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Comparison Between EU and US Bankruptcy Law

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Introduction

The cultural varieties of the cultures in which they serve are concluded through concrete codes of rule. For eg, the UK is known to be a creditor-friendly authority since it floats for compulsory insolvency that helps finance companies to protect them free from the repercussions of the default of a debtor knowing none of the debtor in custody. Given the opaque anxiety for the well-being of debtors in the UK, this situation is hardly astonishing.

In the United States, to the opposite, a debtor’s ability to redeem itself has been shown for eras to be stronger than a creditor’s right to look for and claim complete refund of what it is payable. The varying stabilisation strategies between the rights of creditors and debtors are embodied in the relation necessary for bankruptcy power to be created. In the US the mandatory relation is quite weak, whereas it has traditionally been far more significant throughout the EU. Yet the implications of all descriptions of the jurisdictional choice made by or imposed on a debtor are enormous for stakeholders in both cases.

The Bankruptcy Reform Acts of American Bankruptcy

According to the Nolo page, the Bankruptcy Reform Act of 1994 is the most important improvement in American bankruptcy laws since the 1978 Act. The 1994 Act, signed into law on October 22, 1994 by President Clinton, includes clauses concerning rules on corporate and personal bankruptcy. The National Bankruptcy Commission was also established by the 1994 Act to begin looking at the required reforms in bankruptcy law.

Comparison Between EU and US Bankruptcy Law

The management of cases should expedite the amendments. These can also provide significant revisions aimed at supplying customers with further security in relation to their principal place of residency, the collection of food and child care, and the planning of unscrupulous applications for bankruptcy.

The 2003 Bankruptcy and Exploitation Reduction Act presumes abuse depending on the financial capital of the debtor. For an automatic inference of violence, there is a three-prong exam. If the monthly revenue decreased by expenditures and compounded by 60 is not less than either the largest of 25% or $6,000 or $10,000 of the general unsecured statements. (2002 by Peter)

The measure would imply millions of dollars in recovered assets for banks and credit card firms. But opponents warn that not only deadbeat debtors will be prosecuted by the narrowly worded law, but households forced into bankruptcy by no fault of their own. In the last decade, personal bankruptcy filings have doubled, to more than 1.6 million cases last year. The bill currently under consideration will force tens of thousands of persons claiming relief from bankruptcy to refund at least half of what they owe and render it more impossible for them to wipe out their debts. Supporters believe the bankruptcy scheme has been exploited by persons finding a fast cure for their financial problems. Opponents argue that without eliminating the bankruptcy loopholes open to businesses and rich debtors, the bill would do nothing but worsen the suffering of customers.

Implicitly, calling for the legalisation of bankruptcy contracts is to assume that there are bankruptcy schemes just to maximise performance. This is because deals that increase the anticipated returns of creditors can diminish the interests of other constituencies. Many American analysts contend that bankruptcy schemes can often cover people or organisations who may not have existing lawsuits against the insolvent corporation. Safe groups in the literature involve employees with an interest in continued jobs and local populations that profit from the continued existence of the organisation. In order to promote the needs of employees and societies, some critics are able to compromise bankruptcy worth. (Senior Mag, 2005) The second argument of this article, though is that bankruptcy legislation can function only to encourage corporations’ access to debt resources. Bankruptcy processes do not efficiently secure workers or societies.

We should discern between “free marketers” and “traditionalists” throughout the discussion over the aims of bankruptcy schemes. Free marketers contend that a bankruptcy scheme can optimise the insolvent company’s ex post worth and allocate firm value in line with the utter priority law to existing claimants. Paying debts in the order guided by the firm’s contracts with investors is an utter priority. Under the law, lenders are repaid before owners and mortgage lenders are repaid without lenders. The aim of optimising ex post firm worth stems directly from the achievement of productivity of Kaldor Hicks. Kaldor Hicks is also effective in the objective of pursuing total focus. If the Bankruptcy Code deliberately deviated from total priority, so the corporation and its creditors will sometimes have options to selectively exploit or discourage bankruptcy. For instance, if bankruptcy transferred wealth from senior secured creditors to junior creditors, unsecured creditors would prefer bankruptcy to state rule, while secured creditors would prefer the contrary. Judicial conflicts between both groups will drain time and thus not increase the company’s ex post value.

