tag:theconversation.com,2011:/fr/topics/debt-default-4037/articlesDebt default – The Conversation2023-05-04T12:12:28Ztag:theconversation.com,2011:article/1973952023-05-04T12:12:28Z2023-05-04T12:12:28ZCan Biden and McCarthy avert a calamitous debt default? 3 evidence-backed leadership strategies that might help<figure><img src="https://images.theconversation.com/files/523318/original/file-20230427-22-l2gfdz.jpg?ixlib=rb-1.1.0&rect=30%2C14%2C1167%2C783&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Whether or not the U.S. defaults on its debt may depend on the leadership of Joe Biden and Kevin McCarthy.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BidenIreland/008d696c1da94f00b79de33c01a6c4f8/photo?Query=Kevin%20mccarthy&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=4749&currentItemNo=40">AP Photo/Mariam Zuhaib</a></span></figcaption></figure><p>The U.S. <a href="https://www.cnn.com/2023/03/22/politics/debt-limit-standoff-congress-white-house/index.html">is teetering toward</a> an unprecedented debt default that <a href="https://www.nytimes.com/2023/05/01/us/politics/debt-limit-date-janet-yellen.html">could come as soon as June 1, 2023</a>. </p>
<p>In order for the U.S. to borrow more money, Congress <a href="https://theconversation.com/why-america-has-a-debt-ceiling-5-questions-answered-164977">needs to raise the debt ceiling</a> – currently US$31.4 trillion. President Joe Biden has <a href="https://www.axios.com/2023/04/20/democrats-biden-debt-ceiling-negotiate">refused to negotiate</a> with House Republicans over spending, demanding instead that Congress pass a stand-alone bill to increase the debt limit. House Speaker Kevin McCarthy won a small victory on April 26 by <a href="https://www.nytimes.com/live/2023/04/26/us/debt-ceiling-vote-news">narrowly passing a more complex bill</a> with GOP support that would raise the debt ceiling but also slash spending and roll back Biden’s policy agenda.</p>
<p>Biden recently <a href="https://www.reuters.com/markets/us/us-may-run-short-cash-after-june-1-without-debt-limit-hike-treasury-2023-05-01/">invited congressional leaders</a>, including GOP leader McCarthy, to the White House on May 9 to discuss the situation but insisted he isn’t willing to negotiate. </p>
<p>Rather than leading the nation, Biden and McCarthy seem to be waging a partisan <a href="https://www.nytimes.com/2023/04/27/us/politics/biden-debt-ceiling.html">political war</a>. Biden likely doesn’t want to be seen as giving in to Repubicans’ demands and diminishing legislative wins for his liberal constituency. McCarthy, with his slim majority in the House, needs to appease even the most <a href="https://www.politico.com/news/2023/04/26/mccarthy-debt-plan-gop-00094065">hard-line members of his party</a>.</p>
<p>Having <a href="https://scholar.google.com/citations?user=uM0ynrcAAAAJ&hl=en&oi=ao">studied leadership</a> for over 25 years, I would suggest that their leadership styles are polarized, oppositional, short-term and highly ineffective. Such combative leadership risks a debt default that <a href="https://www.nytimes.com/2023/03/07/us/politics/debt-default-economy.html">could send the U.S. into recession</a> and potentially lead to a global economic and financial crisis.</p>
<p>While it may seem almost impossible in the current political climate, Biden and McCarthy have an opportunity to turn around this crisis and leave a positive and lasting legacy of courageous leadership. To do so, they need to put aside partisanship and adopt a different approach. Here are a few evidence-backed strategies to get them started.</p>
<h2>1. Moving from a zero-sum game to a more holistic approach</h2>
<p>Political leaders often risk being hijacked by members of their own party. McCarthy faces a direct threat by hard-line conservative members of his coalition.</p>
<p>For example, back in January, <a href="https://www.nytimes.com/2023/01/06/us/politics/house-speaker-vote-mccarthy.html">McCarthy agreed to let a single lawmaker</a> force a vote for his ouster to win enough votes from ultraconservative lawmakers to become speaker. That and other concessions give the most extreme members of his party a lot of control over his agenda and limit McCarthy’s ability to make a compromise deal with the president.</p>
<p>Biden, who just <a href="https://apnews.com/article/joe-biden-election-2024-president-democrats-trump-9c72115656855da89a41cac3f79aa65b">announced he’s running for reelection in 2024</a>, is betting his first-term accomplishments – such as <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/24/fact-sheet-president-biden-announces-student-loan-relief-for-borrowers-who-need-it-most/">unprecedented climate investments and student loan forgiveness</a> – will help him keep the White House. Negotiating any of that away could cost him the support of key parts of his base.</p>
<p>My research partner <a href="https://scholar.google.com/citations?user=Gs-m4_oAAAAJ&hl=en&oi=ao">Marianne W. Lewis</a> and I label this kind of short-term, one-sided leadership as “either/or” thinking. That is, this approach assumes that leadership decisions are a zero-sum game – every inch you give is a loss to your side. We argue that this kind of leadership is <a href="https://store.hbr.org/product/both-and-thinking-embracing-creative-tensions-to-solve-your-toughest-problems/10481">limited at best and detrimental at worst</a>. </p>
<figure class="align-center ">
<img alt="a Black man and a white man stand next to each other holding Nobel Peace prize folders and medals" src="https://images.theconversation.com/files/523905/original/file-20230502-22-kwfxh5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/523905/original/file-20230502-22-kwfxh5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=467&fit=crop&dpr=1 600w, https://images.theconversation.com/files/523905/original/file-20230502-22-kwfxh5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=467&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/523905/original/file-20230502-22-kwfxh5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=467&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/523905/original/file-20230502-22-kwfxh5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=587&fit=crop&dpr=1 754w, https://images.theconversation.com/files/523905/original/file-20230502-22-kwfxh5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=587&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/523905/original/file-20230502-22-kwfxh5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=587&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Nelson Mandela, left, and F.W. de Klerk won the Nobel Peace Prize for helping end apartheid in South Africa.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/ObitFWdeKlerk/f808d2c7d2294a13ab6821a7eaa730ae/photo?Query=de%20klerk%20mandela&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=160&currentItemNo=33">Jon Eeg/Pool photo via AP</a></span>
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<p>Instead, we find that great leadership involves what we call “both/and” thinking, which involves seeking integration and unity across opposing perspectives. History offers examples of how this more holistic leadership style has achieved substantial achievements. </p>
<p>President Lyndon B. Johnson and fellow Democrats <a href="https://www.senate.gov/artandhistory/history/common/generic/CivilRightsAct1964.htm">were struggling to get a Senate vote</a> on the Civil Rights Act of 1964 and needed Republican support. Despite his initial opposition, Republican Sen. Everett McKinley Dirksen – then the minority leader and a staunch conservative – led colleagues in crossing party lines and joining Democrats to pass the historic legislation.</p>
<p>Another example came in 1990, when South Africa’s then-President Frederik Willem de Klerk <a href="https://thunderbird.asu.edu/thought-leadership/insights/fw-de-klerk-man-who-ended-apartheid-freed-mandela-and-honored-his">freed opponent Nelson Mandela from prison</a>. The two erstwhile political enemies agreed to a deal that ended apartheid and paved the way for a democratic government – which <a href="https://www.nobelprize.org/prizes/peace/1993/summary/">won them both the Nobel Peace Prize</a>. Mandela became president four years later.</p>
<p>This integrative leadership approach starts with a shift of mindset that moves away from seeing opposing sides as conflicting and instead values them as generative of new possibilities. So in the case of the debt ceiling situation, holistic leadership means, at the least, Biden would not simply put up his hands and refuse to negotiate over spending. He could acknowledge that Republicans <a href="https://www.nytimes.com/2023/02/15/business/national-debt-biden.html">have a point about the nation’s soaring debt load</a>. McCarthy and his party might recognize they cannot just <a href="https://www.politico.com/news/2023/04/26/mccarthy-debt-plan-gop-00094065">slash spending</a>. Together they could achieve greater success by developing an integrative plan that cuts costs, increases taxes and raises the debt ceiling. </p>
<h2>2. Champion a long-term vision over short-term goals</h2>
<p><a href="https://heinonline.org/HOL/Page?handle=hein.journals/jcorl37&div=13&g_sent=1&casa_token=nuOoHSOf8WQAAAAA:7WunxXp3VpouwosDM-mbyu2w_yTxronnybSfNjtD-9kxGYQR3feeJ67kWXRLCyA_Z1yHyX8&collection=journals">What we call “short-termism” plagues America’s politics</a>. Leaders face pressure to demonstrate immediate results to voters. Biden and McCarthy both have strong incentives to focus on a short-term victory for their side with the presidential and congressional elections coming soon. Instead, <a href="https://doi.org/10.5465/amr.2022.0251">long-term thinking</a> can help leaders with competing agendas.</p>
<p>In a 2015 study, <a href="https://research.monash.edu/en/publications/short-on-time-intertemporal-tensions-in-business-sustainability">Natalie Slawinski and Pratima Bansal</a> studied executives at five Canadian oil companies who were dealing with tensions between keeping costs low in the short term while making investments that could mitigate their industry’s environmental impact over the long run. The two scholars found that those who focused on the short term struggled to reconcile the two competing forces, while long-term thinkers managed to find more creative solutions that kept costs down but also allowed them to do more to fight climate change. </p>
<p>Likewise, if Biden and McCarthy want to avert a financial crisis and leave a lasting legacy, they would benefit from focusing on the long term. Finding points of connection in this shared long-term goal, <a href="https://www.nytimes.com/2023/04/27/us/politics/biden-debt-ceiling.html">rather than stressing their significant differences about how to get there</a>, can help shift away from their standoff and toward a solution. </p>
<h2>3. Be adaptive, not assured</h2>
<p><a href="https://doi.org/10.1073/pnas.1617711114">Voters often praise political leaders</a> who act swiftly and with confidence and self-assurance, particularly at a moment of economic uncertainty. </p>
<p>Yet finding a creative solution to America’s greatest challenges often requires leaders to put aside the swagger and adapt, meaning they take small steps to listen to one another, experiment with solutions, evaluate these outcomes and adjust their approach as needed. </p>
<p>In a study of business decisions at a Fortune 500 technology company, I spent a year <a href="https://doi.org/10.5465/amj.2011.0932">following the senior management teams</a> in charge of six units – each of which had revenues of over $1 billion. I found that the team leaders who were most innovative tended to be good at adaptation. They constantly explored whether they had made the right investment and made changes if needed. </p>
<p>Small steps are also necessary to build unlikely relationships with political foes. In his 2017 book, “<a href="https://reospartners.com/publications/introduction-collaborating-enemy/">Collaborating With the Enemy</a>,” organizational consultant Adam Kahane describes how he facilitated workshops to help former enemies take small steps toward reconciliation, such as in South Africa at the end of apartheid and in Colombia amid the drug wars. Such efforts helped South Africa <a href="https://origins.osu.edu/article/south-africa-mandela-apartheid-ramaphosa-zuma-corruption?language_content_entity=en">become a successful multiracial democracy</a> and Colombia <a href="https://www.wola.org/program/colombia/the-colombian-peace-process/">end decades of war with a guerrilla insurgency</a>. </p>
<figure class="align-center ">
<img alt="two white men are seen shaking hands and smiling with other people who's backs are turned" src="https://images.theconversation.com/files/524207/original/file-20230503-27-ygagfw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/524207/original/file-20230503-27-ygagfw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/524207/original/file-20230503-27-ygagfw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/524207/original/file-20230503-27-ygagfw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/524207/original/file-20230503-27-ygagfw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/524207/original/file-20230503-27-ygagfw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/524207/original/file-20230503-27-ygagfw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Former Democratic Gov. Phil Bredesen, second from left, and former Republican Gov. Bill Haslam, right, have built a good relationship since leaving office despite their political differences.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FormerGovernorsTennessee/5a99d137162a498caec7ee02a95cfe95/photo?Query=Phil%20Bredesen%20and%20Bill%20Haslam&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=15&currentItemNo=0">AP Photo/Mark Humphrey</a></span>
