Document Type

Article

Disciplines

International Law

Abstract

Sovereign insolvencies cause enormous losses to lenders, huge disruptions in the debtor's population and its welfare, and extraordinary mobilization of international organizations, such as the International Monetary Fund ("IMF") and the European Central Bank ("ECB"), which were designed to safeguard the financial system. Greece's insolvency displays all these phenomena, but it also demonstrates the improvement that would be available from a sovereign insolvency regime following three simple principles: (1) post-insolvency creditors should have priority; (2) creditors should vote by classes; and (3) restructuring should be conditional on the debtor's compliance with reforms.

Part II offers some historical anecdotes about the weakness of sovereign creditors. Part III discusses a chronology of the Greek default, the negative effect of Greek politics, and the inapplicability of inflation or departure from the Eurozone as possible solutions. Part IV explains two collective action problems and their resolutions. First, the sovereign debtor cannot commit to change its political status quo and adopt growth policies. As a result, its creditors cannot consent to restructuring and advance new loans. Multilateral institutions resolved this by imposing reforms on Greece and by enticing its creditors to agree to a restructuring through a two-step transaction with injection of new value for the creditors' benefit and by accumulating bonds to be partially forgiven. Second, minority creditors have the incentive to hold out for full repayment. Greece resolved this problem by enacting collective action legislation and by triggering the collective action clauses of its foreign-law loans. Part V explains how the cost of restructuring would be much lower under the proposed regime. Part VI concludes by estimating that lacking this regime has cost multilateral institutions (and ultimately taxpayers worldwide) C39-664 billion, or about $51-$85 billion.

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