For bankruptcy law, the error of seeking to preserve collective values is to seek a salutary purpose in the wrong way—to tax an operation that should be supported. To use insolvency to secure employment is to make the same kind of error, which is to tax the production of jobs rather than subsidise them. To understand why first recognise that because of technological progress, workers lose jobs; because of increased rivalry, which places strain on businesses to control costs; and because of management negligence, which may lead companies to shrink or collapse. Such triggers are also related. Well-run businesses will also withstand the entry of new rivals, whereas poorly run companies cannot.

EU Bankruptcy Law

There has been, so far, unsuccessful-attempt to conclude a convention among the Member States of the European Union, to regulate the conduct of insolvency proceedings as between themselves. Although the need for such arrangements was foreseen at the time of drafting the Foundation Treaty of the European Economic Community, and was indeed covered by the terms of a specific provision of that Treaty, 1 successive initiatives have failed to realize this goal, although at various times it has seemed possible that agreement could be achieved among the States then participating. In the most recent disappointment to have befallen this project, in May 1996, a finalized Convention that had been signed by fourteen of the fifteen current members of what had by this time become the European Union, failed to come into effect due to the withholding of the signature of the United Kingdom. This had the unfortunate consequence of causing the text, negotiated by and apparently acceptable to all fifteen States, to lapse.

No public initiative has subsequently been taken under the auspices of the European Union to revive the Insolvency Convention project, and its future prospects remain uncertain. However, it is submitted that both the practical need for such a convention–and indeed the legal requirement under European Union law that effective cross-border arrangements be put in place–are inescapable realities. Whatever solution is finally adopted, it is likely that most if not all of the provisions of the Draft tabled for signature during 1995-1996 will be retained in something like their published form. Therefore, the structure and contents of that text will be examined here.

1  Treaty Establishing the European Economic Community, signed in Rome on 25 March 1957, commonly known as the (first) Treaty of Rome. Article 220(4) of the Treaty commits the Member States to negotiating a series of conventions for the benefit of their nationals, including one to secure ‘the simplification of formalities governing the reciprocal recognition and enforcement of judgments of courts or tribunals and of arbitral awards’. 

2  The logical and legal bases for standardizing the intra-Community treatment of insolvency matters are more fully explored.

Analysis

The Insolvency Convention initiative was on the agenda of the institutions of the European Community/European Union, in particular the Commission and the Council, during the duration from 1960 to 1996. Study developed in several phases over those years, interspersed with intervals of almost complete quiescence. The most intense periods of activity may be broadly divided into two principal phases, of which the first can be subdivided into two parts. The first part of Phase I occurred in the years prior to February 1970, when a group of experts drawn from the original six Member States, [1] convened by the European Commission, produced a text published as the Preliminary Draft Convention. [2] Following the accession of the first three additional Member States from 1 January 1973, work was resumed on the basis of the 1970 text, with a view to its being adopted by all nine Members. During this second part of Phase I, numerous modifications were made to the original text, partly as a reflection of the general thrust of critical comments published after 1970, and partly in response to particular concerns of the new participants in the negotiations. Nevertheless the basic characteristics of the preliminary draught were essentially integrated into the draught convention sent to the Council in April 1980 for further review and eventual acceptance. [3] However, sustained resistance on the part of several Member States resulted in the discreet abandonment of further attempts to promote the adoption of the 1980 Draft, although no formal announcement was made of this. Several years of inactivity and uncertainty ensued.

