Vultures or Vanguards?: The Role of Litigation in Sovereign Debt Restructuring

Abstract

The market for sovereign debt differs from the market for corporate debt in several important ways including the risk of opportunistic default by sovereign debtors, the importance of political pressures, and the presence of international development organizations. Moreover, countries are subject to neither liquidation nor standardized processes of debt reorganization. Instead, negotiations between a sovereign debtor and its creditors lead to a voluntary restructuring of the sovereign's debt. One of the greatest difficulties in restructuring claims against sovereign debtors is balancing the interests of the majority of the creditors with those of minority creditors. Holdout creditors serve as a check on opportunistic defaults and unreasonable restructuring terms, yet their presence can interfere with the restructuring process. In this Article, we examine the role of holdout creditors within the context of the international capital markets. In particular, we consider the effect of a litigation remedy on the power of holdout creditors to influence current restructurings of sovereign debt. Recent commentators have criticized holdout creditors and proposed mechanisms designed to reduce their power - particularly their power to enforce contractual claims against sovereign debtors through litigation. We argue that these proposals may undervalue the role of holdout creditors in facilitating the restructuring process and in promoting the functioning of the international capital markets. Accordingly, we suggest that, prior to the implementation of broad reforms, the value of holdouts be tested through a market-based approach. We propose several modifications to the terms of agreements governing sovereign bonds that can be tested in the market as a mechanism for assessing the value of holdout litigation in the international financial architecture.

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