On The Statutory Approach To Sovereign Debt Restructuring

Since 1990's, sovereign debt crisis has drawn a lot of attentions as it happened frequently worldwide. As capitals from the private sector continue to flow into the emerging market countries, the structure of the international capital market changed: direct investments from the private sector have become the major external financing source of the developing countries, and bonds have become the major tool for financing, replacing syndicate bank loans. Because bond holders are widespread and diverse, they make the procedure of sovereign debt restructuring extremely complicated and unpredictable. The traditional case-by-case market-oriented approach to sovereign debt restructuring becomes inadequate to deal with the collective action problem and the moral hazard which severely interrupt the procedure of sovereign debt restructuring. As a result, sovereign restructuring procedure turns to be very slow and expensive and the interest of both the debtor and creditor is harmed. A consensus forms in the international community as time pass by, i.e. it's important to establish a predictable and efficient sovereign debt restructuring mechanism.To achieve this goal, two proposals were made to the international community. One is the so-called statutory approach by the IMF and the other is the so-call contractual approach by the Unite State Treasury. The two proposals provoked heated debate among academics and governments. In 2003, the contractual approach was finally accepted by the market and the efforts to further perfect the statutory approach stopped on the side of the IMF. However, the debate has not yet finished. Many academics argue that the contractual approach is not a sufficient substitute of the statutory approach, that the contractual approach is not able to solve the problems emerged in the procedure of sovereign debt restructuring and the statutory approach is needed to build a predictable, orderly and efficient sovereign debt restructuring mechanism.This article aims at justifying the necessity of the statutory approach by analyzing the shortcomings of the contractual approach and proposing for a more viable design of statutory approach to sovereign debt restructuring by analyzing the design of SDRM and why it was not practical. This article has 31000 words in total and is divided in to four sections. Section one is an Overview of Sovereign Debt Restructuring. This section explores the development of sovereign debt market and the current procedure of sovereign debt restructuring. It also explains the tools used to restructure the sovereign debt and then identifies the problems of the current mechanism.Section two is the Collective Action Clause and Its Shortcoming. This section analyzes the content and shortcomings of the collective action clause and draws a conclusion that the collective action clause is not adequate to address the problems exiting in the current mechanism. Section three is the Theory and IMF's Attempt of Statutory Approach, which explores various theories of the statutory approach and introduces the design of IMF's SDRM. It then analyzes the significance of SDRM and reason why SDRM was not adopted.Section four is the Perspective of the Statutory Approach and Proposals to a More Viable Statutory Approach. This section investigates elements affecting the perspective of the statutory approach and tries to make proposals on the basis of SDRM to make the statutory approach more likely to be accepted by the market players of sovereign debt restructuring.