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Enforcing Comparable Treatment in Sovereign Debt Workouts

Sovereign borrowers needing debt relief in the 21st century must face three sets of creditors — commercial lenders (usually bondholders), traditional Paris Club government creditors and non-Paris Club bilateral creditors like China. Each of these groups will secretly hope to extract preferential restructuring terms from the sovereign debtor when the negotiations begin but each will publicly insist on receiving a treatment that is no worse than that given to the other groups when the negotiations end. And until they are satisfied that no other creditors are getting or will get better terms, they will refuse to conclude a restructuring of their own claims. In recent sovereign debt workouts, this atmosphere of mutual suspicion among the three major creditor groups has given the debt restructuring process an arthritic, bordering on paralytic, appearance. The resulting delays can stymie the sovereign borrower’s hope of a speedy recovery from the crisis. […]