Systemic Challenges and the Future of Intercreditor Equity Disputes

Abstract

Abstract Chapter 7 discusses intercreditor equity and systemic challenges. More specifically, it discusses whether intercreditor equity rules and the surrounding legal framework of sovereign debt restructuring are compatible with public policy considerations, defined as a debtor state’s need to reach a sustainable debt burden and ensure monetary and financial stability. Only a couple of the rules would be considered as problematic in this regard. The number of different and uncoordinated intercreditor equity rules that a sovereign debtor state is typically bound by, combined with the scope of the rules, may restrict the debtor state’s room for manoeuvre to such an extent that it becomes difficult to implement a sustainable debt restructuring. Sufficient room for manoeuvre for debtor states to provide preferential treatment to certain creditors may allow for targeted measures that help the crisis-struck economy to recover faster. The described risk—that the parties involved in a debt restructuring are not able to reach a sustainable debt restructuring due to a narrowed policy space—is exacerbated under the current ad hoc system for debt crisis resolution. This system is heavily dependent on voluntary participation from creditors and contractual restructuring tools, and the state has limited freedom to use its sovereign powers to solve a debt crisis. Last, the chapter discusses good faith as a general principle of international law and whether it has a role to play as a cohesion tool reducing the fragmentation of intercreditor equity rules.