Reforming the Future: Lessons from Sovereign Debt Restructuring

“Debt restructuring is like a divorce—you can make the perfect framework, but it is always messy.” Maarten Petermann of JP Morgan aptly framed the debate around the issue of sovereign debt restructuring, something which has seized headlines in the last year across Europe and Latin America. Defaults, eager and stubborn investors, and questions of sovereignty have ruled this heated discussion.

The Atlantic Council’s Adrienne Arsht Latin America Center and Global Business and Economics Program hosted an event on Tuesday, May 12 with a group of panelists rarely seen in one place; Cecilia Nahon, the Argentine Ambassador, Joseph Stiglitz, the Noble Prize winning economist, Sean Hagan, the General Counsel of the IMF, and Maarten Petermann of JP Morgan came together for a dynamic discussion on the issue of how to handle sovereign debt crises today, based on the lessons learned from the past.

The need for debt restructuring is on the rise, noted Dr. Stiglitz, and the process is not going as well as people seem to think it has. He attributed this to countries waiting until they were too deep in crisis to have their financial system salvaged in a manageable way, as well as the investors’ unwillingness to go along even as the need for debt forgiveness is clear. Mr. Hagan of the IMF agreed that his organization had limited capacity to help beyond a certain point, emphasizing that the IMF only intervenes when it is invited to by a sovereign country. A delay in the restructuring process, said Mr. Hagan, is “bad for the debtor, it’s bad for the creditors, and it’s bad for the global economic system.” No one wins by delaying the inevitable.

The issue of sovereignty, however, has raised the problem of a lack of international standards in debt restructuring cases. Dr. Stiglitz and Mr. Hagan both advocated for the development of universal rules, though noted that one of the staunchest opponents to such an agreement is the United States. The case of Argentina and the judgement from New York were on display in this discussion as the perfect example of the complications which arise when dealing with international creditors and differing domestic laws.

Ambassador Nahón was quick to defend Argentina in the most recent default, and Dr. Stiglitz endorsed the ambassador’s logic, railing against the ruling from New York. Mr. Petermann took the opportunity to note that such divides were demonstrative of a need for a more incentives for collective participation in debt restructuring so as not to create such hostile divides between nations and their creditors.

One thing is sure, this issue is not going away anytime soon. One needs to look no further than Greece or Ukraine to understand why. It is in the interest of sovereign nations, their citizens, and the stability of the global economy to establish effective and enforceable international processes for the future.