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Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach Steven L. Schwarcz 85 Cornell L. Rev. Issue #4 (May 2000) |
ABSTRACT:
The "pressures and problems that have led to corporate bankruptcy law also operate in the case of a sovereign borrower in financial distress." Yet legal scholars have never systematically examined sovereign debt restructuring in light of bankruptcy reorganization law principles, which are designed to solve such fundamental problems as the ability of holdout creditors to undermine collective action toward a negotiated settlement. Moreover, absent the bankruptcy reorganization incentives that encourage free market liquidity, multilateral governmental institutions such as the International Monetary Fund (IMF) must act by default as lenders of last resort. This not only forces taxpayers to subsidize foreign governments and their creditors but also creates problems such as moral hazard: countries anticipating an IMF bail-out might have less reason to take a prudent economic course, and lenders expecting protection from the consequences of default might have a greater tendency to take unwarranted financial risks. This Article proposes that an international convention for sovereign debt restructuring based on three fundamental bankruptcy reorganization law principles could address these problems, without requiring supervision by an international bankruptcy court. The convention also would permit the IMF, through a mechanism of back-to-back non-recourse lending, to continue its current practice of imposing conditionality on funding without triggering the problems presently associated with IMF lending.
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