When a company or an individual goes bust, a bankruptcy court sells off their assets to pay its creditors. Companies also change management or give creditors shares instead of debt. In the US, there is no shame in having undergone a Chapter XI debt reorganization. So why shouldn’t governments be allowed to do the same thing? A neatly packaged bankruptcy proceeding would be much nicer than suffering the chaotic default visited on poor old Argentina. This is what Anne Krueger, the Fund’s tough first deputy managing director, among others would like.

Unfortunately, life is not that simple. Argentina’s government sold its airports, power stations, phone companies, steel plants and other assets years ago to settle a previous pile of unpaid debts. How could an international bankruptcy court order a government to sell the presidential jet or turn over tax collection to a creditors’ representative? It is ludicrous to think that any country would allow financiers to take over important government functions, such as running fiscal policy. Incredibly, this is what Rudiger Dornbush, an economist at the Massachusetts Institute of Technology, proposed last month.

It would make more sense to build on the experience of past financial disasters in Latin America.

  • Let lenders beware: Argentina never hid its growing debt mountain so investors should have known what they were getting into.
  • Argentina and its creditors can learn from the experience of Ecuador and Russia, which defaulted on their bonds and are now growing again. (Of course, it is only ten years or so since Argentina restructured its commercial bank debt and repackaged it as Brady bonds).
  • New bonds should (if lender and borrower agree) include detailed terms spelling out clearly how and under what circumstances they can be restructured. Bonds were meant to be super-safe, but this made them inflexible.

In the end, bonds are just fancy IOUs backed by no more than the good faith and credit of the person or government selling them. Given the record of Argentina (and Russian and Ecuador), it is amazing that anyone ever bought its bonds in the first place.