This article explores whether a more formal bankruptcy procedure, the Sovereign Debt Restructuring Mechanism (SDRM) as proposed by the IMF, or in some modified form, is needed to deal with sovereign debt problems. The key consequences of the invocation of such a procedure would be a standstill on creditors’ collections of principal and interest, a stay on creditors’ attachments or foreclosures on assets, and new money priority for any funds lent to a sovereign during the duration of the procedure. Negotiations would ensue between the sovereign and the creditors over the terms of restructuring, with super-majority voting on acceptance of any restructuring plan. Once accepted, creditors could not holdout by asking courts to enforce the original terms of their debt instruments. A sovereign bankruptcy framework might enable countries to more easily restructure and reduce their debt, and to do so in a more orderly fashion. This would have significant benefits to the international financial system: countries would have more affordable levels of debt, the need for international rescue packages (primarily through the IMF) would greatly decrease, creditor moral hazard would be reduced, and the variability in credit rates due to legal uncertainty would be reduced as well. Creditors are, of course, concerned that this will reduce their payoffs, and there is a broader concern that use of the procedure might increase the cost of future sovereign borrowing. They have instead advocated more wide spread use of collective action clauses (CACs) in sovereign bonds. Currently, the G-7 countries, including the United States, have supported a two-track approach – more widespread use of CACs in the shorter term and exploration of the use of SDRM in the longer term. Part I of this article summarizes important trends in sovereign debt problems from the 1970s to the present. Part II discusses major concerns about the existing process of dealing with sovereign debt problems. Part III examines the two major solutions advanced to deal with these concerns, CACs and SDRM, and Part IV offers my
