**1. Introduction**

The challenge of resolving a sovereign debt crisis becomes problematic when it has international dimensions. A State with purely domestic indebtedness has the flexibility to enact measures to address a debt problem that is entirely within its jurisdiction. It can, for example, enact laws that reduce the face value of its debts or lengthen their maturities to prevent the possibility of default. In this case, the State's creditors would normally be without any recourse because debt contracts are created, operationalized and sustained within the legal framework of the Debtor State.

Thus, the restructuring measure enacted by the State to preserve its fiscal health and the general well-being of the country would prevail over the creditors' rights to receive the "full value" of the debt. In short, a purely domestic sovereign debt would permit unilateral restructuring by the Debtor State. In the positivistic language of Justice Oliver Wendell Holmes, "there can be no legal right as against the authority that makes the law on which the right depends…" [1]. In economic terms, however, the creditors' lack of legal recourse is effectively part of sharing the burden (like everyone else) to address the collective problem of a sovereign debt crisis.

Once sovereign debt has international dimensions, the Debtor State has to contend with legal systems other than its own. Access to international debt markets

made the resolution of sovereign debt crises an international affair. For their protection, creditors often demand that debt contracts contain provisions that introduce elements of foreign legal systems to them—e.g. provisions on governing law and the choice of a tribunal other than the domestic courts of the Debtor State. As in the Argentinian crisis that started in the early 2000s, Argentina had to contend with creditor holdouts carrying injunctions secured from New York courts (see generally [2]).

Thus, in the case of sovereign debt crises with international dimensions, their resolution involves the interaction between at least two legal systems. The protection given by a foreign legal system has a deterrent effect on unilateral debt restructuring by the concerned State. However, this situation also creates the opportunity for delays and holdout behavior by giving creditors protection contractually drawn from a legal system outside that of the Debtor State. This becomes a collective action problem that ultimately hinders the resolution of a sovereign debt crisis. The International Monetary Fund (IMF) has long acknowledged that "While private creditors as a group may recognize that support for rapid restructuring is in their own interest, they may hesitate to agree to a restructuring out of concern that other creditors may hold out and press for full payment on the original terms after the agreement has been reached" ([3], p. 12).

Proposals for a collective and multilateral proceeding for the resolution of sovereign debt crises have been fairly widespread in the literature (see [4], p. 87). These proposals usually draw from domestic bankruptcy rules which, among others, support a global stay on debt collection efforts, the application of the automatic acceleration principle, priority rules and variants of creditor equality treatments [4, 5]. However, the resolution of a sovereign debt crisis would not be as simple as, to paraphrase the legal positivist H.L.A. Hart, a "bankruptcy regime writ large."1 [6, 7]. There are significant characteristics of sovereign debt restructuring (SDR) that are not found in domestic bankruptcy regimes such as the non-availability of an option to liquidate the Debtor State and the critical role of macroeconomic policy and economic growth in the restructuring process.

Given that the current resolution efforts primarily occur within a conflict of law regime, this paper argues that a minimum level of multilateralization is needed to universalize broad norms that channel collective behavior during a sovereign debt crisis. These norms should consider "inclusive economic growth and sustainable development" within the Debtor State as rational and viable strategy in SDR.

More concretely, this paper proposes that efforts should be exerted so that the principles of sovereignty, good faith, transparency, impartiality, equitable treatment, sovereign immunity, legitimacy, majority structuring and sustainability under the United Nations (UN) General Assembly Resolution 69/319 a dopted on 10 September 2015 ("Basic Principles on Sovereign Debt Restructuring Processes") may be broadly codified into a treaty. Such codification may include changes in the articulation of these principles to accommodate the positions of States such as those in the European Union (EU) (see [8]). Significantly, the principle of sustainability should emphasize the concept of "inclusive growth and sustainable development" within the Debtor State as part of the SDR framework. This proposal is being made in the context of the lack of support from countries which have the "major financial centers from which most of the sovereign debt has been issued" ([9], p. 47).

