Critical review of the international and contractual measures for optimal restructuring

Abstract

Due to time constrain and uncertainties in getting payment through litigation, the sovereign creditors and the debtor prefer restructuring to litigation upon default. However, all the creditors may not agree on restructuring. Some of them may go for enforcement despite the detrimental effects on the restructuring process. After the experience of the sovereign debt crisis in several states, many legislative and contractual proposals were submitted and none of them achieved the desired success. This paper explores the challenges of the restructuring process and the national and international initiatives to mitigate these obstacles, especially the Collective Action Clauses (CACs). The findings express a skeptical view of the effectiveness of CACs to reduce the impediments in the restructuring process. Its overriding effect of majority debtholders’ decisions on exit or stay increases the borrowing costs for the state because of the decrease in the independent decision-making power of the creditors.

Notes

1 Adam Smith, “Book:5, Chapter III, of Public Debts” in William Playfair (ed), The Wealth of Nations (William Strahan, Thomas Cadell, Stockland, 1776) 1228.

2 Judicial remedy includes litigation or arbitration if the debt contract requires and the non-judicial remedies include such as restructuring and bailout.

3 These initiatives include the adoption of the Collective Action Clause (CAC) by the US court according to Elliot vs Peru [1998] 12F. Supp. 2d. 328 (S.D.N.Y.) case, the Sovereign Debt Restructuring Mechanism (SDRM) of IMF in 2001, etc. Some states such as the UK, Belgium, and France, etc. enacted statutory laws to prevent vulture litigation before their courts.

4 SDRM did not get effective because of the non-acceptance by the US. The statutory injunction on litigation has also failed in the case of Puerto Rica. However, the success of CAC is yet to be checked since it has recently been inserted in the debt contracts of the sovereign and the creditors; Sovereign Debt Restructuring Mechanism of IMF in 2001 and formulation of the working committee to develop an international framework for sovereign debt restructuring in the general assembly by its resolution no. 69/247 dated 29 December 2014.

5 Ian Brownlie, Principles of Public International Law (Oxford University Press, 2003).

6 Jonathan I Blackman and Rahul Mukhi, “The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos and Other Legal Fauna” (Fall 2010) 73(4) Law and Contemporary Problems, A Modern Legal History of Sovereign Debt.

7 Julian Schumacher, Christoph Trebesch, and Henrik Enderlein, “Sovereign Defaults in Court” (February 2018) European Central Bank, Working Paper Series No 2135.

8 Jill E Fisch and Caroline M Gentile, “Vultures or Vanguards? The Role of Litigation in Sovereign Debt Restructuring” (2004) Faculty Scholarship, Paper 1051.

9 Mallory Barr, “The Litigation Tango of La Casa Rosada and the Vultures: The Political Realities of Sovereign Debt, Vulture Funds and the Foreign Sovereign Immunities Act” (2016) 7(2) Santa Clara Journal of International Law.

10 Lee C Buchheit and G Mitu Gulati, “Responsible Sovereign Lending and Borrowing” (Fall 2010) 73(4) Law and Contemporary Problems 63, A Modern Legal History of Sovereign Debt.

11 Barr (n 9).

12 International Swaps and Derivatives Association, Credit Derivatives Definitions 2003.

13 Katherine Crispi, “Not Just the Luck of Irish: A Contractual Solution to the Problems of Sovereign Debt Restructuring” (November 2014) 37 Fordham International Law Journal 1859 p. 04.

14 Jack Jrada, “Closing the Book on Argentina’s Sovereign Debt Default: The Second Circuit’s Decision and its Ramifications for Sovereign Debt Restructuring in the Eurozone” (2013) 32 Review of Banking and Financial Law 222.

15 Crispi (n 13).

16 Mark LJ Wright, “Sovereign Debt Restructuring: Problems and Prospects” (2012) 2 Harvard Business Law Review 153, 6.

17 Lee Buchheit, “Sovereign Debt Restructurings: The Legal Context” (July 2013) BIS Paper no 72.

18 Barr (n 9).

19 Ibid.

20 Ibid.

21 Sean Hagan, “Designing a Legal Framework to Restructure Sovereign Debt” (2005) 36 Georgetown Journal of International Law 299.

22 Wright (n 16).

23 Speech of the first deputy managing director of IMF at the National Economists’ Club Annual Members’ Dinner American Enterprise Institute, Washington DC, November 26, 2001 <https://www.imf.org/external/np/speeches/2001/112601.htm> (accessed 15 March 2016).

24 Hagan (n 21).

25 UNCTAD sovereign debt workouts: going forward. Roadmap and guide (April 2015) <https://debt-and-finance.unctad.org/Documents/SDW_roadmap.pdf> (accessed 4 April 2020).

26 UNGA resolution no. 69/247 dated 29 December 2014.

27 United Nations Lays Down Clear Principles in Tackling Sovereign Debt, United Nations Conference on Trade and Development (2015).

28 Basic Principles on Sovereign Debt Restructuring Processes (29 July 2015), UNGA. <https://unctad.org/meetings/en/SessionalDocuments/a69L84_en.pdf> (accessed 4 April 2020).

29 Elizabeth Broomfield, “Subduing the Vultures: Assessing the Government Caps on Recovery of Sovereign Debt Litigation” (2010) Columbia Business Law Review 473.

30 Wright (n 16).

31 Michael Bradley, James D Cox, and G Mitu Gulati, “The Market Reaction to Legal Shocks and Their Antidotes: Lessons from the Sovereign Debt Market” (January 2010) 39(1) The Journal of Legal Studies 289.

32 Elliot v Peru, General Docket No. 2000/QR/92 (Ct. App. Brussels 8th Chamber, Sept 26, 2000).

33 [January 12, 2004] No 02 CV 5932, SDNY.

34 Amicus Brief, New York clearing House Macrotecnic No 02 CV 5932, SDNY January 12, 2004.

35 EM Ltd v The Republic of Argentina, [2010] No. CV 2507 (TPG).

36 Bradley, Cox, and Gulati (n 31).

37 Ibid.

38 Tomas M Arya, “A Decade of Sovereign Debt Litigation: Lessons from the NML vs Argentina Case and the Road Ahead” (2016) 17(2) Business Law International.

39 Alexandria L Todd, “Defaulting the Purpose: The Future of Foreign Sovereign Debt Restructuring in the Wake of Argentina’s Debt Crisis” (Fall 2015) 81 Brooklyn Law Review 269.

40 Wright (n 16).

41 NML vs Argentina [2013] Court of Appeals 12–105 (L).

42 Wright (n 16).

43 Elliott Assocs., LP v Banco de la Nacion [1999] 194 F.3d 363, 368–370, 380–381 (2d Cir.).

44 Wright (n 16).

45 Thomas Laryea, “Donegal vs Zambia and the Persistent Debt Problems of Low-Income Countries” Law and Contemporary Problems (Fall 2010) 73(4) A Modern Legal History of Sovereign Debt 193.

46 Hagan (n 21).

47 Buchheit and Gulati (n 10).

48 Buchheit (n 17).

49 Hagan (n 21).

50 NML vs Argentina [2013] Court of Appeals, 12–105 (L).

51 Arya (n 38).