Sovereign Debt Restructuring and English Governing Law
Brooklyn Journal of Corporate, Financial & Commercial Law, Vol. 12, 2017, Forthcoming
42 Pages Posted: 14 Apr 2017 Last revised: 9 Oct 2017
Date Written: April 27, 2017
Whether or not their fault, nations sometimes borrow at levels that become unsustainable. Until resolved, the resulting debt burden hurts not only those nations but also their citizens, their creditors, and — by posing serious systemic risks to the international financial system — the wider economic community. The existing contractual framework for restructuring sovereign debt is inadequate, often leaving little alternative between a bailout, which is costly and creates moral hazard, and a default, which raises the specter of financial contagion and chaos. Although global organizations, including the United Nations and the International Monetary Fund, have tried to strengthen the sovereign-debt-restructuring framework through treaties, such a multilateral legal approach is highly unlikely to succeed in the near future.
This essay argues that a model-law approach should facilitate sovereign debt restructuring much more feasibly than a multilateral approach. Model laws have long been used in cross-border lawmaking, when treaties fail. Unlike a treaty, a model law does not require widespread acceptance for its implementation. In particular, if this essay’s model law were enacted into English law, that alone would enable the fair and consensual restructuring of the immense stock — perhaps a quarter to a third or more of all sovereign debt contracts — of such contracts governed by that law. And because it would achieve, by operation of law, the equivalent of the ideal goal of including aggregate-voting collective action clauses in all sovereign debt contracts, such enactment should ensure the continuing legitimacy and attractiveness of English law as the governing law for future sovereign debt contracts.
At the very least, however, this essay should serve to increase a model-law approach’s political feasibility by explaining the approach and its potential benefits and limitations. An incremental approach to developing norms, such as one developed through a model law, has strong precedent in the legal ordering of international relationships.
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