November 27, 2013
This is effectively what the NYT told readers in an article discussing the reaction to a proposal by the IMF to require bondholders to accept losses when a government gets an IMF bailout. At one point the piece presented the comment of a Treasury Department spokesperson:
“It is important that efforts to increase the orderliness and predictability of the sovereign-debt restructuring process be undertaken on the basis of a consensual, market-based contractual framework.”
It then added:
“Translation: We don’t like plans that mess around with the rights of bond investors. We didn’t like them 10 years ago, and we don’t like them now.”
This is actually somewhat of a mistranslation. There is not an issue of “rights” here. The question is one of the rules that would apply when the IMF, a multinational institution, puts money into a bailout. In the absence of IMF money, it is extremely unlikely that bond investors would get back their full investment. The United States position is effectively that the IMF should intervene to ensure that bondholders get paid back even though they were not smart enough to assess credit risk when they bought the bonds. (Actually, many investors may buy bonds at sharp discounts when a country is in trouble, with the expectation that the IMF will intervene to ensure that the bonds are paid in full.)
There is no issue of rights here, since countries that go to the IMF for a bailout would generally not have the ability to pay their debt in any case. The NYT seriously misrepresented what is at stake to its readers.
The piece is also somewhat misleading in implying that Europe has a large amount of money at stake if the peripheral countries are allowed to partially default on their debt. Most of the debt is money from the European Central Bank (ECB). If the countries were to default, the ECB could simply print more with very little consequence for the real economy.
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