"The past year has seen some appalling developments. Most notably, in the areas of sovereign debt crisis resolution and IMF governance. The most dispiriting episode is the U.S. Supreme Court’s refusal to set aside a lower-court judgment in the dispute over Argentina’s debt restructuring. As a result, countries burdened with excessive debt will find it much more difficult in the future to negotiate the relief they need to pay their obligations.

Without diving into the legal complexities of the case, the court ruling favoured a hedge fund that bought Argentine bonds at a steep discount just prior to the country’s default in 2001. In 2005, when Argentina offered to settle with its creditors by giving them partial payment on their claims, this hedge fund--which has been appropriately labeled a “vulture investor”--refused to go along. Instead, the hedge fund filed a lawsuit demanding full satisfaction of its claims, including principal and interest. The court has given the investor enormous leverage over Argentina, by making it illegal for Buenos Aires to send payment to investors who had accepted the restructuring unless the vulture investor receives full payment.

It is not clear yet how the situation will be resolved. At present, Argentina has gone again into default, though it may reach a settlement with the investor. As a result of these new legal considerations in the world of sovereign debt, the scales have been tilted massively and excessively against debtor countries. It is hard to see how a satisfactory outcome will be achieved the next time a country with unsustainable debt is stricken by crisis.


On a positive note, the IMF has proposed improved rules that would restrain its ability to lend to countries with unsustainable debts to avoid repeating the mistake it made with Argentina. The Fund circumvented its rules in the case of Greece, and clearly needed to establish new ones. But it is far from clear whether the Fund will truly be more resolute and stick to its new rules the next time a case like this arises, or whether it will again find a loophole.

Separately, efforts to reform IMF governance remain hamstrung because the U.S. Congress has refused to approve the necessary legislation."

"Not a great deal has happened on the regulatory front over the past year, and some important initiatives are making very slow progress.

One development worth highlighting, though, is a Federal Reserve decision in February requiring foreign banks’ U.S. operations to meet the same standards for capital and liquidity as American banks.

This move was decried by foreign regulators as a unilateral step, and it could also be fairly described as reinforcing other trends toward the “balkanization” of international finance. But overall, the Fed’s judgment was correct. The global financial crisis showed the dangers of allowing bank units operating internationally to depend on their parents’ capital and liquidity buffers. In this case, throwing a little sand in the gears of global finance was warranted. Hopefully, once foreign regulators get over their resentment, the Fed’s action will motivate them to work harder on establishing a common approach to restructuring giant international banks that fall into trouble."

"The World Trade Organization’s agreement at its December 2013 meeting in Bali marked the first time a ministerial conference struck a final deal on substantive issues in the Doha Round, the global trade negotiations launched in 2001. So trade ministers and WTO officials hailed the news as a major step forward.

The triumphant claims were ridiculous. All the deal does is streamline customs and other bureaucratic procedures for goods being traded internationally. It is a far cry from the ambition that infused the Doha Round at the outset--that is, the goal of transforming the global trading system so that it would work better for developing countries. In reality, the Bali package was a rescue exercise, an effort to keep the WTO from collapsing into total ignominy as it struggles to salvage a minimal result from the Doha talks.

Moreover, India has recently dealt a huge setback to the Bali accord, effectively scuppering the deal until it gets some of its desired concessions on food-trade issues. India may eventually accept a face-saving compromise, but even if it does, the importance of the Bali achievement should be kept in proper perspective.

The WTO is the central pillar of the system established after World War II to prevent a reversion to 1930s-style protectionism and trade wars. Its slide toward irrelevancy may be very slow and gradual, but it is happening, and little is being done to stop it."