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<p>This kind of leadership requires small steps toward connection rather than large political leaps. It also requires that both sides let go of their positions and consider where they are willing to compromise. </p>
<p>Biden and McCarthy could learn from two former Tennessee governors, Democrat Phil Bredesen and Republican Bill Haslam. Though they <a href="https://www.msn.com/en-us/news/opinion/we-re-a-democrat-and-a-republican-here-s-how-both-parties-can-start-on-gun-reform-together/ar-AA19nbb7">oppose each other on almost every political issue</a>, including gun control, the two former leaders have built a constructive relationship over the years. Rather than tackle the big divisive issues, they started with identifying the small points where they agreed with each other. Doing so led them to build greater trust and continue to look for connections. </p>
<p>So when a gunman <a href="https://theconversation.com/nashville-attack-renews-calls-for-assault-weapons-ban-data-shows-there-were-fewer-mass-shooting-deaths-during-an-earlier-10-year-prohibition-202886">killed six people at a school in Nashville</a> recently, the two former governors were able to move beyond political finger-pointing and focus on how their respective parties could work together on meaningful gun reform.</p>
<p>Of course, it’s easier to do this once you’re out of office and the pressure from voters and parties goes away. And although current Tennessee Gov. Bill Lee <a href="https://www.politico.com/news/2023/04/11/tennessee-governor-bill-lee-red-flag-law-background-checks-00091404">agreed on the need for gun reform</a>, his fellow Republicans in the state Legislature balked.</p>
<h2>A long shot, but …</h2>
<p>And that’s why I know this is a long shot. The two main political <a href="https://www.vox.com/podcasts/2020/1/23/21077236/ezra-klein-show-book-why-were-polarized-identity-politics">parties are as polarized as ever</a>. The odds of a breakthrough that leads to anything more than a last-second deal that kicks the debt ceiling can down the road remain pretty low – and <a href="https://www.cnn.com/2023/03/31/economy/default-debt-ceiling/index.html">even that seems in doubt</a>.</p>
<p>But this is about more than the debt ceiling. The U.S. faces a long list of problems big and small, from <a href="https://theconversation.com/us/topics/inflation-645">high inflation</a> and a <a href="https://theconversation.com/us/topics/2023-bank-crisis-135462">banking crisis</a> to the <a href="https://theconversation.com/us/topics/ukraine-12-months-at-war-134215">war in Ukraine</a> and <a href="https://theconversation.com/us/topics/climate-change-27">climate change</a>. </p>
<p>Americans need and deserve leaders who will tackle these issues by working together toward a more creative outcomes.</p><img src="https://counter.theconversation.com/content/197395/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Wendy K. Smith does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research shows that leaders who can embrace competing demands and focus on the long term are more likely to succeed.Wendy K. Smith, Professor of Business and Leadership, University of DelawareLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1783402022-03-04T14:42:54Z2022-03-04T14:42:54ZCould the Ukraine invasion spark a global financial crisis?<p>The Russian assault on Kyiv and other Ukrainian cities has intensified uncertainty in the world economy. To condemn Putin’s war, western leaders <a href="https://ec.europa.eu/commission/presscorner/detail/en/statement_22_1423">announced</a> some <a href="https://theconversation.com/ukraine-why-the-sanctions-wont-topple-putin-178189">restrictive economic measures</a> to target Russian financial institution and individuals.</p>
<p>The sanctions include: removing some Russian banks from the <a href="https://theconversation.com/swift-ejecting-russia-is-largely-symbolic-heres-why-178065">Swift messaging system</a> for international payments; freezing the assets of Russian companies and oligarchs in western countries; and restricting the Russian central bank from using its US$630 billion (£473 billion) of foreign reserves to undermine the sanctions. </p>
<p>In response to these moves, <a href="https://www.dailyfx.com/forex/market_alert/2022/02/27/Euro-Sinks-US-Dollar-and-Yen-Surge-as-SP-Cuts-Russia-Rating-to-Junk.html">several ratings agencies</a> have either cut Russia’s credit rating to <a href="https://www.reuters.com/markets/europe/credit-rating-agency-scope-downgrades-russias-sovereign-debt-rating-bb-2022-03-02/">junk status</a> or signalled that they may do so soon. In other words, they think the prospect of Russia defaulting on its debts is higher than before. <a href="https://www.reuters.com/markets/europe/russia-extremely-likely-default-debts-if-ukraine-crisis-worsens-iif-2022-02-28/">According to</a> a group of global banks, a default is “extremely likely”. </p>
<h2>The threat to banks</h2>
<p>With over US$100 billion of Russian debt in foreign banks, this raises questions about the risks to banks outside Russia – and the potential for a default to kick off a <a href="https://www.thebalance.com/2008-financial-crisis-3305679">2008-style liquidity crisis</a>, where banks panic about the state of other banks’ solvency and stop lending to one another. </p>
<p>European banks are the <a href="https://www.euronews.com/next/2022/02/24/ukraine-crisis-how-the-west-s-sanctions-on-banks-are-only-scratching-the-surface-of-fortre">most exposed</a> financial institutions to Russia’s new sanctions, specifically those in Austria, France and Italy. Figures from the Bank for International Settlements (BIS) show that France and Italy’s banks each have outstanding claims of about US$25 billion on Russian debt, while Austrian banks had US$17.5 billion. </p>
<p>Comparatively, <a href="https://www.euronews.com/next/2022/02/24/ukraine-crisis-how-the-west-s-sanctions-on-banks-are-only-scratching-the-surface-of-fortre">US banks</a> have been decreasing their exposure to the Russian economy since the Crimea sanctions in 2014. Nonetheless, Citigroup has a <a href="https://www.reuters.com/business/finance/citigroup-flags-54-bln-exposure-russian-assets-2022-02-28/">US$10 billion exposure</a>, albeit this is a relatively small portion of the US$2.3 trillion in assets the bank holds. </p>
<p>There is also the question of exposure to a potential default by Ukraine on its debts. Ukraine’s <a href="https://cbonds.com/country/Ukraine_bond/">circa US$60 billion</a> of bond debt has <a href="https://www.fitchratings.com/research/sovereigns/fitch-downgrades-ukraine-to-ccc-25-02-2022">also been downgraded</a> to junk status, raising the risk of a default from a weak probability to a real danger. </p>
<p>On top of debt exposure, many banks are going to be hit because they offer banking services in either Ukraine or Russia. <a href="https://www.fitchratings.com/research/banks/large-western-european-banks-face-risks-from-russian-exposures-02-03-2022">According to</a> ratings agency Fitch, the French banks BNP Paribas and Credit Agricole are the most exposed to Ukraine because of their local subsidiaries in the country. Société Générale and UniCredit are the European banks with the largest operations in Russia, and both are also among the most exposed to Russian debts. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/450057/original/file-20220304-15-1iawu8s.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="SocGen logo in front of headquarters" src="https://images.theconversation.com/files/450057/original/file-20220304-15-1iawu8s.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450057/original/file-20220304-15-1iawu8s.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450057/original/file-20220304-15-1iawu8s.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450057/original/file-20220304-15-1iawu8s.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450057/original/file-20220304-15-1iawu8s.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450057/original/file-20220304-15-1iawu8s.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450057/original/file-20220304-15-1iawu8s.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">SocGen is one of the banks considered most exposed.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/paris-france-dec-3-2014-societe-373709431">Hadrian</a></span>
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</figure>
<p>In additional bad news for European banks, there has been a <a href="https://finance.yahoo.com/news/money-markets-sanctions-heat-raises-105208751.html">sharp rise</a> in the cost of raising US dollar funding in the euro swaps market. Banks use this market to raise the dollars that are essential for most international trade, so higher rates will put additional pressure on their margins. </p>
<p>So how serious are the risks to banks overall from defaults? US investment research firm Morning Star <a href="https://www.morningstar.com/articles/1082521/european-banks-russia-ukraine-exposure-insignificant">believes that</a> the exposure of European banks, let alone US banks to Russia is ultimately “insignificant” regarding their solvency. Nonetheless it has <a href="https://asia.nikkei.com/Politics/Ukraine-war/Japan-U.S.-and-Europe-banks-risk-losses-from-150bn-Russia-exposure">been reported</a> that European, US and Japanese banks could face serious losses, potentially to the tune of US$150 billion. </p>
<p>Banks will also probably be affected in other ways. <a href="https://www.theguardian.com/world/2022/feb/28/switzerland-adopts-wholesale-eu-sanctions-against-russia">For example</a>, Switzerland, <a href="https://www.telegraph.co.uk/business/2022/03/02/cyprus-russian-bank-dirty-money-posing-eu-state/">Cyprus</a> and the UK are the biggest destinations for Russian oligarchs seeking to store their cash overseas. Cyprus also attracts Russian wealth with golden passports. Financial institutions in these countries are all likely to lose business because of the sanctions. The share prices of UK banks Lloyds and NatWest are both down more than 10% since the start of the invasion, for example. </p>
<h2>Beyond banks</h2>
<p>Apart from banks, the war is going to lead to substantial losses for many businesses with interests in Russia. Any companies that are owed money by Russian businesses are going to struggle to get repaid, given that the ruble is down 30% and the Swift restrictions are going to make payments very difficult. For example, <a href="https://www.fitchratings.com/research/banks/large-western-european-banks-face-risks-from-russian-exposures-02-03-2022">Reuters has reported</a> that US companies have about US$15 billion of exposure to Russia. Many of these debts <a href="https://www.tradersmagazine.com/am/us-investors-may-have-to-write-off-russian-holdings/">will potentially</a> end up being written off, causing serious losses. </p>
<p>Some oil companies like <a href="https://theconversation.com/shell-bp-and-exxonmobil-have-done-business-in-russia-for-decades-heres-why-theyre-leaving-now-178269">Shell and BP</a> have said they are going to offload assets that they own in Russia. Others such as trading and mining group Glencore, which has significant stakes in two Russia-linked companies, Rosneft and En+ Group, <a href="https://www.bloomberg.com/news/articles/2022-03-01/glencore-says-it-s-reviewing-its-stakes-in-two-russian-companies?utm_source=google&utm_medium=bd&utm_campaign=Markets&cmpId=GP.Markets">has said</a> it has put them under review. But if the value of these assets evaporates because there are no buyers at sensible prices, companies like these could be looking at substantial write-downs. </p>
<p>One danger is that this leads to a panic sell-off in the shares of these companies that creates a domino effect across the market similar to what happened with banks in 2007-08. </p>
<p>Pension funds are also in the firing line. For example, the Universities Superannuation Scheme (USS) team <a href="https://amp.theguardian.com/business/2022/mar/01/uk-private-pension-scheme-russia-uss">wants to sell</a> its Russian assets. The USS is the UK’s biggest independent pension scheme with about 500,000 pension customers and £90 billion in funds. Its Russian assets are worth over £450 million. The decline in the value of these toxic assets is potentially going to be a nasty hit. More broadly, <a href="https://www.cnbc.com/2022/03/02/the-10-stock-and-bond-funds-with-the-biggest-russia-exposure.html">many investment funds</a> also have money in Russian sovereign debt and also Russian company shares. They too are potentially looking at serious losses. </p>
