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Abstract

  1. Top of page
  2. Abstract
  3. I Introduction
  4. II Sovereign Debt Restructurings
  5. III Inter-creditor Issues in Sovereign Debt Restructurings
  6. IV Exploring Solutions to Inter-creditor Issues
  7. V Conclusion
  8. Footnotes

The new challenges presented by the current Eurozone crisis and the NML Capital v. Argentina case are likely to shift the international community's attention from holdout behavior in foreign bonds restructuring to inter-creditor issues. In the past years, many academics, and nongovernmental organizations concerned with debt relief, have put forward proposals to create a bankruptcy regime for states. But none of these proposals has seriously examined what rules should apply to treatment among creditors. Moreover, all insist that there must be a collective proceeding for all sovereign debt claims, without explaining why. This approach is simply taken for granted, as it is one of the fundamental principles of bankruptcy law. The article questions this orthodoxy through examining the nature of sovereign debt crisis, the feature of the limited pool of sovereign assets, and the nonliquidable fact of the sovereign debtor. It also argues that the common pool problem does not exist in the sovereign debt context.

I Introduction

  1. Top of page
  2. Abstract
  3. I Introduction
  4. II Sovereign Debt Restructurings
  5. III Inter-creditor Issues in Sovereign Debt Restructurings
  6. IV Exploring Solutions to Inter-creditor Issues
  7. V Conclusion
  8. Footnotes

Despite the efforts to reform the sovereign debt restructuring process undertaken by the International Monetary Fund (“IMF”) in 2003, practitioners in this area face new challenges. In early 2012, both European Union member States and the European Central Bank (“ECB”) managed to claim priority status unilaterally in the middle of the current Eurozone crisis. In October 2012, a US court in NML Capital Ltd. v. Republic of Argentina granted injunctions relating to Argentina's breach of the pari passu clause, which provides that the payment obligation of the debtor under that particular bond issue shall rank equally with all other existing and future unsubordinated and unsecured external indebtedness. How would the sovereign debt community react to these events? To date, nearly all literature on sovereign debt issues has focused on deterring holdout behavior in foreign bonds restructuring, examining strategies that range from a majority voting system to a stay on enforcement.[1] However, these new challenges are likely to shift the attention from holdout behavior to inter-creditor relations, which is considered to be one of the key elements of an effective insolvency law.[2]

Unfortunately very few scholars have discussed inter-creditors issues in a detailed fashion. Buchheit, Gelpern and Wood provide an excellent overview of contractual provisions in sovereign debt instruments that serve the purpose of ensuring equal treatment within certain groups of creditors (i.e., Paris Club members, commercial banks, and bondholders).[3] Wood studies the priority ladder in national bankruptcy law and reveals an existing de facto priority ladder in the sovereign debt context, which follows the order of super-priority claims such as setoff, security interests, and trusts; priority claims such as IMF loans, and pari passu claims.[4] The status quo, however, presents an ambiguous picture of inter-creditor relations and leaves a number of issues wide open such as the scope of priority claims, the relationship between multilateral, bilateral, and commercial creditors, and the status of new financing. The Dutch government and the Permanent Court of Arbitration (“PCA”)[5] recently emphasized the need to develop substantive legal principles in this context in their project on “Sovereign Debt and Arbitration”.[6]

Having acknowledged the challenges involved in discussing all open issues about inter-creditor relations at once, the author intends, in this paper, to focus on the relationship between multilateral, bilateral, and commercial creditors. The author starts with various proposals touching upon this issue and the different views expressed, ranging from equal treatment to separate treatment to comparable treatment. While studying these different views, the author notices that nearly all proposals envisage a “collective” proceeding that would include “all” sovereign debt claims without explaining any reasons for such a vision, partly because this is the form that all national bankruptcy proceedings take.[7] The main purpose of this paper is to take the unusual route of questioning the unquestionable beauty of a collective proceeding for all sovereign debt claims.

This paper is structured as follows: Section II provides an introduction to the context and new developments in sovereign debt restructurings. Section III analyzes inter-creditor issues in sovereign debt restructurings with a focus on the concept and status quo. In exploring solutions to inter-creditor issues, Section IV starts with a summary of the existing proposals relating to inter-creditor issues and moves on to discuss the appropriateness of a collective proceeding for all claims. First, the author argues that the automatic acceleration principle in national bankruptcy law should not apply to the sovereign debt context because of the “temporary” nature of the sovereign debt crisis, the “alive” feature of the limited pool of sovereign assets, and the “nonliquidable” fact of the sovereign debtor. Second, the author argues that a collective proceeding is not the most desirable form of proceeding due to the absence of the common pool problem in the context of sovereign debt and the incomparably different natures of multilateral/bilateral claims that renders the design of a priority order between multilateral/bilateral and commercial claims impossible. Section V concludes this paper.

II Sovereign Debt Restructurings

  1. Top of page
  2. Abstract
  3. I Introduction
  4. II Sovereign Debt Restructurings
  5. III Inter-creditor Issues in Sovereign Debt Restructurings
  6. IV Exploring Solutions to Inter-creditor Issues
  7. V Conclusion
  8. Footnotes

2.1 The context

The current practice of sovereign lending and borrowing is unprecedented. For two centuries, sovereign debtors borrowed from one or more, but not all, of the following sources: commercial banks, bondholders, governments, and multilateral institutions. It was not until the early 1990s that all four types of creditors began to play an active role in the sovereign debt market.[8] Whereas commercial banks and bondholders form the “private sector” creditor group, the “public sector” creditor group is composed of governments (“bilateral creditors”) and multilateral institutions such as the IMF, the World Bank, and other regional banks (collectively, “multilateral creditors”).

With debt comes the possibility of default, and sovereigns are no exception to this axiom. At present, there is no international insolvency regime governing sovereign debt defaults, composed of rules designed to cope with the scenario in which creditors cannot be fully satisfied. Instead, sovereign debt defaults are dealt with using an ad hoc, individual case-by-case approach in which most rules are invented along the way. In practice, to avoid an eternal default, the sovereign debtor is compelled to seek debt relief from creditors before or shortly after the default, via an extension of maturity, and/or a reduction of the value of the claim. Such relief is obtained by renegotiating the relevant debt instruments with individual creditors. The rationale for renegotiation is that all participants in sovereign borrowing and lending activities, both debtor and creditors, should share the risk of insolvency.

Renegotiations with multilateral creditors are often conducted in this ad hoc manner. Renegotiations with bilateral creditors who are members of the Paris Club are conducted through the Club's processes. The Paris Club is an informal group of official creditors with 19 permanent members and a small secretariat in Paris.[9] Countries that are not members of the Paris Club renegotiate with the sovereign debtor on an ad hoc basis. Renegotiations with commercial banks are either purely ad hoc or conducted through the London Club, an informal group of commercial banks with no fixed membership and no secretariat.[10] Renegotiations with bondholders are conducted through exchange offers prepared by the sovereign debtor. Occasionally, bondholder committees are formed on an ad hoc basis to facilitate the process.[11]

From November 2001 through April 2003, the IMF proposed a reform to the contemporary international financial architecture by introducing a treaty-based framework to restructure sovereign debt—the sovereign debt restructuring mechanism (“SDRM”).[12] The key feature of the SDRM is a majority voting system, which binds all creditors to a restructuring agreement that has been accepted by a qualified majority.[13] Whereas this proposal was eventually shelved because of a lack of sufficient support from the IMF member states,[14] the idea of a majority voting system survived. Collective action clauses (“CACs”), a contractual approach to implementing a majority voting system, gained broad support from market participants and sovereign debtors.[15]

2.2 New developments

In October 2012, the United States Court of Appeals for the Second Circuit in NML Capital Ltd. v. Republic of Argentina[16] affirmed the trial court's decision to issue injunctions designed to remedy Argentina's breach of the pari passu clause in certain bond indentures. Specifically, Argentina had issued new debt pursuant to exchange offers in 2005 and 2010 and was making the required payments on this new debt, but had declared through legislation that it would make no payments to those still holding the old bonds.[17] In February 2013, a second arbitral tribunal[18] at the International Center for Settlement of Investment Disputes (“ICSID”), constituted pursuant to the Argentina–Italy bilateral investment treaty, dismissed jurisdictional challenges raised by Argentina and upheld its jurisdiction in the matter initiated by holdout bondholders.[19] The bondholders' remarkable success in these events cannot be underestimated as it introduces a brand new battlefield against sovereign debtors.

