Sovereign insolvency has early precedents. (1) Philip II of Spain had to declare moratoriums on the repayment of Spanish debt in 1557, 1560, 1575, and 1596, largely due to the rising costs of various military enterprises. (2) Many other sovereigns have defaulted on the payment of international debts since that time. On each occasion, almost without fail, extensive debate over the legal and economic aspects of sovereign debt crises have followed, just as they have followed recent financial crises in Iceland and Greece. Given the likelihood that such crises, and such debates, will continue in the future, there is an evident need for the world to reach agreement on a coherent set of guiding principles and procedures to facilitate the resolution of such crises. The establishment of an agreed mechanism for handling sovereign debt crises is essential if the world is to avoid the kind of political impasse that, at the time of writing, is causing such harmful delay in bringing about a resolution of the Greek debt crisis.
In its 2010 report to the Hague Conference of the International Law Association (ILA), the ILA Sovereign Insolvency Study Group identified four broad policy pathways forward when it comes to handling sovereign debt crises. First, there is the option of doing nothing, so sovereign debt defaults or financial difficulties continue to be dealt with exclusively by voluntary negotiation, and agreement between creditors and debtor state. This has happened for at least the last one thousand years. Second, a minimal layer of legal rules to govern the conduct of the insolvency could be created in the form of a limited provision for creditor voting on a debt restructuring plan. Third, a more comprehensive layer of legal rules could be put into place, which would reflect relevant aspects of private sector insolvency reorganization regimes. The rules would not have any mandatory application, and in many cases would not be used. This occurs in the corporate arena when financial difficulties are dealt with by way of private agreements, or "workouts." The sovereign insolvency reorganization regime would provide a background against which debtor-creditor negotiations would take place. Fourth, a different style of insolvency regime could be designed which would emphasize stronger creditor rights, and in which debtor protections would not be the kind of feature they are in domestic insolvency regimes. Again, the legal regime would exist as a background against which negotiations would take place. (3)
This paper explores the international law principles that should be taken into account when choosing among these policy options, and in reaching agreement on a global mechanism for resolving sovereign debt crises. The principles explored are those of general international law. In asking what international law has to say about the way in which sovereign debt crises should be handled, I turn to the various sources of international law as recognized in article 38 of the Statute of the International Court of Justice: international conventions, whether general or particular; international custom, as evidence of a general practice accepted as law; the general principles of law recognised by civilized nations; and judicial decisions and the teachings of the most highly qualified publicists of the various nations. (4)
II. INTERNATIONAL CUSTOM, AS EVIDENCE OF A GENERAL PRACTICE ACCEPTED AS LAW
Examining international custom, both state practice and opinio juris, this paper briefly outlines the history of approaches to handling sovereign debt crises. Examining state practice is particularly important given the lack of internationally accepted codifications relating to this area of international relations. This paper then examines general principles relevant to the handling of sovereign debt crises which can be found in widely accepted treaties and other instruments of international law. …