Fixing Financial Crises in the 21st Century

By Andrew G. Haldane | Go to book overview

12

Comments on "Sovereign bonds and the collective will"

Nathan Sheets1

I very much enjoyed reading the rich and diverse chapter by Buchheit and Gulati. My comments will focus on just two of the chapter's lines of argument: first, the notion of intercreditor duties and its implications; and second, the issue of why debtors and creditors have been reluctant to incorporate collective action clauses into emerging market sovereign debt contracts.


12.1

Notion of intercreditor duties

Chapter 11 provides a helpful historical discussion of the US experience with majority action clauses. Corporate bonds containing such clauses were issued over a period that began in the 1880s and ran through until the early 1930s. The chapter also traces the accompanying development of the notion of intercreditor duties. Courts at that time expected majority bond-holders to treat minority bondholders fairly and in good faith. The courts were equally unsympathetic to efforts by minority creditors to holdout for more favorable terms than were fairly and reasonably being given to the majority. The courts seemed to imply that creditors had something approaching a fiduciary responsibility to each other. The chapter notes, however, that following the establishment of formal bankruptcy arrangements, beginning in the mid-1930s, there was "less and less need to infer broad intercreditor duties, " as aggrieved parties had recourse to the bankruptcy process; more recently, "US law in this area has turned distinctly hostile" to the notion of intercreditor duties.

Drawing on this historical episode, Buchheit and Gulati pose the following question: if majority action clauses were included in emerging market sovereign debt issued in the United States, might US courts reconsider notions of intercreditor responsibility among holders of such debt, given that there is no formal bankruptcy facility for sovereign debtors? In discussing this question, they offer the following observation:

Unless courts are prepared to supervise the operation of majority action clauses in cases where non-assenting minority bondholders can show an abuse by the majority, as courts were willing to do when the

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