Academic journal article Chicago Journal of International Law

Internationalizing US Municipal Insolvency: A Fair, Equitable, and Efficient Way to Overcome a Debt Overhang

Academic journal article Chicago Journal of International Law

Internationalizing US Municipal Insolvency: A Fair, Equitable, and Efficient Way to Overcome a Debt Overhang

Article excerpt


Adam Smith recommended sovereign insolvency as "always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor."1 Christopher G. Oechsli published a detailed proposal of how to adapt Chapter 11, Tide 11 of the US Code,2 well before August 1982,3 the date considered by many as the official beginning of the debt crisis. After Mexico's default, repeated suggestions to emulate Chapter 11 for sovereign debtors met stiff opposition, especially from International Financial Institutions ("IFIs") such as the International Monetary Fund ("IMF"). Their formalistic counterargument was that Chapter 11 did not address the problem of sovereignty. In defense, I proposed an international version of Chapter 94 in a paper presented at a conference at Zagreb University in 1987.5 In November 2001, the IMF suddenly presented its "new approach,"6 emulating Chapter 11 for sovereigns.

Presently, four proposals are on the table: Collective Action Clauses ("CACs"), voluntary Codes of Good Conduct for debt renegotiation proposed both by the Banque de France, and (less elaborated) by the Institute of International Finance, and two models of sovereign insolvency.7 The first two proposals and insolvency models do not preclude each other. By helping creditors to organize, enabling them to act more quickly and efficiently, CACs are a useful component of any insolvency. The proper functioning of fair procedures depends on the full ability of parties to defend their legal and economic interests. Rules such as those elaborated by the Banque de France may help defuse crises. By contrast, the two insolvency proposals contradict each other fundamentally.8

For details of my proposal-termed the Fair Transparent Arbitration Process ("FTAP") by many nongovernmental organizations ("NGOs")-to adapt Chapter 9, Title 11 of the US Code, I refer to other publications.9 Highlighting its irreconcilable differences vis-à-vis the IMF's Sovereign Debt Restructuring Mechanism ("SDRM"), this paper discusses five issues of specific interest to jurists: impartial decisionmaking, the necessity to emulate Chapter 9, human rights and debtor protection, why equal treatment of creditors is mandatory, and an optional element to allow smoother negotiations and to stabilize capital markets.


With good reason, any decent legal system demands an impartial and uninterested entity to be vested with the authority to make certain decisions. It is the courts, rather than creditors or debtors, which must have this power. The very foundation of the Rule of Law demands that one must not be judge in one's own cause. So far, international public creditors have been judge, jury, experts, bailiff, and occasionally even the debtor's lawyer all in one, mocking the very foundation of any legal system.

The SDRM would continue this malpractice, conferring judicial authority on the IMF-both a creditor in its own right and an IFI that is dominated by a creditor voting majority. The Sovereign Debt Dispute Resolution Forum ("SDDRF") is an IMF organ without authority to challenge the Executive Board's decisions. The Board would, inter alia, decide on the adequacy of member's policies and debt sustainability, thus presenting the plan and determining debt reductions. Formally, the SDRM exempts all multilateral claims; but lower sustainability levels, which mean higher losses for discriminated creditors, protect the viability of multilateral debt service. Smaller reductions might put it at risk. The IMF has an economic interest in "erring on the safe side," by demanding relatively larger reductions from others to protect itself. Legal exemptions do not affect economic logic-this legal right is only enforceable if debtors have sufficient money. Higher losses of other creditors make problem-free debt service to IFIs more likely. The IMF would decide in its own cause.

Itself subject to the IMF Board's decision, the SDDRF would hold substantial powers over private creditors and the debtor. …

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