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Montag, 26. November 2012

Et Tu, FT? (Pari Passu Edition) posted by Anna Gelpern

Et Tu, FT? (Pari Passu Edition)

posted by Anna Gelpern
Laugh, cry, give up: the Financial Times editorial argues for Supreme Court review ofJudge Griesa's decision because not enough countries use collective action clauses (CACs) in their foreign-law debt ... and recommends that all do as the Eurozone and adopt CACs (... in their domestic-law debt?). 
Aside: True, Europe had long ago promised to lead by example and adopt CACs in its foreign-law debt, but that was largely beside the point because (a) Mexico had already led by example, and (b) most European sovereign debt is domestic-law ...But maybe not for long ... Then again, the pendulum may have swung back todomestic law. For now, London looks safe from Griesa-style lurches, but so did New York until a few weeks ago.
Bottom line: for sovereign debtors and creditors alike, domestic-law debt offers protections from holdout hostage dramas like the one playing out in New York. These protections do not come from CACs, but from the debtor's unilateral capacity to change the terms (for example, to reroute the payments).  The downside for the creditors is self-evident: there is no guarantee the debtor will use this capacity for their benefit.
The FT also notes improbably that the U.S. Congress could "modify contract law to deal more sensibly with the Argentine restructuring." The idea that the federal legislature would override state law for the sake of a politically toxic debtor is pretty far-fetched, even apart from fiscal cliffside timing.
Despite all that, it is hard to disagree with the basic thrust of the editorial and the existential follow-on: "While countries should service their debts in all but exceptional cases, an orderly mechanism for sovereign restructuring is essential for the exceptions. Just as with bankrupt individuals and corporations, value is only destroyed by holding insolvent debtors in never-ending limbo. ... A sovereign bankruptcy regime is not on the horizon."
And on the bright side, at least the FT cares.

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