Vol 9 (2012) - Issue 6

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A Review of the Need for a Sovereign Debt Restructuring Regime for Countries in Financial Difficulties

Introduction
The idea of establishing a sovereign debt restructuring regime appeared three decades ago, though such a regime has not yet been established. Following the financial crisis of 2008, the restructuring of Greece's unbearable debt was proposed in early 2012 as a means for the Government to tackle it. Even though the restructuring was successfully completed on Friday 9 March, the process was disorderly and stressful, with uncertainty as to whether the country would be left to default or not and as to the parties' willingness to negotiate with each other. In the meantime, this uncertainty resulted in rumours being spread that the nation would default as Argentina did in 2002 and whose default was deemed 'totally uncoordinated', which in turn caused volatility in the markets. As a result, people lost faith in the stock market and the Greek banks, with the National Bank losing half of its share value. The process of sovereign debt restructuring must thus be governed by official rules, though first, its economic importance as a way of dealing with unsustainable debts must be highlighted. In this article, the reasons why restructuring is most advantageous to debtors' and creditors' interests, when the former is in financial difficulties, will be explored by a comparison of the restructuring technique with other ways for a debtor country to tackle its unbearable debts. The form that a formal sovereign debt restructuring regime could take, given its importance as a technique, will then be considered.

Legal remedies and a restructuring solution
From the creditor country's perspective, there is a lack of legal remedies available to it in case its debtor country is in financial difficulties and there is little prospect of repayment. The principle of sovereign immunity prevents a creditor from suing its sovereign debtor, without the latter giving its authorization, 'unless it has submitted to jurisdiction, or it falls within an exception (for example, commercial activity)'. Even if it could, the economic literature confirms that assets cannot be realised for the benefit of the creditor in the same way as happens in corporate insolvencies. This is because it is intended that the loan contract will not be backed by the State's assets, but by exercise of its function as a tax collection entity. The assets are often to remain protected under the debtor's constitution. This is similar to Chapter 9 of the US Bankruptcy Code providing that assets of municipalities in financial difficulties are not to be subject to liquidation. Negotiating a restructuring would therefore be beneficial to the creditor country due to the lack of remedies, as being able to receive part of the debt is certainly better than receiving nothing in case of a default.
From the debtor's point of view, opting for a default instead of a restructuring would be very detrimental in terms of its reputation and trade presence.