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Steven L. Schwarcz - One of the best experts on this subject based on the ideXlab platform.
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A Model-law Approach to Sovereign Debt Restructuring
2017Co-Authors: Steven L. SchwarczAbstract:Unresolved Sovereign Debt problems and disruptive litigation are hurting Debtor nations and their citizens, as well as their creditors. A default can also pose a serious systemic threat to the international financial system. Yet the existing “contractual” approach to Sovereign Debt restructuring, including the use of so-called collective action clauses, is insufficient to solve the holdout problem; recent empirical research indeed shows a drastic rise in Sovereign Debt litigation by holdout creditors. And the political economy of treaty-making makes a multilateral “statutory” approach highly unlikely to succeed in the near future. This article, prepared at the invitation of the United Nations Commission on International Trade Law (UNCITRAL) for presentation at its 50th Anniversary Congress, shows why a model-law approach to Sovereign Debt restructuring should be realistic and effective. Nations and even subnational jurisdictions could individually enact a model law as their internal law, and contracts governed by that law would thereby become governed by the model law. Choice of law thus gives a model-law approach a powerful multiplier effect. A model-law approach could also solve the problem of pari passu clauses and address the critical need for a financially troubled nation to obtain liquidity during its restructuring process. The article proposes a form of Sovereign Debt Restructuring Model Law, which has been vetted in discussions with leading experts worldwide and also embraces the Basic Principles on Sovereign Debt Restructuring Processes adopted by the United Nations General Assembly in 2015. At the very least, pursuing the Model Law in parallel to other approaches would help to develop norms for a Sovereign Debt restructuring legal framework that goes beyond mere contracting.
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Sovereign Debt Restructuring and English Governing Law
The Brooklyn Journal of Corporate Financial and Commercial Law, 2017Co-Authors: Steven L. SchwarczAbstract:Whether or not their fault, nations sometimes borrow at levels that become unsustainable. Until resolved, the resulting Debt burden hurts not only those nations but also their citizens, their creditors, and — by posing serious systemic risks to the international financial system — the wider economic community. The existing contractual framework for restructuring Sovereign Debt is inadequate, often leaving little alternative between a bailout, which is costly and creates moral hazard, and a default, which raises the specter of financial contagion and chaos. Although global organizations, including the United Nations and the International Monetary Fund, have tried to strengthen the Sovereign-Debt-restructuring framework through treaties, such a multilateral legal approach is highly unlikely to succeed in the near future. This essay argues that a model-law approach should facilitate Sovereign Debt restructuring much more feasibly than a multilateral approach. Model laws have long been used in cross-border lawmaking, when treaties fail. Unlike a treaty, a model law does not require widespread acceptance for its implementation. In particular, if this essay’s model law were enacted into English law, that alone would enable the fair and consensual restructuring of the immense stock — perhaps a quarter to a third or more of all Sovereign Debt contracts — of such contracts governed by that law. And because it would achieve, by operation of law, the equivalent of the ideal goal of including aggregate-voting collective action clauses in all Sovereign Debt contracts, such enactment should ensure the continuing legitimacy and attractiveness of English law as the governing law for future Sovereign Debt contracts. At the very least, however, this essay should serve to increase a model-law approach’s political feasibility by explaining the approach and its potential benefits and limitations. An incremental approach to developing norms, such as one developed through a model law, has strong precedent in the legal ordering of international relationships.
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A Model Law Approach to Restructuring Unsustainable Sovereign Debt
2015Co-Authors: Steven L. SchwarczAbstract:Unresolved Sovereign Debt problems are hurting Debtor nations, their citizens and their creditors, and also can pose serious systemic threats to the international financial system. The existing contractual restructuring approach is insufficient to make Sovereign Debt sustainable. Although a more systematic legal resolution framework is needed, a formal multilateral approach, such as a treaty, is not currently politically viable. An informal model-law approach should be legally, politically and economically feasible. This informal approach would not require multilateral acceptance. Because most Sovereign Debt contracts are governed by either New York or English law, it would be sufficient if one or both of those jurisdictions enacted a proposed Sovereign Debt Restructuring Model Law as their domestic law.
