Sovereigns in Distress: Do they need Bankruptcy

Abstract

SHOULD THERE BE a sovereign bankruptcy procedure for countries in financial distress? This paper explores the use of U.S. bankruptcy law as a model for a sovereign bankruptcy procedure and asks whether adoption of such a procedure would lead to a more orderly process of sovereign debt restructuring. It assumes that a quick and orderly debt restructuring process is more efficient than a prolonged and disorderly one, because a lengthy process of debt restructuring takes a high toll on debtor countries’ economies as well as harming creditors in general. I concentrate on three goals for a sovereign bankruptcy procedure: preventing individual credi-tors or groups of creditors from suing the debtor for repayment, prevent-ing groups of creditors from strategically delaying negotiations or acting as holdouts, and increasing the likelihood that private creditors will pro-vide new loans to sovereign debtors in financial distress, thus reducing the pressure on the International Monetary Fund (IMF) to fund bailouts. I conclude that nonbankruptcy alternatives are less likely to accomplish these goals than a sovereign bankruptcy procedure. U.S. Bankruptcy Law and Important Trade-Offs in Bankruptcy Three sections of the U.S. Bankruptcy Code are of possible relevance for a future international bankruptcy procedure: Chapter 7 (bankruptc