina that resulted in another default in 2014.

This year, the reformist government of President Mauricio Macri resolved the debacle. In February, Argentina reached an accord with Elliott, a handful of other hedge funds and creditors that had refused to take its original punitive debt restructuring offering. The money was raised in April through the biggest bond sale — worth $16.5bn — by a developing country.

A saga that has captivated the sovereign debt world is finally over, yet economists and lawyers are now examining the broader implications. The suspicion is that the legal tactic successfully used by Elliott — and its eye-watering profit — could embolden other hedge funds to try to exploit countries in distress and make it harder for states to tackle excessive debt burdens.

“It’s a disaster for the world,” says Joseph Stiglitz, an economics professor at Columbia University and a Nobel laureate. “It sets an enormously bad precedent and will cause a lot of anxiety in the global financial system.”

Moreover, bankruptcies from countries such as Greece and Ukraine have exacerbated other faultlines that could complicate the sovereign debt restructuring process. This is an immediate worry, as states such as Venezuela and a host of others dependent on commodity exports are facing difficulties.

The financial system’s guardians have rallied in response to these concerns. The International Monetary Fund and finance industry bodies have spent the past few years overhauling aspects of the sovereign bankruptcy architecture. Yet it remains an open question whether the measures, such as beefed-up bond clauses, will be sufficient…

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