The term “brand new” is used because the last time sovereign debtors encountered numerous foreign bondholders was before the Great Depression shut down the international bond market in the 1930s, and at that time, sovereign debtors still enjoyed absolute sovereign immunity.[20] From the mid-20th century onwards, the notion of sovereign immunity shifted from the absolute theory to the restrictive theory permitting states to enjoy immunity for their public, but not private, acts.[21] Following the revival of the international bond market in the early 1990s, when banks agreed to exchange bad loans for Brady bonds,[22] sovereign debtors are again facing numerous foreign bondholders, possibly one-time investors with less incentive to accept a debt restructuring offer. This time bondholders can sue sovereign debtors in national courts; however, statistics show that foreign bondholders do not typically run crazily to the courthouse.[23] Bondholders may prefer out-of-court restructurings because favorable court orders may be difficult to enforce for a variety of reasons. For example, there is currently no international convention dealing with the recognition and enforcement of foreign court judgments, and attaching property in the sovereign debtor's territory or abroad presents problems. Nevertheless, despite great controversy, Argentine bondholders overcame both of these problems. The ICSID arbitral tribunals' willingness to embrace sovereign debt claims offers bondholders a better regime for the recognition and enforcement of arbitral awards, as specified in the ICSID Convention.[24] More alarmingly, the injunction granted by the US court in NML Capital Ltd. provides for payment, thus rendering asset searches unnecessary.[25]

Despite the significant implications of these episodes for future sovereign debt restructurings, the solution should not exclusively focus on deterring holdouts. First, in principle, holdout creditors should enjoy the same legal rights as those creditors who participate in the restructuring. Holdout creditors' contractual payment rights should be protected, which may be factored into the price of credit. Second, although categorized as holdout litigation, the NML Capital Ltd. case introduces the new element of inter-creditor concerns. The injunction in this case was granted on the basis of the pari passu clause dealing with inter-creditor relations. The court mentioned that the operation of the pari passu clause as a constraint on Argentina as payor makes sense in the context of sovereign debt, because when sovereign debtors default, they do not enter insolvency proceedings (where the legal rank of debt determines the order in which creditors will get paid).[26] In the view of the author, these two episodes are likely to shift attention from deterring holdouts only to crystallizing inter-creditor issues.

Furthermore, the recent Eurozone episode also calls attention to inter-creditor issues. The newly concluded Treaty Establishing the European Stability Mechanism (“ESM”) states that ESM loans will enjoy preferred creditor status in a similar fashion to those of the IMF, while accepting the IMF's preferred creditor status over the ESM.[27] On 6 September 2012, the ECB relinquished the preferred creditor status it had previously claimed in the event of a future debt restructuring of bonds acquired in its newly launched Outright Monetary Transactions program.[28] This episode has aptly illustrated the great uncertainty associated with certain creditors' unilateral claims of preferred status.

III Inter-creditor Issues in Sovereign Debt Restructurings

  1. Top of page
  2. Abstract
  3. I Introduction
  4. II Sovereign Debt Restructurings
  5. III Inter-creditor Issues in Sovereign Debt Restructurings
  6. IV Exploring Solutions to Inter-creditor Issues
  7. V Conclusion
  8. Footnotes

3.1 The concept of inter-creditor issues

Given that renegotiations necessarily imply a certain degree of debt relief, they are certainly not creditors' favorite activities. When a sovereign debtor is financially sound, renegotiation is only a matter between the debtor and a particular creditor. The creditor does not need to know the identities of other creditors. However, the situation changes when a sovereign debtor encounters serious financial distress and does not have enough money to repay everyone. Under such circumstances, creditors face the reality that sovereign lending activities are not risk-free and that they may have to take a loss. It is often said that, in the time of crisis, creditors should make “contributions” to help the debtor recover.[29] Given that the total amount of contribution needed by the debtor to recover from the crisis is certain, the fact that a particular creditor makes a lesser contribution means that other creditors must make a larger one.

Therefore, as soon as the news of the debtor's financial distress spreads, creditors immediately want to find out who the other creditors are, whether they will be willing to make contributions and how large these might be. This change of attitude toward other creditors is referred to as the “conflict of interest issue among creditors” or “inter-creditor issues”.

3.2 The status quo

3.2.1 Treatment within the same group

As far as the public sector is concerned, multilateral and bilateral creditors enjoy different treatment within their respective groups. Negotiations with multilateral creditors are conducted on an ad hoc and individual basis. Each multilateral creditor is responsible for its own negotiation process with the debtor and has no influence over other multilateral creditors' negotiation processes. Bilateral creditors within the Paris Club support the principle of equal treatment within the Club. All Paris Club decisions are taken on the basis of consensus, in the form of so-called Agreed Minutes. Although the Agreed Minutes are not binding, they guide the future bilateral negotiations that result in changes to the debt contracts.[30] In practice, driven by a mutual interest in avoiding disproportionate repayment of loans, all Paris Club members fully respect the commitments made through the Agreed Minutes.[31] However, such a principle does not apply to bilateral creditors outside the Paris Club, such as China, who are responsible for their own negotiations.

In the private sector, commercial banks and bondholders all enjoy equal treatment within their groups but to a different extent. Commercial banks have employed the “mandatory repayment clause,” which requires pro rata payments to all lenders in the event of a prepayment to any lender.[32] This clause excludes certain categories of claims, such as IMF debt, trade debt, foreign exchange contract obligations, interest, and other agreed categories.[33] In addition, certain bank syndications also contain the “pro rata sharing clause,” which provides that any bank receiving a greater proportion of its share must pay the excess to the agent bank who then redistributes to all banks on a pro rata basis.[34] The purpose of this clause is to share individual receipts, such as receipts by setoff, proceeds of litigation, individual guarantees, or direct payments by the debtor.[35] Private bondholders have over the years expanded the use of the “pari passu clause” in the bond contracts, which provides, in part, that the bonds of that particular issue shall rank equally among themselves.[36]

3.2.2 Treatment among different groups
3.2.2.1 Contractual provisions

Two types of contractual provisions in sovereign debt instruments address issues concerning treatment among different creditor groups: the “negative pledge clause” and the “pari passu clause.” The “negative pledge clause” restricts the sovereign debtor's ability to grant security interests in its property to secure other creditors. The clause provides that if the debtor issues new debt and grants new creditors a security interest in the debtor's assets, then the debtor has to grant old creditors an equivalent security interest.[37] Whereas such a clause appears in both bank loan agreements and bond contracts, in the case of bonds, the negative pledge generally only applies to security for bonds and other debt that is capable of being listed or traded on a market.[38]

Besides ensuring the equal ranking of all bonds of that particular issue, the “pari passu clause” in most bond contracts also provides, in its second part, that the debtor's payment obligation under that particular issue shall rank equally with all other existing and future unsubordinated and unsecured external indebtedness.[39] On many occasions, the pari passu treatment in bond contracts is further limited to other bonds and tradable debt instruments.[40] Over the past decade, the pari passu clause has become a litigation tool for bondholders who refused to accept the exchange offer, and the meaning of this clause has always remained controversial.[41] A narrow interpretation of this clause holds that all claims legally rank equally; in contrast, a wider interpretation suggests that the debtor must pay all its creditors ratably.[42]

Despite Argentine bondholders' success in the recent NML Capital Ltd. decision that finds Argentina in breach of the pari passu clause, the meaning of this clause is far from being settled. It is not clear whether the US court in NML Capital Ltd. chose the narrow or the wider interpretation because it held that a combination of Argentina's actions breached the clause.[43] Furthermore, the court left the issue of whether payments to multilateral creditors would breach the pari passu clause entirely open, simply noting that the plaintiffs had not argued that preferential payments to the IMF made by Argentina could similarly entitle the plaintiffs to ratable payments.[44] Nevertheless, what is clear is that the history of the pari passu clause indicates that its introduction was intended, at least in part, as a tool for preserving inter-creditor equity and fairness in negotiations.[45]

