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Sovereign Debt Restructuring Options: An Analytical Comparison

Harvard Business Law Review, Vol. 2, 2012

28 Pages Posted: 26 Jun 2011 Last revised: 28 Dec 2014

Steven L. Schwarcz

Duke University School of Law

Date Written: November 8, 2012

Abstract

The recent financial woes of Greece, Ireland, Portugal, and other nations have reinvigorated the debate over whether to bail out defaulting countries or, instead, restructure their debt. Bailouts are expensive, both for residents of the nation being bailed out and for parties providing the bailout funds. Because the IMF, which is subsidized by most nations (including the United States), is almost always involved in country debt bailouts, we all share the burden. Yet bailouts are virtually inevitable under the existing international framework; defaults are likely to have systemic consequences, whereas an orderly debt restructuring is currently impractical. This Article analyzes and compares debt restructuring alternatives to bailouts. Under a free-market option, sovereign debtors and their creditors attempt to consensually negotiate a debt restructuring, aided by collective-action clauses and by exchange offers with exit consents. Under a statutory option, sovereign debtors and their creditors would be bound by an international convention that sets forth a process to facilitate debt restructuring. The absence of any systematic comparison of these options has made it difficult to facilitate country debt restructurings. This article attempts to provide that comparison.

Keywords: sovereign debt, debt-restructuring

Suggested Citation

Schwarcz, Steven L., Sovereign Debt Restructuring Options: An Analytical Comparison (November 8, 2012). Harvard Business Law Review, Vol. 2, 2012. Available at SSRN: https://ssrn.com/abstract=1872552

Steven L. Schwarcz (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States
919-613-7060 (Phone)
919-613-7231 (Fax)

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