THERE ARE no real good guys in the story of Argentina’s debt default, which pits President Cristina Fernández de Kirchner’s erratic populist government against bare-knuckled Wall Street hedge funds. The hedgies bet they could persuade U.S. courts to force Ms. Kirchner to honor a small percentage of Argentine bonds that were left out of the country’s two previous restructurings of $100 billion in debt (on which it defaulted in 2001). She bet that the U.S. courts, whose jurisdiction Argentina accepted in issuing the debt, would enable her to repudiate the bond owners as “holdouts.”
Speculators or not, the hedge funds at least have the law on their side, as was elaborately determined in a case that took years and went all the way to the Supreme Court — which let District Judge Thomas P. Griesa’s order in favor of the hedge funds stand. Ms. Kirchner nevertheless continues her massive propaganda campaign against the hedge fund “vultures” and refuses to pay, a stance that, under the terms of Judge Griesa’s order, makes it impossible for her to pay interest on the restructured bonds. Hence the default.
Fortunately for the world, Argentina has been out of the market so long that its latest mess has few implications beyond its borders. Argentines themselves, of course, won’t be so lucky. Unless and until Ms. Kirchner accepts her legal defeat and gets back in the good graces of creditors, her countrymen are likely to face more inflation and unemployment. There’s still time to cut a face-saving deal with the hedge funds in the next few days; Argentina’s private banks have offered to put up enough cash to make it happen.
That much is of interest mainly to Argentina and its creditors. The broader question is what precedent this case might establish for other indebted sovereigns and those who lend them money. Critics of the hedge funds, including such luminaries as Nobel-winning economist Joseph Stiglitz and, at one point, the Obama administration , argued that a ruling in the funds’ favor would encourage would-be holdouts, thus obstructing the debt restructurings that are a regrettable but necessary feature of international finance. Others warn that a pro-lender stance by U.S. courts might cost Wall Street business, since sovereigns would market their bonds in more borrower-friendly jurisdictions in Europe.
We’re not so sure about all that. A growing percentage of sovereign debt already includes collective-action clauses, which essentially allows a majority of bondholders to overrule holdouts. Yes, it will be years before such innovations become standard. In the meantime, however, the strict interpretation of borrower responsibilities that the U.S. courts endorsed in Argentina’s case probably won’t burden sovereign debtors, few of whom face anything like the predicament into which Argentina has mismanaged itself. The outcome may actually encourage lenders to provide funds and debtors to use it wisely — rendering debt restructurings less necessary in the first place. Markets thrive on transparency and clarity. And the battle between Argentina and the hedgies has certainly clarified U.S. law, to wit: If you borrow money, sooner or later, you have to pay it back.