Revisiting Sovereign Bankruptcy

Revisiting Sovereign Bankruptcy, Brookings Institution, October 2013

57 Pages Posted: 13 Nov 2013

See all articles by Lee C. Buchheit

Lee C. Buchheit

Center for Contract and Economic Organization

Anna Gelpern

Georgetown University Law Center

G. Mitu Gulati

Duke University School of Law

Ugo Panizza

United Nations - Conference on Trade and Development (UNCTAD)

Beatrice Weder

University of Mainz - Department of Economics

Jeromin Zettelmeyer

Peter G. Peterson Institute for International Economics; CEPR

Multiple version iconThere are 2 versions of this paper

Date Written: October 3, 2013

Abstract

Sovereign debt crises occur regularly and often violently. Yet there is no legally and politically recognized procedure for restructuring the debt of bankrupt sovereigns. Procedures of this type have been periodically debated, but so far been rejected, for two main reasons. First, countries have been reluctant to give up power to supranational rules or institutions, and creditors and debtors have felt that there were sufficient instruments for addressing debt crises at hoc. Second, fears that making debt easier to restructure would raise the costs and reduce the amounts of sovereign borrowing in many countries. This was perceived to be against the interests of both the providers of both creditors and major borrowers.

This report argues that both the nature and our understanding of sovereign debt problems have changed, over the course of the last decade, in a direction that creates a much stronger case for an orderly sovereign bankruptcy regime today than ten years ago. Pre-crisis policy mistakes are now recognized to be a much more severe problem for borrowing countries than the costs or limited availability of private financing. Recent court rulings – particularly a recent U.S. ruling that gives “holdout creditors” that decline a restructuring offer the right to interfere with payments to the creditors that accept such an offer. This will complicate efforts to resolve future debt crises on an ad hoc basis. Finally, sovereign debt crises are no longer just a problem in emerging markets, but a core concern in advanced countries as well – particularly in the Euro area. If the Euro is to survive, this will require both better ways to resolve debt crises and stronger, market-based incentives that prevent debt problems from occurring in the first place.

To address these problems, policy proposals are presented at two levels: for the Euro area, and globally. A Euro area sovereign debt restructuring regime could be developed by amending the Treaty establishing the European Stability Mechanism (ESM). This would both restrict the scope for lending to highly indebted countries without also restructuring their debts, and protect Euro area members receiving ESM financial assistance from legal action byholdout creditors. At the global level, a number of proposals are discussed, ranging from a coordinated introduction of "aggregate collective action clauses" that would allow a supermajority of bondholders across all bonds to amend bond payment terms to an amendment of the IMF articles that would limit the legal remedies of holdouts when a debt restructuring proposal has been accepted both by a majority of creditors and endorsed by the IMF.

Keywords: Sovereign debt, fiscal crises, default, bankruptcy, debt restructuring

JEL Classification: F34

Suggested Citation

Buchheit, Lee C. and Gelpern, Anna and Gulati, Gaurang Mitu and Panizza, Ugo and Weder di Mauro, Beatrice and Zettelmeyer, Jeromin, Revisiting Sovereign Bankruptcy (October 3, 2013). Revisiting Sovereign Bankruptcy, Brookings Institution, October 2013. Available at SSRN: https://ssrn.com/abstract=2353173

Lee C. Buchheit

Center for Contract and Economic Organization ( email )

New York, NY

Anna Gelpern

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Gaurang Mitu Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Ugo Panizza

United Nations - Conference on Trade and Development (UNCTAD) ( email )

Palais des Nations
Geneva, 1211
United States

Beatrice Weder di Mauro

University of Mainz - Department of Economics ( email )

Chair of Corporate Finance
D-55099 Mainz, 55128
Germany
+49 613 1392 0144 (Phone)
+49 613 1392 5053 (Fax)

Jeromin Zettelmeyer (Contact Author)

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

CEPR ( email )

London
United Kingdom

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