<p>In short, the ripple effects of this war are potentially enormous, and many more will probably become apparent in the coming days and weeks. With the global economy still recovering from the pandemic and already having to deal with substantial inflation, the markets have been highly volatile. Russia’s invasion of Ukraine has intensified this situation, and finance will be on high alert to see how things unfold.</p><img src="https://counter.theconversation.com/content/178340/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nasir Aminu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Here are the threats being faced by banks, companies and investment funds.Nasir Aminu, Senior Lecturer in Economics and Finance, Cardiff Metropolitan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/942282018-04-08T19:48:18Z2018-04-08T19:48:18ZWe need evidence-based law reform to reduce rates of Indigenous incarceration<figure><img src="https://images.theconversation.com/files/213349/original/file-20180405-189801-12205y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The cost of incarceration of Indigenous Australians in 2016 was estimated at A$3.9 billion.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>On March 28, the Australian Law Reform Commission (ALRC) <a href="https://www.alrc.gov.au/sites/default/files/pdfs/publications/final_report_133_amended1.pdf">report</a> on reducing Indigenous incarceration was tabled in parliament. Its recommendations aim to decrease Indigenous contact with the criminal justice system and reform punitive laws that entrench Indigenous disadvantage. </p>
<p>Imprisonment <a href="https://www.alrc.gov.au/sites/default/files/pdfs/publications/final_report_133_amended1.pdf">statistics</a> for Indigenous Australians are deplorable. Imprisonment of Indigenous Australians increased 41% between 2006 and 2016. In 2016, Indigenous Australians constituted 27% of the national prison population, but just 3% of the Australian population. Indeed, Indigenous Australians are the <a href="https://theconversation.com/factcheck-qanda-are-indigenous-australians-the-most-incarcerated-people-on-earth-78528">most</a> incarcerated people on Earth.</p>
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<p>For those who remain unmoved by these numbers, there are the economic costs. The cost of incarceration of Indigenous Australians in 2016 was estimated at <a href="https://www.alrc.gov.au/sites/default/files/pdfs/publications/final_report_133_amended1.pdf">A$3.9 billion</a>. Beyond costs directly related to the justice system, the estimated cost rises to A$7.9 billion. </p>
<p>Governments have met these statistics not with inaction, but with the creation of more crimes, <a href="http://www.justice.nsw.gov.au/Pages/media-news/media-releases/2015/New-bail-laws.aspx">tougher bail laws</a>, and lengthier sentences. </p>
<h2>The recommendations</h2>
<p>Informed by 127 submissions, 149 consultations, and earlier reports and inquiries, the report makes recommendations to improve justice for Indigenous Australians. </p>
<p>Notable among its 35 recommendations are:</p>
<ul>
<li><p>the establishment of a <a href="http://www.austlii.edu.au/au/journals/AILRev/2010/1.pdf">justice reinvestment</a> body</p></li>
<li><p>review of police complaints handling policies and practices</p></li>
<li><p>consideration of systemic and cultural factors affecting Indigenous Australians in bail and sentencing decisions</p></li>
<li><p>abolition of imprisonment in lieu of, or as a result of, unpaid fines, and</p></li>
<li><p>national criminal justice targets to reduce the incarceration of, and violence against, Indigenous Australians.</p></li>
</ul>
<h2>Minor fines create a cycle of poverty</h2>
<p>Many Australians have received on-the-spot fines for parking offences, traffic breaches or minor offences. Such fines may be inconvenient, or place a small financial burden on some; but for those without the means to pay, fines can spiral into insurmountable debt.</p>
<p>Indigenous Australians, people who are homeless, and those of low socioeconomic status are <a href="http://www.ombudsman.wa.gov.au/Publications/Documents/reports/CCINs/Ombudsman-WA-CCINs-Report-Vol-1.pdf">more likely</a> to receive infringement notices for public order and other minor offences. This is a result of multiple and complex factors. </p>
<p>Indigenous Australians occupy public space more often than non-Indigenous Australians, <a href="http://www.austlii.edu.au/au/journals/CICrimJust/2005/28.html">primarily due</a> to socio-cultural factors and their connection to the land. People who are homeless or living in temporary accommodation must conduct their private lives, including personal disputes, in public spaces. </p>
<p>There is also a greater proportion of physical disability, mental illness, alcohol or drug dependency, and a history of <a href="https://theconversation.com/factcheck-qanda-are-indigenous-women-34-80-times-more-likely-than-average-to-experience-violence-61809">family and domestic violence</a> among these groups. This leads to increased police surveillance and interactions, particularly for public nuisance-type offences.</p>
<p>Indigenous and vulnerable Australians are <a href="http://www.ombudsman.wa.gov.au/Publications/Documents/reports/CCINs/Ombudsman-WA-CCINs-Report-Vol-3.pdf">more likely</a> to fail to pay fines on time and incur further sanctions. Fines coupled with enforcement costs become impossible to pay for people on low incomes, or those who are homeless or unemployed. </p>
<p>Fine amounts can be prohibitive. In 2014, the NSW government increased the fine for the continuation of intoxicated and disorderly behaviour following a move-on direction from A$200 to A$1,100. A report by the NSW Ombudsman <a href="http://www.austlii.edu.au/au/journals/CICrimJust/2014/24.html">found</a> Indigenous Australians accounted for 31% of the 484 fines and charges issued for this offence in the review period. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/indigenous-incarceration-in-australia-at-a-glance-57821">Indigenous incarceration in Australia at a glance</a>
</strong>
</em>
</p>
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<p>Every state and territory has progressive sanctions regimes for fine default. If fines are not paid on time, people accumulate further debts, have their drivers licence suspended or disqualified, have property seized, perform community service work, and — in some cases — are imprisoned.</p>
<p>Drivers licence sanctions operate <a href="https://www.indigenousjustice.gov.au/wp-content/uploads/mp/files/publications/files/initiative002.pdf">especially harshly</a> on Aboriginal people living in regional, rural or remote communities. Private vehicles are often the only practical means of transport available to access work or basic services, such as health care. </p>
<p>Sentences of imprisonment may also be imposed as a result of secondary offending from driver licence disqualification. The ALRC has recommended governments develop options to reduce the imposition of fines and infringement notices, limit penalty amounts, and avoid suspension of driver licences for fine default.</p>
<h2>Imprisonment for fine default</h2>
<p>In many states and territories, a person can “cut out” court-imposed fines by serving a prison sentence, where that person has failed to comply with a Community Service Order, or is otherwise ineligible for a CSO. </p>
<p>Western Australia has the highest rate of incarceration for fine default. Between July 2006 and June 2015, 7,462 people were imprisoned for fine default in WA. The average sentence served was four days. Indigenous men represented <a href="https://www.alrc.gov.au/sites/default/files/pdfs/publications/final_report_133_amended1.pdf">38%</a> of the male defaulter prison population. </p>
<p>The impact on Indigenous and disadvantaged women is even more stark. Between July 2006 and June 2015, <a href="https://www.alrc.gov.au/sites/default/files/pdfs/publications/final_report_133_amended1.pdf">73%</a> of female fine defaulters in WA were unemployed when imprisoned, and 64% were Indigenous.</p>
<p>The injustice that may be suffered by fine defaulters was highlighted by the death of Aboriginal woman Ms Dhu in August 2014. Ms Dhu <a href="http://www.coronerscourt.wa.gov.au/I/inquest_into_the_death_of_ms_dhu.aspx?uid=1644-2151-2753-9965">died in the custody</a> of police officers after being taken to South Hedland Police Station for unpaid fines and enforcement penalties amounting to A$3,662. The fines, which neither she nor her father could pay, were largely for swearing at police officers. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/seeing-ms-dhu-how-photographs-argue-for-human-rights-69044">Seeing Ms Dhu: how photographs argue for human rights</a>
</strong>
</em>
</p>
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<h2>Repealing offensive language crimes</h2>
<p>Another focus of the inquiry was the policing and impact of offensive language provisions. All Australian states and territories <a href="http://classic.austlii.edu.au/au/journals/UTSLRS/2017/15.html">criminalise</a> offensive, obscene or indecent language used in or near a public place. Offensive language crimes generally target verbal speech, and predominantly the swear words “fuck” and/or “cunt”. Written signs and displays (such as a person wearing a t-shirt with a swear word printed on it) are punished under offensive conduct offences.</p>
<p>A recent initiative allows police to issue on-the-spot fines for offensive language. These fines range from A$110 in Queensland to A$500 in <a href="https://www.nsw.gov.au/news-and-events/news/bigger-fines-for-offensive-conduct/">NSW</a> and <a href="https://www.police.wa.gov.au/Police-Direct/Infringement-Payments-and-Enquiries/Criminal-Code-Infringements/Criminal-Code-Infringement-FAQs">WA</a>. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/a-nation-of-convict-cussers-time-for-australian-law-to-embrace-our-potty-mouths-83494">A nation of convict cussers? Time for Australian law to embrace our potty mouths</a>
</strong>
</em>
</p>
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<p>Kimberly Community Legal Services has <a href="https://www.alrc.gov.au/sites/default/files/pdfs/publications/final_report_133_amended1.pdf">suggested</a> that for many Indigenous people, those who are homeless, and other disadvantaged groups, the imposition of a A$500 fixed fine for swearing is “tantamount to a prison sentence”.</p>
<p>Indigenous people are significantly over-represented when it comes to receiving fines and charges for offensive language. In the year from 1 April 2016 to 31 March 2017, Indigenous adults comprised <a href="https://www.alrc.gov.au/sites/default/files/subs/114._dr_e_methven.docx">21%</a> of all 1,054 adults in NSW proceeded against to court for using offensive language. Indigenous adults also comprised 15% of all 1,716 adults in NSW proceeded against by way of infringement notice.</p>
<p>The ALRC has recommended state and territory governments review the effect of offensive language provisions on Indigenous people, with a view to repealing them or narrowing their scope. </p>
<p>This recommendation is by no means novel. The review and repeal of offensive language crimes has previously been advocated by legal <a href="http://www.austlii.edu.au/au/journals/UNSWLJ/2013/20.html">academics</a> and <a href="http://www.lawreform.justice.nsw.gov.au/Documents/Publications/Reports/Report-132.pdf">law reform bodies</a>. Most notably, in 1991, the Royal Commission into Aboriginal Deaths in Custody <a href="http://www.bocsar.nsw.gov.au/Documents/CJB/cjb34.pdf">observed</a>: </p>
<blockquote>
<p>It is surely time that police learnt to ignore mere abuse, let alone simple “bad language” … Charges about language just become part of an oppressive mechanism of control of Aboriginals.</p>
</blockquote>
<h2>Implementation of the recommendations</h2>
<p>The Turnbull Government has been <a href="https://www.theguardian.com/australia-news/2018/mar/30/coalition-criticised-for-pathetic-response-to-indigenous-incarceration-report">criticised</a> for its underwhelming response to the ALRC report. The Coalition has so far issued a two-line statement indicating that it “will consider the report’s relevant recommendations and respond in due course.” </p>
<p>It is hoped the report will be not be “<a href="https://www.theguardian.com/australia-news/2018/mar/30/coalition-criticised-for-pathetic-response-to-indigenous-incarceration-report">shelved</a>” like that of the Royal Commission into Aboriginal Deaths in Custody, and instead the government will respond promptly with evidence-based law reform. </p>
<p>Reducing contact with the criminal justice system is an important aspect of achieving equality and justice for Indigenous Australians. Implementation of the 35 recommendations — alongside measures to enhance Indigenous self determination — are necessary steps on the path to achieving these goals.</p><img src="https://counter.theconversation.com/content/94228/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elyse Methven receives funding from a UTS Early Career Research Grant.</span></em></p>Fines for minor infringements and offensive language crimes are among laws that create a cycle of poverty and disadvantage for Indigenous Australians.Elyse Methven, Lecturer in Law, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/575372016-06-16T09:54:32Z2016-06-16T09:54:32ZWhy it’s so hard for students to have their debts forgiven<figure><img src="https://images.theconversation.com/files/126805/original/image-20160615-14027-1qpuo7m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Forgive me, for I have borrowed.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/43005015@N06/6285016967/in/photolist-azomzv-q7onw-5zEzVz-rr7qEJ-mCFiyY-q7pLU-oTwqGx-eRbbko-rr7mFm-4uut9f-q7qrz-q7qDe-4uutod-4uur3E-5Z3pA9-5zEyVP-7Wxo2N-q7qJU-4tgN59-5zJRkU-q7pFH-paL6Mg-q7p1S-eQYNVp-4tgLPy-5zJRAs-4tcK5p-4uuna3-q7oB5-q7oaQ-9hgiRR-4tgRbS-p8ZHNq-9GsCXR-4uuqsN-4uqoZg-pvFjj6-q7nGp-9rD5jc-q7qqf-q7pHi-9hgibn-q7oa8-eQYNVX-4uqnxZ-q7qzb-9GsCSn-mCEaBr-dcsp6W-q7oEy">Peg Hunter/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Outstanding student loan debt in the United States <a href="https://research.stlouisfed.org/fred2/series/SLOAS#">reached a record US$1.35 trillion</a> in March, up six percent from a year earlier. </p>
