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Sovereign Creditors Must Not Rewrite the Rules During the Pandemic

If Argentina acceded to the demands of a group of hold-out creditors, it would create a disastrous precedent that would set back by more than a decade the development of the international legal architecture for sovereign debt. More than 70 economists and scholars urge the international community to reject such irresponsible behavior.

NEW YORK – In the wake of COVID-19, there is an urgent need for sovereign debt restructuring, including debt relief. In the circumstances caused by the pandemic, many countries’ repayment obligations could have devastating social consequences if they are not adjusted. Financial markets face risks of sovereign default.

While some ad hoc relief has already been promised by official creditors, indebted poor countries are again facing private creditors without a sovereign-debt restructuring mechanism – the global equivalent of a bankruptcy regime. In the absence of such a framework, called for by the United Nations General Assembly and advocated by many experts and stakeholders, there have nevertheless been some constructive innovations in contractual approaches to sovereign debt. These address at least some of the collective-action problems of restructuring, including opportunistic hold-out behavior.

The most promising measure is a collective action clause (CAC) that allows a restructuring to go forward where approved by a supermajority of the aggregate of creditors. This progress reflects the understandable reaction to litigation by “vulture funds” against Argentina in New York, which threatened an already viable restructuring supported by the majority of the nation’s creditors.

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