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'Idiot's Guide' to Sovereign Debt Restructuring
SSRN Electronic Journal, 2004Co-Authors: Steven L. SchwarczAbstract:This essay attempts to achieve the same goal for the complex and confusing topic of Sovereign Debt restructuring that the "Idiot's Guide" series of books achieve for their covered topics: to provide a systematic, accessible, and easy-to-grasp overview, so that readers can understand issues in context and go on to more advanced study. The essay also compares and contrasts public-law and private-law approaches to Sovereign Debt restructuring.
Manuel Amador - One of the best experts on this subject based on the ideXlab platform.
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A contraction for Sovereign Debt models
Journal of Economic Theory, 2019Co-Authors: Mark Aguiar, Manuel AmadorAbstract:Abstract Using a dual representation, we show that the Markov equilibria of the one-period-bond Eaton and Gersovitz (1981) incomplete markets Sovereign Debt model can be represented as a fixed point of a contraction mapping, providing a new proof of the uniqueness and existence of equilibrium in the benchmark Sovereign Debt model. The arguments can be extended to incorporate re-entry probabilities after default when the shock process is iid. Our representation of the equilibrium bears many similarities to an optimal contracting problem. We use this to argue that commitment to budget rules has no value to a benevolent government. We show how the introduction of long-term bonds breaks the link to the constrained planning problem.
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Sovereign Debt booms in monetary unions
The American Economic Review, 2014Co-Authors: Mark Aguiar, Manuel Amador, Emmanuel Farhi, Gita GopinathAbstract:We propose a continuous time model to investigate the impact of inflation credibility on Sovereign Debt dynamics. At every point in time, an impatient government decides fiscal surplus and inflation, without commitment. Inflation is costly, but reduces the real value of outstanding nominal Debt. In equilibrium, Debt dynamics is the result of two opposing forces: (i) impatience and (ii) the desire to conquer low inflation. A large increase in inflation credibility can trigger a process of Debt accumulation. This rationalizes the Sovereign Debt booms that are often experienced by low inflation credibility countries upon joining a currency union.
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Chapter 11 - Sovereign Debt☆
Handbook of International Economics, 2014Co-Authors: Mark Aguiar, Manuel AmadorAbstract:In this chapter, we use a benchmark limited-commitment model to explore key issues in the economics of Sovereign Debt. After highlighting conceptual issues that distinguish Sovereign Debt as well as reviewing a number of empirical facts, we use the model to discuss Debt overhang, risk-sharing, and capital flows in an environment of limited enforcement. We also discuss recent progress on default and renegotiation; self-fulfilling Debt crises; and incomplete markets and their quantitative implications. We conclude with a brief assessment of the current state of the literature and highlight some directions for future research.
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Sovereign Debt: a Review
2013Co-Authors: Mark Aguiar, Manuel AmadorAbstract:In this chapter, we use a benchmark limited-commitment model to explore key issues in the economics of Sovereign Debt. After highlighting conceptual issues that distinguish Sovereign Debt as well as reviewing a number of empirical facts, we use the model to discuss Debt overhang, risk sharing, and capital flows in an environment of limited enforcement. We also discuss recent progress on default and renegotiation; self-fulfilling Debt crises; and incomplete markets and their quantitative implications. We conclude with a brief assessment of the current state of the literature and highlight some directions for future research.
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Sovereign Debt and the Tragedy of the Commons
2007Co-Authors: Manuel AmadorAbstract:The paper presents a model of Sovereign Debt repayment based in a tragedy of the commons. It is shown that Sovereign Debt is issued and repaid in equilibrium, even when contracts a la Bulow-Rogoff are available to a country that defaults.
