Sovereign Debt

For all the hopers, dreamers, and scaredy-cats out there--Relax. The long-awaited IMF overview paper on sovereign debt restructuring is here, the first since 2005.

Creditors owed identical amounts under identical defaulted Argentine bonds, including identical pari passu clauses, could get very different recoveries under the plaintiffs' theory of ratable payment--unless all such creditors are corralled into a mandatory class action that divvies up Argentina's surplus among them under equitable supervision of the courts.

Italy does not do things half-way. Of all the pari passu clauses on the planet, it had the one that most definitely, unambiguously, no-two-ways-about-it promised ratable payment to its bondholders. In English. Just search for "ratably" here. This got Italy some bloggy grief.

Stepping back from the Cyprus bail-in, I'm wondering if it is penny-wise, pound-foolish. The depositor tax is only supposed to raise about $7.25 billion (5.8 billion Euros).  Given the risks created by a bailout being rejected and the risk of runs created in other countries, does it really make sense to demand the depositor tax?  $7.25 billion seems like a really cheap price for avoiding the problems that the Cyprus depositor tax is making. Indeed, in the big picture, the whole Cyprus bailout package is only around $23 billion.