<p>About 10 million people who borrowed from the government’s main student loan program – 43 percent – <a href="http://www.wsj.com/articles/more-than-40-of-student-borrowers-arent-making-payments-1459971348">are currently behind or no longer making payments</a>, with more than a third of them in default. Some students are especially at risk, <a href="http://www.brookings.edu/about/projects/bpea/papers/2015/looney-yannelis-student-loan-defaults">such as those who attended for-profit institutions</a>. </p>
<p>Meanwhile, the loan default rates widely reported by the U.S. Department of Education <a href="https://btl.bayloralumniassociation.com/wp-content/uploads/2015/05/Student-Debt-Crisis-Cloud-and-Fossey.pdf">fail to account</a> for borrowers who default more than three years after repayment begins. These rates also fail to account for the millions of borrowers who are struggling or unable to repay their loans but aren’t included in the numbers because they’ve claimed an economic hardship deferment.</p>
<p>These unsettling numbers raise the question of what happens to borrowers unable to repay their student loans.</p>
<h2>The ‘undue hardship’ issue</h2>
<p>While individuals with debt they cannot repay often turn to bankruptcy, this discharge option is frequently unavailable in the case of student loans. Such debtors <a href="http://www.studentloanborrowerassistance.org/bankruptcy/">must first demonstrate “undue hardship,”</a> an exacting standard few borrowers are able to satisfy and one not applied to most types of unsecured debt in bankruptcy. </p>
<p>Credit card debt, for example, can be easily discharged as long as a person qualifies to file for bankruptcy protection. The standard also leaves student-loan debtors without the types of options open to businesses in bankruptcy to work with creditors to reduce debt.</p>
<p>Some student-loan borrowers may soon have some relief, however. The Department of Education <a href="http://www.ed.gov/news/press-releases/education-department-proposes-new-regulations-protect-students-and-taxpayers-predatory-institutions">proposed a new rule</a> this week, for example, that would make it easier for students who are defrauded by their colleges to have their debt forgiven. </p>
<p>That’s a step in the right direction. But more needs to be done.</p>
<p>As higher education legal scholars who have been examining these issues for many years, we have a special interest in the ways in which laws and legal standards support or harm students. The general inability for Americans to discharge student loans under current bankruptcy law represents an issue affecting millions of borrowers and their families. </p>
<p>This and the growing mountain of debt have prompted <a href="http://www.npr.org/2014/03/27/294858103/senator-warns-of-a-student-loan-bubble">lawmakers and other observers to warn</a> of another bubble in the making, with potentially disastrous consequences. </p>
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<h2>How undue hardship was established</h2>
<p>The federal role in student loans can be traced back to the <a href="http://www.britannica.com/topic/National-Defense-Education-Act">National Defense Education Act of 1958</a>, which made federal loans available to all students.</p>
<p>In 1965, the federal government shifted from making loans to <a href="https://studentaid.ed.gov/sa/about/data-center/lender-guaranty">serving as a guarantor of student loans</a>. An overhaul of federal loan policy in 2010 made direct loans from the federal government the only federally guaranteed student loan program, although loans from other lenders, often referred to as private student loans, are still available.</p>
<p>Until the 1970s, student loan debt received the same treatment in bankruptcy proceedings as other types of unsecured debt. Concerns arose, however, that unscrupulous borrowers had sought to discharge their student loans after obtaining lucrative positions in such fields as medicine and law. </p>
<p><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1121226">Evidence suggests</a> no widespread pattern of abuse existed, but Congress directed in 1976 that federally guaranteed loans could not be discharged in bankruptcy during the initial five years of the repayment period, absent a showing of undue hardship. Congress extended the undue hardship requirement to seven years in 1990, and in 1998 made the standard applicable throughout the loan’s life. And in 2005, Congress also extended the undue hardship standard to private student loans not guaranteed by the federal government. </p>
<p>Congress did not define the term undue hardship, leaving it to the bankruptcy courts to interpret its meaning. Most courts have adopted the <a href="http://www.thebankruptcysite.org/resources/bankruptcy/debt-relief/student-loans-bankruptcy-the-brunner-test">so-called Brunner test</a> (named after a famous court ruling), which requires student loan debtors to make three showings. First, they must prove that they cannot pay off their student loans and maintain a minimal standard of living. Second, they must show additional circumstances that make it highly unlikely they will ever be able to repay their student loans. And finally, debtors must demonstrate that they have made a good faith effort to pay their student loans.</p>
<p>This stringent standard can lead to disheartening results. For example, in one case, a <a href="http://www.condemnedtodebt.org/search/label/student%20loan%20bankruptcy">bankruptcy judge denied discharge</a> under the undue hardship to a student loan debtor in her 50’s who had a record of homelessness and lived on $1,000 a month.</p>
<p>In practice, most courts <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2256463">have applied</a> the Brunner test, or similar standards, in ways that make discharge in bankruptcy especially difficult for many student loan borrowers. In fact, a <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1894445">2012 paper calculated</a> that 99.9 percent of bankrupt student loan debtors do not even try to discharge them. Among the reasons for this low percentage is likely the difficult standard to qualify for a discharge.</p>
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<h2>Some courts push back</h2>
<p>Recently, however, a few bankruptcy courts have interpreted the Brunner test more leniently. </p>
<p>In perhaps the most <a href="http://cdn.ca9.uscourts.gov/datastore/bap/2013/04/16/RothV%20ECMC%20opinion-FINAL%20AZ-11-1233.pdf">well-known example</a>, a panel of judges reviewing a bankruptcy decision discharged the student loan debts of Janet Roth, a 68-year old woman with chronic health problems who was subsisting on Social Security income of $780 a month.</p>
<p>Roth’s creditor argued that she could not pass the good-faith prong of the Brunner test because she had never made a single voluntary payment on her student loans. But the panel rejected this argument on the grounds that Roth had lived frugally and had never earned enough money to pay back her student loans in spite of her best efforts to maximize her income.</p>
<p>The panel also rejected the creditor’s arguments that Roth should be placed in a long-term income-based repayment plan that would extend for 25 years. Roth’s income was so low, the creditor pointed out, that she would not be required to pay anything on the student loan anyway. Nevertheless, a remote possibility existed that Roth’s income would rise in the future, permitting her to make at least token payments.</p>
<p>In the court’s view, putting Roth on a long-term repayment plan seemed pointless. Applying a common law principle of basic fairness, the court stated “that the law does not require a party to engage in futile acts.”</p>
<p>One of the judges in the Roth case filed a separate opinion agreeing with the judgment but suggesting that courts should abandon the Brunner test altogether. He argued courts should replace it with a standard in which bankruptcy judges “consider all the relevant facts and circumstances” to determine whether a debtor can afford to repay student loan debts “while maintaining an appropriate standard of living.” </p>
<p>Such a standard would be more closely aligned with how most other types of debt are eligible for discharge in bankruptcy.</p>
<p>So far, federal appeals courts have not taken up the suggestion to scrap the Brunner test, although several lower courts have begun applying it more humanely. The Brunner test, however, is a subjective standard, and debtors experience widely different outcomes when they attempt to discharge their student loans in bankruptcy.</p>
<h2>Moving toward a more humane standard</h2>
<p>Recent actions by the Obama administration on the issue – including this week’s <a href="http://www.ed.gov/news/press-releases/education-department-proposes-new-regulations-protect-students-and-taxpayers-predatory-institutions">announcement</a> on “predatory” colleges – has accompanied the judicial activity.</p>
<p>For example, in 2015 the Department of Education offered <a href="https://www.ifap.ed.gov/dpcletters/GEN1513.html">guidance</a> on when loan holders should “consent to or not oppose” undue hardship petitions involving government-backed student debt in bankruptcy proceedings. </p>
<p>The department also recently announced <a href="http://www.ed.gov/news/press-releases/us-department-education-acts-protect-social-security-benefits-borrowers-disabilities">an initiative</a> to address problems in making loan forgiveness available to individuals who are permanently disabled. </p>
<p>In the case of private student loans, the <a href="http://www.reuters.com/article/us-usa-obama-studentloans-idUSKBN0EK1UF20140609">Obama administration has urged</a> Congress to make such loans no longer subject to the undue hardship standard.</p>
<p>Courts and federal agencies can help to humanize interpretation and application of the undue hardship standard and make discharge a more realistic option for some borrowers. Ultimately, however, authority rests with Congress to make any substantive changes to the treatment of student loan debt in bankruptcy.</p>
<p>While <a href="https://www.washingtonpost.com/news/grade-point/wp/2016/02/09/can-alexander-and-murray-recapture-bipartisan-magic-to-pass-higher-education-legislation/">likely on hold until after the November elections</a>, the pending reauthorization of the Higher Education Act – the centerpiece of federal higher education policy – presents a key opportunity for Congress to review the undue hardship standard. At a minimum, Congress should give serious consideration to abolishing the standard for private student loans. </p>
<p>Other options include reinstating limits on how long the undue hardship standard should apply to federal student loans or directing courts to adopt a more flexible test for discharge in bankruptcy, such as that advocated in the separate opinion in the Roth case. </p>
<p>With so many student loan borrowers struggling, circumstances suggest the need for Congress to take decisive action on this critical issue on public policy and humanitarian grounds.</p><img src="https://counter.theconversation.com/content/57537/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>About 10 million borrowers in the government’s main student loan program are struggling to make their payments, yet unlike other types of debt, it’s next to impossible to have it forgiven.Neal H. Hutchens, Professor of Higher Education, University of MississippiRichard Fossey, Paul Burdin Endowed Professor of Education, University of Louisiana at LafayetteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/434092015-06-18T08:49:44Z2015-06-18T08:49:44ZIf Greece defaults, dominoes will not fall<p>How would a unilateral Greek default affect politics and policy elsewhere in Europe? Governments in Ireland, Portugal and Spain have been conspicuously hard-line in negotiations with the Syriza-led government, partly out of concern that accepting Greek demands would strengthen anti-austerity parties at home. </p>
<p>Certainly, a Greek default may lead some voters in other countries to view default as an opportunity to shift resources from well-heeled foreign creditors to struggling public sector employees, pensioners, those on low incomes and the unemployed. </p>
<p>However, a Greek default is more likely to strengthen voter support across southern Europe for existing policies than to precipitate a new wave of defaults. This effect could in turn strengthen the Euro.</p>
<p>Historically, governments that have chosen default have experienced a much higher risk of losing political office – due largely to the unusually sharp economic downturns that typically follow default. Given this high risk, incumbent governments in democracies usually do their best to avoid it, which is why Greece’s high stakes negotiating tactics have been so shocking to many of its interlocutors. </p>
