An Incremental Approach to Sovereign Debt Restructuring: Sovereign Debt Sustainability As a Principle of Public International Law

Abstract

The paper sets out the legal foundations of an incremental approach to sovereign debt restructuring. As the political momentum that would be necessary to adopt an international treaty governing sovereign debt workouts is currently lacking, the incremental approach explores the possibility of further developing current practice in line with legal principles that have emerged from progressive developments in debt restructuring practice in reaction to the crises of the last decades. Key among them is the principle of sovereign debt sustainability. Debt sustainability is a global concern today. This is evidenced by significant institutional, procedural and substantive innovations in the way in which sovereign debt is treated. Among them is the generalized conviction that debt sustainability cannot come at the expense of human rights enjoyment. The rise in holdout litigation does not contradict this finding, as it has been countered by a strong policy response. The incremental approach is not only unique because it overcomes the binary structure of a debate juxtaposing statutory, institutional and contractual, market-based approaches to improve the current debt restructuring framework. Rather, the incremental approach puts law and legal theory right at the center of the debate about sovereign debt that in the last decades has been dominated by economic thinking. It thereby claims that markets, including markets for sovereign debt, must be embedded in other social fields and therefore require regulation. The incremental approach is thus opposed to the idea of markets as spontaneous orders. However, given that knowledge is limited, market regulation that proceeds continuously and in small steps does not need to be less successful in its effort to avoid crises and solve collective action problems than grand proposals for institutional design.

Keywords: sovereign debt restructuring, international law, collective action clauses, debt sustainability, legal principles, holdout creditors, holdout litigation