Restructuring a Sovereign Debtor's Contingent Liabilities

10 Pages Posted: 27 Dec 2012

See all articles by Lee C. Buchheit

Lee C. Buchheit

Center for Contract and Economic Organization; Cleary Gottlieb Steen & Hamilton LLP - New York Office

G. Mitu Gulati

Duke University School of Law

Date Written: December 26, 2012

Abstract

How should the contingent liabilities of a sovereign be treated in a general restructuring of the debts of that sovereign? This question has played only a minor role in past sovereign debt restructurings because the size of such contingent liabilities has in most cases been small. In recent years, however, slathering government guarantees on third party debt has become the tool of choice for many countries in their efforts to quell an incipient panic in their financial markets. Some of those sovereigns are now, or may soon be, in the position of needing to restructure their debts. Ignoring large contingent liabilities in a sovereign debt restructuring may plant a land mine on the road to debt sustainability once the restructuring closes. That said, the answers to the questions of whether and how to restructure contingent liabilities are not obvious. Is the restructurer to assume that some, all or none of those contingent liabilities will eventually wind up as direct claims against the sovereign? Even if the underlying instrument can be successfully restructured, the guarantee will typically stand as an independent obligation of the guarantor that will require separate treatment in the restructuring.

Suggested Citation

Buchheit, Lee C. and Gulati, Gaurang Mitu, Restructuring a Sovereign Debtor's Contingent Liabilities (December 26, 2012). Available at SSRN: https://ssrn.com/abstract=2194099 or http://dx.doi.org/10.2139/ssrn.2194099

Lee C. Buchheit (Contact Author)

Center for Contract and Economic Organization ( email )

New York, NY

Cleary Gottlieb Steen & Hamilton LLP - New York Office ( email )

One Liberty Plaza
New York, NY 10006-1470
United States

Gaurang Mitu Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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