DP4717 Resolution of Sovereign Debt Crises: The New Old Framework

Author(s): Richard Portes

Publication Date: October 2004

Keyword(s): collective action clauses , financial crises , sovereign debt

JEL(s): F33 , F34

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4717.asp

The Paper sets out the principles that should underlie sovereign debt restructuring. It argues for a rules-based approach to achieve private sector involvement in restructuring. The rules must operate, however, in the context of an appropriate institutional framework with appropriate incentives. The markets cannot and will not create these institutions without some official intervention. The Paper discusses why intervention in the form of a Sovereign Debt Restructuring Mechanism has been shelved. It goes on to consider a new institutional framework, with a permanent bondholders’ committee and collective action clauses (CACs) in bond contracts. It stresses the need for uniformity in CACs. After interpreting the views of market participants on CACs, the Paper concludes with an argument for official intervention to make CACs universal.