In my first post on this topic, The Modern Greek Drama: Comedy, Tragedy, or Both?, I offered the insights of Cleary Gottlieb Steen & Hamilton partner and sovereign debt guru, Lee Buchheit, on the current Greek sovereign debt drama. In the next post, The Modern Greek Drama, Part 2, Buchheit’s frequent co-author, Duke law professor Mitu Gulati, discussed his reactions. Today, I’m happy to introduce a post from Anna Gelpern, Associate Professor of Law at American University.
For a supposedly exotic field, sovereign debt has been scull-splittingly, mind-numbingly boring for some time—Groundhog Day with no life lesson in the end (cite to years of Rogoff and Reinhart on centuries of sovereign badness). Judge Thomas “Serial Embargoer” Griesa’s umpteenth Argentina order is all ennui. I say this at some peril, owing my entire existence to a combination of Buchheit, Gulati, Argentina and Krawiec indulgence.
But really: every few years, a country defaults or almost defaults on its debt. Theory caption says this is all because the government over-borrowed and the creditors over-lent, which might not have happened had there been a bankruptcy-like resolution regime, and/or had the debt been predictably enforceable against assets beyond sovereign control. Deep theory caption then wonders why we have sovereign debt at all, and bellyaches about whether the market is really a disciplinarian or a strumpet. Disciplinarian strumpet awaits discovery in her little black swan costume. Yawn.
Shifting the scenery slightly on the same old script, Dubai and Greece hold out a glimmer of hope for the unböring turn in sovereign debt:
· First, the new politics make politics cool again: how much would Abu Dhabi (Germany) take to teach Dubai (Greece-Spain-Portugal-etc.) a lesson? Euro law and politics can turn particularly interesting, since some Euro-area exporters might quietly cheer the currency’s slide on Greek misfortunes. Meanwhile, Argentina must work harder to get attention with the same-old-central-bank-sacking act.
· Second, coming on the heels of the global financial bailoutfest and a bubble in crisis pulp, Greece can only confirm that policy randomness is the last best hope for moral hazard worry warts. There is no legal barrier to bailouts. Ever. Really. Whether Greece gets one is entirely a function of EU and Euro politics. With banks and sovereigns alike, “commitment” is part of “confidence boosting.” They work until they don’t. The Greek lesson is that we lawyers need to diversify our shtick.
· Third, the IMF looks much sexier in the pink light of lecturing to New York, London and Brussels while the erstwhile emerging markets get to sit smug (less Eastern Europe, but note the EU accession angle). If the IMF co-opts the G-20 the post-World War II institutional dream might rise again from the ashes of new age informality. The Fund might also benefit from the round of regional bailout battles: having a common enemy in Washington may turn out to be preferable to bickering with your own neighbors.
As for the disciplinarian strumpet: Hank Paulson serves up a reminder of the invisible hand gone frisky. Turns out that as Russia was fighting Georgia, it tried to get Beijing to join Moscow in dumping Fannie and Freddie to get Washington to bail out the GSEs. It’s a small world.
-- Anna Gelpern