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Beware the maverick sovereign creditor

The next cycle of sovereign debt default will be different from the last. Lawyers hope that the mechanisms for coping with it will have evolved as well. By Christopher Stoakes

Lawyers for whom the debt crisis of the early 1980s created an interesting intellectual challenge ­ how do you deal with a borrower which can go bust but can't be wound up? ­ have seen it turn into their life's work. Mexico's peso devaluation of late 1994 reminded them, if reminder were needed, that demand for their expertise should outlast their careers. The problem is that the legal solutions devised in the 1980s are themselves already outdated.

S The reason for this is that much of the sovereign debt raised in the 1990s has come from the bond market, a market with a diversity of holders not matched by the comparatively collegial commercial banking market which provided the original loans rescheduled during the 1980s. Indeed, much of that earlier commercial bank lending was securitized into Brady bonds as part of the rescheduling process and sold off to non-bank investors. As that debt has become tradeable on the secondary market, so the spectre of the maverick creditor has increased.

The maverick creditor originally sprang from the unanimity requirement included in the very first rescheduling agreements.

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