Karel Verbeke - One of the best experts on this subject based on the ideXlab platform.
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Sovereign Debt Workouts: Quo Vadis?
AfricaGrowth Agenda, 2018Co-Authors: Danny Cassimon, Dennis Essers, Karel VerbekeAbstract:The existing framework for Sovereign Debt workouts is often described as a ‘non-system’, a loose mix of Paris Club arrangements for official Debts, voluntary renegotiations with commercial creditors, and more ambitious but, ultimately, temporary schemes for Debt relief such as the Heavily InDebted Poor Country (HIPC) initiative (which is now nearing its end). With Sovereign Debt crises looming in a range of countries, from advanced economies to former HIPCs, the question of how such crises should be confronted is again growing louder. Whereas most would agree that the current framework for Sovereign Debt workouts needs reform, opinions on the design of the reform diverge widely. This short paper outlines a number of initiatives that are currently under way or on the table and discusses their main advantages and drawbacks.
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Sovereign Debt Workouts: Quo Vadis?
2017Co-Authors: Danny Cassimon, Dennis Essers, Karel VerbekeAbstract:The existing framework for Sovereign Debt workouts is often described as a ‘non-system’, a loose mix of Paris Club arrangements for official Debts, voluntary renegotiations with commercial creditors, and more ambitious but, ultimately, temporary schemes for Debt relief such as the Heavily InDebted Poor Country (HIPC) initiative (which is now nearing its end). With Sovereign Debt crises looming in a range of countries, from advanced economies to former HIPCs, the question of how such crises should be confronted is again growing louder. Whereas most would agree that the current framework for Sovereign Debt workouts needs reform, opinions on the design of the reform diverge widely. This short paper outlines a number of initiatives that are currently under way or on the table and discusses their main advantages and drawbacks. (This abstract was borrowed from another version of this item.)
Mark Aguiar - One of the best experts on this subject based on the ideXlab platform.
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A contraction for Sovereign Debt models
Journal of Economic Theory, 2019Co-Authors: Mark Aguiar, Manuel AmadorAbstract:Abstract Using a dual representation, we show that the Markov equilibria of the one-period-bond Eaton and Gersovitz (1981) incomplete markets Sovereign Debt model can be represented as a fixed point of a contraction mapping, providing a new proof of the uniqueness and existence of equilibrium in the benchmark Sovereign Debt model. The arguments can be extended to incorporate re-entry probabilities after default when the shock process is iid. Our representation of the equilibrium bears many similarities to an optimal contracting problem. We use this to argue that commitment to budget rules has no value to a benevolent government. We show how the introduction of long-term bonds breaks the link to the constrained planning problem.
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Sovereign Debt booms in monetary unions
The American Economic Review, 2014Co-Authors: Mark Aguiar, Manuel Amador, Emmanuel Farhi, Gita GopinathAbstract:We propose a continuous time model to investigate the impact of inflation credibility on Sovereign Debt dynamics. At every point in time, an impatient government decides fiscal surplus and inflation, without commitment. Inflation is costly, but reduces the real value of outstanding nominal Debt. In equilibrium, Debt dynamics is the result of two opposing forces: (i) impatience and (ii) the desire to conquer low inflation. A large increase in inflation credibility can trigger a process of Debt accumulation. This rationalizes the Sovereign Debt booms that are often experienced by low inflation credibility countries upon joining a currency union.
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Chapter 11 - Sovereign Debt☆
Handbook of International Economics, 2014Co-Authors: Mark Aguiar, Manuel AmadorAbstract:In this chapter, we use a benchmark limited-commitment model to explore key issues in the economics of Sovereign Debt. After highlighting conceptual issues that distinguish Sovereign Debt as well as reviewing a number of empirical facts, we use the model to discuss Debt overhang, risk-sharing, and capital flows in an environment of limited enforcement. We also discuss recent progress on default and renegotiation; self-fulfilling Debt crises; and incomplete markets and their quantitative implications. We conclude with a brief assessment of the current state of the literature and highlight some directions for future research.
