A recent court decision in a long-running legal battle between investors and the government of Argentina has highlighted problems with restructuring the debts of countries that fall on hard times. The case, which is being fought in federal court in New York, suggests that policy makers must develop a more systematic way to deal with sovereign defaults.

The case deals with Argentina’s decision in 2001 to stop paying debts worth about $80 billion. The country eventually reached deals with most of its investors and banks to forgive most of the amount that they were owed. But some bondholders, including the hedge funds Elliott Management and Aurelius Capital, held out for a better deal and sued Argentina.

Until recently, the Argentina case has been a quixotic pursuit because American law makes it hard to collect money from other countries. But late last year, Judge Thomas P. Griesa of Federal District Court ruled that Argentina had to pay the holdouts as long as it was paying the investors who had agreed to the restructuring because the country couldn’t favor some investors over others under the terms of its bonds. Because Argentina has previously refused to pay the holdouts, the judge further ordered the banks and other intermediaries the country uses to make the payments from the money it sent to them. The United States Appeals Court for the Second Circuit will soon hear an appeal of that decision, which has alarmed the Obama administration, banks and other countries because it could affect other cases.

The Argentina case, while unusual for being so drawn out, is just one of a rising tide of litigation involving defaults by countries. One recent study found the likelihood of such cases has more than doubled compared with the 1980s, and there were 61 cases initiated in the last decade. One explanation for the increase is that these debts are increasingly held by hedge funds, rather than banks, which often settle under pressure from policy makers in Washington and London. The threat of litigation dogged the recent renegotiation of Greek debt, which was ultimately resolved out of court after changes to local laws and intervention by European officials.