International Financial Arquitecture

In contrast to domestic bankruptcy laws, the international debt architecture is characterized by the absence of a sovereign debt restructuring mechanism. In this context, bargaining between a distressed debtor and its creditors is based on decentralized market-based instruments. Essentially, this entails that sovereign debt restructuring negotiations are framed by established debt contracts between the debtor, and its creditors, be them other states, multilateral institutions, banks, bondholders or others. Given that debt contracts cannot possibly contemplate all contingencies that may arise and considering the changing debt landscape since the Global Financial Crises – including the rise of bonded debt in Emerging Markets and Developing Economies and that of China as the major bilateral creditor - debt restructurings have become more complex and protracted, at the cost of debtors and (most of) their creditors.

Despite important multilateral initiatives in recent years, such as the Common Framework for Debt Treatment beyond the DSSI, the international debt architecture continues to be ill equipped to ensure efficient, equitable and expedient restructurings. In addition to building capacity in Emerging Markets and Development Markets to be better prepared in case a restructuring becomes necessary, the international debt architecture thus needs to be made fit for purpose. This includes considering the full range of potential policy measures, ranging from statutory measures, such as domestic legislation in financial centers, to contractual innovations, such as state-contingent debt instruments. Debt transparency on the side of both sovereign debtors and private, bilateral, and multilateral creditors is equally important.