With severe sovereign debt distress now entrenched and more to come, many analysts and practitioners want to revamp the architecture for sovereign-debt restructurings. To do this they are offering reform proposals that are often incompatible with the facts on the ground.
The current architecture is undeniably a messy hodgepodge. But market practitioners shouldn’t expect major changes, and should focus instead on the improvements that can realistically be made.
One long imagined sweeping solution is to create a global bankruptcy regime, such as the IMF’s proposed Sovereign Debt Restructuring Mechanism of two decades ago. But the current world order is based on nation-states with differing legal political and economic systems, not global governance. Supranational bankruptcy enforcement requires a globally recognised supranational bankruptcy authority, and that does not exist. A global bankruptcy regime is a non-starter for further reasons, including possible politicisation of decision-making and that the US would not likely cede the sovereignty of US courts in core areas to a supranational body. Nor would others.