<p>Since 1870, the average number of years between defaults among democracies that have defaulted at least once – even including negotiated debt restructurings – is 42 years. (Note: this has been calculated with the default measure from <a href="http://www.reinhartandrogoff.com/">This Time is Different: Eight Centuries of Financial Folly</a> by Carmen Reinhart, and Kenneth Rogoff (2009).)</p>
<p>Default is thus a once-in-a-lifetime experience for most voters; many will never experience it. Compare this with voter experience of standard economic recessions, which have occurred about every five years since 1870 in advanced economies.</p>
<p>The main reason why a Greek default is more likely to strengthen support elsewhere for current policies follows directly from voter inexperience with default. Psychologists have shown that people focus strongly on rare and vivid events. They are also more sensitive to the costs than to the potential benefits of policy change. </p>
<p>A Greek default and its immediate aftermath would be followed closely in all European countries. Voters elsewhere would be strongly inclined to view the accompanying chaos and economic disruption in Greece as highly relevant to their own national situation. Some voters would also view continued good behaviour by their own country as a useful and attractive counterpoint to economic misbehaviour in Greece.</p>
<p>Our research points to the empirical importance of this “network” effect. Since 1870, governments that opted for default against private foreign creditors were far more likely to lose elections when significant numbers of their trading partners had also defaulted. That is, voters punish their own governments much more severely when witnessing default by apparently similar countries. </p>
<p>Rather than break a social taboo, a Greek default is therefore likely to instead reinforce voter concerns in southern Europe that such policies are accompanied by unacceptably large costs.</p>
<p>Some historical examples illustrate this effect. When a number of other Latin American countries were defaulting in the early 1980s, Venezuela initially appeared as if it would be able to ride out the financial storm that hit the region and avoid the fate of its peers. After a series of bungled negotiations with its external bank creditors, the incumbent Christian Democratic government led by Luis Herrera Campins succumbed to an avoidable default. In 1983, it suffered a landslide election loss.</p>
<p>In the early 1930s, another peak period of default in the global economy, Australia also came close to default when prices for its commodity exports collapsed. A populist state Labor government led by Jack Lang in New South Wales unilaterally suspended interest payments on its large foreign debts in 1931 and demanded that the federal Labor government do the same. At the end of 1931, a newly formed United Australia Party government led by “Honest Joe” Lyons was elected on a platform of honourable repayment of all Australia’s foreign debts and severe austerity at home. Lyons was strongly rewarded by voters, being re-elected twice before he died in office in 1939.</p>
<p>In a similar fashion, the British Conservative Party since 2010 used the Greek example as a counterpoint to reinforce political support for fiscal austerity at home. The comparison was of doubtful economic validity, but it was politically effective. There were also overtones in this case of one of Joe Lyons’ most effective rhetorical devices – his claim that “British peoples”, unlike those in less sturdy countries, always honoured their obligations.</p>
<p>Contrary to Lyons’ claim, there is little evidence that cultural factors play a powerful role. Rather, voters become more cautious rather than more adventurous in the presence of extreme economic misbehaviour abroad. All of this suggests that a Greek default and possible “Grexit” would be more likely to lower rather than to raise the political incentives for other European governments to follow, contrary to the expectations of many commentators and political leaders.</p>
<p><em>This article is based on <a href="http://ssrn.com/abstract=2478057">Networked Default: Public Debt, Trade Embeddedness, and Partisan Survival in Democracies Since 1870</a>.</em></p><img src="https://counter.theconversation.com/content/43409/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeffrey M. Chwieroth has received funding from the Economic and Social Research Council (ESRC) via its support of the Systemic Risk Centre (grant number ES/K002309/1), from the British Academy for the Humanities and the Social Sciences (MD130026), and from the Australian Research Council (DP140101877).</span></em></p><p class="fine-print"><em><span>Andrew Walter receives research funding from the Australian Research Council (DP037178) and the Melbourne School of Government, University of Melbourne.</span></em></p><p class="fine-print"><em><span>Cohen R. Simpson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A possible “Grexit” would be more likely to lower rather than raise the political incentives for other European governments to follow.Jeffrey M. Chwieroth, Professor of International Political Economy , London School of Economics and Political ScienceAndrew Walter, Professor of International Relations, The University of MelbourneCohen R. Simpson, Doctoral Candidate in Social Research Methods, London School of Economics and Political ScienceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/387752015-03-19T09:35:18Z2015-03-19T09:35:18ZWhy the national debt doesn’t matter – or how I learned to stop worrying and love Treasuries<figure><img src="https://images.theconversation.com/files/75274/original/image-20150318-2502-aloopm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A friendly reminder. </span> <span class="attribution"><span class="source">IOU from www.shutterstock.com</span></span></figcaption></figure><p>The rate of growth of the US federal government’s debt load has slowed of late, but its level remains high.</p>
<p>As of the end of 2014, <a href="http://www.treasurydirect.gov/NP/debt/current">total US Treasury obligations</a> stood at US$18 trillion, more than 100% of current US output, or $56,500 for every one of us. This hefty sum is a reflection of the large annual budget deficits that the federal government has run, pretty much continuously, since 1931. (Prior to that, surpluses were much more common, apart from the years following the Civil War.) </p>
<p>But as another round of anxiety-causing debt-ceiling debates is likely to return, it is worth asking whether we should even care about the government’s debt. Is it a good measure of the federal government’s role in the economy or even a good indicator of the fiscal burden on US taxpayers? Does the size of our nation’s debt matter?</p>
<h2>Why it’s irrelevant</h2>
<p>To be sure, $18 trillion is a large number. But that number is essentially irrelevant to proper thinking about the economic role of the US government, or about responsible fiscal policy. </p>
<p>Government debt simply reflects the <em>timing</em> of taxes. The face value of debt will be large if, for given past and future levels of government spending, taxes are collected later rather than sooner. </p>
<p>But regardless of when taxes are collected, what ultimately matters is the quantity of the economy’s scarce resources the federal government commands and controls, which mostly depends on the level and path of government spending. </p>
<p>Government debt is not necessarily a good indicator of such control – the government can be wildly intrusive in the economy even if it never borrows, or it can be fiscally effective and efficient with high levels of debt. </p>
<h2>Default isn’t imminent</h2>
<p>Current debt levels in the US also do not indicate imminent default. As long as the federal government remains an “ongoing concern” – fiscal institutions remain strong and effective, taxing authority is maintained, and the long-run productive capacity of the nation’s economy is secure – there is no economic reason to fear default on the nation’s debt (only political reasons, such as debt-ceiling mischief). </p>
<p>To remain solvent and ultimately pay what it owes, the Treasury needs only to balance its budget over the long run, not over an arbitrary unit of time like a year. <a href="http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx">Near-record low interest rates</a> on government debt suggest that bond market participants agree with this view, and are not afraid of sovereign debt default in the US. </p>
<p>If excessive government debt-burdens on future generations keep you up at night, buy Treasury securities with the money saved from low current taxes and bequeath those securities to your kids. They can use the principal and interest to pay off high future taxes, with no ultimate effect on their net wealth or well-being. </p>
<p>In other words, taxpayers can use capital markets to offset transfers of their wealth (taxes) to bondholders by becoming bondholders themselves. It’s almost like a hedge. In aggregate, if private savings rise along with levels of government debt, then the latter need not crowd out borrowing for productive activity by the private sector. There would still be plenty of lending capacity to go around. This argument holds even if all US debt were to be held by the People’s Bank of China.</p>
<h2>The real burden to worry about</h2>
<p>Assuming that the US government will always pay its bills and never default, the fiscal burden on the private sector ultimately depends on the path – past and future – of government outlays and expenditures. And here is where the $18 trillion “on-balance-sheet” debt is likely to woefully underestimate the federal government’s true liabilities and their potential demand on the economy’s resources. </p>
<p>Treasury debt is the government’s formal commitment to repay its creditors, but Uncle Sam has many other commitments for future spending that are not on the books, so-called “off-balance-sheet” liabilities. Such liabilities do not show up in standard debt measures. While these commitments are different in nature from the promise to pay back previously borrowed funds, they are nonetheless a potentially large burden on taxpayers, and surely governmental imposition on the economy.</p>
<p>These commitments arise from implicit and explicit federal loan guarantees that support housing and education policy, from deposit insurance and Federal Reserve actions that attempt to promote a stable financial system, and from commitments to the elderly and poor through social security, pension guarantees, and Medicare/Medicaid. </p>
<p>Economist Jim Hamilton has recently estimated that such off-balance-sheet liabilities could <a href="http://www.nber.org/papers/w19253">exceed $70 trillion</a>, more than three times the the current value of outstanding treasury securities. The biggest share of that, or about a third, is Medicare. </p>
<p>So OK, worry about the debt, but pick the right measure to worry about.</p>
<h2>Forget about the debt, focus on future spending</h2>
<p>We should think less about the timing of taxes (which determines debt) and more about how much the government spends now and in the future, what that spending is for and how to best collect taxes to pay for that spending (which are independent of debt). </p>
<p>Tops on my list of fiscal issues worthy of serious consideration are:</p>
<ol>
<li><p>corporate and income tax reform to eliminate complexity and reduce incomprehensible and costly economic distortions, regardless of the effect on debt</p></li>
<li><p>elimination of regulatory and policy uncertainty (get rid of the unnecessary and economically illogical debt ceiling!), and</p></li>
<li><p>establishment of systematic cost-benefit analyses of government spending programs to help properly define the role of the federal government in the economy. </p></li>
</ol>
<p>These issues are more important than the irrelevant magnitude of the national debt.</p><img src="https://counter.theconversation.com/content/38775/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William D. Lastrapes does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Despite its tendency to provoke anxiety-inducing debates in Congress and government shutdowns, the high level of US IOUs isn’t a big deal.William D. Lastrapes, Professor of Economics, University of GeorgiaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/365572015-01-22T15:58:07Z2015-01-22T15:58:07ZECB injects €1 trillion into eurozone, but members aren’t off the hook yet<figure><img src="https://images.theconversation.com/files/69770/original/image-20150122-12100-1xc6add.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The European Central Bank is set to buy up government bonds.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/jurjen_nl/5271842133/sizes/o/">jurjen_nl/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>By allowing the European Central Bank (ECB) to <a href="http://www.bbc.co.uk/news/business-30933515">start buying debt</a> issued by its member states, the eurozone is copying a strategy now associated with the earlier return to growth in the US and UK. </p>
