Sovereign Debt Restructuring: A Latin American Perspective

In summary

This chapter addresses transactional aspects of sovereign debt restructuring and litigation issues when dealing with sovereign debt, emphasising previous crises from Latin America, such as Argentina, Ecuador, Jamaica, Peru, Venezuela – and particularly Uruguay as a benchmark on how to restructure sovereign debt.

Discussion points

• How to restructure sovereign debt
• The distinction between debt re-profiling and debt restructuring
• Different tools and techniques available to enhance creditor participation
• Issues of concern when suing a sovereign debtor
• Lessons learnt from previous debt restructurings in Latin America

Referenced in this article

• Banco Nacional de Cuba v Sabbatino, 376 U.S. 398, 401, 84 S.Ct. 923, 11 L.Ed.2d 804 (1964)
• Chrystallex International Corporation v Bolivarian Republic of Venezuela, C.A. No. 17-mc-151-LPS, 10 August 2018.
• Elliott Assocs L.P. General Docket No. 2000/QR/92 (Courts of Appeal of Brussels, 2000).
• EM Ltd. v Banco Central de la República Argentina
• IMF, Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring, October 2014.
• Libra Bank Ltd. v Banco Nacional de Costa Rica, 676 F.2d 47, C.A.2 (N.Y.) (1983).
• NML Capital, Ltd. v Republic of Argentina, 12-105(L).

Forecasting the balance of payments for Latin American Countries has become a major indoor sport among bankers, bureaucrats, and academics.

Carlos F Diaz-Alejandro¹

Introduction

Edward III of England borrowed money from certain Florentine banks to finance his war against France, which then defaulted in 1340, resulting in the bankruptcy of Peruzzi Bank (1343) and Compagnia dei Bardi (1346). In view of this, it has been said that a ‘king’s promise to repay could often be removed as easy as the lender’s head’.²

In other words, being a creditor of a sovereign state is particularly difficult due to its nature. Sovereigns’ acts can be considered acts of state and can enjoy sovereign immunity. If considered an act of state, such act would be shielded from external scrutiny by the laws of a foreign state. Sovereign immunity will shield the sovereign and its agents from jurisdiction. The mentioned example also shows that sovereign default and debt restructuring is no breaking news. Historically, debt accumulation by sovereigns has been a pressing issue. Sovereigns states tend to accumulate debt beyond reasonable control to unsustainable levels, consequently leading to an increased need for debt restructuring.³

With globalisation, sovereign debt has atomised and debt recovery has become more complex. This becomes even more evident considering that the public debt of 32 countries is currently unsustainable or at high risk of default.⁴ This chapter will address transactional aspects of sovereign debt restructuring and litigation issues when dealing with sovereign debt. In doing this, particular emphasis will be put on previous crises episodes from the region, such as Argentina, Ecuador, Jamaica, Peru and Venezuela. Finally, the case of Uruguay is analysed in more detail as it can be seen as a benchmark on how to restructure sovereign debt.

Debt Reprofiling v Debt Restructuring and Substantial v Procedural Aspects

Accumulating debt beyond sustainable levels leads to complex economic crises. Even if the accumulated debt is within reasonable levels, economic crises can be triggered by endogenous or exogenous shocks or simply by correlated or uncorrelated liquidity problems with maturities in the short term. For example, even if one could argue that Argentina’s current accumulated debt is within sustainable levels compared with other countries or based on its debt-to-GDP ratio, the Argentine government has to upfront maturities in foreign currency of approximately US$15 billon until 2021, creating significant liquidity problems due to current political uncertainty.

To prevent these economic crises, sovereign states may conduct debt management programmes that can result in a debt re-profiling or restructuring. If done pre-emptively, it is referred as a debt re-profiling (a voluntarily exchange offer prior to default) or once the default has already occurred, it is referred as a debt restructuring. In other words, the main difference between a debt re-profiling and a debt restructuring is the timing when the exchange offer or debt management exercise is performed. A debt re-profiling can help ease the pressure of an internal devaluation by reducing the debt servicing burden. Jamaica is an excellent example, where interest costs and principal repayments exceeded the countries revenues. Through a voluntarily domestic debt exchange offer performed in early 2010, and without entering into default, Jamaica released some of its servicing debt burden. Examples of debt re-profiling on external debt also include Uruguay in 2003 (or more recently Greece in 2012). In the case of Greece, it was done using collective action clauses (CACs).

