Playing Sovereign Debt Creditors’ Orchestra: Inter-Creditor Issues in Sovereign Debt Restructuring

Abstract

Lack of support for the Sovereign Debt Restructuring Mechanism (SDRM) discussion at the IMF a decade ago has encouraged several debt NGOs to actively advance proposals for sovereign debt arbitration - a bankruptcy-type arbitral tribunal to handle sovereign debt disputes in a collective manner. In response to these proposals, the Government of the Netherlands and the Permanent Court of Arbitration recently initiated a project to investigate the desirability and feasibility of sovereign debt arbitration. The interim project report flags, among other issues, the absence of agreed principles that would be applied by the arbitral tribunal. This paper wishes to contribute to the discussion surrounding such principles by addressing inter-creditor issues in sovereign debt restructuring. It begins with an explanation of inter-creditor issues at the time of crisis, and the urgent need for better creditor coordination looking at the Argentine bondholders’ recent success in the Abaclat and NML Capital cases. It draws from the experience of domestic bankruptcy law to explore the best solution for resolving inter-creditor issues in the sovereign debt context. Importantly, this paper challenges the fundamental theory of collectivity in bankruptcy law, arguing that the approach used in most domestic bankruptcy systems to address inter-creditor issues — the inclusion of all claims in a collective proceeding that ensures equitable treatment among all creditors - should be applied differently in the sovereign debt world due to the difference of the debtor being a State.