A new working group on the Bankruptcy Convention was set up under the chairmanship of Dr Manfred Balz by the Council of Ministers, which had already extended its membership of the Community to twelve in May 1989 and was soon destined to rise to fifteen, as an initiative which led to the relaunching of the project. Phase II was followed with much vigour, and was also distinguished by a greater transparency in that a substantial measure of attention and recourse to informed comment was provided to the evolving versions of the document, in stark contrast to the prevalent demand for anonymity that had attended most of the developments during Phase I. One source of motivation for those engaged in the task of forming the P. [4] In addition to adapting some innovations of the Istanbul text, the working party resurrected certain features of the Phase I concept, while expunging or modifying others in the interests of achieving a more workable, and politically acceptable convention in terms of the existing realities among a community of fifteen States whose domestic laws exhibit numerous differences in matters concerning credit, security and insolvency.

The principle of collectivity is a common denominator which is capable (within limits) of transcending the conceptual and structural distinctions between systems which are an inescapable reality at present and for the foreseeable future in terms of the insolvency procedures provided for under individual national laws, which vary from one another in countless ways. In general, all systems provide for at least one main procedure in which the entire patrimony of an insolvent debtor (apart from certain permitted exemptions in the case of individuals) can be subject to a liquidation and schematic distribution process in accordance with the collectivity principle. The alternative to outright liquidation by means of a binding composition or arrangement concluded between the debtor and the general body of creditors is another type of procedure which is frequently encountered. The collectivity principle is also a standard feature of composition procedures in that, although it is often permissible for an agreement to acquire binding force by accepting the prescribed majority of creditors and thus becoming binding on the dissident minority, the dissident minority is entitled to full parity of treatment under the terms of the distribution scheme that can be imposed on the dissident minority

The principle of respect for such pre-bankruptcy rights is widely accepted by national laws, even though the nature of those rights and the conditions attached to their creation are by no means uniform worldwide. However, broadly speaking, under the regime of insolvency law, the precedence enjoyed by the proprietor over private and contractual claims under general law is replicated, with the consequence that security interests and other rights created prior to the start of insolvency remain intact and are thus enabled to fulfil their intended purpose of isolating the creditor from insolvency. The completely secured creditor is then permitted to stand beyond the collective mechanism of handling the debtor’s unencumbered properties, whilst the partially secured creditor is put in a position to depend on the unsecured balance of his argument in relation to that process. One of the vital elements of the credit system, both domestically and internationally, is the ability of creditors to base their expectations on this principle and to create appropriate arrangements to suit their particular needs. If, owing to the differences between the rules of domestic law of the countries concerned, such international arrangements break down or encounter uncertainty, the destructive impact on commercial confidence can be particularly acute, and the sensitive deployment of techniques of private international law is perhaps the last line of defence. The rate of progress is slow and the outcomes uneven in so far as a prevalent trend appears to emerge at the present time. In this context, several cases can be discussed, but the most relevant example is the Yukos bankruptcy case.

Yukos Bankruptcy Move Thrown out by US Judge

Yukos’ bid to win bankruptcy protection in the US has been thrown out by a Federal judge in Houston. The embattled Russian oil company had argued that it was entitled to protection under the laws of that country because it had a small presence in the US. But that was rejected by the judge. “The vast majority of Yukos’ business and financial activities continue to take place in Russia. Such activities require the Russian government’s continued participation,” said bankruptcy judge Letitia Clark.

In an attempt to stop the Russian government from auctioning off its key asset, Yuganskneftegas, Yukos first brought the case to court in December. (The Standard for the Evening)

Yukos’s claims were opposed by bankers advising the Kremlin on that sale. Until the Houston court reviewed the case, Yukos’ assets were ordered frozen, but the auction went ahead anyway with state-owned Russian oil company Rosneft taking over, effectively nationalising 11 percent of Russia’s oil production. Judge Clark tacitly acknowledged claims that the problems of Yukos stem from the Kremlin’s seizure of control over the company. “It seems likely that Russian government agencies have acted in a way that under U.S. law would be considered confiscatory,” she said. But she went on to say that the question she had to consider was not whether any wrongdoing had occurred, but whether there was any jurisdiction in the US court.

