Now that Argentina, in the midst of a political whirlwind, has defaulted on its debts to creditors the world over, those creditors face a difficult choice: Whether to grab assets or just wait for the offer of a repayment deal.
Both options are risky, and Argentina has had enough problems scrambling to form a government, let alone agreeing on a policy for dealing with creditors.
The chaos has left bankers, lawyers and academics alike wondering whether matters could have taken a better turn had there been a third way.
In particular, the IMF recently suggested offering countries the same sort of bankruptcy reorganization procedures, through an international tribunal, that are available to companies and municipalities in the US and other industrialized Western countries.
The idea, which has been around for at least a decade, was revived by no less a person than Anne O. Krueger, the No. 2 official at the IMF, in a November speech.
One of the first to propose this idea was Jeffrey D. Sachs, the Harvard economist well known for his work advising Russia and other Eastern European countries after the fall of Communism. "It's not just economists pushing some flaky economist's idea," Sachs said in an interview last week. "I've always regarded it as needed because it's just incredibly messy how things proceed in these instances."
For three decades, an average of one country a year has defaulted on its national debts. On some occasions, big American financial institutions and their customers lost billions of dollars in heavily leveraged portfolios that relied on the high returns of other countries' risky bonds. When those portfolios collapsed, they brought the markets -- and sometimes individual investors' wealth -- down with them.
Argentina alone owes US$141 billion, mostly to the IMF, the World Bank, other countries and institutional investors -- though its default won't be so dire.
David A. Skeel Jr, a bankruptcy expert at the University of Pennsylvania's law school, says the bankruptcy idea has promise. "At least in concept, this idea of an international bankruptcy tribunal makes a lot of sense," he said.
In an interview, Krueger said one motivation for resurrecting the idea was an increased diversity of creditors. Talks between debtor countries and creditors were easier, she said, when only a few governments and big banks were involved.
No `real world' relevance
But skepticism prevails among those for whom debt crises matter in a material sense, not just a theoretical one.
"It's a complete nonstarter as far as I'm concerned," said Hans Humes, a managing partner at Van Eck Capital, which holds some of Argentina's bonds. Humes, who said he fears that a bankruptcy process would be slanted toward debtor countries, acts as a spokesman for the Argentine Bondholder Committee, a group of private creditors.
Walter B. Wriston -- a former Citicorp chairman who once advocated bank loans to third-world countries by famously saying that "countries don't go out of business" -- agreed. "It's an idea that doesn't really have any relevance in the real world," he said.
The three stages of the process proposed by Sachs, and later by Krueger, will be familiar to those who know Chapter 11 (for companies) and Chapter 9 (for municipalities) of the US Bankruptcy Code. First, a country would receive legal protection from debts. Then, as restructuring discussions proceeded, a creditor would keep the country supplied with cash in return for priority in repayment -- like the "debtor in possession" loans recently obtained by, say, Enron Corp. Then, when creditors reached an agreement, a form of majority voting would ensure that no dissenters delayed the process.
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