More than three years after defaulting on its debt, the Argentine Government has proposed a bond exchange which would see its investors losing about 70% of their initial investments. Whatever the exact outcome of the operation, it already illustrates the weaknesses of the contractual approach to handling sovereign defaults. Given the coordination problems faced by private investors, the Argentine authorities were able to refuse any constructive and sincere negotiation. However, the scope for resisting such an noncooperative strategy is in fact limited: the threat of court action was over-estimated and no arbiter or institutional monitor has emerged able of replacing the IMF. The absence of a binding link between private renegotiation and multilateral instruments for policy monitoring considerably reduces the leverage of the Fund on the overall process. This confirms the relative decline of the IMF in the new “international financial architecture”. Furthermore, if the contractual approach may attain its objectives for “small” defaults, then several accidents as occurred in Argentina could well lead to a dead-end, requiring more institutional and political responses.
debt; insolvency; system of payments; monetary system; crisis; banking system
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