Restructuring Sovereign Debt by Incorporating Soft Law as Governing Law or by Reference

Abstract

This paper, presented at the D-DebtCon 2020 sovereign debt panel, examines an innovative new contractual approach to help solve the holdout problem. That problem arises, for example, when certain hedge funds—known as vulture funds—buy distressed sovereign debt at pennies on the dollar and vote their holdings to block a restructuring plan unless they receive more than their fair share thereunder. Holdouts thereby can obstruct otherwise rational sovereign debt restructuring plans. Although, in principle, statutory and contractual solutions can solve the holdout problem, statutory solutions have not been politically acceptable and contractual solutions have been insufficient. This paper advances the arguments recently made in Soft Law as Governing Law, 104 MINNESOTA LAW REVIEW 2471 (2020), that parties to sophisticated business contracts, such as sovereign debt contracts, should be able to choose non-governmental rules, or soft law—in the case of sovereign debt contracts, the CIGI Model Law for sovereign debt restructuring—as the contract’s governing “law”. Choosing the Model Law as that governing law would help to facilitate aggregate supermajority voting, thereby solving the holdout problem.