FDI was originally seen as the most likely route of bringing capital, expertise and employment into Russia. It has not worked for several reasons. For most of the 1990s Russia was actually a net contributor to Western economies through personal investments into Swiss bank accounts, or informal, unregulated transfers of money out of the country. With the post-1998 recovery of Russia, however, we are beginning to see some major new investment projects, such as BP’s joint venture with the oil giant TNK, announced in early 2003. More important than FDI has been the rise of the Financial Industrial Groups, and the massive recent merger and acquisition activity. Parts of the Soviet planning and vertical integration infrastructure are being reconstituted along capitalist ownership. The signs are, however, that the change of ownership has done little to affect control and management of enterprises.

A further development, and one that was perhaps the least predictable, is the importance of individual, enormously rich individual Russian investors becoming involved in transnational economic activity. In the space of a few months in 2003, some globally connected business events took place that would have been unthinkable until relatively recently. First, in May, a Russian investor named Alisher Usmanov purchased over 5 per cent of the shares of the struggling UK-Dutch steel giant Corus (Tavernise, 2003). In July, two of Russia’s largest oil companies, Yukos and Sibneft announced their intent to merge. At the same time Roman Abramovich, the largest shareholder in Sibneft, took control of London’s Chelsea Football Club (and Chelsea Village hotel complex), stimulating a series of big-money football player transfers in a hitherto depressed market.

The Russian future seems to lie with the giant companies that wield enormous power – the oil, energy and metals companies. The key actors in these large enterprises have more power and agency than many sectors of the Russian state, as demonstrated in the continual battles between state and enterprises over non-payment of taxes and utility bills. As for Tatarstan’s own development, it does not have private companies of this size. Tatneft is comparable to a degree, but wields nothing of the trans-regional power of Yukos or Norisk Nickel. Instead, the regional power source lies more with the state. The Tatar state is frightened that its key enterprises will be acquired from outside, via a takeover from one of the Russian giants, or via investment from abroad. So the focus has shifted towards assisting and protecting these companies as much as possible. Much will depend on the behavior of Shaimiev’s successor. The residual state apparatus will still be a major player by virtue of the immense regional power of the established network ties. The Western literature’s focus on free-floating concepts of markets and information, symbols and signs is not readily applicable to this region of Russia. The very strong level of local embeddedness of the Tatar economy tends to support the basis of the ‘transformationalist’, third wave view of globalization, but it does not support its background thesis of total global change and the growth of a globally interconnected, weightless economy. Tatarstan’s wealth is not significantly embedded in global networks. Nor is it based on flows of information, or ICT. It remains rooted in the nineteenth century-style, Soviet ‘Category A’ economy.

Non-transparency and a virtual economy helped cause the crisis in 1998, but many Russian entrepreneurs are still not aware of the advantages to the open market. Democracy and capitalism are still sometimes blamed for the radical decline in Russian economic power during the late nineties, but government needs to take more responsibility in encouraging transparency rather than penalizing those that do come clean. One incredible example of the benefits of transparency can be seen in the rise and net worth of Russia’s second largest oil corporation, Yukos, and its billionaire president Mikhail Khodorkovsky. Since 1999 and the decision to detail its profits to its shareholders, Yukos has soared from a net worth of $1.5 billion to $20 billions. (Eudes, 2002)

Pottow’s Research

Pottow’s study and instruction focus on the thorough discussion   on bankruptcy and commercial law with meticulous research interest in worldwide bankruptcy. He has written on international bankruptcy theories and procedures, and retains   an active interest in technical matters as well. In addition, he has contributed papers in international insolvency law at  several conferences in the United States and other developed countries.

