The U.S. court ruling that required Argentina to pay back holdout creditors in full puts the global financial system at risk, says Harvard economist Kenneth Rogoff, former chief economist of the International Monetary Fund.
"True, the country’s periodic debt crises are often the result of self-destructive macroeconomic policies. But, this time, the default has been triggered by a significant shift in the international sovereign-debt regime," he writes on Project Syndicate.
"The shift favors hard-line creditors in bond issuances governed by U.S. law. With emerging-market growth slowing and external debt rising, new legal interpretations that make future debt write-downs and reschedulings more difficult do not augur well for global financial stability."
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So what's the solution?
"Given the recurring complications of adjudicating sovereign-debt contracts in foreign courts, and the world’s inability to organize a credible and fair procedure for foreign bankruptcies, perhaps the best idea is to steer the bulk of international debt flows through debtor-country courts," Rogoff writes.
To be sure, not everyone views Argentina's default as a cause for great concern. "Argentina has been living in a default reality for over 10 years," Estanislao Malic, an economist at the Center for Economic and Social Studies of Scalabrini Ortiz in Buenos Aires, told the New York Times.
He was referring to the country's 2001 financial crisis. "This default is not a drastic change," he said.
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