Hunt is on for sovereign debt holdouts European officialdom, and those portfolio managers who did not underweight eurozone sovereign and bank paper, have had the month of January to savour a triumphalist moment. The currency is high, credit spreads are low, bonuses have been paid, and Davos Man is self-satisfied. Of course, some more bank careerists have been thrown to the prosecutors on the Coliseum sands, but the public needs entertainment and distraction from its troubles, doesn't it? Even so, the people you expect to show up at every crisis are preparing for the next euro event. Capital markets teams are modelling private placement products that can be used to prop up balance sheets during a prolonged market closure. Journalists are staying in practice by predicting nine of the next five disasters. And, of course, the restructuring lawyers are doing their documentation in advance, all ready for the search-and-replace function on their word processing programs. View from the US Some people in these financial first-responder teams are worth listening to more than others, for example, Lee Buchheit, a sovereign restructuring lawyer with Cleary Gottlieb, and his writing partner, Mitu Gulati of Duke University Law School. Back in May 2010, the two of them published a scholarly paper, How to Restructure Greek Debt, that turned out to be an accurate outline of what actually happened in March 2012. You may recall the eurozone leadership summit of that month, at which the Greek problem was solved for all time. Not. So if there is a multiple-vehicle traffic accident in the markets for euro sovereign and banking securities over the next year or two, consider what Mr Buchheit, Mr Gulati, and their most recent co-author, Ignacio Tirado, are saying. It's all in a paper they published a few days ago, called The Problem of Holdout Creditors in Eurozone Sovereign Debt Restructurings. Some of my best friends are holdout creditors and those who litigate against them. Holdouts refuse to accept less than what the documents in their bondholdings promise them. If other bondholders, such as heavily regulated banks or insurance companies, want to accept International Monetary Fund, European Central Bank or eurozone official demands that they get back only 30 or 50 cents on the euro, they can. The holdouts say that if they are not paid they will tie up the distressed sovereign in the courts for decades, as they have done to Argentina and others. When Greece's compliant private sector lenders were forced into taking deep write-offs on the value of their bonds, about 3 per cent of the country's outstanding debt remained in the hands of people who refused to accept the deal. Some more than doubled the money they invested at the bottom of the market. All did well. Their margins were made at the expense of the compliant bondholders and the taxpayers of the eurozone, who have to underwrite their national governments" and the ECB's new loans. Messrs Buchheit, Gulati, and Tirado point out that the threat of litigation was what kept furious European and international officials from "visiting some discomfort on a hedge fund manager in Greenwich, Connecticut." You can expect the forthcoming German election campaign to feature screen shots of cheerful hedgies being interviewed on US business television shows. Let's say some sort of euro area sovereign debt restructuring is on the horizon. To avoid any future erosion of euro-creditor-country political support for more cheque-writing to stressed sovereigns, the holdouts must be stopped, or so say Mr Buchheit et al. The proposed blocking of holdouts is based on a previous UN arrangement created after the Iraq war They propose an amendment to the Treaty Establishing the European Stability Mechanism (the new bailout facility), that would block any holdout creditors in a future sovereign restructuring from pursuing their claims in EU courts. This is based on a previous shelter from holdout creditors created for post-Saddam Iraq by the UN Security Council. The proposed treaty amendment wouldn't be as broad, since it couldn't be used as a defence in US, Japanese or Swiss courts, for example. But it's a lot more shelter than Argentina has had. As Mr Buchheit says, "This would be a pretty big shark cage to protect the restructuring sovereign from the holdouts." It's also, effectively, yet another form of capital control by another name, rather like the Italian prohibition on cash transactions of more than €1,000. Whether or not the authors" proposal is adopted to protect, say, a future Cyprus restructuring, it shows how the rights to free capital flows are becoming more restricted.