A Framework for a Formal Sovereign Debt Restructuring Mechanism: The KISS Principle (Keep It Simple, Stupid) and Other Guiding Principles

Abstract

Given the ongoing work on a multilateral restructuring process for sovereign debt in the UN, consideration of the content and implementation of a sovereign debt restructuring mechanism (SDRM) is timely. The framework and content of the SDRM proposed here differs from earlier proposals in several important respects. For the classification and supermajority voting of claims in the approval a restructuring plan, it would mimic the structure and operation of the model collective action clauses (Model CACs) proposed by the International Capital Markets Association. Restructuring under a qualified sovereign debt restructuring law (QSDRL) would be guided by four principles: (i) observe the KISS (keep it simple, stupid) principle, (ii) follow the Model CACs, (iii) limit the discretion of an administrator of a proceeding, and (iv) address only major current problems.

A convention would oblige each adopting state to recognize and enforce a restructuring plan approved under a QSDRL of another adopting state. This obligation would be subject to exceptions along the lines of those under the New York Convention on arbitral awards. The QSDRL would employ novel methods of binding creditors under an approved restructuring plan. The convention would specify the requirements for a QSDRL while leaving implementing legislation to adopting states wishing to enact a QSDRL. A QSDRL would address many matters normally covered in an insolvency law, such as the requirements for approval of a plan. But it would not provide for the cramdown of dissenting classes of creditors, which would offend the norm of super-majority voting and require a tribunal with substantial discretion. It also would not provide for priority interim financing, as priority rules necessarily would offend the KISS principle and could be addressed outside the QSDRL. The proposed QSDRL would embrace a voluntary, contractual, and market-based approach — standards advocated by SDRM opponents such as the United States, the EU, and the IMF.

Keywords: SDRM, insolvency, restructuring, public finance, arbitral, sovereign immunity, statutory, default, enforcement, automatic stay, classification, holdout, Argentina, aggregated CACs, resolvency, pari passu, cram down, conflict of laws, tribunal discretion, convention, interim financing, priority

JEL Classification: F34, F53, G15, H63, K33