Legitimacy and Impartiality in a Sovereign Debt Workout Mechanism

Particularly in light of recent developments in sovereign debt litigation, there is a pressing need for discussion of more robust sovereign debt restructuring mechanisms. This paper contends that any sovereign debt workout mechanism (DWM) should embody the principles of legitimacy and impartiality, to the extent possible, in order to garner the stable and long-term adherence of international stakeholders. These two elements are important both for attracting support ex ante, i.e. in the initial development of any treaty, ad hoc, or soft law restructuring mechanism, and for ensuring ex post that a DWM is ultimately utilized by states and their creditors. These principles are particularly essential in the international arena, given the absence of a clear global enforcement mechanism and in light of the historical resistance of some states and other institutional actors to the development of a debt workout mechanism. The first section of this background paper will introduce the key concepts of legitimacy and impartiality, laying out different schools of thought on the characteristics of a legitimate and impartial institutional order and developing a preliminary list of features appropriate for a DWM. The second section will consider the institutional and historical background of debt restructuring in light of these themes, to better understand the political and economic context of current discussions of a possible workout mechanism. Third, this paper will consider how several domestic and transnational institutions attempt to meet standards of legitimacy and impartiality, focusing especially on domestic insolvency/debt restructuring institutions and on investment treaty arbitration rules. Finally, this paper will offer preliminary recommendations for how a future DWM might instantiate the principles of legitimacy and impartiality, and will briefly assess existing proposals in light of these themes. This last section will also note several obstacles to meeting the goals of legitimacy and impartiality, and ask whether the negative effect of such impediments might be mitigated