miércoles, 23 de marzo de 2011


The first reference to the desirability of a bankruptcy procedure for countries was made in 1976[1]. However, it was not until the mid nineties that different authors started to think seriously about the importance of an international insolvency framework for sovereign debtors. The increasing negative effects of the Tequila crisis, the crisis in South East Asia and Argentina’s default in 2001, triggered several proposals to address the problem[2].  In April 1995, Jeffrey Sachs proposed a reorganization in the IMF practices to allow this financial institution to play a role similar to an international bankruptcy court[3]. Several proposals came to light thereafter. However, the academic debate was only bolstered when the United States Government addressed the problem of sovereign debt crises and proposed the utilization of Collective Action Clauses in bonds issued by sovereign debtors, and later when the International Monetary Fund (IMF) took the initiative to create a SDRM.

2. The United States Perspective: Collective Action Clauses.

At the onset of the 21st century, the former Under Secretary of the Treasury of the United States, Mr. John Taylor, made a proposal, which consisted of changing the existing sovereign debt bonds for new bonds which would include Collective Action Clauses (CACs). These kind of clauses would describe what happens when a country decides to restructure its debt.  The new bonds would include a ‘majority action clause’ to allow a super majority of creditors to agree to a restructuring and to make the decision of this super majority binding on the rest of the creditors. Furthermore, the bonds would: (i) describe the process through which debtors and creditors would negotiate in the event of a restructuring; (ii) describe how the sovereign debtor would initiate the restructuring, and (iii) include a provision providing a "cooling off" period during which there would be a temporary suspension or deferral of payments and bondholders would be prevented from initiating litigation[4].
Although Mr. Taylor’s proposal was well received by financial markets, it posed some problems. First, the inclusion of CACs would require sovereign debtors to issue new debt and to exchange the existing bonds for new bonds. This would not only be time consuming but it would also imply fees to be paid by a country which is already in default. Secondly, the new bonds would be less attractive in the market and they would show that the issuing country is effectively in default and therefore it would increase the financial costs of such bonds. Thirdly, sovereign debtors usually borrow in different jurisdictions and therefore not even identical CACs would guarantee uniform interpretation or application[5].

The IMF played a significant role in bolstering the debate about the need of a SDRM. The IMF proposal, which was developed by Mrs. Anne Krueger, was based on a “Two Track Approach”. The first track would involve the use of Collective Action Clauses in sovereign bonds. The second track would involve the creation of a “statutory mechanism”, including a dispute resolution forum, to make the decisions taken by a super majority of creditors in the restructuring process, binding on all creditors[6].
Mrs. Krueger’s proposal was not very well received in the financial markets[7] because it was seen as prejudicial for the interest of creditors. For that reason, the IMF went on with that proposal and tried to improve it by introducing some reforms in order to make it more acceptable.
Basically, after a year of debate, the IMF proposed six changes to its original proposal: (i) The mechanisms should only be applicable to unsustainable debt; (ii) Interference with contractual relations would be limited to measures necessary to resolve Collective Action Clauses problems; (iii) The SDRM would be designed to promote transparency in the restructuring process; (iv) The SDRM should encourage “early and active” creditor participation; (v) There should be an impartial dispute resolution forum; (vi) The role of the IMF in the SDRM would be limited.
The advantage of the IMF’s proposal is that it is relatively simple to come into force since it would only require an amendment to its Articles of Agreement. Furthermore, the IMF’s proposal would ensure that all the member countries of the IMF be bound by the SDRM.
However, although this procedure appears to be simpler in practice, it still poses some questions. First, even if all the member states of the IMF approve the reform to the articles of agreement, such change would be binding on those states, but not on its citizens or companies incorporated in those countries, which hold sovereign debt bonds.
Secondly, and more important, the IMF is not the most appropriate sphere of activity to legislate this kind of procedures since one of the IMF’s purposes is essentially to give international loans to countries undergoing through financial crises. For that reason the IMF cannot be the institution responsible to pass the legislation that will regulate the SDRM. If the IMF undertakes that task, it would end up acting as lender and legislator at the same time, and the procedure would not be as neutral and impartial as it should be. However, the IMF involving in the debate gave political impetus to the different proposals that were meant to deal with sovereign debt crisis. As a consequence of that, the necessity to have a SDRM became an international issue which has now acquired new force in light of the PIIGS debt crisis. The time has now come to take further action and adopt a legislation that will serve as an effective aid for countries in financial distress.