Discussion / Comparison and Contrast

The power of states is expected to erode in a globalising world, while that of transnational corporations is growing, but a distinctive system appeared to emerge in Russia under Putin where the FICs themselves provided the state with resources for their industrial policy and generally acted as replacements for the state. Old-fashioned dirigisme now gave way to an original form of neo-corporatism. The interests of big business and the state did not always coincide, of course, and the peculiar development of the state and Russian capitalism was characterized by numerous political contradictions. These came to the fore in the pressure that factions in the Kremlin brought to bear against Mikhail Khodorkovsky and his Yukos oil company in 2003. It appeared that Khodorkovsky’s generous support for a number of political parties and his open political ambitions had breached the terms of the ‘social contract’.

In the 2002 dataset, the lack of traditional reorganisations does not prove that they have disappeared altogether. Another dataset that shows less dramatic changes may be available. In 2002, the amount of purchases and pre-existing transactions could have been exceptionally large and the number unusually limited without obvious going-concern meaning. But in any dataset, these basic features—high sales levels and pre-existing deals and low going-concern value—will likely appear. We vetted our observations against the large cases in the BRD filed in the calendar year 2000 while writing The End of Bankruptcy, and the image was much the same. In addition, these findings were confirmed by the interviews we then conducted with reorganisation lawyers and their experience extended over several years over a wide range of cases.

The Parmalat Case

To most Italians, prior to 2003, Parmalat represented a shining example of the Italian economic miracle. Calisto Tanzi, Parmalat’s founder, had taken his family’s salami and preserves business and within thirty years had transformed it into an industrial giant. Tanzi started by adopting new technologies and applying them to the milk business. After purchasing its first agricultural business in Brazil in the 197O’s, Parmalat grew at an unprecedented rate of more than 50% a year. In addition to milk, Parmalat branched out into other areas such as juices, sauces, baking products, yogurts, soups, and mineral water. In the United States, Parmalat is known for its Mother’s Cookies brand, along with Black Diamond and Sunnydale Farms products.

By 2003, headquartered in the small northern Italian city of Parma (from which Parmalat takes it name), the company was active in thirty countries with its primary markets in North America, South America, and Europe.” Employing well over 30,000 employees and with revenues reaching more than $7 billion, Parmalat was ranked 369 among Forbes’ top 500 international companies in 2003 and ranked within the top ten in the food products industry. Moreover, Parmalat was Italy’s eighth-largest company and controlled 50% of the Italian market in milk and milk derivative products.

The Bankruptcy of the Group and the Accusation of Fraud

In 1997, Parmalat decided to become a “global player” in the world economy and expand outside of the Italian market. Parmalat started a campaign of international acquisitions, primarily in North and South America, financed through debt. In a relatively short time, the group became the third largest producer of cookies in the United States. But such acquisitions, instead of bringing in profits, began to fail in 2001. Because the group’s operational activities continued to operate at a loss, management decided to shift to the derivatives market and other speculative enterprises.’ Parmalat’s founder and former CEO, Tanzi, led the group into several different new enterprises, including a tourism agency called Parmatour, and a local soccer club, Parma F.C. Huge amounts of money were poured into these two enterprises, which had been running at a loss from the very beginning. It has been reported that Parmatour, no longer in business, had a loss of at least € 2 billion, an incredible sum for a tourism agency. The losses of the Parma F.C. soccer club, on the other hand, have not yet been completely uncovered. Since it became part of the Parmalat group, Parma F.C. purchased a remarkable number of high-priced soccer players from South America, mainly Colombia.’ These two enterprises that at first glance could be deemed insignificant in the global analysis of the Parmalat group, were “the tip of the iceberg” of an accurate and well organized “financial plan.” In fact, while accumulating losses and with debts owed to banks, Parmalat began to build a network of offshore mailbox companies (most of them registered in the Cayman Islands, tax harbor), which were used to hide losses through a mirror-game which made them appears as assets or provides liquidity.

