Sovereign and Sub-Sovereign Debt Restructuring

Project Expert

Brad W. Setser

Senior Fellow

About the Project

Countries borrow too much, often in foreign currency, and sometimes cannot repay on time and in full.  Subdivisions of states—such as territories—also can borrow too much.  Puerto Rico is a recent case in point. The rules for determining how sovereign and sub-sovereign restructuring proceeds, and how any vote on the restructuring terms takes place, are thus of significant importance for the global economy. Recently, a major reform was introduced into the contractual provisions used in most international sovereign bonds to allow all bond holders to vote collectively on restructuring terms. The mechanics of these provisions—called aggregation clauses—are described in a recent paper co-authored with Georgetown’s Anna Gelpern.    But it will take time before these new provisions are in a large share of the outstanding stock of bonds and in the interim, the existing rules either require “bond” by “bond” voting, or do not allow voting on terms at all—potentially complicating needed restructurings. Yet in many ways the frontier of the debate on sovereign debt restructuring isn’t a classic sovereign case, but rather Puerto Rico. The legislation creating Puerto Rico’s oversight board also created two potential processes for restructuring Puerto Rico’s debts—one loosely modelled on the new clauses, and another modelled on Chapter 9 of the U.S. bankruptcy code. The lessons ultimately learned from Puerto Rico will help to shape the broader debate on the right rules for sovereign restructuring for years to come—with the initial lessons the subject of a forthcoming research paper.