While certainly not an easy feat, the foregoing follows the so-called Incremental Approach that "complement, rather than replace, existing mechanisms, including contractual approaches and the activities of the International Financial Institutions

**125**

*Sustainability in Indebtedness: A Proposal for a Treaty-Based Framework in Sovereign Debt…*

In what follows, Part II of this essay describes the current conflicts of law regime where SDR occurs. Part III sets out the proposal to codify the principles embodied in UN General Assembly Resolution 69/319 in to a treaty. Part IV discusses the principle of sustainability which emphasizes the concept of "inclusive growth and sustainable development" as a rational and viable strategy of SDR. Part V

The international dimension of SDR does not arise primarily from international law as set out in Article 38 of the Statute of the International Court of Justice, but by contractual provisions that incorporate laws other than the legal system of the Debtor State. In general, there are no "top-down" international norms that govern SDR in the form of treaties, custom or principles. Instead, there is a "bottom-up" normative system that arises from the number of debt contracts issued by Debtor States that contain provisions which introduce elements of a foreign legal system to them. While there are international laws that may apply to SDR such as the principle of sovereign immunity or the Hague Convention on the Recognition and Enforcement of Foreign Judgments [11], these international norms are limited to

The legal environment where SDR presently operates is a regime of "conflict of laws" or "private international law." Conflict of laws does not principally concern itself with international law. Rather, it is the application of domestic law whenever a particular jurisdiction is "faced with a claim that contains a foreign element" ([12], p. 2). In other words, a conflict of law approach does not depend on the application of international law among States. Instead, it entails the operation of a particular domestic law in cases involving the interaction between at least two legal systems. Thus, "[t]he *raison d'être* of private international law is the existence in the world of a number of separate municipal systems of law—a number of separate legal units that differ…from each other in the rules by which they regulate the various legal

As in the current regime of SDR, the rules that generally govern SDR are strictly

The provisions that are often stipulated to introduce elements of a foreign legal system in debt contracts are (a) dispute settlement clauses that confer jurisdiction to a tribunal other than the domestic courts of the Debtor State; and (b) governing law clauses (see [13]). Incidentally, these contractual provisions mirror the scope of private international law which is "always concerned one or more of three questions, namely," (a) the jurisdiction of the domestic court; (b) recognition and

not international law, but a State's domestic rules that apply when foreign laws that are incorporated in a debt contracts. The practice of SDR is therefore situated within a conflict of laws regime which recognizes that while a State may enact rules in the treatment of foreign laws, "[a] sovereign is supreme within [its] own territory…[It] can, if [it] chooses, refuse to consider any law but [its] own" ([12], p. 4). As discussed below, while the principle of State sovereignty is conceded in theory, its practical application in SDR is qualified by the set of debt contracts that a State

or the Paris Club, and guide their operation" ([10], p. 38). The thrust of this proposal is to broadly formalize the norms in UN General Assembly Resolution 69/319 tha t would give States the flexibility to negotiate and adopt specific measures in resolving a sovereign debt crisis. As such, this would not involve an unqualified "surrender of sovereignty" which has been part of the reason for States' reluctance

**2. The conflict of law regime of sovereign debt restructuring**

the extent that they do not dictate how SDR is implemented as a whole.

*DOI: http://dx.doi.org/10.5772/intechopen.82470*

to enter into a "hard law" approach in SDR.

relations arising in daily life" ([12], p. 4).

has entered into in accessing capital.

concludes.

<sup>1</sup> In criticizing John Austin's Command Theory of law, H.L.A. Hart described it as a "gunman situation writ large."

*Sustainability in Indebtedness: A Proposal for a Treaty-Based Framework in Sovereign Debt… DOI: http://dx.doi.org/10.5772/intechopen.82470*

or the Paris Club, and guide their operation" ([10], p. 38). The thrust of this proposal is to broadly formalize the norms in UN General Assembly Resolution 69/319 tha t would give States the flexibility to negotiate and adopt specific measures in resolving a sovereign debt crisis. As such, this would not involve an unqualified "surrender of sovereignty" which has been part of the reason for States' reluctance to enter into a "hard law" approach in SDR.

In what follows, Part II of this essay describes the current conflicts of law regime where SDR occurs. Part III sets out the proposal to codify the principles embodied in UN General Assembly Resolution 69/319 in to a treaty. Part IV discusses the principle of sustainability which emphasizes the concept of "inclusive growth and sustainable development" as a rational and viable strategy of SDR. Part V concludes.
