Sovereign Bonds and the Collective Will

41 Pages Posted: 7 Nov 2002

See all articles by Lee C. Buchheit

Lee C. Buchheit

Center for Contract and Economic Organization

Mitu Gulati

University of Virginia School of Law

Ashoka Mody

International Monetary Fund (IMF) - Research Department

Abstract

One hundred years ago in the United States, confronted by the urgent need to find a debt workout procedure for large corporate and railroad bond issuers, the financial community looked at three options: amend the U.S. bankruptcy law to permit reorganizations (the predecessor of today's Chapter 11), not just liquidations of the debtor companies; include contractual provisions in the underlying bonds that would allow a restructuring of those instruments with the consent of a supermajority of the bondholders; or pursue a court-supervised debt restructuring by engaging the equitable powers of the civil courts to oversee such a process.

A century later, confronted by the urgent need to find a debt workout procedure for sovereign bond issuers, the same three options are open for discussion. The International Monetary Fund is actively studying the possibility of constructing, at the supranational level, the equivalent of a "Chapter 11 for countries." The use of contractual provisions to facilitate sovereign debt workouts - an idea whose time had visibly not come even just a few years ago - is being reconsidered by both the sovereign borrowers and the institutional bondholder community in the light of Argentina's catastrophic debt default in December 2001. Resort to the equitable powers of the civil courts to oversee creditor-led sovereign debt workouts is, we believe, possible in appropriate circumstances.

This article looks at the existing contractual provisions in sovereign bonds and the existing U.S. legal procedures in order to explore how far these may be enlisted to further the goal of orderly sovereign debt rearrangements. This article concludes that these existing contractual provisions and civil procedures - if used creatively and confidently - can go much further toward achieving this goal than conventional wisdom would suggest.

Suggested Citation

Buchheit, Lee C. and Gulati, Mitu and Mody, Ashoka, Sovereign Bonds and the Collective Will. Available at SSRN: https://ssrn.com/abstract=346884 or http://dx.doi.org/10.2139/ssrn.346884

Lee C. Buchheit

Center for Contract and Economic Organization ( email )

New York, NY

Mitu Gulati (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Ashoka Mody

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-9617 (Phone)
202-589-9617 (Fax)

HOME PAGE: http://www.amody.com

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