Sovereign Damage Control

A string of US court rulings against Argentina is reverberating around the world: Italy changed its debt contracts, Taiwan sued Grenada, Belize passed a special law, and the International Monetary Fund (IMF) and some of its largest members are revisiting their policies on sovereign debt restructuring. The case, NML Capital Ltd. et al. v. Republic of Argentina, has breathed new life into initiatives ranging from sovereign bankruptcy to market-wide contract reform. If upheld, recent rulings threaten collateral damage to other countries and parts of the financial system.

The impact may be felt sooner and farther afield, even compared with Argentina’s record- reaking 2001 default, because court action is unfolding against the background of public debt distress in Europe, new emerging-market restructurings, and a regulatory focus on clearing and payment systems.