On December 22, the Italian government rushed to pass emergency legislation in order to allow Parmalat to quickly file for bankruptcy in order to protect its industrial activity, payrolls, vendors, and others from creditors’ claims. The government appointed an administrator, Enrico Bondi, to devise and present a reorganization plan for the Parmalat Group by January 20, 2004.” The government was extremely concerned about the more than 100,000 Italian owners of Parmalat’s bonds and shares, and therefore promised an immediate review of the current legislation protecting investors.” The role played by the Italian, European, and American banks is extremely significant and dramatic. In fact, the banks had led unsophisticated investors (workers, pensioners, and professionals) into making high-risk investments. In most cases investors did not know where their money had been invested or were told that it was invested in “safe” financial

products.” On December 27 Calisto Tanzi and all of Parmalat’s executives were arrested under suspicion of fraud. Italian prosecutors investigated the alleged fraud and asked that in addition to all Parmalat executives. Bank of America and two auditors, Italian affiliates of Grant Thomton and Deloitte & Touche, are put on the first hearing of the Parmalat trial was held in October 2004.

Judges estimated that $9 billion had vanished from the accounts of Parmalat.’ The investigation continues to find evidence of where this enormous amount of money was hidden. In addition, over the years, Tanzi is suspected of misappropriating at least $600 million from the company. In order to finally appreciate the gravity of the Parmalat scandal, it must be mentioned that the amount of money missing from the accounts of the company represents about 0.8% of the gross domestic product of Italy.’ The main question about the collapse of Parmalat still remains: how and why did this happen? Was it the two accounting firms’ fault?

In Italian companies, the prevailing control structure is characterised by the existence of an active majority shareholder (“the block holder”) who is willing and able to effectively monitor the company’s management.” This type of ownership and control structure seems to reduce the problem of the agency between management and shareholders. Indeed the controlling shareholder could immediately discharge managers who, to the detriment of the shareholders, seek to favour their personal interests. In reality, “the issue of the agency only shifts to the relationship between various types of shareholders: the controlling shareholder and the minority shareholder.” In fact, “the controlling shareholder can exercise its power to pursue its interests even at the expense of the minority shareholders.”

“While the main corporate governance problem in the United States is defined as “strong managers, weak owners,” the main corporate governance problem in Italy is about “weak managers, strong block holders and unprotected minority shareholders.”‘” In this section it will become clear that in the Parmalat case the block holder, the Tanzi family, used its power in the organisation to pursue personal ii.

Can Italy Learn From the United States?

The collapse of Parmalat has clearly shown that Italian law provides minority shareholders and investors with minimum protection. However, while the U.S. legal system introduced strict rules to prevent financial crimes, i.e., the 2002 Sarbanes-Oxley Act, after similar cases such as Enron and WorldCom, Italy is still waiting for Parliament to approve and enact a specific law protecting the rights of investors. The Parmalat case was an unquestionable case of accounting fraud in which for more than ten years, the majority shareholder and his management had been able to conceal the mismanagement and convince the market, the minority shareholders and the investors that the company was in a solid financial position and, consequently, a reliable investment. In addition to the obvious detriment of thousands of minority shareholders and investors, Calisto ‘Tanzi and his management funnelled enormous amounts of the company’s money into their personal accounts, not all of which were discovered. As previously described, Parmalat was a pyramidal group organised and structured to be under the total control of Tanzi, the majority shareholder, and to exclude minority shareholders from any company activity or control.

Conclusion

There have been several eases in the US and other European Union countries in which bankruptcy-type values have gradually been implemented; there has never been an effective mechanism for dealing with them. The US bankruptcy legislation persists when creditors’ autonomous interventions do not achieve the two items that bankruptcy law is meant to do: tribulations of mutual action occur as many creditors meet an insolvent debtor and extended danger in an environment of imperfect financial contracts. Bankruptcy debt ejection is a type of danger spreading, since it is a means of freeing debtors from the most immense and heinous states of character, irrespective of how they got there. Much of the land and even the sovereignty of the insolvent used to be stripped before bankruptcy legislation prevailed in the EU.

