Enforcing Comparable Treatment in Sovereign Debt Workouts

14 Pages Posted: 30 Sep 2022 Last revised: 6 Oct 2022

See all articles by Lee C. Buchheit

Lee C. Buchheit

Center for Contract and Economic Organization

Mitu Gulati

University of Virginia School of Law

Date Written: September 26, 2022


Sovereign borrowers needing debt relief in the 21st century must face three sets of creditors — commercial lenders (usually bondholders), traditional Paris Club government creditors and non-Paris Club bilateral creditors like China. Each of these groups will secretly hope to extract preferential restructuring terms from the sovereign debtor when the negotiations begin but each will publicly insist on receiving a treatment that is no worse than that given to the other groups when the negotiations end. And until they are satisfied that no other creditors are getting or will get better terms, they will refuse to conclude a restructuring of their own claims.

In recent sovereign debt workouts, this atmosphere of mutual suspicion among the three major creditor groups has given the debt restructuring process an arthritic, bordering on paralytic, appearance. The resulting delays can stymie the sovereign borrower’s hope of a speedy recovery from the crisis.

Breaking this logjam will require a measure that the sovereign debtor can implement unilaterally without first seeking the consent of each creditor group. One such measure could involve the inclusion in the early restructuring agreements of a binding and enforceable provision ensuring that if another creditor group later succeeds in extracting better terms from the borrower, those sweeter terms will retroactively benefit the creditors that had already signed a restructuring deal.

Keywords: Sovereign Debt Restructuring, Paris Club, China, MFC, Common Framework

Suggested Citation

Buchheit, Lee C. and Gulati, Mitu, Enforcing Comparable Treatment in Sovereign Debt Workouts (September 26, 2022). Virginia Public Law and Legal Theory Research Paper No. 2022-67, Virginia Law and Economics Research Paper No. 2022-23, Available at SSRN: https://ssrn.com/abstract=4229061 or http://dx.doi.org/10.2139/ssrn.4229061

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

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