Chicago Journal of International Law


Over the past several years, the international community has devoted considerable attention to improving arrangements for resolving financial crises and, in particular, for the restructuring of unsustainable sovereign debt. These efforts have benefited from the active participation of sovereign debtors, market participants, workout professionals, lawyers, economists and the "official sector," including the International Monetary Fund ("IMF"). As can be expected, perspectives regarding the dimensions of the problem and the direction of reform have varied. Nevertheless, a consensus appears to have been reached on two broad issues. First, there is a recognition that, in circumstances where a sovereign's debt has become unsustainable, all stakeholders-the sovereign debtor, its creditors, and the system more generally-will benefit from a restructuring process that is more rapid, orderly, and predictable than is currently the case. Second, it is generally accepted that enhancing the effectiveness of the legal framework is critical to the success of any meaningful reform in this area. Much of the discussion has focused on whether the necessary strengthening of the legal framework can be achieved exclusively through private contract or, alternatively, requires official intervention, perhaps in the form of the IMF's proposed "Sovereign Debt Restructuring Mechanism" ("SDRM"). Market participants have expressed concern that any form of official intervention would undermine the operation of capital markets in this area and, in particular, the quality of emerging market debt as an asset class. In contrast, the premise behind the SDRM has been that official intervention, if appropriately designed, would strengthen rather than weaken the operation of the international financial system. While recognizing the important limits of the analogy, supporters of official intervention have pointed to the critical role that domestic insolvency frameworks play in a market economy. [CONT]