Sovereign Debt Restructurings as Exercises of International Public Authority: Towards a Decentralized Sovereign Insolvency Law

Abstract

This paper argues that sovereign debt restructurings as agreed between defaulting states and their multilateral, bilateral, or private creditors constitute exercises of international public authority. Their authoritative character results from their effects on the citizens of the defaulting state, especially through adjustment programs. They also affect taxpayers in lending states as well as shareholders of commercial creditors. Their public and international character derives from their legal basis in hard or soft public international law.

As a consequence of their qualification as exercises of international public authority, sovereign debt restructurings need to be framed by public law in order to ensure their legitimacy. This paper is based on a discursive approach to legitimacy and shows how legal scholarship might promote the development of such a public law framework.

The paper then proposes a set of legal principles for sovereign debt restructurings. Some of them might already exist de lege lata, while others should be understood as proposals de lege ferenda. Legal scholarship is especially useful for developing procedural requirements, while substantive issues require a political decision, with the exception of the need to respect fundamental human rights. Most importantly, however, the qualification of sovereign debt restructurings as exercises of public authority requires domestic and international courts and tribunals to defer to them and to stay proceedings as long as such restructurings are being negotiated or implemented. Domestic and international courts and tribunals might thereby control the legitimacy of these exercises of public authority.

Keywords: sovereign debt, international public authority, sovereign insolvency, state insolvency, debt crisis, Paris Club, London Club, IMF

JEL Classification: E62, H30, H62, H63, H87