<p>Quantitative easing (QE) <a href="https://theconversation.com/ecb-is-about-to-implement-the-wrong-type-of-quantitative-easing-36543">may not have worked</a> in the way its architects hoped; reviving private investment by reducing borrowing costs and raising asset values. But QE has set up conditions for such revival by helping governments and households finance their debt at low cost, so that spending picks up and gives an incentive to invest. </p>
<p>There will be a further boost if QE weakens the euro against other currencies, lifting the eurozone’s exports and re-introducing inflation (which further reduces the real costs of debt).</p>
<h2>Back to the future</h2>
<p>QE takes the eurozone back to the future. Until 2008, it suffered from what is now viewed as an excess of internationalism. Newer members that had traditionally borrowed at a premium (Greece, Spain, Portugal and Ireland) could now get credit as cheap as Germany’s. Although they were meant to aspire to German-style rectitude, this was a temptation to fiscal (and sometimes private-sector) recklessness. Their private and government debts built up to levels that were unsustainable, once growth rates slowed and interest rates rose.</p>
<p>After 2008, the zone abruptly “<a href="http://www.bruegel.org/nc/blog/detail/article/1137-blogs-review-the-renationalization-of-european-finance/">renationalised</a>”. Less dynamic countries were again left paying substantially more for their debt, which further drained their dynamism. Capital no longer flowed to them, despite these higher yields. More indebted governments were forced into budget cuts that stalled growth, reduced real income and eroded tax revenue, leaving their finances in deficit and worsening downturns, which began to strain social cohesion. </p>
<p>To break this vicious circle which risks <a href="https://theconversation.com/hard-evidence-can-germany-throw-greece-a-lifeline-and-save-the-euro-35870">forcing Greece’s exit</a> (and a default on euro debts that would hurt the zone’s already fragile banks) the ECB will now attempt to re-internationalise its monetary system. </p>
<p>As in the Anglo-American approach, it won’t directly buy member states’ new government debt. This will reassure the less heavily borrowed member states (especially Germany) that they’re not taking responsibility for debts caused by other countries’ excesses. But by paying banks and other private investors for existing debt, the ECB will give them newly created funds that might then finance more affordable lending and increased production. </p>
<h2>Not a lifeline</h2>
<p>Despite the hopes now invested in it, QE is unlikely to ensure the survival of the eurozone’s peripheral members. <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech560.pdf">Experience suggests</a> that without complementary fiscal policy action, the effects of these measures will be limited. Governments must be able to use their new borrowing opportunity to restore (through fiscal deficits) the aggregate demand that private investment and consumption are currently not generating. </p>
<p>EU rules prevent this, imposing an “excessive deficit procedure” on any government whose deficit exceeds 3% of its national income (GDP). For comparison, the US overcame its post-2008 downturn with a deficit deliberately widened to almost <a href="http://www.politifact.com/wisconsin/statements/2014/sep/05/barack-obama/obama-says-he-has-cut-national-deficit-half/">10% of GDP</a>, and the UK’s recovery still requires a deficit of <a href="http://www.ons.gov.uk/ons/rel/psa/public-sector-finances/december-2014/stb-dec-2014.html">close to 6%</a>.</p>
<h2>Questionable concerns</h2>
<p>The EU deficit limits reflect <a href="http://www.investopedia.com/terms/m/monetarist.asp">monetarist</a> economists’ longstanding beliefs that government borrowing will undermine longer term growth (by substituting public consumption for private investment), and cause longer term inflation (through the increase in money supply due to new borrowing). Neither of these beliefs has fared well in the years since 2008, as the American approach has featured fiscal deficits alongside <a href="http://www.bea.gov/newsreleases/national/gdp/gdphighlights.pdf">reviving private investment</a>, and QE alongside motionless inflation. </p>
<p>Efforts to give the ECB comparable powers to other big central banks such as the US Federal Reserve and Bank of Japan – including authority for QE and zone-wide bank supervision – move Europe further away from the approach that enabled its post-war revival. </p>
<h2>Disowning the past</h2>
<p>The EU took shape in the <a href="http://www.investopedia.com/terms/b/brettonwoodsagreement.asp">Bretton Woods</a> era, when national governments left themselves scope to choose their own economic and social policies, by closing off their <a href="http://economictimes.indiatimes.com/definition/capital-market">capital markets</a>. This enabled them to run fiscal deficits when the domestic economy grew too slowly, without being punished by the bond market when their domestic interest rates moved out of line. </p>
<p>It also preserved the benefits of a stable (though not rigidly fixed) currency, which underpinned the post-war growth of international trade. The European economy was it its most dynamic under this framework, which was effective from around 1950-71. </p>
<p>Bretton Woods is long gone, and its international capital curbs might be impossible to recreate after a half-century of financial deregulation and innovation. But the EU’s success in that era – when it rebuilt shattered nation states and restored war-torn economies to US-style prosperity – stands in informative contrast to its malaise in the decades before and after economic and monetary union. </p>
<p>The EU originally worked – as historian Alan Milward <a href="http://www.eu-historians.eu/uploads/Dateien/milward.pdf">persuasively recounted</a> by giving up selected aspects of national sovereignty in order to reinforce what remained. It was a project to rescue the nation state, not to transcend it. </p>
<p>The monetary union has worked less well because it weakened some aspects of national sovereignty – fiscal policy discretion, and the accompanying leeway over taxation and welfare arrangements – without which economic growth and social cohesion can be lastingly compromised. Further monetary integration, under present fiscal rules, could be another step away from what succeeded in the past.</p><img src="https://counter.theconversation.com/content/36557/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>By allowing the European Central Bank (ECB) to start buying debt issued by its member states, the eurozone is copying a strategy now associated with the earlier return to growth in the US and UK. Quantitative…Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/311202014-09-01T20:26:27Z2014-09-01T20:26:27ZBid to avoid repeat of Argentina debt row risks a sting in the tail<p>Sovereign debt is a crucial lubricant for growth, especially among emerging nations, and so it is equally crucial that we can ensure the <a href="https://theconversation.com/why-argentina-matters-for-indebted-countries-everywhere-30801">interminable row over Argentina’s default</a> is not repeated. Measures proposed to do just that, however, might just make things worse.</p>
<p>Argentina’s latest default (its eighth) has at least sparked key players into action. According to <a href="http://www.ft.com/intl/cms/s/8e27f6b8-2e8b-11e4-afe4-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F8e27f6b8-2e8b-11e4-afe4-00144feabdc0.html%3Fsiteedition%3Dintl&siteedition=intl&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fasia#axzz3Bk1HkvYl">a report in the Financial Times</a>, the International Capital Market Association (ICMA), whose members include banks, investors and debt issuers, has created fresh clauses for inclusion in sovereign debt contracts that will give countries the option to bind all investors to decisions agreed by the majority.</p>
<p>It is an effort to keep the wheels turning smoothly in international financing: Just as a new company requires loans to start up, emerging markets must depend on richer countries to fund their development needs. </p>
<p>But, just as a company may go bankrupt because of external factors, a country may be faced with economic crises that make it difficult to repay the debt. A company in that situation can declare bankruptcy and reach a deal with creditors to restructure or sell assets in a deal brokered by the local courts. When the same situation faces an entire nation, there is no international court that can enforce contracts between creditors and debtors from different countries. This lack of enforceability creates a host of problems.</p>
<h2>Credit where credit’s due</h2>
<p>A natural question is that if creditors are aware of the non-enforceability of contracts, why would they lend in the first place? And how can sovereign states then raise funds? The obvious answer is reputation for repayment. If a country shows that it is credit-worthy because it repaid loans in the past, then this reputational capital may be used to attract funding. In principle, a better credit history may imply better terms of repayment – and we can all relate to that.</p>
<p>However, this relies on the creditors being able to punish the debtor country effectively once default occurs. In other words, if there is no punishment after default, then the signal is that debt will be forgiven in any case and may lead to less effort to repay on the part of the debtor country. This undermines the reputation mechanism and is a particularly salient issue when there are multiple creditors, as in the case of most sovereign debt, and notably Argentina. </p>
<p>Argentina’s experience has acted as a pretty thorough examination of the flaws in the current system. In 2005, at the time of the last crisis, the country had agreed on reduced debt servicing with the vast majority of creditors (75% of the defaulted bonds). In 2010, another 17% of the original bond holders agreed to the new terms. Thus all but a small minority of the bondholders agreed to a proposed “haircut” on their debt which essentially meant creditors sacrificed 35% of what they were owed.</p>
<h2>Out for blood</h2>
<p>The 8% of bondholders who did not accept the terms, <a href="http://www.businessweek.com/articles/2014-08-07/argentinas-vulture-paul-singer-is-wall-street-freedom-fighter">“vulture” investors like Elliott Associates</a>, specialise in buying up cheap debt and seeking full repayment when the country comes out of the crisis. They sued the Argentinian government for full repayment plus the interest accrued (about $1.5 billion). Had the debt been issued in Argentina, it would be handled by judges within Argentina. The problem was that the debt was issued in New York and thus subject to the American judicial system (this made it cheaper for Argentina to borrow money). </p>
<p>Judge Greisa, the governing judge in the case, <a href="https://theconversation.com/argentinas-vulture-defeat-shows-courts-have-too-much-power-28623">has ruled in favour of the vulture funds</a> and has prevented Argentina from paying back the restructured debt to other creditors until it pays the full amount asked for by Elliot Associates. This has virtually sent Argentina into an involuntary default. </p>
<p>So, what’s going to happen now? What can Argentina do? <a href="http://www.bloomberg.com/news/2014-07-30/argentina-defaults-according-to-s-p-as-debt-meetings-continue.html">Standard and Poor’s has already downgraded Argentinian debt</a>. Usually, as after the Greek crisis, a downgrade means that countries can only borrow at very high rates of interest. In the case of Argentina, this may not happen because investors realise the reason for the default is not in Argentina’s control. If Argentina were to do what Judge Greisa has ordered, it opens itself up to a spate of legislation from other creditors, making another default inevitable.</p>
<p>The main problem lies in the inability to make creditors agree on the restructuring deal. The latest proposal from the ICMA has been suggested before and has some broad support, even if some fine turning of the new clauses for insertion in contracts would be required to deal with multiple bond issues and all debt. The proposed solution would bind all creditors to a vote that is agreed to by at least 75% of the creditors, instead of 100%. The idea is that this reduces the incentives to hold out. Some countries, such as the UK, already employ these clauses.</p>
<h2>Counter-productive?</h2>
<p>While this approach is promising, the trade-off is that debtor countries may default more readily knowing that restructuring can be agreed to more readily. This in turn may discourage creditors from lending in the first place. The new clauses, after all would not address the lack of enforceability of sovereign debt, and so we are left to see how they impact on the reputational mechanism instead.</p>
<p>The change in the voting threshold implies that the value of distressed debt will be higher, thus reducing the incentives of vulture funds to buy it. This can only be good. However, will the new clauses improve creditor coordination? And what if, instead of faster agreements, the bondholder composition becomes more concentrated and more creditors decide to hold out? The risk lies is not quite knowing whether a new regime would lead to a different, and more coordinated group of creditors, and not knowing which way they might act. </p>
