CIAO DATE: 05/03

Improving The Sovereign Debt Restructuring Process

Abstract

The recent debate on reforming the international financial system has focused on the need to improve the sovereign debt restructuring process, and in particular on steps that could limit the risk that litigation could disrupt or delay a sovereign debt restructuring. This debate increasingly has focused on the debt restructuring process in those cases where debt reduction is needed to produce a sustainable debt profile. Less attention has been given to those cases where a sovereign lacks the reserves needed to cover its near-term obligations and, absent international support, has a clear need for debt rescheduling to push out near-term maturities.

There is a strong case for seeking to make the sovereign debt restructuring process more orderly, more predictable, and more rapid. There is also a strong case that steps to address collective action problems created by the threat of holdout litigation could help to improve the restructuring process, and give all parties more confidence that there is path that can lead a sovereign from the decision that a restructuring is necessary to its successful conclusion. Moreover, reasonable steps to reduce the risk of holdout litigation would not suddenly dilute the sovereign’s incentives to pay: no rational sovereign would prefer default to payment just because it can restructure with a super-majority vote.

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