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La lezione argentina per la crisi greca
Greece may have managed to kick the can down the road once again, but will eventually have to restructure its debt. If Greece or any other nation restructures, they will find that one of the most glaring gaps in global economic governance is the lack of an agreed-upon regime for resolving debt crises. New research shows that in the absence of conscious global economic governance, we may be left with a de facto regime: the thousands of international trade and investment treaties that have jurisdiction over government debt. Just ask Argentina.
A number of commentators have pointed to Argentina's "success" after its bond restructuring as a lesson for Greece. Indeed, Argentina has experienced impressive growth alongside debt restructuring. But as others have pointed out, the two cases are not all that comparable. One additional reason for Argentina's swift recovery is due to the fact that Argentina devalued its currency, which Greece cannot do under the euro. It is also true that Argentina happened to be endowed with key primary products in the middle of a commodity boom. Greece is not so lucky.
As I show in one of two studies released Tuesday, one trait that both Greece and Argentina do share is that they are party to scores of international trade and investment treaties that allow private bondholders to take sovereign states to private tribunals and effectively sue those states to retrieve the full value of their bonds. This trait is unique to regional and bilateral trade deals and is absent from the World Trade Organisation (WTO) treaties, which do not cover government debt and don't let private firms take on sovereign states. At the WTO, rather, sovereign states alone can file cases against each other, not private firms.
In the wake of its financial crisis, Argentina restructured over $100bn in principal and interest on bonds in 2005 where the bondholders were to receive a 67% "haircut". In the end, Argentina restructured just over $62bn with a 76% participation rate. The remaining 24% "holdouts" and some observers of the restructuring were furious, going so far to call Argentina a "rogue creditor".
In September 2006, about 180,000 Argentine bondholders filed a claim under the Italy-Argentina Bilateral Investment Treaty for approximately $4.3bn. The creditors claimed that the Argentine restructuring was analogous to an expropriation and that the bondholders were not treated fairly. The case is still pending, but the bondholders must think they have a good chance of winning – given the fact that Argentina held another exchange in 2010, closing with more than 90% of all bondholders swapping for new bonds. The bondholders seeking their investments through the trade treaty are among the few remaining holdouts.
We normally think of trade and investment treaties as dealing with actual trade in goods like shoes and cars, or direct investment like opening up a shoe or automobile factory in a foreign country. Look deeper and you will learn that many trade and investment treaties also cover government debt (though some significant treaties such as Nafta do not govern sovereign debt). Under these treaties, nations have to treat foreign holders of sovereign bonds no differently than domestic bondholders, must not diminish the value of those investments and must treat bondholders in a fair and equitable manner.
There are over 2,000 trade and investment treaties out there that have these principles. Greece has 43 treaties. Debt restructuring could be seen as flying in the face of all of them.
A restructuring, by definition, reduces the value of an investment, but should it really be seen as an expropriation? And when governments, international institutions and banks sit down in crisis mode and decide that the benefits of a debt workout may outweigh the costs to some bondholders who take a haircut. Is that unfair treatment if a restructuring is what it takes to get a nation back on track and prevent global contagion?
In a restructuring, policy-makers may often treat domestic and foreign bondholders differently. Prioritising domestic debt may needed to revive a domestic financial system, provide liquidity and generally manage risk during a recovery. Is that really a violation of the level playing field between foreign and domestic investors, especially since those domestic investors also have to bear the costs of the recession that results from the crisis, in addition to the haircut on a bond (unlike the foreigners, who won't go near the nation for years to come)?
The bigger question is whether private investment tribunals are the right forum to govern sovereign debt restructuring or any other measure to prevent or mitigate a financial crisis. They are not. Sovereign debt restructuring should not be governed by trade and investment treaties. If government debt is covered, disputes should be settled among nation states that can weigh the larger costs and benefits for societies and economies as a whole – not by handfuls of private bondholders in private tribunals.