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Sovereign work-outs: a new idea

Argentina's de facto default on $130 billion in face value of debt - investors who've seen the price of their bonds more than halve to 35 cents on the dollar in four months are in no doubt that this is a default-like loss, if not yet a legal default - and the tortuous progress of its supposedly voluntary and orderly debt restructuring, which shows no sign of being either, have drawn renewed and urgent calls for a better approach to sovereign debt work-outs.

There are three possibilities: large scale bail-outs by the G7 and the IMF, which markets now realize are no longer likely; some kind of sovereign bankruptcy court, though what court might claim the legal right or enforcement mechanisms to attach and dispose of sovereign assets within a country's own borders, no-one knows; or... something else.

So last month's simulation hosted in New York by Carnegie Mellon University of a new proposal by Adam Lerrick and Allan Meltzer, both of Meltzer commission fame, for an official floor of support during a sovereign debt default and restructuring, is worthy of serious consideration.

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