The Case for a Sovereigns' Bankruptcy Procedure

The issue of a bankruptcy procedure for sovereign states has been addressed by many famous and less famous authors since the mid-1970s, that is, since the international financial markets experienced a strong and sometimes problematic development. The objective of organized bankruptcy procedures is to assure the protection of the legitimate interests of both debtors and creditors and to prevent a negative spillover (“domino effect”) on the financial system and the rest of the economy. In the wake of the international debt crises of the 1980s and 1990s serious consideration was given within the International Monetary Fund to the development of an organized bankruptcy procedure for sovereign debtors. While at the technical level the concept of the “Statutory Sovereign Debt Restructuring Mechanism” proposed by the IMF staff appeared to be workable, the Executive Board decided not follow up on this initiative. The present chapter recalls this important moment in recent international financial history and contains suggestions, in the light of the current debt crisis, for reviving this approach and defines the conditions under which it could be implemented.