The world desperately needs a better way of coping with countries that owe more than they could ever repay
When the frigate Libertad berthed in Ghana's Tema harbour last month, it was meant to be a brief stop; but the Argentinian navy's tall ship has been impounded there ever since, part of the spoils in a round-the-world battle to force Buenos Aires to atone for defaulting on its debts more than a decade ago.
As eurozone ministers prepare for yet another painful negotiation about how to prevent Greece plunging into its own catastrophic default, the fate of the Libertad – and a controversial US court judgment last week in favour of the vulture funds pursuing Argentina – is a reminder that the world desperately needs a better way of coping with countries that owe more than they could ever repay.
More than a decade after it suspended repayments on more than $90bn (£60bn) of debt, and long after its economy began to emerge from deep financial crisis, Argentina is locked in a seemingly intractable row with the "holdouts", as they are known, about how much is owed to them.
Vulture funds, which specialise in buying up the debts of countries already in distress at a fraction of their face value, when most investors have given up on being repaid, are actively pursuing Buenos Aires through the legal systems of scores of countries.
In a decision that sent shock waves through financial markets, a New York circuit judge ruled last week that even the banks handling Argentina's repayments to other bondholders would be "in active concert" with the country if they fail to co-operate in ensuring that the vultures – in this case, Elliott Capital Management – have their feast.
After years of negotiations, over 90% of creditors signed up to two separate deals, in 2005 and 2010, which wiped out 70% of the value of the unpayable debts but at least meant some repayments would be made.
But unlike in, for example, a corporate takeover, when the votes of a majority of equity holders can bind the rest, or a bankruptcy, where the law in the firm's home country governs which creditors get what, and who is first in the queue, there is no agreed process for sovereign default.
Some countries have used "collective action clauses" when they have issued new debts to make restructuring easier.
But despite the wrenching social and economic crises that have repeatedly ensued when countries plunge too deep into debt, there is no internationally agreed way of settling the competing claims of investors and creditors. And as last week's shenanigans showed, a mini-industry has developed in buying up debts and trying to squeeze defaulting governments for whatever they have left.
Bondholders, including the vulture funds themselves, insist that offering debt relief on any significant scale generates "moral hazard" – the risk that borrowers are encouraged to take on reckless debts in the assumption they will be let off the hook in the end.
But the reason ratings agencies make a very healthy living from assessing the riskiness of sovereign bonds is that the interest rates paid by governments are meant to compensate investors for the possibility that they may not get all their money back.
Spendthrift rulers and the voters who hand them power are culpable, of course; but so are speculative investors who hope to make a quick buck by riding on a booming country's growth.
And once an economy has been plunged into crisis, with borrowing costs spiralling as creditors dump its debts, putting it back on its feet by cutting debts to a genuinely manageable level can offer the best prospect of anyone getting any money back at all.
That principle has repeatedly been accepted for the world's poorest countries, through HIPC, the heavily indebted poor countries regime, overseen by the World Bank. It can still be a fraught process, requiring countries to jump through policy hoops, but it does at least involve an independent assessment of how much a country can afford to repay without being sentenced to decades of running to stand still.
Even Charles Dallara, the outgoing head of the Institute of International Finance, the US-based body that has negotiated hard on behalf of holders of Greece's bonds, has argued that some kind of managed restructuring – including a writedown of debts – might actually help the country get back on its feet properly. In other words, Greece needs much more radical debt relief than its eurozone neighbours have so far been willing to offer.
Yet again last week, the eurozone and the International Monetary Fund failed to break the deadlock over releasing the latest tranche of Greece's desperately needed bailout, despite the coalition leader, Antonis Samaras, having guided another monumentally unpopular set of austerity measures through the country's parliament, as its creditors had demanded.
The fate of the Libertad, which the vulture funds would like to seize as a prize, remains unresolved – as does the future of the millions of Greeks struggling to manage in a collapsing economy as its government battles to afford the repayments to its eurozone partners.
Drawing up an agreed international process for managing sovereign default would be a fraught diplomatic exercise; but it must be better than years of social and economic chaos, as bullying bondholders seek to impose their will through the courts – and on the high seas.
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