3.2.2.2 Creditor policies

In the 1980s, commercial banks routinely imposed conditions for the restructuring of their loans, which involved a corresponding restructuring of the Paris Club debt.[46] Paris Club members have actively advocated that a sovereign debtor may not accept less debt relief from its non-Paris Club creditors than the amount agreed with the Paris Club. This is referred to as the comparability of treatment principle.[47] The principle, in essence, forbids other creditors from making a lesser contribution than Paris Club creditors—although the Club considers certain mitigating factors to justify a deviation from the principle.[48] A controversial issue arises with respect to the willingness of Paris Club members to contribute proportionally when other creditor groups make larger contributions.[49] However, it is worth noting that the Paris Club considers on a case-by-case basis whether mitigating factors exist to justify a deviation from the comparability of treatment principle in respect of a particular creditor or debt instrument—although no explanation is provided as to what the “mitigating” factors entail.[50]

IV Exploring Solutions to Inter-creditor Issues

  1. Top of page
  2. Abstract
  3. I Introduction
  4. II Sovereign Debt Restructurings
  5. III Inter-creditor Issues in Sovereign Debt Restructurings
  6. IV Exploring Solutions to Inter-creditor Issues
  7. V Conclusion
  8. Footnotes

4.1 Existing proposals

Proposals in favor of a legal framework for sovereign debt workouts advanced by both economists and legal scholars started to emerge in the 1980s.[51] Notably, not all proposals focus on inter-creditor issues in sovereign debt workouts. The IMF's famous SDRM proposal, for instance, identifies the range of claims that could potentially be restructured under the mechanism but leaves it to the debtor to decide which subset of eligible claims would need to be restructured in a particular case.[52] It nevertheless mentions that debt owed to an international organization could not be restructured under the SDRM[53]; the claims of official bilateral creditors would be excluded from the SDRM or, alternatively, restructured within the SDRM as a separate class.[54] This section summarizes the discussion of inter-creditor issues in recent proposals.

4.1.1 Soft law approach

According to Gelpern, inter-creditor issues could be addressed by allowing the sovereign debtor to impose priority rules on creditors unilaterally or by contract, to disclose the rankings at the time of borrowing, and to comply with its commitments.[55] This proposal gives international financial institutions, such as the IMF, a role in monitoring the sovereign debtor's compliance with such obligations. Among other things, the IMF could report whether the priorities states disclose in advance are consistent with the “general principles for according priority agreed among the official sector, the borrowers, and the private creditors.”[56] In case of any violation, creditors would follow the old path of suing the sovereign debtor in national courts.[57]

The Joint Public–Private Sector Committee[58] organized by the Institute of International Finance recently proposed a new version of the Principles for Stable Capital Flows and Fair Debt Restructuring. The principle dealing with inter-creditor issues stipulates that the sovereign debtor should “avoid unfair discrimination among affected creditors,” including “seeking rescheduling from all official bilateral creditors.”[59] It further provides that in keeping with general practice, short-term trade-related credits and inter-bank advances should be excluded from the restructuring plan and treated separately if necessary.[60] The note to this principle explains that the goal of avoiding unfair discrimination among affected creditors could be achieved through treating all creditors fairly and providing “comparable treatment to all creditors.”[61] It stresses that no creditor group should be “excluded ex ante from participating in debt restructuring,” and any such arrangement should be “discussed and agreed to among all creditors on the basis of adequate justification.”[62]

4.1.2 Hard law approach

Berensmann and Schroeder endorsed the old version of the Principles for Stable Capital Flows and Fair Debt Restructuring proposed by the Institute of International Finance, and suggested a statutory approach to implement such principles. The old version of the principle dealing with inter-creditor issues provides that the sovereign debtor should “guarantee equal treatment of all creditors.”[63] In connection with this, Berensmann and Schroeder proposed that all creditors (i.e., private, bilateral, and multilateral) should participate in the restructuring negotiations under a newly established International Debt Framework Commission, with a few exceptions made for creditors with new financing and those holding trade credits.[64] The nongovernmental organization German Debt Network (Erlassjahr) followed a similar approach. Its proposal states that in principle, all creditors need to be treated equally, and preferred creditor status can only be granted by mutual consent.[65] It emphasizes “all claims on a sovereign need to be treated in one single process.”[66]

Paulus discussed the current “sectoral treatment of creditors” in sovereign debt workouts and emphasized the need for “a comprehensive solution.”[67] To that end, Paulus advocated “an all-encompassing resolvency proceeding all claims should be included”[68] and envisaged a single forum.[69] His proposal suggests that different creditor groups could be treated differently and allows small creditors be packed into a separate group receiving full payment, whereas other groups, such as institutionalized creditors, take haircuts.[70]

Bolton and Skeel addressed issues concerning the ranking for unsecured sovereign debt and proposed a “first-in-time” rule. According to this rule, when a sovereign debtor files for debt restructuring, “all unsecured debt would be classified by date of issue and earlier issues would have higher priority over later issues.”[71] To avoid the creation of too many classes, they suggested that either each class must be of “a minimum size in value relative to the total value of outstanding debt” or “issues within any given fiscal year” should be put together in a single class.[72]

Schwarcz drafted a Model Sovereign Debt Convention dealing with the sovereign debt restructuring process. Article 6 of the Model Convention states that a debt restructuring plan shall designate classes of claims in accordance with Article 7(3), specify the proposed treatment of each class, and provide the same treatment for the same class.[73] Article 7(3) provides that each class shall consist of claims against the sovereign debtor that are pari passu in priority, “provided that (a) paripassu claims need not all be included in the same class, and (b) claims of governmental or multigovernmental entities each shall be classed separately.”[74] Article 4 of the Model Convention requires the sovereign debtor to “notify all of its known creditors of its intention to negotiate a [p]lan under this Convention.”[75]

Similarly, Dickerson's proposal also requires the sovereign debtor to notify all creditors, disclose all claims, and explain the intended treatment of those claims.[76] It expresses the need to “ensure that all claims will be dealt with in an efficient, predictable, collective proceeding.”[77]

4.1.3 Observations

It appears from the proposals discussed earlier that inter-creditor issues in sovereign debt workouts are far from being settled. To begin with, not all proposals touch upon issues concerning the ranking of different claims. Among those that discuss the ranking issue, most of them address it in a rather ambiguous way. For instance, the Principles for Stable Capital Flows and Fair Debt Restructuring provides that sovereign issuers should treat all creditors fairly and provide comparable treatment to all creditors. However, the terms “fairly” and “comparable treatment” are not defined. Berensmann and Schroeder and the German Debt Network proposed equal treatment of all creditors without giving sufficient reasons. Furthermore, a few proposals discussing the ranking issue do not provide a complete picture. Bolton and Skeel advocated a “first-in-time” rule for the ranking of unsecured debt. Schwarcz touched upon the relationship between private and bilateral/multilateral claims, suggesting that bilateral/multilateral claims should be classed differently from private claims.

Despite the uncertainty of the ranking issue, nearly all proposals envisage a “collective” proceeding that would include “all” sovereign debt claims. Paulus employs the term “an all-encompassing resolvency proceeding all claims should be included.” Dickerson mentions that “all claims” should be dealt with in an efficient, predictable, “collective” proceeding. Berensmann and Schroeder propose that “all” creditors should participate in the restructuring negotiations under a newly established International Debt Framework Commission. German Debt Network emphasizes the need for “all” claims to be treated in a “single” forum. The Principles for Stable Capital Flows and Fair Debt Restructuring provide fair and comparable treatment for “all” creditors. Although Bolton and Skeel do not explicitly mention a collective proceeding for all claims, their detailed discussion concerning national bankruptcy law and claim classification implies a single process for all claims. Schwarcz's extensive discussion of claim classification also calls for a similar conclusion. In this respect, it is observed that the issue of whether a collective proceeding including all claims is the appropriate forum for sovereign debt workouts has never attracted attention in any proposal. These proposals either take a collective proceeding for all claims for granted without explaining any reason for this or discuss directly issues involved in a collective proceeding including all claims (i.e., claim classification), thereby assuming the appropriateness of such a process. The following paragraphs intend to fill this gap by exploring the reasons behind a collective proceeding for all claims in national bankruptcy law and the rationale for borrowing (or not) such a concept for discussions concerning a legal framework for sovereign debt restructuring.

4.2 Treatment of all or partial claims

4.2.1 Creditors affected by inter-creditor issues

As mentioned earlier, inter-creditor issues are caused by the conflict of interests among creditors. The reason for such a conflict lies with a limited pool of assets that is insufficient for everyone's satisfaction so that creditors have to take a loss and contribute to the debtor's recovery. It is widely accepted that a lesser contribution made by any individual creditor requires that other creditors contribute more. However, this theory only makes sense in the situation of a still pool.

