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UK sovereign debt ruling a rebuke for US courts
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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 鈥淕riesafault.鈥
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鈥檚 decision. Does the authority of US courts really extend beyond America鈥檚 borders?
Now, a court in the United Kingdom has finally brought some clarity to the issue, ruling that Argentina鈥檚 interest payments on bonds issued under UK law are covered by UK law, not US judicial rulings.
The decision 鈥 a welcome break from a series of decisions by American judges who do not seem to understand the complexities of global financial markets 鈥 conveys some important messages.
First and foremost, the fact that the Argentine debt negotiations were preempted by an American court 鈥 which was then contradicted by a British court 鈥 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.
Deficiencies
Even afterward, 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.
But simple modifications like contract amendments will not overcome the system鈥檚 deficiencies. With multiple debts subject to a slew of sometimes-contradictory laws in different jurisdictions, a basic formula for adding the votes of creditors 鈥 which supporters of a market-based approach have promoted 鈥 would do little to resolve complicated bargaining problems.
Nor would it establish the exchange rates to be used to value debt issued in different currencies. If these problems are left to markets to address, sheer bargaining power, not considerations of efficiency or equity, will determine the solutions.
The consequences of these deficiencies are not mere inconveniences. Delays in concluding debt restructurings can make economic recessions deeper and more persistent, as the case of Greece illustrates.
This brings us to the second lesson of the British ruling. With the stakes so high and the system so broken, debt markets have little reason to remain in the US. America has always prided itself on the strength of its 鈥渞ule of law,鈥 a selling point that has made Wall Street host to the largest sovereign-debt market. But Griesa鈥檚 ruling, based on a peculiar 鈥 and in our view, indefensible 鈥 interpretation of certain terms in Argentina鈥檚 contract, showed that US commercial interests can dominate its courts鈥 decisions.
The vaunted American rule of law no longer looks so robust. Perversely, it protects the strong against the weak.
The Griesafault is only the latest of many decisions and legal changes that have revealed what one might call a symptom of 鈥渃orruption, American-style,鈥 in which lobbying and campaign contributions compromise the entire system, even when no individual official is on the take.
The final, overarching message of the British court鈥檚 decision is one that all countries should heed. There is an urgent need to renew the United Nations鈥 efforts to create a multinational legal framework for sovereign-debt restructuring. Though the US is striving to undermine these efforts, the UK ruling reminds us that America鈥檚 judges are not the world鈥檚 judges.
That last revelation may not make Wall Street happy; but, for the many countries around the world that rely on sovereign debt, it is very good news indeed.
Joseph E Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. Martin Guzman, a postdoctoral research fellow at the Department of Economics and Finance at Columbia University Business School, is a co-chair of the Columbia Initiative for Policy Dialogue Taskforce on Debt Restructuring and Sovereign Bankruptcy. Copyright: Project Syndicate, 2015.www.project-syndicate.org
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