Neither Order nor Chaos: The Legal Structure of Sovereign Debt Workouts

Abstract:     
Despite continuing academic debate over the relative merits of "statutory" versus contractual approaches to improving the process for sovereign debt restructuring, policymakers have converged around a contractual approach that includes voluntary inclusion of collective action clauses in sovereign debt contracts and the development of codes to regularize the expectations of market actors as to how workouts will proceed. This article explains the revealed preference of policymakers by reference to the multiplicity of sometimes conflicting aims of the official sector; concern that self-contained statutory reforms may result in diminished capital flows to emerging markets; continuing uncertainty as to the causes of financial crises; and the fact that policymakers' reputations are more likely to suffer from negative short-term effects resulting from reduced capital flows to many emerging markets than benefit from a smooth workout of a specific sovereign's debt in the future. Thus policymakers have pursued their goal of facilitating sovereign workouts without a default and without substantial commitments of official resources by opting for an incremental, flexible approach. The official sector sees the current situation as one characterized neither by chaos nor by comprehensive rules, and prefers to keep things that way. The article ends by noting the challenges that the Argentine default in 2001 and subsequent contentious, unproductive workout negotiations may pose to both the positive and normative aspects of official sector views.

Accepted Paper Series