<p>The second point to make here is that the revised contracts will have to wrestle with age-old dilemmas over the balance created in such debt deals. If bankruptcy laws favour the debtor too much, it creates incentives to misuse them and in turn discourages banks and investors from lending. If the law favours creditors too much, then it reduces the incentives to borrow money and reduces the potential for innovation and entrepreneurship. Sovereign states and the financiers know this only too well, and no single clause will be a cure-all for the kind of predicament faced by Argentina.</p><img src="https://counter.theconversation.com/content/31120/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amrita Dhillon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Sovereign debt is a crucial lubricant for growth, especially among emerging nations, and so it is equally crucial that we can ensure the interminable row over Argentina’s default is not repeated. Measures…Amrita Dhillon, Professor of Economics, King's College LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/308012014-08-22T16:55:00Z2014-08-22T16:55:00ZWhy Argentina matters for indebted countries everywhere<p>Another week, another proposal to deal with <a href="https://theconversation.com/for-argentina-debt-default-is-a-solution-not-a-problem-30010">Argentina’s debt</a>. The latest one, by the Argentine president, Cristina Fernández de Kirchner, is to launch a voluntary debt swap where investors holding defaulted bonds exchange them for new debt governed by Argentine law. </p>
<p>So Bank of New York Mellon would cease to be the trustee and would be replaced by Banco de la Nación in Buenos Aires and this would enable Argentina to pay the interest owed to the majority of bondholders who agreed to a restructuring deal. </p>
<p>While the proposal may resolve the current technical default, it does not represent a viable solution to the problem of the hold-outs, who have little incentive to enter this voluntary arrangement. Whether or not this particular deal will work, it is imperative that some sort of deal is struck: not just for Argentina, but as a precedent for the way that international debt is managed. </p>
<p>In an era of increasingly integrated capital markets the ability for a state to wind down and restructure defaulted debt obligations is imperative. </p>
<h2>Vultures circling</h2>
<p>The current situation in Argentina is but the latest development in a saga that started in January 2002 when the country defaulted on US$95 billion in outstanding debt. Despite two rounds of restructuring – one in 2005 and one in 2010 – there are still a number of “hold-outs” or “vulture funds”, that refuse to accept the reduced repayment terms. They won a court order in the US (where the bonds were issued) this year saying that, contrary to the majority of Argentina’s creditors who accepted reduced payouts, they can hold out to be paid in full, including all past due interest. </p>
<p>This led to a very curious situation where Argentina had the money to pay its bondholders and was willing to pay them, but was prevented from doing so by its trustee BNY Mellon for fear of breaking US law. Such unusual circumstances prompted rating agencies to declare the country in default. </p>
<p>There are fears of how the market will react and <a href="http://www.ft.com/cms/s/0/b5d3acde-287d-11e4-8bda-00144feabdc0.html">Argentine bond prices are falling</a> – trading at around 80 cents on the dollar. But this is no way near the levels of the 2002 aftermath, which saw prices plummet as low as 15 cents on the dollar. This seems to indicate that the markets have confidence that a deal will eventually be reached.</p>
<h2>Striking a deal</h2>
<p>Striking a deal is in the interests of everyone. The vultures themselves want a return on their investment – not just in terms of what they paid for the defaulted debt in the first place but also subsequently the blood and treasure spent on several years of protracted legal battles. </p>
<p>The returns they stand to gain may be morally dubious because of their aggressive tactics of pursuing countries that can least afford to repay defaulted debt that was accumulated during military dictatorships, but they will be real enough. Even without a deal – instead accepting the terms of the original deals made in 2005 and 2010 – the vultures still stand to gain enormous dividends of more than 300% from their original investment. </p>
<p>A deal is also in the interests of Argentina itself, which needs access to international credit markets. The economy did incredibly well in the years after 2002; pursuing a model of development both different and more successful to the neoliberalism of the 1990s under the Presidency of Carlos Menem. However, this occurred during a period consisting of a stable and benign international economic environment and buoyant international commodity prices. In their absence the model has begun to demonstrate some areas of tension, exposing some underlying flaws in the model.</p>
<p>One of these tensions is persistently high inflation. Investment strikes by international energy companies since 2002 have led to a number of key bottlenecks in the Argentine economy, which domestic savings are insufficient to deal with. For example, the Vaca Muerta, a region in the west of the country with the world’s <a href="http://www.bloomberg.com/news/2014-08-21/argentina-elections-may-spur-vaca-muerta-development.html">second largest shale gas deposit</a>, would receive a boost from international capital.</p>
<p>While international capital (in the form of Chevron, Petrobras, ExxonMobil and others) has already shown an interest, this will only get easier once a debt deal has been struck. This would help re-ignite GDP and help ease inflation. It would also take pressure off the federal government’s fiscal accounts and so allow it to continue plans to alleviate poverty – still a significant problem in Argentina.</p>
<p>While there is an <a href="http://www.telam.com.ar/notas/201408/74187-realizaran-un-acto-en-apoyo-al-gobierno-y-contra-los-fondos-buitre.html">argument</a> that Kirchner can gain short-term political capital in not reaching a deal – her intransigence has clearly helped her <a href="http://www.economist.com/news/americas/21611114-default-gives-argentinas-president-political-advantage-not-long-palindrome">flagging domestic popularity</a> – the long term economic interests should outweigh this calculation. It is also clearly in the interests of international capital that a resolution is found. </p>
<p>The legal precedent that this case produces is too difficult to discern at this stage, but there is a very real danger that it will seriously impact on the ability of other countries to deal with default in the future. </p>
<p>While eurozone nations have introduced collective action clauses into their newly issued debt, this practice has not spread to the developing world. “<a href="http://www.investopedia.com/terms/p/pari-passu.asp">Pari-passu</a>” clauses that demand all creditors be treated equally remain for vultures to capitalise on, and they give little incentive for creditors to agree to restructuring deals in the future – in Argentina or anywhere else. </p>
<p>This has clear implications for the smooth functioning of international debt markets and the international economy by extension. Without the ability to engage in an orderly default everyone loses; with those who lose most often being those who can least afford it – the poor.</p><img src="https://counter.theconversation.com/content/30801/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christopher Wylde has received funding from the ESRC.</span></em></p>Another week, another proposal to deal with Argentina’s debt. The latest one, by the Argentine president, Cristina Fernández de Kirchner, is to launch a voluntary debt swap where investors holding defaulted…Christopher Wylde, Lecturer in Political Economy, Richmond American International UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/189422013-10-09T01:38:08Z2013-10-09T01:38:08ZPressure could mount on US Treasury as debt ceiling closes in<figure><img src="https://images.theconversation.com/files/32613/original/r88x6jvs-1381189856.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4096%2C2732&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">US Treasury Secretary Jacob Lew will need to write the book on technical and ethical challenges if no agreement is reached on raising the debt ceiling.</span> <span class="attribution"><span class="source">EPA/Jim Lo Scalzo</span></span></figcaption></figure><p>Financial markets must be confident that the US will not default on its sovereign debt, otherwise those markets would have plummeted by now. But is that confidence justified?</p>
<p>Markets participants are comforted by two ways of avoiding the calamity of a US sovereign default. </p>
<p>The first level of containment is political. Each passing day will bring more pressure on Washington for a political solution. Political pressure from outside the Beltway forced resolution of previous debt ceiling stand-offs, most notably in 2011. </p>
<p>But positions are more entrenched this time. Both the White House and the Republican leadership in the House have made firm commitments to their supporters that they will not compromise – it won’t be easy to climb down from those positions.</p>
<p>The Congressional Budget Office says that if there is no increase in the debt ceiling above its current level of $16.7 trillion then, sometime between the 22nd of October and 5th of November, the US Government will no longer be able to meet all of its financial obligations.</p>
<p>Let’s consider the figures. This year the US Government will spend about $4 trillion and have receipts of about $3.3 trillion for a projected deficit of $650 billion. That is, spending is expected to exceed receipts by between $50 and $60 billion per month. </p>
<p>Ordinarily the Treasury would issue new debt to cover that difference. Without the ability to raise new debt some of these obligations will go unpaid.</p>
<p>But the markets have confidence in the second level of containment –- the ability of the Treasury to prioritise payments. If there is no political solution then sometime in mid-October the US Treasury will have to start to prioritise payments.</p>
<p>The highest priority will go to the payment of interest on debt. About $7 billion per day will flow into the Treasury in the form of income tax and payroll tax payments. That will easily cover the interest payments on US Treasury debt which is ‘only’ about $35 billion per month. Any debt that matures can be rolled over without breaching the debt ceiling.</p>
<p>Other payments – to military personnel, social security and medicare recipients, and many others – will be given a lower priority. The Treasury has not stated that it will prioritise payments in this way. </p>
<p>There is a legal question on whether the Treasury can undertake this prioritisation. And there are the ethical questions about whether financial market claimants should be ahead of ordinary families dependent on Federal Government payments to live. </p>
<p>But legal and ethical questions pale compared to the spectre of the global economic calamity that would follow an actual default on US Treasury bills, notes or bonds.</p>
<p>Financial markets are not very concerned about legal or ethical challenges to prioritisation of payments by the Treasury. The markets are concerned about something else – the technical challenge. </p>
<p>The Treasury has pointed out that its computer systems process over 100 million cheques per month and those systems are not set up to prioritise payments. They are set up to make every payment in sequence as it becomes due.</p>
<p>Skeptics will say Treasury reports to the Obama Administration and therefore the Treasury will overstate the technical problems with prioritisation to please its political masters in the Whitehouse. </p>
<p>But a report compiled by the Treasury in 2011 – and published after the debt ceiling crisis in that year – emphasised the technical challenges of printing cheques out of order and concluded that it could not be easily done.</p>
<p>The markets seem to be focusing on the good news about prioritisation. The payment of cheques by the Treasury is made by three separate systems – one for defence related payments, one for payments to Treasury debtholders and one for all other payments. </p>
<p>Optimists – which, for now, is most of the markets – expect that debt payments system will be operated separately and with priority to the other systems. The other systems will make payments (social security, medicare, military wages, etc) on a day by day basis. </p>
<p>As soon as enough cash has accumulated (after the prioritised debt payments) for a whole day of payments then all of those payments for a particular day will be made. The US Government will then get successively further and further behind in its non-debt obligations on a whole day basis.</p>
<p>The US can go on indefinitely without a sovereign debt default so long as it can prioritise payments of interest on Treasury debt above all other obligations. </p>
<p>The markets in this developing crisis have held up because they are confident the Treasury can solve the technical problems associated with prioritisation. </p>
