from Kevin P. Gallagher
As Tuesday’s headlines from Greece prove, the latest eurozone rescue plan is far from a long-term solution. But it should prevent this week’s G20 meeting from being completely hijacked by Europe‘s short-term woes.
Instead of another round of fire-fighting, the G20 should address the larger issue of a mechanism to prevent sovereign debt crises in the future from spiraling like this one. If they don’t, Greece and defaulters of the future will suffer the fate of Argentina – a nation whose sovereign debt restructuring threatens to be taken over by trade and investment treaties.
As political economist Eric Helleiner has shown, with every crisis comes a new proposal for a sovereign debt workout mechanism that meets a sticky end. Mexico proposed a mechanism in 1933; the United States a mechanism in early drafts of the IMF articles of agreement in the 1940s; UNCTAD saw such a regime as core to a “new international economic order” in the 1970s; and most recently, the IMF issued a call for a sovereign debt restructuring mechanism, in 2001 in the wake of Argentina’s financial crisis.
The most recent attempts at a regime sought to provide a fair forum for negotiation between bondholders and governments; a standstill clause whereby bondholders can’t yank their money out of a debtor nation in a herd; a facility to provide short-term financing and to prioritise a debtor nations’ debt schedule; and clauses that limit the ability of disgruntled minority bondholders to file lawsuits against debtor nations.
In today’s environment, one would need to ensure that a globally agreed upon mechanism overrode attempts by the International Swaps and Derivatives Association to call a restructuring a “credit event”, in which case credit default swaps would need to be paid out and could spread contagion. And one would also need to ensure that such a regime overrode the numerous trade and investment treaties that see a restructuring of sovereign debt as tantamount to expropriation.
At present, we are left with bailouts that are costly, unfair and do not work. Europe shelled out $1tn in May of 2010, over $100bn in July of this year, and proposes yet another $109bn as of last week. These bailouts go from the pockets of taxpayers to the pockets of private creditors and do little to stimulate a sluggish economy.
Problems of this nature can only be solved by global cooperation. Debtor nations will never propose such a structure because of fear that they will be perceived as potential defaulters. Creditors will never propose such a scheme because it will show what we already know – that they are willing to negotiate.
If the world doesn’t act, we are left with an odd, de facto regime of trade and investment treaties. Just ask Argentina: little did we know that many of the over 2,000 trade and investment treaties that govern international investment flows cover “any type of asset”. When Argentina restructured its debt in 2005 and 2010, in the wake of its financial crisis, close to 180,000 Argentine bondholders filed a claim under the Italy-Argentina Bilateral Investment Treaty for approximately $4.3bn. The creditors claim that the Argentina’s restructuring was an expropriation. This September, a private World Bank tribunal decided that Argentina’s bond restructuring indeed does fall under the jurisdiction of these treaties, and the case will continue. Greece has 43 of these treaties.
The G20 and the Financial Stability Board could start a discussion with the goal of striking a single global standard for balanced and timely restructuring that satisfies the needs of creditors, while enabling debtor nations to recover and grow without “expropriation” claims hanging over them. As the Occupy Wall Street protests, street demonstrations in Greece and even the Tea Party movement in the United States attest, citizens across the world are increasingly fed up with bailing out the top few tenths of a per cent of society’s income distribution for a crisis those taxpayers did not create. It is time for the G20 to lead.
Published in the Guardian 11-1-2011