By contrast, in the context of sovereign debt, the debtor can always raise revenue through taxation. Therefore, the pool of assets, although limited, is not still but alive. In other words, the pool is dynamic, with money going in and out on a daily basis. In addition, a sovereign state can never be liquidated, thus rendering the crisis merely temporary. Indeed, because the state will ultimately recover, the pool here will never become still. In a still pool, the interests of all creditors are conflicted. By contrast, where the pool of assets is constantly replenished, the ability of individual creditors to make a lesser contribution does not necessarily require other creditors to contribute more.[78] The conflict of interest exists only during the temporary period when there are not enough assets for everyone. During this period, the concerned creditors are those holding claims with maturities before the end of the crisis period. Taking Greece as an example, the financial crisis is severe but will eventually end in X years. Thus, a conflict of interest exists only among creditors holding claims with maturities in the next X years. It follows that inter-creditor issues are only relevant for creditors holding claims that will mature in the next X years. Therefore, any rules designed to address inter-creditor issues should not include all claims.

Because the task of identifying “X” is extremely complex, if not impossible, the practical solution is to allow the debtor to determine its anticipated date of recovery from the crisis, after considering the debt sustainability analysis provided by international financial institutions. Giving the debtor the freedom to determine X will not be problematic, as it only intends to address the conflict of interests among creditors but not to make the restructuring process necessarily easier for the debtor.

4.2.2 Inappropriateness of the automatic acceleration principle

Needless to say, the proposal that inter-creditor issues only exist among creditors holding claims with maturities in the next X years challenges the basic principle of national bankruptcy law that all claims become due upon the filing of bankruptcy (“automatic acceleration principle”). Different national bankruptcy legislations may use different terms for this principle, but it basically refers to the situation that all claims are allowed in a bankruptcy proceeding regardless of the maturity date. The author argues that this principle should not be applied to any future legal framework for sovereign debt restructurings for the reasons outlined in the following paragraphs.

First, the rationale for this basic principle derives from the liquidation scenario and should not be applied to sovereign states where liquidation is not a possibility. In liquidation, the company will eventually be liquidated and dissolved; thus, all creditors must be able to make their claims immediately instead of years later, according to the maturity date.[79] This principle makes sense under the contract law theory that the debtor's repayment obligations cannot be assigned to a new entity without the creditor's permission unless the original debtor remains responsible.[80] It is argued that, from a contract law perspective, the continuation of a debtor's contractual obligation beyond its liquidation is equivalent to a delegation of that obligation to a new entity.[81] However, because the original debtor does not exist beyond liquidation, such a delegation of the repayment obligation is prohibited, and all claims become due and payable immediately. The principle also applies in reorganization on the basis that a company may still be liquidated if the reorganization plans fail.[82] In the absence of any possibility of liquidation, the principle that all claims are automatically accelerated simply should not apply to sovereign states. However, this rule would not affect creditors' ability to accelerate claims pursuant to the terms of the debt contract.

Second, the fact that the US municipal bankruptcy law[83] does not differentiate between the municipal debtor and other types of debtors on this point does not mean that the automatic acceleration principle is appropriate for states. The principle that all claims with different maturity dates are allowed in a domestic bankruptcy proceeding is to be found in the definition of “claim” contained in the general provisions of the US bankruptcy law, which apply to all types of debtors. The US Code defines claim as “right to payment, whether or not such right is […] matured, unmatured […].”[84] This broad definition contemplates that all legal obligations of the debtor, no matter how remote, will be addressed in the bankruptcy proceeding.[85] The US Code explains that the reason for such a broad definition is that it “permits the broadest possible relief in the bankruptcy court.”[86] However, this presumption does not hold in the context of sovereign debt restructuring. In the recent successful Greek restructuring, all creditors holding claims with maturities between 0 (20 March 2012) to 45 years (25 July 2057) were offered the same deal, which provides that the latest repayment date is 2042.[87] Accordingly, the bonds with the longest maturity (2057) will actually be paid before they become due (2042); the present value haircut implicit in the restructuring for this bond was −26.5.[88] This negative figure indicates that these bondholders suffered no loss at all; instead, their positions improved through the inclusion of their claims in the restructuring process. This finding contradicts the theory that the inclusion of all creditors in the bankruptcy proceeding necessarily contributes to the broadest possible relief for the debtor.

To summarize, the author argues that the “temporary” nature of a sovereign debt crisis and an “alive” pool of sovereign assets put the fundamental principle of automatic acceleration adopted from national bankruptcy law in doubt. An analysis of the underlying reasons for such a principle further demonstrates its inappropriateness for sovereign debtors. Therefore, any future rules for inter-creditor issues should not address all sovereign debt claims but only those claims that are relevant.

4.3 Collective or noncollective proceeding

4.3.1 Need for a collective proceeding in national bankruptcy law

The need for a collective proceeding in national bankruptcy law is justified by two main theories—the common pool problem and the creditors' bargain theory. Scholars describe the creditors of a debtor with a limited pool of assets not enough for everyone as enmeshed in a common pool problem.[89] They compare the debtor's assets to a jointly owned pool of fish and the debtor's creditors to self-interested fishermen. They view the creditors' pursuit of their remedies in terms of attachment, garnishment, execution, and levy as analogous to the overfishing of a common pool: self-interested creditors have every incentive to collect as many of the debtor's assets as quickly as they can, because the creditors who are first to collect suffer none of the deleterious effects of their collection actions.[90] With this observation, they make a powerful case for the need for some form of a collective bankruptcy remedy.[91]

Moreover, the creditors' bargain theory holds that it is in the creditors' best interest to agree ex ante on binding collective procedural rules. The argument is that unsecured creditors prefer a collective system that treats them alike, because it reduces the costs associated with individual creditors' actions, increases the aggregate pool of assets, and avoids a piecemeal dismantling of a debtor's business, as well as enhances administrative efficiencies.[92] However, fully secured creditors are not direct beneficiaries of any of these advantages, because they can easily remove the collateral from the debtor's estate.[93] (Referees' comment on US automatic stay) Thus, unsecured creditors have a strong interest in including secured creditors in the collective proceeding, in order to prevent actions by them that diminish the aggregate estate.[94] Unsecured creditors are therefore willing to give secured creditors at least some benefit in exchange for their agreement to join in the collective proceeding. Secured creditors have no reason to object to inclusion if left as well off as before.[95] The result is a collective system that includes both secured and unsecured creditors, with the rights of secured creditors preserved through a priority position in the order for the distribution of assets.

4.3.2 Absence of the need for a collective proceeding in the sovereign debt context

To begin with, the so-called common pool problem does not exist in the sovereign debt context. Litigation against a sovereign debtor in national courts is not an easy undertaking. Sovereign debt creditors holding a favorable judgment may still encounter problems with enforcement. Whereas attempts to attach property in the sovereign debtor's territory may face objections based on public policy, efforts to enforce the judgment abroad may fail because of the sovereign's lack of attachable assets in foreign countries and the principle that certain assets located abroad cannot be attached because of their special characteristics (i.e., diplomatic missions, central bank reserves, military assets, etc.).[96] Because of these difficulties and uncertainties, the number of instances of court litigation against sovereign debtors is relatively small.

Schumacher recently conducted empirical research concerning sovereign debt litigation filed against debtor governments in the US and UK courts between 1976 and 2010.[97] This research shows that only 108 cases were filed in the USA and the UK by foreign banks, bondholders, and other commercial creditors during this period and that these cases only relate to 29 of the 180 sovereign debt restructurings with private creditors (16%).[98] It further reveals that only 27 out of 69 debtor governments have been sued.[99] It is worth noting that the number of creditors who manage both to obtain a favorable judgment and to enforce that judgment is even smaller. The author argues that such a small number of individual actions that may diminish the debtor's pool of assets cannot be compared with the overfishing situation in a common pool. Although the recent NML Capital Ltd. decision is likely to encourage future litigation against sovereign debtors, it is still too early to gauge that effect. Any decision to implement a collective proceeding should be balanced against the actual need and costs involved.