<p>This is a dangerous assumption, but it reflects a confidence in American technical prowess rather than confidence in the American political system.</p><img src="https://counter.theconversation.com/content/18942/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sam Wylie does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Financial markets must be confident that the US will not default on its sovereign debt, otherwise those markets would have plummeted by now. But is that confidence justified? Markets participants are comforted…Sam Wylie, Principal Fellow, Melbourne Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/91462013-02-21T03:46:19Z2013-02-21T03:46:19ZExplainer: what are safe haven investments?<figure><img src="https://images.theconversation.com/files/14734/original/6bg7x6tc-1346211797.jpg?ixlib=rb-1.1.0&rect=7%2C143%2C980%2C778&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Gold and silver are traditionally considered "safe havens".</span> <span class="attribution"><span class="source">Image sourced from shutterstock.com</span></span></figcaption></figure><p>Safe haven investments are investments that provide a low level of risk during periods of extreme economic uncertainty. </p>
<p>The problem is that a safe haven investment is a safe haven investment until it is no longer a safe haven investment. </p>
<p>There are a number of assets that are often said to fall within this class and these include US government bonds, gold and silver, and land and property. Even if you identify such an investment the most important decision that you face is to decide when to invest in these assets?</p>
<p>US government bonds provide a classic example. In this case, US government bonds carry <a href="http://www.publicdebt.treas.gov/">the guarantee of the US government</a> with respect to coupon and principal payments, “backed by the full faith and credit of the U.S. government”. </p>
<p>Most governments issue bonds to investors but they are not all the same in terms of risk. For example, the Russian government defaulted on its bonds in 2000. Indeed, it is surprising just how many countries, including Australia during the 1930s, have defaulted on their debt over the last 200 years. The concern about European debt default is not unique to 2012. </p>
<p>While US Government bonds draw on the power of the US Government for their continued existence there are other safe haven type investments that draw upon their physical value. These include gold and silver, land and property and other physical assets that, in some sense, remain intact regardless of the surrounding economic turmoil.</p>
<p>Yet, can investment in silver or gold actually be labelled riskless? The gold price is currently high though there have been long periods of time when the gold price languished around USD 300.00 to USD 400.00 per ounce. To buy gold at USD1600.00 per ounce might seem a safe thing to do at present. However, this might not seem so safe if the price of gold were to suddenly fall to USD 300.00 per ounce as it did in the early 1980s. Similar movements have been observed in silver prices.</p>
<p>Many individual Australian investors believe that investment in land and property is riskless. But there now exists a growing body of disaffected Australian investors burned by the recent failure of a range of property investment vehicles due to the global financial crisis. </p>
<p>The timing of investment into safe havens is perhaps the most difficult decision. Should you wait until the equity market bottoms and then sell your shares and invest in the safe haven asset? This may seem reasonable at the time, but the problem with his action is that it crystalizes your losses. </p>
<p>In the wake of the global financial crisis equities could rebound, as they have after each of the recent financial crises over the last 30 years. While the equity market may not rebound to its earlier highs, waiting 12 months before moving your wealth to a safe haven could reduce the loss suffered as a result of the crisis. </p>
<p>But the market rebound poses its own question; is it really necessary to incur considerable transaction costs to invest in an asset class with little return (US government bonds) or with considerable risk (gold and property) now that things have settled a little? </p>
<p>Whether or not to move towards safe haven assets really comes down to your own investment portfolio decisions, and whether you believe in the value of diversification. If you are well-diversified it is likely that your investment portfolio already has exposure to so called safe haven investments. </p>
<p>Why would you decide to move from a well-diversified portfolio to a concentrated portfolio of safe haven assets just because of uncertain economic conditions? The whole reason for diversifying is to ride out both the certain and the uncertain times.</p><img src="https://counter.theconversation.com/content/9146/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Heaney has received funding from the ARC in the past though is not currently a chief investigator on an ARC project.</span></em></p>Safe haven investments are investments that provide a low level of risk during periods of extreme economic uncertainty. The problem is that a safe haven investment is a safe haven investment until it is…Richard Heaney, Winthrop Professor, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/109892012-12-04T19:48:22Z2012-12-04T19:48:22ZArgentina wins brief reprieve from default, but the vulture funds are circling<figure><img src="https://images.theconversation.com/files/18218/original/4fzsb3c4-1354249961.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Since defaulting on its debt in 2001, Argentina has been locked in a decade-long war with foreign hedge funds.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>Since defaulting on its debt in 2001, Argentina has been locked in a decade-long battle with international investors. Tensions between the country and institutional bondholders reached new highs on October 2, when the Ghanaian government <a href="http://www.guardian.co.uk/world/2012/oct/22/argentina-ghana-ship-libertad-nml">seized the Argentine tall ship ARA Libertad</a>. The ship was prevented from leaving the port of Tema after a Ghanian court upheld a court order at the request of Argentina’s creditors, led by US hedge fund Elliot Associates, who are suing Buenos Aires over its 2002 bond default. NML Capital, a firm affiliated with Elliot Associates, is currently <a href="http://www.globalpost.com/dispatch/news/regions/americas/argentina/121123/vulture-funds-NML-economy">trying to recoup $1.3 billion of debt from Argentina</a> through the US legal system in New York.</p>
<p>The fund was created by Paul Singer, a strong backer of the US Republican Party and former Republican presidential candidate Mitt Romney. <a href="http://www.guardian.co.uk/global-development/2011/nov/15/vulture-funds-key-players?intcmp=122">According to The Guardian</a>, Singer’s money-making strategy involves “buying distressed debt cheaply and selling it at a profit or suing for full payment”.</p>
<p>Such speculative financial and profitable operations are performed by hedge or financial funds known as <a href="http://ebook.law.uiowa.edu/ebook/faqs/what-is-a-vulture-fund">“vulture funds”</a>, which obtain their name because they hover like vultures over the remains of moribund companies or debtor states like Liberia, Peru and Argentina. As such, these funds operate in a highly opportunistic and exploitative manner. </p>
<p><a href="http://www.gregpalast.com/bbc-on-the-hunt-for-an-american-vulture-attacking-liberia/">According to investigative journalist Greg Palast</a>, they “buy up the debt of the poorest nations on the planet, usually for pennies on the dollar, then sue or use other means to squeeze the nations to pay ten times, even a hundred times, what the vulture fund paid for the debt”. Palast also notes that Liberia was sued to pay $20 million to such a sovereign fund — the equivalent of building almost half a million homes in the former war ravaged nation. This practice has cost many African and Latin American nations millions of dollars and created immense social distress. The practice continues to persist unregulated around the world, netting millions of dollars without regard to the social consequences of the most destitute people in the world.</p>
<p>Hector Timerman, Argentina’s Foreign Minister, <a href="http://www.huffingtonpost.com/hector-timerman/africa-latin-america-vulture-funds_b_2100827.html">explains at the Huffington Post</a> that “vulture funds” originated in South America and then spread to Sub-Saharan Africa. “In the ‘90s vulture funds took flight and, have since then, landed on the Democratic Republic of Congo, Congo Brazzaville, Liberia, Zambia, Cameroon, Ethiopia secretly acquiring debt at bargain prices. They then waited for debt relief policies from the World Bank, IMF and wealthy nation-states to launch their attack presenting their titles before American and European courts and suing for the full value of the debt”.</p>
<p>In 2002, Argentina defaulted on its debt, which had been accumulated as a result of extremely poor economic management by successive governments. A large part of this debt was generated during the military’s dictatorship, which conducted a “dirty war’ between 1976 and 1983 on its political opponents. This was a murderous period which saw the disappearance of nearly 30,000 political opponents.<br>
This was followed by a poorly executed and suicidal war against Britain over the Falklands/Malvinas islands. Between 1983 and 2001, a number of democratic governments managed Argentina following the now discredited neoliberal economic policies based on the Washington Consensus. These policies had catastrophic consequences, amassing billions of dollars in debt. </p>
<p>By 2001, Argentina’s debt stood at over $100 billion which at the time amounted to 1.5 times Argentina’s GDP. The debt was so large that Argentina was not even able to pay its interest dues, so it had no choice but to make the largest default in the world’s financial history. After its default, most of Argentina’s creditors accepted debt restructuring. In 2005 and 2010, as part of the debt restructuring plan, the great majority of bondholders agreed to exchange defaulted debt at very low prices. However, others holders of debt did not, <a href="http://www.reuters.com/article/2012/11/26/us-argentina-debt-idUSBRE8AP0LD20121126">so they sued</a>. "U.S. District Judge Thomas Griesa … ordered Argentina to pay the holdouts, led by Elliott Management Corp’s NML Capital Ltd and Aurelius Capital Management, who rejected the swaps and are fighting for full repayment in the courts”.</p>
<p>The order shocked investors and outraged the Argentine government. Argentina’s President, Cristina Kirchner stated that her government will not pay a single dollar to the vulture funds comprised of Elliott Management Corp, an affiliate of NML Capital Ltd and Aurelius Capital Management, which own $1.3 billion of the debt. For its part, Argentina’s Economics Minister referred to Griesa’s order as <a href="http://www.pagina12.com.ar/diario/elpais/1-208448-2012-11-23.html">“judicial colonialism”</a>. “The judgement breaches Argentine sovereignty and threatens the whole of the world’s financial system and we … are seeing a clear case of judicial colonialism. All we need is the arrival of the fifth fleet”.</p>
<p>Argentina’s restructured debt currently stands at nearly $25 billion. The result of this is that Argentina could default on its restructured debt payment of $3 billion to its exchange bondholders by not paying on December 15. The worst case scenario is that the possible Argentine default could spread to countries in Europe, particularly Greece, which is facing massive financial pressures and distress as a result of colossal debt accumulated over many years of excessive borrowing. Indeed, the thought of default may not be too far away, thus threatening the financial stability of the whole of the Eurozone and the world.</p>
<p>This clearly is a worst case scenario and one that is highly unlikely to occur, but the possibility remains. In the meantime, Argentina has received some breathing space. The three judges which upheld Griesa’s decision have postponed any decisions to February 27, 2013, when arguments by lawyers representing Argentina and the “vulture funds” argue over payment details. In the <a href="http://blogs.reuters.com/felix-salmon/2012/11/28/a-rare-and-temporary-pari-passu-victory-for-argentina/">words of Felix Salmon</a>: “My hope is that somewhere up the chain, principles of national sovereignty and smoothly-functioning markets will prevail, and Griesa will be overruled”.</p>
<p>The certainty is that in these times of global financial dysfunction, the biggest winners will be extremely wealthy New York lawyers who will be celebrating all the way to the bank with their obscene exorbitant fees, while millions of Argentines will continue to struggle on a daily basis.</p><img src="https://counter.theconversation.com/content/10989/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexis Sergio Esposto does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Since defaulting on its debt in 2001, Argentina has been locked in a decade-long battle with international investors. Tensions between the country and institutional bondholders reached new highs on October…Alexis Sergio Esposto, Senior Lecturer, Economics, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.