A Framework for a Formal Sovereign Debt Restructuring Mechanism: The Kiss Principle (Keep It Simple, Stupid) and Other Guiding Principles

Michigan Journal of International Law, Dec 2015

This paper explores the feasibility of a formal legal regime for the restructuring of sovereign state debt and outlines a framework for such a mechanism. More than a decade ago, senior officials at the International Monetary Fund (IMF) proposed the creation of a formal sovereign debt restructuring mechanism (SDRM). The proposal received support, but was eventually abandoned. One factor that contributed to its demise was the unwillingness of IMF members to submit to a tribunal that would encroach on a state’s sovereignty. Another determinative factor was the ultimate opposition of the United States. Likely related to that opposition, and perhaps its primary source, was the strong opposition of the private sector to the IMF’s SDRM proposal.

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A Framework for a Formal Sovereign Debt Restructuring Mechanism: The Kiss Principle (Keep It Simple, Stupid) and Other Guiding Principles

Principle (Keep It Simple, Stupid) and Other Guiding Principles Michigan Journal of International Law Charles W. Mooney Jr. 0 1 Charles W. Mooney Jr., A Framework for a Formal Sovereign Debt Restructuring Mechanism: The Kiss 0 University of Pennsylvania Law School , USA 1 This Article is brought to you for free and open access by the Michigan Journal of International Law at University of Michigan Law School Scholarship Repository. It has been accepted for inclusion in Michigan Journal of International Law by an authorized editor of University of Michigan Law School Scholarship Repository. For more information , please contact , USA Follow this and additional works at: https://repository.law.umich.edu/mjil Part of the Banking and Finance Law Commons, International Law Commons, and the Law and Economics Commons Recommended Citation - TABLE OF CONTENTS * Charles A. Heimbold, Jr. Professor of Law, University of Pennsylvania Law School. I wish to thank Steven Burbank and the participants at the conference on Sovereign Debt Restructuring sponsored by Centre for International Governance Innovation and Columbia University’s Initiative for Policy Dialogue at Columbia University, September 22, 2015, for helpful comments on an earlier draft. 1. A Skeptical View: Unfriendly Fora . . . . . . . . . . . . . . 2. The Debtor State’s Courts . . . . . . . . . . . . . . . . . . . . . . 3. Other Approaches: The Argentina Proposal and Variations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Convention Menu of Administrators . . . . . . . . . . . . III. BREAKING THE LOGJAM: VIEWING A QSDRL AS A MARKET-BASED, VOLUNTARY, AND CONTRACTUAL APPROACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CONCLUSION AND SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 105 107 108 109 110 INTRODUCTION This paper explores the feasibility of a formal legal regime for the restructuring of sovereign state debt and outlines a framework for such a mechanism.1 More than a decade ago, senior officials at the International Monetary Fund (IMF) proposed the creation of a formal sovereign debt restructuring mechanism (SDRM).2 The proposal received support, but was eventually abandoned.3 One factor that contributed to its demise was the unwillingness of IMF members to submit to a tribunal that would encroach on a state’s sovereignty.4 Another determinative factor was the ultimate opposition of the United States.5 Likely related to that opposition, 1. As used here, “restructuring” refers to the legally binding modification of the terms of a debtor state’s sovereign debt, such as by a reduction of principal or by an extension of maturities (such an extension being a “reprofiling” in the vernacular of the International Monetary Fund (IMF). See generally IMF, THE FUND’S LENDING FRAMEWORK AND SOVEREIGN DEBT—PRE LIMINARY CONSIDERATIONS PG (2014 ), http://www.imf.org/externa l/ np/pp/eng/2014 /052214.pdf [hereinafter IMF, LENDING FRAMEWORK]. 2. See ANNE O. KRUEGER, A NEW APPROACH TO SOVEREIGN DEBT RESTRUCTURING (2002), http://www.imf.org/external/pubs/ft/exrp/sdrm/eng/sdrm.pdf (following up on recent speeches and articles and explaining current thinking within the IMF); FRANCOIS GIANVITI, ET AL., A EUROPEAN MECHANISM FOR SOVEREIGN DEBT CRISES RESOLUTION: A PROPOSAL, 15-20, (Bruegel Blueprint Series, 2010) [hereinafter GIANVITI, EUROPEAN MECHANISM] (discussing the IMF’s SDRM proposal, various objections, and its eventual demise). The proposal may have been inspired, at least in part, by Steven Schwarcz’s article calling for such a framework based on corporate reorganization law. See Steven L. Schwarcz, Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach, 85 CORNELL L. REV. 956 (2000) [hereinafter Schwarcz, Reorganization]. 3. See GIANVITI, European Mechanism, supra note 2, at 19. 4. See IMF, SOVEREIGN DEBT RESTRUCTURING—RECENT DEVELOPMENTS AND IMPLICATIONS FOR THE FUND’S LEGAL AND POLICY FRAMEWORK 13 (2013), https:// www.imf.org/external/np/pp/eng/2013 /042613.pdf [hereinafter IMF, Recent Developments] (stating that the SDRM proposal “received considerable support within the Board, but failed to command the majority needed to amend the Fund’s Articles of Agreement due to the members’ reluctance to surrender the degree of sovereignty required to establish such a framework.”). 5. GIANVITI, EUROPEAN MECHANISM, supra note 2, at 19 (“[T]he fact that the US effectively held veto power doomed the SDRM proposal once the US administration formally opposed it.”) (footnote omitted). and perhaps its primary source, was the strong opposition of the private sector to the IMF’s SDRM proposal.6 In the wake of the SDRM proposal’s rejection, the IMF, International Capital Market Association (ICMA), United States, European Union (EU) and EU member states, and other organizations and states have advocated and supported a contractual, market-b (...truncated)


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Charles W. Mooney Jr.. A Framework for a Formal Sovereign Debt Restructuring Mechanism: The Kiss Principle (Keep It Simple, Stupid) and Other Guiding Principles, Michigan Journal of International Law, 2015, pp. 57-111, Volume 37, Issue 1,