In certain European countries, the cost of servicing debts is in fact, death. In these developing nations, about 8 million citizens die every year of easily preventable and treatable communicable diseases. There is no question that the overhang of unjustified debt is not the sole or even the primary cause of this financial catastrophe, but it is undoubtedly a causative factor. In US and EU bankruptcy rules, there is obviously a far more well-organized solution to operating sovereign debt, but it is also true that going there will undoubtedly entail a reduction of value inflicted by those obtainable creditors. A modern paradigm of default risks in asset valuation will provide an incentive for potential creditors; open creditors will see any of their current liabilities written down in order to release insolvent sovereign debtors from their present misery. Of necessity, to buy out the present battle, one might dream about alternative modification mechanisms and payment programmes, but that would be quite complicated and multi-faceted to implement. What prevents one from cleverly engaging with insolvent independent debtors in the light of bankruptcy law in America and Europe is the vested advantages of present creditors, not the long-term merits and rationale of growth itself.

In countries with under-developed bankruptcy procedures, the costs of premature liquidation are felt most acutely. The ineffectiveness of bankruptcy law contributes to informal credit networks that are vulnerable to communication collapse, driven by unwritten understandings and socially consistent standards. Partly owing to the fact that their bankruptcy scheme is more successful than others, some European countries have faced lower crisis costs. One explanation why IMF crisis initiatives often stress new bankruptcy legislation is the moribund existence of structured bankruptcy proceedings in developing market countries, and their consequences for crisis costs. One of the interesting issues underlying the existence of the problem of default on sovereign debt is the use of foreign currency denominated debt. This is the so-called problem of ‘original sin’. If sovereign debt was in domestic currency a country could always print money to satisfy its obligations. The problem of inflation risk if countries borrow significant amounts in domestic currency is addressed at length.

The modern policy debate on the international financial architecture has responded to the debt problems spawned by creditor coordination failure by largely focusing on sovereign bankruptcy reform. Two broad strategies have been proposed in order to facilitate orderly debt restructuring while balancing both creditor and debtor rights. On one view, a contractual approach encourages the IMF and G7 governments to promote the inclusion of collective action clauses (CACs) in bond contracts. Such clauses attempt to establish clear procedures for debt restructuring and allow a qualified majority of creditors to alter the terms of the contract in the event of debt problems. A second view adopts a more statutory approach in line with domestic bankruptcy principles of the US code. It proposes legal structures to resolve disputes, with the official sector playing an important role in determining whether a debtor can suspend payments. The most prominent proposal of this kind has been the IMF’s Sovereign Debt Restructuring Mechanism (SDRM).

Creditor coordination problems in sovereign debt restructuring manifest themselves in two ways. If one creditor fails to renew its loans with the debtor, then all creditors will do likewise. A ‘country run’ means that creditors as a whole may fail to extend new finance or rollover loans, even when it is in their collective interest to do so. A second aspect of creditor coordination failure arises in bargaining over restructuring. Each creditor has an incentive to ‘hold out’ in the hope of obtaining payment according to the original terms of the contract, rather than agreeing to a collective settlement. Rogue or ‘vulture’ creditors, who pursue their claims aggressively in the courts, are particularly problematic in these instances. Reforms to sovereign bankruptcy tackle both types of coordination failure. A payments standstill or a stay on litigation can prevent creditor grab races, and the agreement of well-defined procedures under super-majority voting can mitigate the hold out problem by allowing a qualified majority to pursue restructuring despite the objections of a dissenting minority. Regardless of whether the approach adopted is contractual or statutory, bankruptcy reforms bind the private sector into crisis resolution, thereby sharing the burden of crisis amongst private creditors, the debtor, and the official sector.

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