Sovereign Bankruptcy Hydraulics

Abstract

Sovereignty and sovereign immunity occur along a continuum. The kings and queens of old at one end; the North Hudson Sewerage Authority and its ilk at another. The need for a bankruptcy system to address financial distress varies inversely with a sovereign’s place on the continuum.

Queens and kings have no need for bankruptcy. They will pay or rework their debts only if larger political or economic considerations induce them to do so. A bankruptcy judge, operating under a bankruptcy law, has little to add to such discussions.

A municipal power company, on the other hand, is not readily liquidated or turned over to creditors to do as they see fit – turning off the power to any part of a nation these days seems incredible. Yet the power company has no sovereign immunity to hide behind. It needs a bankruptcy procedure to coral its creditors into an equitable solution, while keeping public assets out of private hands.

In short, pushing against sovereignty increases the need for a governmental entity to have access to sovereign bankruptcy. This insight has several important implications, which are addressed in this short paper.

Keywords: Sovereign debt, municipal bankruptcy, sovereign bankruptcy, chapter 9, Puerto Rico, PROMESA, financial distress