Towards an international legal framework for sovereign debt restructuring: Evidence from law and economics, and debates on country classification
Promovendus: Mw. I. Jennekens
Promotores: Dr. L.P.W. van Vliet, Dr. B. Kemp
Duur: 1/6/2023 - 31/5/2024
Whilst before 2007 only peripheral economies defaulted on their external debt, plummeting their citizens and the countries in their region into recessions, since the Greek debt crisis we know that systemic players can also default. When they do, the exposure of large banks in other major economies threatens these economies just as much. The result? Global financial depression, civil unrest, and potentially even (civil) war. In order to resolve this situation, the international community has put forward proposals to what would in effect be an international bankruptcy regime for sovereigns, but without success. This begs the question: what bars the system from being established? The obvious answer might be political will, but that is unlikely to be the only reason. In fact, quite some proposals have been discussed and/or implemented by the international community, both permanent like the IMFs SDRM, blocked by the United States and ad hoc such as the Paris Club. It is also not because there is simply no demand in the market, as both investors and creditor countries spend large amounts of money on transaction costs in order to recover lost money, such as suing each other through costly court procedures. Previous research has mostly examined either how specific workouts should be structured (such as the Greek debt restructuring during the Eurozone crisis ), or how the proposals towards a mechanism for sovereign workouts functioned legally , or how the negotiations went to establish such a system . But the reality is that before 2007, no systemic country had defaulted to a point that restructuring was needed whereas in our time, it is highly likely that countries even larger than Greece might default . A second question that has not been addressed by the current literature is whether the regulation for systemic countries (countries that are too big to fail) should differ from regulation of non-systemic countries (countries whose default might have local effects, but would not cause severe global downturn). This proposal therefore aims to answer the following research questions: what is missing in the current system for resolving problematic sovereign debt? The paper answers the following subquestions: why have past attempts to regulate such sovereign debts failed (i) and what do we need to arrive at building blocks for such a system(ii)? The answers would also state whether, if such a system can be justified and established, the system would be the same for systemic and non-systemic countries. In order to do this, the research proposes a novel way of looking at the problem: focusing on the incentives of the actors involved.