Argentina Wins/Loses

Argentina won an important contest last night at the World Cup, on a fine Messi goal.  However, while I’m a firm believer that nothing is more important than football, Argentina’s loss at the U.S. Supreme Court this morning may have larger long-term consequences.

Without comment, the court rejected Argentina’s appeal of an earlier lower court ruling that required Argentina to pay holders of its defaulted bonds in full if it is to pay other creditors that had restructured their debts.  In recent months, legal scholars had speculated that the court might hear the case, delaying or even overturning the early ruling.  Anna Gelpern explains why this decision is a big deal; I have blogged on this far less intelligently as well.

Argentina’s economy is a disaster for reasons unrelated to this ruling.  Nonetheless, should it now decide to default on all debts rather than pay its holdout creditors, the resultant freezing of relations with the international financial community, which the government had been working to normalize including through an agreement with the Paris Club of official creditors, will be costly and long-lasting. If Argentina can navigate the politics and its earlier commitment not to offer a better deal (before end 2014) to holdouts than those than exchanged their bonds, the economic case for negotiation seems strong.

I am less convinced that the ruling has broader implications for sovereign debt markets; the government’s opposition to dealing with creditors and U.S. courts was extreme here.  Moreover, for countries that are working in good faith with their creditors, a small number of holdouts is no obstacle to a country achieving its macroeconomic objectives in an exchange. But if lenders see this as a broader risk of lending to countries that might go rogue in the future, there could be contagion and the pendulum could swing too far toward the creditor in future negotiations.  This is in part motivating a debate at the IMF and elsewhere on whether the rules of the game need to be changed.