Alison Frankel has a very insightful post about how the looking Argentine debt default illustrates the limits of US courts to manage sovereign debt litigation:
... the hedge fund litigation with Argentina has laid bare the limits on the power of U.S. courts, the borderline between litigation and foreign policy. Thanks to Argentina, bond investors are now on notice that they might not be able to enforce U.S. judgments against foreign sovereigns. They’ll have to factor that risk into investment decisions.
But at least investors know. U.S. courts fulfilled their duty. They heard all sides, rendered decisions and reconsidered those decisions on appeal. They laid down the law. They just can’t get Argentina to follow it.
If Argentina manages to successfully evade the US courts' orders to repay the bondholders in question, it could have a significant impact on the ability of all sovereign debtors to borrow. One thus continues to think it would be in the interest of sovereign borrowers to establish some sort of international regime akin to bankruptcy reorganizations. All of which takes me to one of my first law review articles, Comity and Sovereign Debt Litigation: A Bankruptcy Analogy. Maryland Journal of Int'l Law and Trade, Vol. 10, No. 1, 1986. Available at SSRN: http://ssrn.com/abstract=302009:
On repeated occasions in the post-war period, the cumulative effects of policy mistakes, recessions, inflation, and other economic problems have made it difficult for sovereign debtors to service their external debt. Unlike a domestic U.S. private debtor, who may resort to formal bankruptcy procedures in the event of insolvency, a defaulting sovereign debtor has no formal mechanism for triggering a restructuring of its debt.
In some cases, sovereign debtors have resorted to a moratorium on debt payments. This article argues that U.S. courts ought to give effect to such moratoria under the international law principle of comity. Using standard game theory methodology (the so-called "creditors dilemma" variant of the famous "prisoners dilemma"), the article argues that creditors of such debtors would agree in advance to give effect to such a moratorium provided it neither repudiated the sovereign's debts nor gave preference to certain creditors. A legal test for granting comity to sovereign debt moratoria is therefore proposed.