Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach

Abstract

This article systematically examines sovereign debt restructuring in light of bankruptcy reorganization law principles. It proposes that a simple and arguably practical convention, based on just three of these principles, would encourage free market funding of troubled States, thereby avoiding reliance on the International Monetary Fund (and the moral hazard and taxpayer subsidy issues caused by such reliance). On the other hand, the article proposes a limited role for the IMF that would allow it to continue its current practice of imposing conditionality on funding, but without triggering any of the problems presently associated with IMF lending. Furthermore, the article explains why a convention is needed to solve the problem of holdout creditors undermining collective action toward a negotiated settlement. In this context, the article shows that recent proposals to contractually solve this problem by introducing special-majority voting clauses in new bond issues are doomed to failure. The article additionally explains why no international bankruptcy court or other new organization is needed.