Buchheit et al.: Revisiting Sovereign Bankruptcy

An informative review from the leading scholars (and in the case of Buchheit, scholar and practitioner) in the field.  From the Introduction:

Sovereign debt crises tend to trigger calls for sovereign bankruptcy. In the postwar era, a first round of such calls coincided with the great Latin American debt crisis of the 1980s. A second round accompanied the post-Brady debt crises, beginning with the 1995 Mexican crisis and particularly Russia’s 1998 default, and leading to the International Monetary Fund’s 2001 proposal for a Sovereign Debt Restructuring Mechanism (SDRM), which was intensely debated and finally rejected by IMF shareholders in April 2003. Since 2010, calls for some form of international sovereign bankruptcy regime have returned. These have been motivated partly by events in Europe, but also by difficulties in restructuring stubbornly high debt levels in other parts of the world, such as the Caribbean Sea Basin, and by ongoing litigation that could make such restructurings even harder.

This report revisits the case for a sovereign bankruptcy regime, understood as a mix of national and international institutions that would, in some conditions, sanction a comprehensive modification of sovereign debt contracts, and extend legal protections to the sovereigns and creditors involved. It formulates the economic trade-offs involved with creating such a regime, explains why and under what conditions the regime could improve welfare, and presents options for implementing the regime. Its main conclusion is that the intellectual case for—and feasibility of—a sovereign debt workout mechanism based on some combination of national statutes and international treaty is much stronger now than it was 10 or 20 years ago. This is especially true for the euro zone, where the case for such a regime is particularly strong and its implementation as a complement to the existing European Stability Mechanism would be comparatively straightforward.

 

Available for download here.

 

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