Sovereign Debt Restructuring: Problems and Prospects

This Article reviews the history of sovereign debt restructuring operations with private sector creditors with a view toward diagnosing the factors that lead to inferior outcomes. The Article also attempts to forecast potential problems that may arise in sovereign debt restructuring negotiations in the future and reviews possible modifications of existing institutions. The future potential problems range from the role of credit default swaps in discouraging creditor participation in voluntary exchange offers to the potential for manipulation of aggregation clauses. Other potential issues include the possibility of de facto sovereign default on state contingent debts through statistical manipulation, more widespread use of appeals to the notion of odious or illegitimate debts, and the extent to which recent regulatory changes aimed at restricting litigation against sovereigns in default might reduce the incentive for sovereigns to repay their debts in the future.