Breaking news just announced that Puerto Rico defaulted on a $58 million bond payment due. Argentina, Greece, Puerto Rico -- all have recently been in the news for failing to manage and restructure unsustainable debt.
Despite this evidently common global problem, there is no established process or forum, like bankruptcy, for sovereigns to efficiently resolve issues with all creditors, who often span the globe, in one place at one time. Financial crises of countries not only seriously adversely affect the economy and the well-being of their citizens, but threaten the destabilization of the global economy. Further, access to global capital markets and private and institutional investors may be seriously curtailed if such investors are unable to protect and enforce their investments with some measure of fairness and certainty of process.
Case in point: in 2008, U.S.-based holders of more than $20 billion in Argentine bonds filed suit to collect on their debts in U.S. courts in litigation that is still ongoing. Whether Argentina will ultimately comply with U.S. court orders regarding repayment remains to be seen. It is precisely this type of unpredictability that may quell future investment in sovereign debt, with worldwide financial repercussions. Accordingly, the implementation of a global framework for adjudicating these types of claims is imperative.
The best and worst of bankruptcy laws around the world should be examined by experts representing different nations, with the goal of distilling such laws into an international system for resolution of sovereign debt. This is not a new concept; many scholars and international organizations, such as the United Nations, have been examining ways in which to address the cross-border resolution of sovereign debt. Proposed treaties are being contemplated. A further example is the work of Professor Steven L. Schwarcz of Duke University School of Law, who has proposed a model–law approach to sovereign debt restructuring. Finally, industry groups such as the International Insolvency Institute have formed working groups to study, discuss and propose how to best approach sovereign debt restructuring from an international perspective.
Most recently, after six months of study, the United Nations, through its ad hoc committee on sovereign debt restructuring process, just announced the unanimous adoption of nine principles for restructuring sovereign debt (right of sovereign states to restructure their debt; sovereign immunity; good faith; transparency; impartiality; equal treatment; legitimacy; sustainability; and respect for majority decision in restructuring processes). While these nine principles are noteworthy and critical to a fair and efficient system, and their publication is a crucial first step, much more work needs to be done to formulate a larger debt resolution scheme that both incorporates these principles and is sufficiently regarded internationally to achieve buy-in by the sovereign nations. Such a global structure, if feasible, would improve and support global economic and political relations and likely propagate new sources of capital for struggling nations to access in the future. For these reasons, the creation of such a structure, though challenging on numerous fronts, is a worthwhile endeavor and should be a primary focus of political leaders and insolvency professionals in the near term.
Itkin and Kelly are attorneys with the Los Anglese-based firm of Liner LLP.