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The Day After Default

Feb 1, 2002

The debate over how to deal with countries that go bust heated up as Argentina's finances disintegrated. But the idea of establishing a formal mechanism to process sovereign debt faces many obstacles, starting with investors.

Weighing in: The IMF supports codifying
sovereign bankruptcies.

Two Latin American sovereign defaults in two years have enraged lenders and jeopardized the health of the emerging markets asset class. What's more, Argentina's collapse and the 1999 Ecuadorian default have placed monumental strains on the negotiation process between markets and governments.

Years of debate over crisis mitigation has yet to provide the world with a quick and clean debt restructuring that gives creditors a reasonable deal and allows sovereigns to return to the capital markets quickly and resume normal borrowing.

The discussion gained further impetus as Argentina sank into default last year and investors hardened their opposition to the government. Anne Krueger, the International Monetary Fund's first deputy managing director, had earlier proposed a negotiation and rehabilitation procedure for insolvent sovereign governments that would work rather like Chapter XI of the US bankruptcy code.

Her suggestions made the headlines in...

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