[1] See Ohlin, Goran. “Debts, Development and Default”, in Gerald K. Helleiner (ed.), “A World Divided: the less developed countries in the international economy”, Cambridge, New York: Cambridge University Press.
[2] For a detailed analysis of the history of the proposals for a SDRM, see Rogoff, Kenneth and  Zettelmeyer Jeromin “Early Ideas on Sovereign Bankruptcy Reorganization: A Survey” IMF working paper 02/57. Available at http://www.imf.org/external/pubs/ft/wp/2002/wp0257.pdf
[3] Sachs, Jeffrey, “Do we need an International Lender of Last Resource”, Frank D. Graham Lecture at Princeton University, April 20, 1995. Available at
[4] Sovereign Debt Restructuring: A US Perspective”. Speech given by John B. Taylor, Under Secretary of Treasury for International Affairs of the United States, at the Conference "Sovereign Debt Workouts: Hopes and Hazards" Institute for International Economics Washington, DC April 2, 2002. Available at www.iie.com/publications/papers/taylor0402.htm.
[5] See Krueger Anne, “Sovereign Debt Restructuring and Dispute Resolution”.  Speech given at the Bretton Woods Committee Annual Meeting, Washington DC, June 6, 2002. Available at www.imf.org/external/np/speeches/2002/060602.htm.
[6] “This would resolve the problem posed by different legal jurisdictions, as the treaty obligation would provide for legal uniformity in all jurisdictions. Moreover, the establishment of a single and exclusive dispute resolution forum would ensure uniform interpretation”. Krueger Anne.
[7] See for example Chamberlin, Michael, Executive Director of EMTA, “The IMF’s Sovereign Bankruptcy Proposal and the Quest for More Orderly Sovereign Work-Outs”. Available at www.emta.org/ndevelop/riderjp.pdf; See also a joint statement by five securities industry associations available at www.sia.com/2002_comment_letters/pdf/IMF.pdf.

martes, 15 de marzo de 2011


1.      Why do PIIGS need a SDRM

      During the last decades, globalisation and proliferation of international commerce and investment have caused a radical change in international financial markets. World economic expansion, together with economic integration has created new ways of financing which have changed the physiognomy of international financial crises. The current PIIGS crisis brings back the focus on how the world should address the situation of countries that are forced to restructure its debt and the need for a framework to resolve debt crises. Greece has provided a warning on the fragility of the international financial system at the beginning of 2010 and it will not take long until another country sends new signals of a desperate need for debt restructuring. In this context, financial institutions have adopted spasmodic actions to address the situation over the past decades. However, financial markets should start worrying about finding long term solutions to avoid last minute decisions once a new debt crisis explodes.
      With the exception of those situations where there was a voluntary negotiation between creditors and sovereign debtor, the rule was that when a country declared a moratorium, creditors started independent actions against the sovereign debtor. However, the uncertainty of the results of litigation and the fact that legal actions against defaulting states take several years, are some of the main factors that triggered some proposals to find an alternative dispute resolution procedure for these situations. Although financial markets have evolved throughout the years, there has not been any change in the procedures to solve international financial crises. The current dispute resolution procedure for sovereign debt crises is obsolete and a new system must be found.
      In this context, a Sovereign Debt Restructuring Mechanisms (SDRM) would address the problem of  unsustainable sovereign debt by providing a legal framework where the sovereign debtor and its creditors can negotiate in good faith a solution for a sovereign debt problem. The PIIGS crisis which now puts in danger the developed economies with a potential risk of affecting the entire global economy require strong and precise actions and, in particular, a statutory mechanism to make the decisions of a majority of creditors in the restructuring process, binding on all creditors.

2.      Getting to Work. Principles and rules of a SDRM.

      A SDRM should follow at least three main principles. First, a SDRM should provide equal protection to debtor and creditors in order to negotiate in good faith a solution for the sovereign debt. The SDRM should seek to protect the sovereign debtor from abuses but at the same time, it should impose strong sanctions to the sovereign debtor, when it breaches the agreement with creditors. Secondly, the SDRM should only be applicable to those countries which voluntarily agree to submit that process. Thirdly, a SDRM should be based on the principle that the decision of the majority should be binding to all creditors. One of the main problems that sovereign debt crises pose is the diversity and number of creditors. The rationale behind any insolvency procedure is that the debtor will have the possibility to negotiate on an arms-length basis with its creditors and at the end of the negotiation it will have to make a proposal which should be accepted by its creditors.

      With these principles in mind, the question now turns to the main issues to be legislated in a SDRM, namely:

1.      A SDRM should clearly define the persons and circumstances under which it may be filed.
2.      A SDRM should foresee an automatic stay after a SDRM has been filed.
3.      A SDRM should establish a procedure for verification of claims by creditors.
4.      A SDRM should allow for a negotiation period between creditors and the sovereign debtor. The result of these negotiations should be reflected in a Sovereign Debt Restructuring Plan.
5.      The decision of the majority regarding the Sovereign Debt Restructuring Plan should be binding on all creditors and on the sovereign debtor.
6.      A SDRM should include a procedure for enforcing the Sovereign Debt Restructuring Plan in case of breach by the sovereign debtor.
7.      A neutral international court is essential to guarantee the transparency of the process, but also to protect the sovereign debtor and its creditors during the negotiations.

3.      The Road Beyond

      Sovereign debt crises represent an increasing problem in the world economy and an obstacle to development. A SDRM would address the problem of sovereign debt crises by providing an institutional framework for a sovereign debtor and its creditors to find a solution for a debt crisis. However, there are still some issues that need to be solved. First, a SDRM cannot facilitate default on sovereign debt. Secondly, a SDRM can project an unnecessary rigidity in the market. That rigidity would be evidenced by a restriction in the lending to sovereign borrowers and in higher interest rates that those sovereign borrowers will have to pay to its lenders. Finally, these kinds of reforms depend on a political decision and it will not be possible to have this procedure in place until such political decision is made. However, given the time, efforts and money that G-20 countries are putting in debating the nature and solutions to the crisis, it is crucial to take concrete steps towards a solution before the next crisis explodes.