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Sovereign Debt: a Review
2013Co-Authors: Mark Aguiar, Manuel AmadorAbstract:In this chapter, we use a benchmark limited-commitment model to explore key issues in the economics of Sovereign Debt. After highlighting conceptual issues that distinguish Sovereign Debt as well as reviewing a number of empirical facts, we use the model to discuss Debt overhang, risk sharing, and capital flows in an environment of limited enforcement. We also discuss recent progress on default and renegotiation; self-fulfilling Debt crises; and incomplete markets and their quantitative implications. We conclude with a brief assessment of the current state of the literature and highlight some directions for future research.
Singh Dalvinder - One of the best experts on this subject based on the ideXlab platform.
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Part III Sovereign Debt Restructuring, 12 Transactional Aspects of Sovereign Debt Restructuring
Debt Restructuring, 2016Co-Authors: Olivares-caminal Rodrigo, Douglas John, Guynn Randall, Kornberg Alan, Paterson Sarah, Singh DalvinderAbstract:This chapter details the transactional aspects of Sovereign Debt restructuring. The amount of accumulated Debt and its progressive increase have led to repayment problems for some countries and, in some cases, resulted in default. Therefore, as countries amass unsustainable Debt burdens (as happens when the ratio of Debt to gross domestic product rises to such an extent that the application of policies cannot revert the situation), they have an increasing need to restructure their Sovereign Debt. Sovereign Debt restructuring can be understood as the technique used by Sovereign states to prevent or resolve financial and economic crises and to achieve Debt sustainability levels. The IMF has reviewed its lending framework in the context of Sovereign Debt vulnerabilities. It is hoping to introduce greater flexibility and be able to provide exceptional access to funding on the base of a Debt operation that involves an extension of maturities.
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Part III Sovereign Debt Restructuring, 11 Litigation Aspects of Sovereign Debt
Debt Restructuring, 2016Co-Authors: Olivares-caminal Rodrigo, Douglas John, Guynn Randall, Kornberg Alan, Paterson Sarah, Singh DalvinderAbstract:This chapter starts the study of litigation aspects of a Sovereign Debt by looking at the effect of a disruption in the economy in terms of legal options for recovery. The chapter also looks at the pari passu clause in Sovereign Debt instruments. A pari passu clause is a standard clause included in public or private international unsecured Debt obligations (syndicated loan agreements and bond issuances). From a close reading of the clause, it can be argued that it has two limbs: firstly, an internal limb, ie that the bonds will rank pari passu with each other; and, secondly, an external limb, ie that the bonds will rank pari passu with other unsecured (present or future) inDebtedness of the issuer. Not all pari passu clauses are drafted in the same way, and they will vary according to the drafter. The chapter considers various relevant cases.
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Part III Sovereign Debt Restructuring, 10 An Introduction to Sovereign Debt Restructuring
Debt Restructuring, 2016Co-Authors: Olivares-caminal Rodrigo, Douglas John, Guynn Randall, Kornberg Alan, Paterson Sarah, Singh DalvinderAbstract:This chapter starts by introducing the Brady Plan which aimed to address the Debt crisis that occurred in the developing countries during the 1980s. The chapter also looks at new developments which have taken place in the area of Sovereign Debt restructuring since the Brady Plan. These are the EU Sovereign Debt crisis, and the ongoing Argentine litigation in New York. The former is a Debt crisis that was originated in Greece in late 2009 and has been taking place in other Euro-areas ever since and has affected Portugal, Ireland, Spain, and Cyprus. The ongoing Argentine litigation in New York relates to a claim initiated by a hedge fund to collect on defaulted Debt obligations issued by Argentina based on the breach of the pari passu clause. The pari passu clause is a standard clause in public or private international unsecured Debt obligations.
