The Time Has Come for Disaggregated Sovereign Bankruptcy

Abstract

The ongoing economic crisis caused by the COVID-19 pandemic has generated important proposals for addressing countries’ financial distress in the short to medium term. However, it has also made even more apparent the existing gaps in the global financial architecture writ large and highlighted the extent to which key actors pay closest attention to this infrastructure in situations of crisis. By then, of course, it is already too late.

This essay argues that the international community should use the energy generated in the current context to move toward ‘disaggregated sovereign bankruptcy’—which can be understood as a framework by which multiple processes at varying levels simultaneously support or instantiate a shared set of sovereign debt resolution principles and commitments. Such an approach moves beyond overly simplistic and binary framings of market-based versus statutory options, and instead conceives of improvements in the contractual realm, in the multilateral arena, and at the level of domestic legislation as complementary rather than competitive. The essay also clarifies that the explicit embrace of a more disaggregated framework for implementing debt resolution principles need not be disorganized. It argues in favor of establishing an international body purpose-built to recommend, coordinate, and facilitate steady, incremental progress in the architecture for dealing with sovereign debt across multiple vectors. Advocates of more rational debt restructuring should take steps now to adopt an infrastructure that would make future debt crises less severe and perhaps less likely—even when the spotlights are directed elsewhere.