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A US Supreme Court ruling has made restructuring sovereign debt more difficult, leaving both debtors and creditors worse offThe US supreme court's ruling obliges Argentina to pay holdout hedge funds in full as part of its debt-restructuring agreements.

Argentina and its bankers have been barred from making payments to fulfil debt-restructuring agreements reached with the country's creditors, unless the 7% of creditors who rejected the agreements are paid in full – a judgment that is likely to stick, now that the US supreme court has upheld it. Though it is hard to cry for Argentina, the ruling in favour of the holdouts is bad news for the global financial system and sets back the evolution of the international regime for restructuring sovereign debt. Why is it so hard to feel sympathy for a developing country that is unable pay its debts? For starters, in 2001 Argentina took the unusual step of unilaterally defaulting on its entire $100bn debt, rather than negotiating new terms with its creditors. When the government finally got round to negotiating a debt swap in 2005, it could almost dictate the terms – a 70% "haircut". In the intervening decade, President Cristina Fernández de Kirchner and her late husband and predecessor, Néstor Kirchner, have pursued a variety of spectacularly bad economic policies. The independence of the central bank and the statistical agency has been severely compromised, with Fernández forcing the adoption, for example, of a consumer price index that grossly understates the inflation rate. Contracts have been violated, foreign-owned companies have been nationalised, and when soaring global prices for Argentina's leading agricultural commodities provided a golden opportunity to boost output and raise chronically insufficient foreign-currency earnings, Fernández imposed heavy tariffs and quotas on exports of soy, wheat and beef. Some might counter that the holdout hedge funds that sued Argentina deserve no sympathy either. Many are called "vulture funds", because they bought the debt at a steep discount from the original creditors, hoping to profit subsequently through court decisions. The problem with the Argentine debt case has little to do with the moral failings of either the plaintiffs or the defendant. It lies in the precedent it establishes for resolving future international debt crises. The most common reaction to the recent rulings is pro-holdout. After all, the judge is only enforcing the legal contract embodied in the original bonds, isn't he? As the former US president Calvin Coolidge supposedly said of US loans to its first world war allies: "They hired the money, didn't they?"

If only the world were so simple. If only a regime of consistent enforcement of all loan contracts' explicit terms were sufficiently practical to be worth pursuing. We have, however, long since recognised the need for procedures to rewrite the terms of debt contracts under extreme circumstances.

The British Joint Stock Companies Act of 1856 established the principle of limited liability for corporations, and indentured servitude and debtors' prisons have been illegal since the 19th century. Individuals and corporations can declare bankruptcy. There will always be times when it is impossible for a debtor to pay.

As for corporate bankruptcy, it is recognised that it is a poor legal system that keeps otherwise viable factories shuttered while assets are frittered away in expensive legal wrangling, leaving everyone – managers, workers and shareholders – worse off. A good legal system permits employment and production to continue in cases where the economic activity is still viable; divides up the remaining assets in an orderly and generally accepted way; and makes these determinations as efficiently and speedily as possible, while discouraging future carelessness by imposing costs on managers, shareholders, and – if necessary – creditors.

No such body of law exists at the international level, and some believe this vacuum is the primary difficulty with the international debt system. Ambitious proposals to redress it, such as a sovereign debt restructuring mechanism (SDRM) housed at the International Monetary Fund, have always run into political roadblocks.

Incremental steps had, however, been slowly moving the system in the right direction since the 1980s. In the international debt crisis that began in 1982, IMF country adjustment programmes went hand-in-hand with "bailing in" creditor banks through "voluntary" coordinated loan rollovers. Eventually, it was recognised that a debt overhang was inhibiting investment and growth in Latin America, to the detriment of debtors and creditors alike.

Subsequent programmes to deal with emerging-market crises featured an analogous combination of country adjustment and "private sector involvement". Voluntary debt exchanges worked, roughly speaking, with investors accepting haircuts.

After Argentina's 2001 unilateral default, many investors saw more clearly the need to allow explicitly for less drastic alternatives ahead of time, and incorporated so-called collective action clauses (CACs) into debt contracts. If the borrower runs into trouble, CACs make it possible to restructure debt with the agreement of a substantial majority of creditors, usually around 70%. The minority is then bound by the agreement.

Such incremental steps gave rise to a loose system of debt restructuring. To be sure, it still had many deficiencies. Restructuring often came too late and provided too little relief to restore debt sustainability. But it worked, more or less. In contrast, the US court rulings' indulgence of a parochial instinct to enforce written contracts will undermine the possibility of negotiated restructuring in future debt crises.

Time will run out for Argentina at the end of July. Unable to pay all of its debts, it will perhaps be forced to default on all of them. The more likely outcome, however, is that it will manage to come to some accommodation that the holdouts find more attractive than the deal accepted by the other creditors. Either way, future voluntary debt-workout agreements have just become more difficult to reach, which will leave debtors and creditors alike worse off.
Meanwhile in Europe : Troubled Portuguese lender Banco Espirito Santo is set to be split into "bad" and "good" banks under a multi-billion euro state rescue plan.  The plan, aimed at saving a bank that has been engulfed by the fall of the owning family’s business empire, includes using at least half of the €6bn (£4.8bn) left from Portugal’s recently exited international bailout program, sources said. The bailout money will be used to finance a special bank resolution fund set up by Portugal in 2012 that will in turn inject money into the new Banco Espirito Santo, or BES, "good bank". BES shares would be delisted under the plan, with shareholders likely to lose their investment. One source told the Reuters agency that the injection could be of at least €4bn. It was not clear how the bad bank would be handled. The plan, which is also being worked on by officials from the European Central Bank and European Commission, is expected to be announced on Sunday evening. Details were still being hashed out and an announcement could be postponed until Monday, the people familiar with the talks said. Anything in order to stop the first domino from falling.
Why? ... As the powers that be know, that once the first 'Credit Default Swap' is triggered, it will it turn trigger a long line of other CD'S. A process which will in turn reveal the 'fact' that our entire global financial system is little more than a gigantic 'Pyramid Scheme'.... A structure without 'any' type of foundation.
Quite literally 'A Pyramid Of lies'.