Bloomberg View gives its take on the recent Supreme Court decision to let stand a ruling that says Argentina has to pay some creditors full value on bonds that were in default. Here are a few quotes from the article:
"In effect, the U.S. Supreme Court has just rewritten the rules of sovereign borrowing -- and not in a good way. It did this indirectly, by refusing to intervene in the legal fight between Argentina and an unusually persistent creditor. The immediate implications may be confined to Argentina, whose outlaw tendencies have made it a special case. The longer-term implications go wider".
"Why, you may ask, is it wrong to give creditors legal recourse against sovereign defaulters? In a properly coordinated process such as bankruptcy, it wouldn't be. Without such a process, though, you've got problems: The next time a government is overwhelmed by its debts, creditors will be reluctant to take part in a restructuring because holdouts will see better prospects of success at others' expense. A disorderly default -- the worst outcome for everybody -- becomes more likely."
The Bloomberg article ends by mentioning what the writer feels would be a better way to solve this kind of problem (how to resolve sovereign debt that is in default). He says:
"Ten years ago, governments talked about creating the treaty-based Sovereign-Debt Resolution Mechanism. That's the right answer, but the idea went nowhere. There's no sign yet that Argentina's debacle is reviving interest. Sadly, it will take more than the plight of a government that had it coming to force action."
So what is the Sovereign Debt Resolution Mechanism (SDRM)? You can read about that here. Basically it is a proposal at the IMF that would allow "a sovereign and a qualified majority of creditors to reach an agreement that would then be made binding on all creditors that are subject to the restructuring". The IMF article points out that this proposal has been subject to intense and constructive debate. Because the 2010 IMF reforms are not yet approved this SDRM is not yet in place as the Bloomberg article noted.
As a side note, readers here might find this essay on a coming "reset" thought provoking. The author of this article predicts not only that the IMF reforms will eventually be approved, but it will lead to implementation of the SDR as reserve currency and that this SDRM will be used to resolve the overhanging sovereign debt problems in the world. Here are some quotes of interest from the essay:
"Returning to the options on the table, rescheduling of debt and debt stock reduction, its time to discuss the SDRM, or Sovereign Debt Restructuring Mechanism.The SDRM will act as a form of creditor bail-in and help regulate debt. But when it was first introduced by the IMF shortly after the events of 9/11 the SDRM was tantamount to default, which we know is not market friendly and is to be avoided.
A lot of the above prediction in this article falls in line with what Jim Rickards is predicting. However, it adds in the component of the IMF using this SDRM to essentially write off debt that is viewed as unsustainable in the world and to convert the sustainable debt into "SDR bonds". Right now, all this is stalled because the IMF reforms sit unapproved. If a global sovereign debt crisis arose, things might change.
Update 6-23-14 4:00 pm: AP runs a story on this that provides some Q&A.
Update 6-25-14: UN issues statement about Argentina debt ruling. This is obviously a very important issue when both the IMF and the UN issue statements of concern that the ruling could have "profound consequences for the international financial system" as the UN says in this article.