Resolving Sovereign Debt Restructuring Disputes: Contractual v. Statutory Approach

When a sovereign is inept to service its external debt obligations, it negotiates with the creditors to restructure repayment terms. Restructuring becomes central for both the sovereign and the creditors as the sovereign economy is facing a crisis and it is vital to restore the economy before the sovereign debtor can resume servicing its debt obligation. This paper reviews the contractual and statutory approach for restructuring sovereign debt. It then details the dual components of the contractual approach and their limitations. Arising from this analysis is the proposition to include the useful tools of the contractual approach as a supplement to a legal framework for sovereign debt restructuring. Worthwhile to an extent, collective action clauses respond to a minor aspect of the larger problem of sovereign debt restructuring. While problem of collective action is a major impediment in efficient debt restructuring, that is not the only problem. Voluntary inclusion of CACs can resolve only coordination issues and that too in a limited manner. The loopholes that are either created by the inclusion of CACs or the ones not attended to by the clauses leave enough latitude for the creditors to unravel the restructuring if they wish to, either by holding out, or free riding or litigating or all of these.