Proactive Resolution of Sovereign and Subnational Debt

Abstract

Sovereign debt restructuring strategies have been mostly reactive, applying only once a nation’s debt burden becomes unsustainable. Reactive strategies are suboptimal for many reasons, including that international law does not yet provide mechanisms—in the corporate sector, provided by bankruptcy law—for correcting collective action and other market failures that impede the restructuring of sovereign debt. A financially troubled nation often faces a dilemma: paying its debt would reduce its ability to provide critical public services, but defaulting would further damage the nation’s fiscal integrity and reputation and could even shock the broader economy. Building on “proactive” strategies designed to resolve corporate debt burdens, this Article examines the proactive resolution of government debt burdens, first addressing the problem of unsustainable sovereign debt and then addressing the growing crisis of unsustainable subnational debt.

Keywords: sovereign debt, subnational debt, debt restructuring