Study On The Legal Matters Of Sovereign Debt Restructuring

In the late 1980s, due to a debt crisis in emerging economies, banks exited from the sovereign debt market by means of the Brady plan, which resulted in a shift towards bonds as the principal instrument of sovereign debt. As a result, the international capital markets function more efficiently, and the broader investor base which is available to provide financing for emerging market sovereign has helped diversify risk. But there is a serious downside if a country faces unsustainable debt. Private creditors have become increasingly numerous, diversified and widespread, which makes the sovereign debt restructuring extremely complicated. This problem is exacerbated by the variety of debt instruments involved.Various restructuring schemes have been proposed to address the problems a country might face in a sovereign debt restructuring. One is so-called contractual approach. Through the modification of existing debt contracts or introduction of collective action clauses into new external debt contracts, the contractual approach enables a qualified majority of bondholders to restrain the ability of a minority bondholders to undermine the restructuring process so as to provide a degree of order and predictability to the restructuring process. Although won the support of the United States Treasury and the international capital markets, collective action clauses fall short and cannot fully address the existing problems in the process of sovereign debt restructuring. The Sovereign Debt Restructuring Mechanism, which is advocated by the IMF, can provide a framework that strengthens incentives for a sovereign and its creditors to reach a rapid collaborative agreement on a restructuring of unsustainable debt, thereby restructuring unsustainable sovereign debts in an orderly and timely manner. For a number of reasons, neither emerging market sovereigns nor their creditors supported the adoption of the SDRM.Considering the different political needs and pressures distressed sovereigns face and the differences in their debt structures, it is unrealistic to expect the international community to enact a uniform, comprehensive, one-size-fits-all treaty, and it is not flexible enough for the sovereigns to be easily modified to adapt to new circumstances. Instead, the international community should take the"art of the possible"approach and allow each debtor country create a"Designer"Sovereign Debt Restructuring Mechanism (DSDRM) tailored to each country's individual needs. Giving sovereigns the authority to make incremental changes to their debt restructuring procedures also gives the international community time to review the various terms that could be included in a debt restructuring treaty and to gauge the markets action to those terms outside the more formalized context of a treaty drafting process.But the preference to the DSDRM does not mean that collective action clauses will retreat from the sovereign debt restructuring in the near future. As a more flexible means of sovereign debt restructuring, collective action clauses have their own superiorities. Moreover, some countries are reluctant to make a fundamental change to this area. As a result, it is not surprising that collective action clauses will still work in the process of sovereign debt restructuring.