Sovereign Debt Restructuring: A Contract Theory Perspective

The story of sovereign debt restructuring has been one mixed fortunes. While sovereign debt restructuring based on contractual approach has shown remarkable success, certain challenges (particularly holdout disruption) continue to beset it. Market players and other stakeholders in international finance have made some efforts to contain these challenges. However, they do not appear to have been laid to rest. Recent history of sovereign debt restructuring appears to show that these challenges are rooted in a classical theoretical approach to sovereign debt restructuring. But, remedies and proposals to contain them have been sought almost exclusively from positive law (by positive law I refer to the bare body of man-made laws consisting of codes, regulations, and statutes enacted or imposed within a political entity such as a state or nation and stripped of underlying theoretical legal norms). The pith of this paper is to present an alternative way of looking at contractual sovereign debt restructuring – legal (contract) theory. This perspective from contract theory presents an alternative approach to sovereign debt restructuring based on a theoretical enquiry into the contractual relationships that underlie sovereign debt transactions. This enquiry should lead to a formulation of normative principles of sovereign debt in context; and from these principles positive rules of law may be extrapolated to address issues arising from sovereign debt restructuring, based on the product of the enquiry. This is in contrast with the current approach to contractual sovereign debt restructuring where barefaced ex ante positive law of contract (mostly domestic) is applied to sovereign debt restructuring with little or no regard as to whether the legal norms that inform the positive law also underpin the sovereign debt relationship