Debtor-States and an International Bankruptcy Court: The IMF Creditor Problem
Hilgers, Michael T., Chicago Journal of International Law
Bankruptcy can happen to any person or organization. It can happen to small businesses, corporations, and multinational conglomerates; even sovereign states are not immune from financial default. Contemporary business bankruptcies are arenas for creditors and debtors to handle their negotiations in a systematic manner under national laws in national courts. Yet when a sovereign state defaults on its debts, there is no equivalent forum to adjudicate the disputes between creditors and the state. The increasing numbers of creditors of debtor-countries make creditor refusals to consent to debt restructuring, also known as creditor-holdouts, increasingly likely. In academic circles there have been several proposed remedies to the creditor-holdout problem; these include a judicially-imposed limit on remedies1 and the staying of collective actions against a sovereign,2 proposals that are designed to force creditors into good faith negotiations. The most prominent, far-reaching, and controversial proposal is an international bankruptcy court ("IBC") that has the power to supervise and enforce negotiations between a nation and its creditors.
The idea of an IBC is not new; the idea of universalism, or "one law, one court," has enticed academics for years.3 However, until the recent International Monetary Fund ("IMF") proposal to create an IBC, there had been no effort to turn the abstract into reality. Though the IMF action is welcomed, it is imperfect.4 Some flaws are minor, while others are inherent to the IMF itself and are incurable regardless of the specific plan. A fundamental flaw in the proposal is the IMF Creditor Problem: the IMF cannot be an objective and unbiased arbiter in cases where it has a substantial financial interest as a creditor.
This Development uses US law as a guide to analyze the problems of having the IMF as both a creditor and international arbiter of sovereign bankruptcies. Part I provides a brief background of sovereign bankruptcies, global capital markets, and the IMF. Part II illustrates the effectiveness of the US system, and how the application of the US Code could efficiently handle some problems inherent in an IMF-based bankruptcy proceeding. Part III deals with the IMF Creditor Problem. The Development does not argue normatively whether an IBC in the abstract should exist. And though it specifically analyzes the unique problem of an IMF-run court, the initial conclusions of Part II apply equally to any IBC effort.
I. GLOBAL CAPITAL MARKETS, SOVEREIGN BANKRUPTCIES, AND THE IMF
Foreign states' borrowing trends have evolved over the last sixty years. At the beginning of that period, countries would borrow primarily from the IMF.5 Even though the IMF had access to billions of dollars, two conditions pushed borrowing countries away from the IMF. First, the pool of money did not keep pace with inflation in the 1960s.6 Second, the IMF tied the loans to numerous economic conditions that -were designed to improve the economic situation, but were often difficult to meet.
The difficult conditions imposed by the IMF led borrowing countries to search for alternative sources of funding. These countries found that the more flexible commercial banks-at the time flush with money from OPEC deposits in the 1970s-were better able to fuel their financial appetite.7 Unfortunately, in many countries economic conditions only worsened; as a consequence, such countries were forced to take out more loans simply to pay off the interest on old loans. These new loans were called "bridge loans."8 However, this method of payment could not be sustained, and the perceived solution was use of the so-called "Brady Bills": US-backed Treasury bonds sold to the public.9 Because Brady Bills made securitized sovereign debt available as Treasury bonds, they opened up the sovereign financing to a larger pool of investors. Throughout each phase of the global lending transformation, from the IMF to banks to US investors, both the volume and diversity of investors have increased. …