Turning to the creditors' bargain theory, as discussed earlier, a collective proceeding is only desirable when it is in the best interests of both unsecured and secured creditors, and secured creditors would only agree to be included in the same proceeding as unsecured creditor if their rights are well preserved through priority rules. In the sovereign debt world, however, whether creditors are secured or not is not a major difference between them as a result of the negative pledge clause that restricts the debtor's ability to grant security interests in its property to secure other creditors. One unique feature of the sovereign debt context is the involvement of multilateral and bilateral creditors. Whereas commercial creditors lend merely for profit, multilateral and bilateral creditors lend for a wide variety of purposes in addition to making a profit. For example, multilateral lending relates to information provision in terms of monitoring government policies in recipient countries and the exercise of conditionality aimed at changing governmental policies.[100] Similarly, bilateral creditors often extended to advance political and social objectives, such as ensuring that domestic exporters are not disadvantaged by financial support offered by other governments, or sharing the costs of building infrastructure projects that can help the debtor achieve higher rates of economic growth.[101]

Given the noncomparable differences between multilateral/bilateral and commercial creditors, it seems extremely difficult, if not impossible, to weigh political and financial considerations and to devise a priority order between them. Such difficulty is acknowledged in the sovereign debt framework proposals put forward by the IMF and Schwarcz, in which the term “separate” is used to describe the treatment for multilateral and/or bilateral creditors.[102] Importantly, separate treatment does not necessarily violate the equitable treatment principle in national bankruptcy law, which basically ensures the fair treatment of creditors with similar legal rights so that assets are distributed according to the creditors' ranking.[103] That is, all creditors do not need to be treated equally, but “in a manner that reflects the different bargains they have struck with the debtor.”[104]

In light of the foregoing, the author argues that a collective proceeding is not the most desirable form of proceeding due to the absence of the common pool problem in the context of sovereign debt and the incomparably different nature of multilateral/bilateral claims that renders the design of a priority order between multilateral/bilateral and commercial claims impossible. In the view of the author, the inapplicability of a collective proceeding offers two possibilities: several separate collective proceedings or a noncollective proceeding. Whereas collectivity is considered to be the easiest way to ensure equal treatment, a similar result can arguably be achieved through the implementation of mandatory rules to the same effect and legal sanctions against violation of these rules. The ultimate choice largely depends on an analysis evaluating the benefits and costs involved for collective proceedings within a smaller circle.

V Conclusion

  1. Top of page
  2. Abstract
  3. I Introduction
  4. II Sovereign Debt Restructurings
  5. III Inter-creditor Issues in Sovereign Debt Restructurings
  6. IV Exploring Solutions to Inter-creditor Issues
  7. V Conclusion
  8. Footnotes

In light of recent creditor episodes, the NML Capital Ltd. decision in particular, the time for academic attention to shift from holdout concerns to inter-creditor issues has become ripe. This paper details the concept and status quo of inter-creditor issues in sovereign debt restructurings and explores possible solutions to inter-creditor issues. Notably, it questions the unquestionable beauty of a “collective” proceeding for “all” sovereign debt claims.

With respect to “all” claims, this paper identifies the scope of creditors affected by inter-creditor issues by discussing the “temporary” nature of the sovereign debt crisis and the “alive” feature of the limited pool of sovereign assets. It maintains that where the pool of assets is constantly replenished, inter-creditor issues do not concern all creditors because the ability of individual creditors to make a lesser contribution does not necessarily require other creditors to contribute more. To further support this argument, the paper discusses the reasons for nonapplicability of the automatic acceleration principle in national bankruptcy law in the sovereign debt context through its analysis of the nonliquidable nature of sovereign debtors and the legislative motivation for the adoption of the automatic acceleration principle for municipal debtors in US chapter 9 bankruptcy.

Turning to a “collective” proceeding, this paper explains the theories in favor of such a proceeding in national bankruptcy law, namely, the common pool problem and the creditor's bargain theory. It uses empirical data concerning the number of instances of litigation against sovereign debtors in the US and UK courts between 1976 and 2010 to argue that the common pool problem does not exist in the sovereign debt context. Moreover, it explains that, according to the creditor's bargain theory, a collective proceeding is only desirable when it is in the best interests of both unsecured and secured creditors, and that secured creditors would only agree to be included in the same proceeding as unsecured creditors if their rights are well preserved through priority rules. It analyzes the incomparably different nature of multilateral/bilateral claims and argues that it is almost impossible to weigh political and financial considerations and to devise a priority order between multilateral/bilateral and commercial claims. Therefore, multilateral/bilateral and commercial claims should receive separate treatment and should not be included in a collective proceeding.

