Restructuring Greece's debt crisis

by Kevin Gallagher

Guardian
July 5, 2011

Greece may have managed to kick the can down the road once again, but will eventually have to restructure its debt. If Greece or any other nation restructures, they will find that one of the most glaring gaps in global economic governance is the lack of an agreed-upon regime for resolving debt crises. New research shows that in the absence of conscious global economic governance, we may be left with a de facto regime: the thousands of international trade and investment treaties that have jurisdiction over government debt. Just ask Argentina.

A number of commentators have pointed to Argentina's "success" after its bond restructuring as a lesson for Greece. Indeed, Argentina has experienced impressive growth alongside debt restructuring. But as others have pointed out, the two cases are not all that comparable. One additional reason for Argentina's swift recovery is due to the fact that Argentina devalued its currency, which Greece cannot do under the euro. It is also true that Argentina happened to be endowed with key primary products in the middle of a commodity boom. Greece is not so lucky.

As I show in one of two studies released Tuesday, one trait that both Greece and Argentina do share is that they are party to scores of international trade and investment treaties that allow private bondholders to take sovereign states to private tribunals and effectively sue those states to retrieve the full value of their bonds. This trait is unique to regional and bilateral trade deals and is absent from the World Trade Organisation (WTO) treaties, which do not cover government debt and don't let private firms take on sovereign states. At the WTO, rather, sovereign states alone can file cases against each other, not private firms.

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