Restructuring Ruritania: Bankruptcy, Sovereign Debt, and the Equity Receivership

The traditional legal story of sovereign restructuring goes something like this: foreign governments cannot file for bankruptcy under domestic law. When faced with the need to restructure unsustainable debts, they must negotiate with each of their creditors. Since the late 1980s, private debt has been held by increasingly diverse and dispersed bondholders, making renegotiation more difficult. Defaulting debtors face two basic problems: first, they have no process analogous to the automatic stay in bankruptcy, which can pause litigation by creditors and buy time for an orderly reorganization; second, and more importantly, they have no process analogous to the cramdown provisions of Chapter 11, whereby new terms can be imposed on non-consenting creditors. As a result, sovereign reorganizations are at the mercy of holdout creditors, who can extract concessions at the expense of other creditors. This creates economic uncertainty with attendant lower growth rates and ultimately imposes additional hardship on the sovereign’s taxpayers. This Article argues against the conventional wisdom, showing how it is possible for a sovereign debtor to use existing law to stay pending or future litigation, and impose new terms on holdout creditors. This can be done with the venerable equity receivership, a legal device used to reorganize corporate debtors prior to the adoption of the first modern Bankruptcy Code in the 1930s. In effect, sovereign debtors can be treated like a nineteenth-century railroad in need of reorganization. To be sure, this procedure would reach only American law-governed debt, but the ability of sovereigns to resolve the holdout problem for all their dollar-denominated debt could dramatically simplify restructurings. Even if finance ministries are hesitant to avail themselves of such a novel and untested legal theory, the possibility of being able to cram down new terms against holdout creditors may ease the process of negotiated restructurings.