In January 2002, the Argentine government announced it would default on $141 billion in public sector debt-the largest default of a sovereign state in history. Having devalued its currency and gone through five presidents within a few weeks, Argentina was on a downward spiral and could no longer sustain its debt payments. Government limitations on bank withdrawals, an attempt to prevent a run on banks, resulted in violent street protests. Argentina's debt crisis renewed debate over the need for an international mechanism through which countries can declare bankruptcy.1 Nine months later, at the conclusion of the 2002 annual meeting of the International Monetary Fund ("IMF") and the World Bank in Washington, D.C., delegates approved the creation of a sovereign debt restructuring plan that would enable countries suffering severe financial crises to renegotiate their payment terms with creditors.2
The plan is not a novel one. An IMF proposal for the creation of a sovereign debt restructuring mechanism, which would include a dispute resolution forum, was discussed and presented by Anne Krueger, the First Deputy Managing Director of the IMF, at previous IMF meetings.3 Now that the IMF has won the approval of many developed countries, it will move beyond the drawing board and begin developing tangible debt restructuring measures to present by the spring of 2003. Horst Koehler, head of the IMF, described the approval of their plan as "a kind of breakthrough ... . There is a recognition that there is a gap in the international financial architecture."4
The IMF proposed a "twin track approach" comprised of two parts that are to be simultaneously pursued: 1) a "contractual approach" involving the use of collective action clauses in sovereign bond contracts, which describe ex ante what will occur in the event of a default, to keep creditors from halting the restructuring process; and 2) a "statutory approach" allowing a supermajority of creditors to establish new, legally binding terms with the debtor country, and creating a dispute resolution forum to resolve disputes that may arise in the process.5 The International Monetary and Financial Committee, consisting of finance ministers from both developed and developing nations, is looking forward to the final version of the IMF's plan, especially the plan for an international bankruptcy court.
However, not all have been in favor of the IMF's proposed sovereign debt plan. At first, the leaders of the Group of Seven industrialized nations ("G7")-the United States, Canada, Japan, France, Italy, Germany, and Britain-only supported the contractual approach of including collective action clauses in foreign emerging markets' bonds.6 The top emerging economies ("G24"), which the plan was designed to help, as well as Wall Street, were not as supportive of the contractual approach. Even more contentious was the IMF's plan to form an international bankruptcy court. While the G24 stated that they would be "open-minded" toward the G7's proposal to include collective action clauses, they were "skeptical" about the international bankruptcy court.7 Wall Street representatives had a similar negative reaction.
Following a year of debate over whether to pursue collective action clauses and an international bankruptcy court, developed nations increasingly supported pursuing both options simultaneously in "a sort of belt and braces approach."8 The US administration has moved beyond solely supporting the contractual approach to endorsing the IMF's progress toward a two-track approach. In fact, the entire G7, along with Belgium, Holland, Sweden, and Switzerland, has endorsed the IMF's twin track approach at side meetings held during the 2002 IMF and World Bank annual conference. The IMF is expected to present concrete proposals concerning the establishment of an international bankruptcy court by spring of 2003.
The most controversial point of the proposed reforms remains the formation of an international bankruptcy court, which falls under the IMF's second track: the statutory approach. …