Sovereigns in Distress: Do They Need Bankruptcy?

Abstract

SHOULD THERE BE a sovereign bankruptcy procedure for countries in financial distress? This paper explores the use of U.S. bankruptcy law as a model for a sovereign bankruptcy procedure and asks whether adoption of such a procedure would lead to a more orderly process of sovereign debt restructuring. It assumes that a quick and orderly debt restructuring process is more efficient than a prolonged and disorderly one, because a lengthy process of debt restructuring takes a high toll on debtor countries' economies as well as harming creditors in general. I concentrate on three goals for a sovereign bankruptcy procedure: preventing individual creditors or groups of creditors from suing the debtor for repayment, preventing groups of creditors from strategically delaying negotiations or acting as holdouts, and increasing the likelihood that private creditors will provide new loans to sovereign debtors in financial distress, thus reducing the pressure on the International Monetary Fund (IMF) to fund bailouts. I conclude that nonbankruptcy alternatives are less likely to accomplish these goals than a sovereign bankruptcy procedure.

Collective Action Clauses in International Sovereign Bond Contracts – Whence the Opposition?

“…Secondly, compared to the 1980s, the debt instruments were less flexible and the number of creditors was infinitely bigger. For the restructuring of syndicated bank loans and inter-government loans, the so-called London Club and Paris Club, respectively, provide a forum for negotiations between a relatively small number of creditors, who interact repeatedly and are therefore less likely to act opportunistically (White, 2002). No institution of that sort exists for sovereign bonds.…”

Individual Enforcement Rights in International Sovereign Bonds

“…Table 3.1 in Sturzenegger and Zettelmeyer (2006b) presents an overview of litigation against sovereign debtors and the associated outcomes. 16 Sturzenegger and Zettelmeyer (2006a, p. 31) 17 See, for example, Dixon and Wall (2000), Sturzenegger and Zettelmeyer (2006b), White (2002), or Häseler (2007.…”

Bankruptcy Proceedings for Sovereign State Insolvency

“…According to White (2002), what happens if a plan is not adopted by vote is ambiguous (an observation she also makes about the Krueger proposal). The main point here is that under Chapter 11 legislation, the 'fallback' position is effectively that of liquidation (i.e., Chapter 7).…”