Footnotes

  1. Top of page
  2. Abstract
  3. I Introduction
  4. II Sovereign Debt Restructurings
  5. III Inter-creditor Issues in Sovereign Debt Restructurings
  6. IV Exploring Solutions to Inter-creditor Issues
  7. V Conclusion
  8. Footnotes
  • 1
    L. Buchheit et al., “The problem of holdout creditors in Eurozone sovereign debt restructurings” (Jan. 2013), available at http://ssrn.com/abstract=2205704 (last viewed 11 March 2013); W. Weidemaier & M. Gulati, “A People's History of Collective Action Clauses” (November 2012), available at http://ssrn.com/abstract=2172302 (last viewed 11 March 2013); S. Hagan, “Designing a legal framework to restructure sovereign debt”, 36 Geo. J. Int'l L. 299 (2005); J. Eaton, Chapter 15 “Standstills and an international bankruptcy court”, in: Fixing Financial Crises in the 21st Century (2004); S. Schwarcz, “Idiot's guide” to sovereign debt restructuring, 53 Emory Law Journal (2004) pp. 11891218;IMF, “The design of the sovereign debt restructuring mechanism—further considerations”, prepared by the Legal and Policy Department and Review Departments (November 2002); K. Rogoff & J. Zettelmeyer, “Early ideas on sovereign bankruptcy reorganization: a survey”, IMF WP02/57 (Mar. 2002); J. Sachs, “Do we need an international lender of last resort?” Frank D. Graham Lecture at Princeton University, Vol. 8 (Apr. 1995), available at http://www.earth.columbia.edu/sitefiles/file/about/director/pubs/intllr.pdf (last viewed 11 March 2013).
  • 2
    Key objectives of an effective and efficient insolvency law specified by the United Nations Commission on International Trade Law (“UNCITRAL”) Legislative Guide on Insolvency Law include the recognition of existing creditor rights and the establishment of clear rules for ranking of priority claims, and the equitable treatment of similarly situated creditors. See UNCITRAL Legislative Guide on Insolvency Law (2004), available at http://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf (last viewed 11 March 2013), at 11–13.
  • 3
    L. Buchheit, “The search for intercreditor parity”, 8 L. & Bus. Rev. Am. 73 (2002); A. Gelpern, “Building a better seating chart for sovereign restructurings”, 53 Emory L. J. (2004); P. Wood, “Sovereign insolvency: the bankruptcy ladder of priorities and the paripassu clause”, TijdschriftvoorFinancieel Recht (March 2012).
  • 4
    P. Wood, “Sovereign insolvency: the bankruptcy ladder of priorities and the paripassu clause”, supra note 3, at 64.
  • 5
    Established by the 1899 and 1907 Conventions for the Pacific Settlement of International Disputes, the PCA is an intergovernmental organization that works to facilitate the resolution of international disputes through arbitration and other processes.
  • 6
    Since 2000, several nongovernmental organizations focused on sovereign debt matters have actively advocated for the establishment of an arbitral tribunal for sovereign debt matters, which would function as an international insolvency court. See Jubilee, “Chapter 9/11? Resolving international debt crises—the Jubilee Framework for international insolvency”, January2002, available at http://probeinternational.org/library/wp-content/uploads/2011/02/9-11.pdf (last viewed 7 January 2013); Erlassjahr, “Resolving sovereign debt crises—towards a fair and transparent international insolvency framework”, September 2010, available at http://www.erlassjahr.de/english/towards-an-international-insolvency-framework.html (last viewed 7 January 2013), and AFRODAD, “Fair and transparent arbitration on debt”, 2002, available at http://www.afrodad.org/Publications/FTA/fta%20issues%20paper%202002.pdf (last viewed 7 January 2013). In response to their proposals, the Netherlands government invited the PCA to initiate a project to promote and facilitate the settlement of disputes arising out of international loan agreements. The interim conclusion of this project also refers to the need to develop substantive legal principles in this respect.See “Arbitration and Sovereign Debt”, paper prepared by the Steering Committee of the Netherlands Government and the Permanent Court of Arbitration, 11 July, 2012, at para. 2, available at http://www.slettgjelda.no/filestore/ArbitrationandSovereignDebt.pdf (last viewed 7 January 2013).
  • 7
    C. Paulus, “A resolvency proceeding for defaulting sovereigns”, IILR 2012; A. Dickerson, “A politically viable approach to sovereign debt restructuring”, 53 Emory L. J. (2004), pp.997-1041; K. Berensmann & F. Schroeder, “A proposal for a new international debt framework (IDF) for the prevention and resolution of debt crisis in middle-income countries”, Discussion Paper 2/2006; Erlassjahr, “Resolving sovereign debt crises—towards a fair and transparent international insolvency framework”, September 2010, available at http://www.erlassjahr.de/english/towards-an-international-insolvency-framework.html (last viewed 7 January 2013); P. Bolton & D. Skeel, “Inside the black box: how should a sovereign bankruptcy framework be structured?”, 53 Emory L. J. 763 (2004); S. Schwarcz, “Idiot's guide” to sovereign debt restructuring, 53 Emory L. J. (2004) pp. 11891218.
  • 8
    Following the first issuance of international bonds by Barings in 1817, bonds were the primary means of international long-term lending to states for more than 100 years until the 1930s. Bank lending was often limited to the form of short-term trade financing or inter-bank credit lines. The Great Depression in the 1930s shut down the bond market. At that time, states began to lend money to one another through loans, grants, and export credits. Since 1944, the IMF, World Bank, and many regional development banks have been established to achieve international economic cooperation, and join the sovereign debt creditor group. Also after the Second World War, long-term borrowing from commercial banks to sovereign states began to grow rapidly and peaked in the 1970s. A wave of bank loan defaults in the 1980s triggered a new debt crisis, and in the early 1990s, banks agreed to exchange bad loans for Brady bonds. As a result, bond finance, largely dormant for more than 60 years, has again dominated foreign sovereign borrowing.See A. Gelpern and M. Gulati, “Public symbol in private contract: a case study”, (2006) 84 Wash. U. L. Rev. 1627, at 1632–1633; L. Rieffel, “The Bank Advisory Committee Process”, Chapter 6 in Restructuring Sovereign Debt: The Case for Ad Hoc Machinery (2003, Brookings), at 96.
  • 9
    Paris Club official website, available at http://www.clubdeparis.org/sections/composition/membres-permanents-et/membres-permanents, (last viewed 13 December 2012).See generally E. Cosio-Pascal, The emerging of a multilateral forum for debt restructuring: the Paris Club, UNCTAD/OSG/DP/2008/7, Discussion Papers No. 192, available at http://unctad.org/en/Docs/osgdp20087_en.pdf (last viewed 7 January 2013).
  • 10
    L. Rieffel, “The bank advisory committee process”, supra note 8, at 103.
  • 11
    For a discussion of the use of creditors' committees in the Congo debt restructuring, see M. Richards, “The Republic of Congo's debt restructuring: are sovereign creditors getting their voice back?”, (2010) 73 Law& Contemp. Probs 273–299. Creditors' committees were also organized in the Greek debt restructuring,see J. Zettelmeyer, C. Trebesch and M. Gulati, “The Greek Debt exchange: an autopsy” (2012), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2144932 (last viewed 13 December 2012).
  • 12
    S. Hagan, “Designing a legal framework to restructure sovereign debt”, supra note 1, at 300-301
  • 13
    IMF, “The design of the sovereign debt restructuring mechanism—further considerations”, supra note 1, at para 8.
  • 14
    An amendment of the IMF's Articles of Agreement needs the approval of three-fifths of member States, holding 85% of the total voting power. See Articles of Agreement of the International Monetary Fund, as amended, Art. XXVIII(a), available at http://www.imf.org/external/pubs/ft/aa/aa28.htm (last viewed 11 March 2013).
  • 15
    In fact, CACs in bonds governed by English law began to appear in the 1980s. What the SDRM initiative encouraged was the inclusion of such clauses in bonds governed by New York law and others. Countries such as Mexico, Brazil, Belize, Guatemala, Venezuela, and Uruguay were among the first group to include CACs in their New York law bonds. More recently, the Treaty Establishing the European Stability Mechanism (“ESM”) also forces the inclusion of CACs, as of 1 January 2013, in all euro-area government securities with maturity above 1 year. In addition, the model CAC prepared includes an aggregation feature—referred to as cross-series modification—that permits changes to bind more than one series of bonds. See generally Cliffford Chance newsletter, “Euro area member states take collective action to facilitate sovereign debt restructuring”, December 2012, available at http://www.cliffordchance.com/publicationviews/publications/2012/12/euro_area_memberstatestakecollectiveactiont.html (last viewed 7 January 2013); M. Bradley & M. Gulati, “Collective action clauses for the Eurozone: an empirical analysis” (Oct. 2011), available at http://ssrn.com/abstract=1948534 (last viewed 11 March 2013); R. Quarles, “Herding cats: collective-action clauses in sovereign debt the genesis of the project to change market practice in 2001 through 2003”, Law& Contemp. Probs (September 2010); J. Drage & C. Hovaguimian, “Collective action clauses (CACS): an analysis of provisions included in recent sovereign bond issues” (November 2004).
  • 16
