[Yanying Li is a Ph.D researcher at Leiden University, the Netherlands, and a visiting research fellow at the University of Cambridge]
Recent reforms for more orderly sovereign debt restructurings have been prompted by the so-called “trial of the century” in sovereign debt restructuring—
NML Capital Ltd. v. Republic of Argentina. In short, various court decisions in New York found Argentina in breach of the
pari passu clause in its defaulted bonds, and prohibited Argentina from making payments to those creditors who accepted the bond exchange offer unless other creditors who rejected the exchange offer (i.e. holdout creditors), including plaintiffs in this case, were paid the same percentage of the amount due to them. The
pari passu clause in question provides that the debtor’s payment obligation under that particular bond series shall rank equally with all other existing and future unsubordinated and unsecured external indebtedness. Given that
Julian has already addressed the latest development in this case, my little contribution here will only focus on the issues of legal reform in the context of sovereign debt restructuring.
As discussed in my earlier
post, on September 9, 2014, the United Nations General Assembly adopted a resolution entitled “Towards the establishment of a multilateral legal framework for sovereign debt restructuring processes”. The modalities for the intergovernmental negotiations and the adoption of the text of the multilateral legal framework will be discussed at the General Assembly’s 69th session plenary meeting on
November 14, 2014. In the meantime, the directors and staff at the International Monetary Fund did not just sit back and relax. As noted in
Press Release No.14/459dated October 6, the IMF’s Executive Board approved the staff paper on “Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring”. The
staff paper suggests a few contractual reforms designed to tackle collective action problems so as to achieve orderly sovereign debt restructurings. These reforms include potential changes to international sovereign bond contracts, namely the
pari passu clause and the collective action clause (“CAC”).
