Distrust, Disorder, and the New Governance of Sovereign Debt

Abstract

The unique characteristics of sovereign debt finance provide fertile ground for opportunistic behavior and intractable disputes among states and their creditors. Lacking reliable contractual enforcement mechanisms and formal bankruptcy procedures, the sovereign debt restructuring process is hampered by fragmentation, costly standoffs, and unpredictable outcomes. The result is a non-system of ad hoc, decentralized negotiations and litigation that some fear is perpetually at risk of falling apart. To address these concerns, recent years have seen renewed efforts to fix sovereign debt through soft law, public-private collaboration, and informal governance mechanisms, which this Article collectively refers to as sovereign debt governance. This Article focuses on one of the most prominent proposed reforms in sovereign debt governance: the use of creditor committees to facilitate engagement between a sovereign debtor and its private external creditors. Notwithstanding the uniqueness of sovereign debt in international law and financial regulation, we explain how the debtor-creditor relationship reflects a fundamental governance challenge amidst individual distrust and collective disorder. This challenge suggests that the sovereign debt restructuring process can be improved by reforming the procedural rules and institutional frameworks that govern debtor-creditor engagement. To assess this proposition, we examine the use of creditor committees in the current era of sovereign debt, focusing on factors that influence the conduct of debtors and their creditors vis-à-vis each other. Drawing on our observations, we consider the potential value and limitations of creditor committees in the context of sovereign debt governance.

Keywords: sovereign debt, creditor committees, debtor-creditor engagement, New Governance, global governance, international financial regulation