    Plaintiffs are individual bondholders, and hedge funds and other distressed asset investors who purchased the bonds in dispute on the secondary market. See NML Capital, Ltd. v. Republic of Argentina, No. 12-105-(L) (2d Cir. 26 October 2012), at 4, available at http://www.shearman.com/argentine-sovereign-debt/ (last viewed 26 April 2013).
  • 17
    The pari passu clause in dispute provided that securities shall at all times rank pari passu, and that the Argentina's payment obligations under the bonds shall at all times rank equally at least equally with all its other present and future unsecured and unsubordinated securities. The Second Circuit explained that the clause protected against two different forms of discrimination: the issuance of other superior debt and the giving of priority to other payment obligations. It affirmed the injunctions issued by the trial court that requires Argentina to make ratable payments to plaintiffs concurrent with or in advance of its payments to holders of old bonds, and asked the trial court to further clarify how the payment formula in the injunction will operate. The trial court clarified, in a subsequent order issued on 21 November 2012, that the payment formula in the injunction is intended to operate as follows: Whenever Argentina pays any amount due under the terms of the exchange bonds, it must concurrently or in advance pay plaintiffs the same percentage of the amount due to them. See NML Capital, Ltd. v. Republic of Argentina, No. 12-105-(L) (2d Cir. 26 October 2012);NML Capital, Ltd. v. Republic of Argentina, 08 Civ. 6978 (TPG), 09 Civ. 1707 (TPG), 09 Civ. 1708 (TPG)(S.D.N.Y., 21 November 2012), available at http://www.shearman.com/argentine-sovereign-debt/ (last viewed 26 April 2013). For a discussion of this case,see Global Law Intelligence Unit, Allen & Overy LL.P, “The paripassu clause and the Argentine case”, 27 December 2012; W. Weidemaier, “Sovereign debt after NML v. Argentina, Capital Markets Law Journal (forthcoming), available at http://ssrn.com/abstract=2199655 (last viewed 10 March 2013).
  • 18
    Between 2006 and 2008, three groups of bondholders initiated arbitration at the ICSID against Argentina under investment treaties that grant foreign investors certain treaty protections with respect to the host country's behavior (i.e., Abaclat and others v. Argentine Republic, ICSID Case No. ARB/07/5;Giovanni Alemanni and others v. Argentine Republic, ICSID Case No.ARB/07/8;and AmbienteUfficioS.p.A. v. Argentine Republic, ICSID Case No.ARB/08/9). In August 2011, the arbitral tribunal in Abaclat upheld its jurisdiction by a majority decision. One of the jurisdictional issues is whether bonds qualify as investment and could enjoy the protection offered by investment treaties. The word “investment” is not defined in the ICSID Convention, but the definition of investment in the applicable treaty in Abaclat does include sovereign bonds. Nevertheless, Argentina raised jurisdictional challenge, arguing that ICSID proceedings are not appropriate in the context of sovereign debt restructuring. Views of the members of the tribunal differed. One member would have declined jurisdiction, explaining that the intervention of ICSID tribunals in sovereign debt disputes raises international public policy issues about the workability of future sovereign debt restructurings. However, the majority of the tribunal, in finding jurisdiction, reasoned that policy concerns are for states, not for the tribunal, to consider when negotiating investment treaties, and that the appropriateness of ICSID proceedings in this context is irrelevant.See Abaclat and others v. Argentine Republic, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility (August 2011), at para. 550;Abaclat and others v. Argentine Republic, ICSID Case No.ARB/07/5, Georges Abi-Saab's dissenting opinion of 28 October 2011, at para. 271.
  • 19
    AmbienteUfficioS.p.A. v. Argentine Republic, (ICSID Case No. ARB/08/9), Decision in Jurisdiction and Admissibility (February 2013). Co-arbitrator Santiago Torres Bernárdez dissented but has yet to issue a separate opinion.
  • 20
    Because the doctrine of absolute sovereign immunity did not permit states be sued in foreign courts without their express consent, disappointed private lenders to foreign states had very few options other than to seek the help of their own governments, known as “diplomatic protection.” During that period, creditor states have often been debt collectors for money lent by their nationals to other governments through pressuring debtor state into payment or settlement by means of superior bargaining power, the use of power politics (including the use of force) or arbitration, and adjudication at international courts and tribunals. A few case examples are French Company of Venezuelan Railroads Case (1905);Canavero Claim (Italy v. Peru, PCA, 1912);French claims against Peru (PCA, 1921);Payment of various Serbian loans issued in France (PCIJ, 1929);Payment in gold of Brazilian federal loans contracted in France (PCIJ, 1929);SocieteCommerciale De Belgique (Belgium v. Greece, PCIJ, 1939).See generally M. Waibel, Sovereign defaults before international courts and tribunals (2011, Cambridge); L. Buchheit, “The role of the official sector in sovereign debt workouts”, 6 Chi. J. Int'l L. 333 (2005); E. Borchard, State Insolvency and Foreign Bondholders, General Principles Volume I (1951).
  • 21
    Quite a few states have passed statutes codifying the restrictive theory of sovereign immunity. Examples include the Sovereign Immunities Acts of the United States (1976), United Kingdom (1978), Singapore (1979), Pakistan (1981), South Africa (1981), Canada (1982), and Australia (1985). See generally H. Fox, The Law of State Immunity (2008, Oxford). Moreover, Austria, France, Iran, Japan, Kazakhstan, Lebanon, Norway, Portugal, Romania, Saudi Arabia, Spain, Sweden, and Switzerland have ratified the United Nations Convention on Jurisdictional Immunities of States and Their Property (not yet in force) signed in December 2004, which recognizes the restrictive theory of sovereign immunity.See the Status of the United Nations Convention on Jurisdictional Immunities of States and Their Property, available at http://treaties.un.org/pages/ViewDetails.aspx?src=TREATY&mtdsg_no=III-13&chapter=3&lang=en (last viewed 11 March 2013).
  • 22
    See A. Gelpern and M. Gulati, “Public symbol in private contract: a case study”, (2006) 84 Wash. U. L. Rev. 1627, at 1632–1633
  • 23
    Schumacher provides an excellent dataset of sovereign debt litigations filed in the UK and US courts between 1976 and 2010. Schumacher et al., “Sovereign defaults in court: the rise of creditor litigation 1976-2010”, available at http://dx.doi.org/10.2139/ssrn.2189997 (last viewed 11 March 2013), at 8.
  • 24
    The ICSID Convention requires its 147 member states to recognize and enforce an arbitral award rendered pursuant to the convention as if it were a final judgment of a court in that state. See Art. 54(1), ICSID Convention, available at https://icsid.worldbank.org/ICSID/ICSID/RulesMain.jsp (last viewed 14 December 2012).
  • 25
    Schumacher describes the current sovereign debt litigation environment as a hunt for assets. See Schumacher et al., Sovereign defaults in court: the rise of creditor litigation 1976-2010, supra note 23, at 8.
  • 26
    NML Capital, Ltd. v. Republic of Argentina (2nd Cir. 26 October 2012), supra note 17, at 19.
  • 27
    Treaty Establishing the European Stability Mechanism, Preamble, at para. 13.
  • 28
    The ECB announced that “it accepts the same (paripassu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions.” Under the Outright Monetary Transactions program, the ECB buys short-term (1 to 3 years) bonds of Eurozone countries in the secondary market, in unlimited amounts, in order to suppress the yields on those instruments. See ECB Press Release, 6 September 2012—Technical features of Outright Monetary Transactions. It has been suggested that the uncertainty surrounding these events might have a potentially destabilizing effect on the market. See Global Law Intelligence Unit, Allen &Overy LL.P, “How the Greek debt reorganization of 2012 changed the rules of sovereign insolvency” (September 2012), at 31.
  • 29
    L. Buchheit, “The search for intercreditor parity”, supra note 3, at 76.
  • 30
    E. Cosio-Pascal, supra note 9, at 12.
  • 31
    Ibid., at 13.
  • 32
    M. Wright, “The paripassu clause in sovereign bond contracts: evolution or intelligent design?”, 1 Hofstra L. Rev.40 (2011), at 5; L. Buchheit, “The search for intercreditor parity”, supra note 3, at 76.
  • 33
    P. Wood, “Sovereign insolvency: the bankruptcy ladder of priorities and the paripassu clause”, supra note 3, at 69.
  • 34
    Ibid.
  • 35
    Ibid.
  • 36
    The usage of paripassu clauses in unsecured bonds issued from 1960 to 2011 is recorded as follows: 123/144 (1960–1979), 429/464 (1980–1999), and 684/691 (2000–2011). See M. Gulati and R. Scott, The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design (2012, Chicago), Appendix 7.
  • 37
    Ibid., at 34. M. Wright, supra note 33, at 6.
  • 38
    One limitation of the negative pledge clause is that it does not catch various forms of quasi-security or title finance which, although not security in legal form, may be security in substance. P. Wood, “Sovereign insolvency: the bankruptcy ladder of priorities and the paripassu clause”, supra note 3, at 69-70.
  • 39
    Wood lists a few examples of the paripassu clause in sovereign bonds, for example, Pakistan (15 November 1999), Ecuador (27 July 2000), Ukraine (8 February 2001), Russian (25 February 2004), Argentina (10 January 2005), and Dominican Republic (20 April 2005). Ibid., at 66-67.
  • 40
