Chicago Journal of International Law


Adam Smith recommended sovereign insolvency as "always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor." Christopher G. Oechsli published a detailed proposal of how to adapt Chapter 11, Title 11 of the US Code, well before August 1982, the date considered by many as the official beginning of the debt crisis. After Mexico's default, repeated suggestions to emulate Chapter 11 for sovereign debtors met stiff opposition, especially from International Financial Institutions ("IFls") such as the International Monetary Fund ("IMF"). Their formalistic counterargument was that Chapter 11 did not address the problem of sovereignty. In defense, I proposed an international version of Chapter 9 in a paper presented at a conference at Zagreb University in 1987. In November 2001, the IMF suddenly presented its "new approach," emulating Chapter 11 for sovereigns. Presently, four proposals are on the table: Collective Action Clauses ("CACs"), voluntary Codes of Good Conduct for debt renegotiation proposed both by the Banque de France, and (less elaborated) by the Institute of International Finance, and two models of sovereign insolvency. The first two proposals and insolvency models do not preclude each other. By helping creditors to organize, enabling them to act more quickly and efficiently, CACs are a useful component of any insolvency. The proper functioning of fair procedures depends on the full ability of parties to defend their legal and economic interests. Rules such as those elaborated by the Banque de France may help defuse crises. By contrast, the two insolvency proposals contradict each other fundamentally. For details of my proposal-termed the Fair Transparent Arbitration Process ("FTAP") by many nongovernmental organizations ("NGOs")-to adapt Chapter 9, Title 11 of the US Code, I refer to other publications. Highlighting its irreconcilable differences vis- -vis the IMF's Sovereign Debt Restructuring Mechanism ("SDRM"), this paper discusses five issues of specific interest to jurists: impartial decisionmaking, the necessity to emulate Chapter 9, human rights and debtor protection, why equal treatment of creditors is mandatory, and an optional element to allow smoother negotiations and to stabilize capital markets.