Since April of last year, a small but growing cadre of lawyers, investors, regulators, and yes, even journalists, have been carrying around dog-eared copies of an International Monetary Fund paper (read: trial balloon) that revisits how the fund, the lender of last resort for many nations, might revamp its approach to sovereign debt restructurings.

 

The IMF prefaces its latest foray into sovereign restructurings by saying history shows official sector sovereign debt restructurings have been “too little too late” and when it gets involved, the public money used in a settlement too often just flows to private sector investors who take the cash out of the afflicted country.

 

The Fund tried this once before in 2002 under former First Deputy Managing Director Anne Krueger with the idea of establishing a Sovereign Debt Restructuring Mechanism (SDRM). This was two years after hedge fund Elliott Associates won a judgment against Peru in a case where it held out for better restructuring terms. It was a year after Argentina’s last and biggest sovereign debt default had occurred and progress in negotiating a deal with creditors was going nowhere. (That default was a sovereign record, only to be eclipsed by Greece in 2012.) The SDRM plan some 14 years ago died after the United States, the largest donor to the fund, decided against to withhold its support.

 

There are some similar circumstances today. Greece still has sizeable debt and a wrenching economic retrenchment. Argentina still has a fight on its hands.

 

Creditors such as Elliott and Aurelius Capital Management, the holdouts that Buenos Aires calls vultures for picking over the economy’s carcass, are  now armed with a U.S. 2nd Circuit Appeal Court ruling that effectively backs them into a corner. They have a choice: pay the holdouts their roughly $1.33 billion award (plus accrued interest) at the same time it pays the investors who accepted 25-29 cents on the dollar for their bonds or risk defaulting again because the payments system is under injunction. The case is based upon a pari passu, equal treatment, clause in the original bond offering, is up for possible review by the U.S. Supreme Court, prolonging the debt saga further, possibly into 2015. Meanwhile Argentina faces a balance of payments crisis that is helping to exacerbate investor concerns, globally, about the health of emerging markets. That said, fund managers are loathe to see Argentina being used as an excuse for the blowout losses in emerging markets.