    Global Law Intelligence Unit, Allen &Overy LL.P, “The paripassu clause and the Argentine case” (27 December 2012), at 7.
  • 41
    For a discussion of relevant case law, see P. Wood, Sovereign insolvency: the bankruptcy ladder of priorities and the paripassu clause, TijdschriftvoorFinancieel Recht, March 2012, pp. 6070, at 65-66; M. Gulati and R. Scott, The Three and a Half Minute Transaction: Boilerplate and the Limits of Contract Design (2012, Chicago), at 20–26.
  • 42
    Global Law Intelligence Unit, Allen &Overy LL.P, supra note 17, at 8.
  • 43
    Those actions included executive declared moratoriums on payments on the old bonds that had been renewed each year, the fact that Argentina had not made a single payment on the old bonds for 6 years while timely servicing the new bonds, that Argentina enacted the Lock Law, and that Argentina had stated in the prospectuses for the new bonds that it had no intention of making any payments on the old bonds and classified the old bonds as a separate category from the new bonds in its Security Exchange Commission (SEC) filings. Ibid., at 11.
  • 44
    NML Capital, Ltd. v. Republic of Argentina, (2nd Cir. 26 October 2012), supra note 17, at 21.Global Law Intelligence Unit, Allen &Overy LL.P, supra note 17, at 12.
  • 45
    M. Wright, supra note 33, at 4.
  • 46
    L. Buchheit, “The search for intercreditor parity”, supra note 3, at 78.
  • 47
    Non-Paris Club creditors include all external creditors except multilateral creditors. The Paris Club explains that non-Paris Club official bilateral creditors grant loans generally similar to those provided by Paris Club creditors. Consequently, non-Paris Club official bilateral creditors often restructure on terms very similar to those agreed with the Paris Club. These creditors may also participate in Paris Club treatments and, under these circumstances, apply exactly the same treatment as that applied by Paris Club creditors. See Paris Club official website, supra note 10.
  • 48
    Ibid.
  • 49
    L. Buchheit, The search for intercreditor parity, supra note 3, at 76.
  • 50
    See Paris Club official website, supra note 10; L. Rieffel, “What is broken? What fixes make sense?”, Chapter 12 in Restructuring Sovereign Debt: The Case for Ad Hoc Machinery (2003, Brookings), at 282.
  • 51
    For a summary of proposals, see Das et al., “Sovereign debt restructurings 1950–2010: literature survey, data, and stylized facts”, IMF WP 12/203, at 87-95; Berensmann & Herzberg, “Sovereign insolvency procedures—a comparative look at selected proposals”, Journal of Economic Surveys (2009) Vol. 23, No. 5, pp. 856881.
  • 52
    Examples of eligible claims are listed as follows: (i) repayment of money lent or credit advances; (ii) receipt of deferred purchase price of goods or services; (iii) payments under bonds, notes, or similar instruments; (iv) amounts payable under interest rate and current swaps, and other financial derivatives; (v) the right of an issuing bank to be reimbursed for payments made under a letter of credit, bankers acceptance, or bond; (vi) payments due under leases; (vii) guarantees or insurance contracts (direct or indirect) of the indebtedness of another party; and (viii) court judgments requiring payment for liability on eligible claims. See IMF, “The design of the sovereign debt restructuring mechanism—further considerations”, supra note 1, at 13 & 18.
  • 53
    Ibid., at 22-23.
  • 54
    Ibid., at 23-25.
  • 55
    A. Gelpern,supra note 3, 53 Emory L. J. 11191160 (2004), at 1153.
  • 56
    Ibid., at 1158.
  • 57
    Ibid. Gelpern argues that this approach would encourage transparency and advance planning by the debtor, improve incentives for risk assessment by the creditors, and introduce a multilateral policy check on governments' unilateral decisions in crisis.
  • 58
    The Institute of International Finance's Joint Committee on Strengthening the Framework for Sovereign Debt Crisis Prevention and Resolution is a public–private sector initiative launched under the auspices of the co-chairs of the Group of Trustees. The Joint Committee is chaired by Jean Lemierre, Senior Advisor to the Chairman, BNP Paribas, and Co-Chair of the IIF Special Committee on Financial Crisis Prevention and Resolution; Thomas Wieser, President, Eurogroup Working Group; David Mulford, Vice-Chairman International, Credit Suisse Group; and Gerardo Rodríguez Regordosa, Undersecretary of Finance and Public Credit, Mexico. It comprised 35 prominent representatives from the public and private sectors with extensive experience in sovereign debt restructuring in the euro-area and elsewhere. The report was endorsed by the Group of Trustees during their Annual Meeting in Tokyo on 14 October 2012. See Report of the Joint Committee on Strengthening the Framework for Sovereign Debt Crisis Prevention and Resolution (October 2012), available at http://www.iif.com/press/press+393.php, last viewed 11 March 2013), at 5 and 6. Information about the old version of the principles is available at http://www.iif.com/press/press+3.php (last viewed 9 March 2013).
  • 59
    Ibid., at 22.
  • 60
    Ibid.
  • 61
    Ibid., at 26.
  • 62
    Ibid.
  • 63
    K. Berensmann & F. Schroeder, supra note 7, at 11.
  • 64
    Ibid., at 14.
  • 65
    Erlassjahr, supra note 7, at 12.
  • 66
    Ibid., at 16.
  • 67
    C. Paulus, supra note 7, at 6.
  • 68
    Ibid., at 16.
  • 69
    Paulus mentions that “before it comes to the voting the debtor and its creditors have to sit at the same table and discuss the proposed plan.” Ibid., at 13.
  • 70
    Ibid.
  • 71
    P. Bolton & D. Skeel, supra note 7, at 799.
  • 72
    Ibid.
  • 73
    S. Schwarcz, supra note 7, at 1216.
  • 74
    Ibid., at 1217.
  • 75
    Ibid., at 1216.
  • 76
    A. Dickerson, supra note 7, at 1030.
  • 77
    A. Dickerson, Ibid., at 999.
  • 78
    It is argued that taking assets out of a live pool does not necessarily lead to a situation where fewer assets are available for other creditors, provided that the debtor can coordinate the rate at which assets increase, relative to the rate at which assets are attached by creditors. See S. Block-Lieb, “Fishing in muddy waters: clarifying the common pool analogy as applied to the standard for commencement of a bankruptcy case”, 42 Am. U. L. Rev. 337 (1993), at 381.
  • 79
    T. Jackson, “Determining liabilities and the basic role of nonbankruptcy law”, Chapter 2 in The Logic and Limits of Bankruptcy Law (1986, Harvard), at 38.
  • 80
    Ibid.
  • 81
    Ibid.
  • 82
    Notably, in reorganization proceedings, Section 1124 (2)(b) of the US Code allows the debtor to “reinstat[e] the maturity of such claim or interest as such maturity existed before such default.” Ibid., at 40.
  • 83
    11 USC § 901–946. It is worth noting that Chapter 9 debtors are subject to five eligibility requirements (11 USC § 901(c)) and court approval. Large portion of reported case law deals with eligibility issues.
  • 84
    11 USC § 101.
  • 85
    11 USCA § 101.
  • 86
    Ibid.
  • 87
    All creditors were offered (i) 1-year and two-year notes issued by the European Financial Stability Facility, amounting to 15% of the old debt's face value; (ii) 20 new government bonds maturing between 2023 and 2042, amounting to 31.5% of the old debt's face value, with annual coupons between 2% and 4.3%; (iii) A Gross Domestic Product (GDP)-linked security that could provide an extra payment stream of up to one percentage point of the face value of the outstanding new bonds if GDP exceeds a specified target path (roughly in line with the IMF's medium-term and long-term growth projections for Greece). See J. Zettelmeyer, C. Trebesch and M. Gulati, supra note 11, at 6.
  • 88
    Ibid., at 17.
  • 89
    Susan Block-Lieb, “Congress's temptation to defect: a political and economic theory of legislative resolutions to financial common pool problems”, 39 Ariz. L. Rev. 801, pp. 802803 (1997);See also T. Jackson, The Logic and Limits of Bankruptcy Law (1986), pp. 1213; D. Baird & T. Jackson, Cases, Problems and Materials on Bankruptcy, 2030 (2d ed. 1990); T. Jackson & R. Scott, “On the nature of bankruptcy: an essay on bankruptcy sharing and the creditors' bargain”, 75 Va. L. Rev. 155: 178 (1989).
  • 90
    Thomas Jackson, The Logic and Limits of Bankruptcy Law (1986), p. 13.
  • 91
    Susan Block-Lieb, “Fishing in muddy waters: clarifying the common pool analogy as applied to the standard for commencement of a bankruptcy case”, supra note 79.
  • 92
    T. Jackson, “Bankruptcy, non-bankruptcy entitlements, and the creditors' bargain”, 91 Yale L. J. 857 (1982), at 864 and 866.
  • 93
    Ibid., at 868
  • 94
    Ibid., at 869
  • 95
    Ibid., at 870.
  • 96
    R. Olivares-Caminal, Legal Aspects of Sovereign Debt Restructuring (2009, Sweet & Maxwell), at. paras. 2-001, 2-002, 2-004.
  • 97
    Schumacher et al., supra note 23.
  • 98
    Ibid., at 3.
  • 99
    Ibid.
  • 100
    D. Rodrik, “Why is there multilateral lending?”, NBER Working Paper No. 5160 (June 1995), at 2. Crippa discusses the human right issues involved in projects financed by multilateral development banks.See L. Crippa, “Multilateral development banks and the human right responsibility”, 3 Am. U. Int'l L. Rev. 25(2010): 531577.
  • 101
    L. Rieffel, “What is broken? What fixes make sense?”, supra note 51. E. Downs, “Inside China Inc.: China Development Banks' Cross-border Energy Deals”, The John L. Thornton China Center at Brookings (2011).
  • 102
    IMF, “The design of the sovereign debt restructuring mechanism-further considerations”, supra note 1, at 23-25. S. Schwarcz, supra note 1, at 1217.
  • 103
    UNCITRAL, supra note 1, at 11.
  • 104
    Ibid.