What Iraq and Argentina Might Learn from Each Other

I. INTRODUCTION Financial collapse usually triggers a flurry of market, academic, and policy innovation.1 The Latin American debt crisis of the 1980s produced the Brady Bonds and led to the rise of today's emerging markets. In the late 1990s, crises in Pakistan, Ecuador, and Ukraine helped teach the markets how to restructure international sovereign bonds.2 Crises in Mexico, Russia, Brazil, Turkey, and throughout East Asia raised doubts about the international system's ability to manage vast and rapid capital flows, and prompted a big-picture reassessment under the rubric "international financial architecture." This included most famously the sovereign bankruptcy proposals discussed elsewhere in this volume. The sovereign debt workouts now underway in Iraq and Argentina continue this trend. Each country is trying to restructure more than $100 billion in defaulted external debt this year-perhaps before this Essay goes to print. Each may fail, leaving the debts unresolved for years. A full study of the law emerging out of the two restructurings must await their completion, and will likely take volumes. This Essay focuses on several early data points that Iraq and Argentina offer for the law of sovereign debt, and suggests lessons that the two cases might hold for each other and for future restructurings. The two cases are rarely mentioned together.3 Most think of Argentina as the quintessential case of financial globalization gone awry-a lapsed market reformer that sank under the weight of (depending on your perspective) misguided liberalization or its own financial chut^ah,4 and took with it Argentine depositors, Italian retirees, Japanese banks, and offshore investment funds. Iraq's debt has a distinctly "preglobalization" flavor. Most of its obligations date back to the 1970s and 1980s, before the recent wave of financial liberalization. Iraq's money troubles came to light after three wars, a quarter-century of dictatorship, and over a decade of financial isolation under international sanctions. In the words of Iraq's own advisers, its debt restructuring is a "quintessential geopolitical case, a classic outlier" framed by strategic more than financial concerns.5 Aside from the obvious intuition that no case of government debt is immune from politics and no multibillion dollar restructuring is devoid of finance, Argentina and Iraq appear to be on opposite ends of the finance-politics spectrum. Despite, or because of this distance between them, each of these two restructurings offers insights for policy and doctrinal problems normally associated with the other. I focus on two such problems: shielding sovereign debtors from lawsuits, now most acutely associated with Argentina,6 and restructuring debts inherited from bad regimes, such as those Iraq had incurred under Saddam Hussein. The first half of this Essay surveys recent efforts to protect governments from private creditor lawsuits in national courts. The general shield already in place-a bundle of sovereign immunities that have inspired a rich literature7-has looked increasingly fragile in the wake of emerging sovereign bond crises, an impression reinforced by hundreds of lawsuits against Argentina. But the project of bolstering these protections, which culminated in the IMF's statutory sovereign bankruptcy proposal, kept running into political and technical constraints that looked insurmountable. In the case of Iraq, the United Nations dispensed with these constraints and granted broad new immunities for Iraqi assets, all but destroying the prospect of near-term recovery from litigation. In the second half, I look at the Odious Debt Doctrine, which is experiencing a revival after regime change in Iraq.8 The doctrine is often cited for the proposition that the countries emerging from nasty dictatorships can repudiate their debts, because those debts came about without the consent of or benefit for their people. But since its invention and throughout the past century-rife with oppressive regimes, revolutions, reckless borrowings, and debt defaults-the doctrine has languished in near complete disuse save for an occasional NGO campaign or bout of parliamentary rhetoric. …