Since most of sovereign debt is documented by means of bonds (either domestic or international), sovereign debt restructurings are usually complex processes. Broadly speaking, sovereign debt restructuring can be understood as the technique used by sovereign states to prevent or resolve financial and economic crises and to achieve debt sustainability levels.⁵ Any debt restructuring has two aspects: procedural and substantial. The focus is on the procedural aspects (ie, the way to conduct a restructuring and the techniques or tools that can be used to enhance the degree of participation). The substantial aspect, on the contrary, involves the actual restructuring of debt which can be achieved by rescheduling amortisation schedules and the possibility of reducing interest rates and principal.

Sovereign debt restructuring

With many banks and retail bondholders now involved, private creditors have become increasingly numerous, anonymous and difficult to coordinate. The goal of debt restructuring should be a better and more timely handling of unsustainable sovereign debts, while at the same time protecting asset value and creditors’ rights.⁶

Sovereign debt restructurings are generally conducted through the use of voluntary exchange offers or CACs. The former can involve the use of other legal techniques, such as contractual ‘sweeteners’ to enhance the degree of participation of creditors or ‘exit consents’ to compel creditors to participate. The latter (ie, CACs) are clauses that most of the time are included in the prospectus of a bond issuance, requiring the interaction of bondholders to perform an action aimed at facilitating the restructuring of these debt instruments by overcoming coordination issues.

The sweeteners can be seen as an ad hoc contractual tool to address the lack of a formal regime and to enhance the degree of participation of creditors. Some examples of these contractual sweeteners include mandatory prepayment clauses or mandatory restatement of principle clauses. These are clauses that you can include in the new terms of the bonds when you launch the exchange offer to try to convince your creditors that they are still going to be protected, either by reducing the outstanding stock of debt (ie, mandatory prepayment clauses) or that the accepted face value reduction will be reinstated in the event of a new event of default. These were used by Ecuador in the year 2000.

Other creditor participation-enhancing techniques include:

• the use of credit-linked notes (eg, as in Argentina 2005 and Greece 2012);
• a guarantee (eg, as in Seychelles in 2010 where a guarantee was provided by the African Development Bank);
• the use of a principal defeasance (eg, as it was considered in an early stage of the Greek private sector involvement); or
• the use of collateral (eg, as in the Brady Plan).

Another option is the ‘most favoured creditor clause’ (MFCC), usually linked to another clause known as the Rights Upon Future Offers clause, as used by Argentina in 2005 which was at the epicentre of the pari passu litigation in New York.⁷ If a sovereign decides to enter into a repurchase, a new exchange offer or an offer to purchase of exchange, or enter into a settlement in better terms than the offer made to the original bondholders at the time of the exchange offer, due to the MFCC included in the new terms of the bond being issued as a result of the exchange offer, the ‘more beneficial’ terms being offered will also be extended to those that accepted to enter into the exchange offer.

In separate subsections below, the use and features of CACs are analysed, as well as the exit consent technique to enhance the degree of participation in an exchange offer.

Collective action clauses

Collective action clauses are generally included in the prospectus of a bond issuance that can be categorised⁸ in:

• collective representation clauses intended to coordinate representation of the bondholders as a group;
• majority action clauses as an action to be taken or adopted by a majority decision;
• sharing clauses, which provide that any proceeds obtained from the debtor would be shared among all the creditors on a pro rata basis; and
• acceleration clauses that require voting on bonds to accelerate unmatured principal in the event of a default.

In the context of sovereign debt, the term collective action clauses have been indistinctively used to describe majority action clauses or, in other words, clauses that provide contractual cramdowns by enabling a qualified majority to bind a minority to a change in the terms of the bonds. CACs are important because a willing majority can force a dissenting minority to accept a face value or interest reduction, or an extension of maturity, creating a more orderly and predictable restructuring process.

The required majority threshold to amend the terms of the bonds containing CACs has generally been 75 per cent in aggregate principal amount of the outstanding bonds. However, the first CACs were included on single bond issuances only, allowing modifications series by series. This creates a problem in itself because bonds had to be restructured series by series and could lend to different outcomes depending on each series. As explained by Billington, each class of bondholders ‘will be reluctant to “go first” without any guarantee that the holders in the other classes will provide similar relief’⁹ – a classic prisoner’s dilemma problem. This was addressed by the adoption of an aggregation feature, binding all creditors (including dissenting series) if the modification is approved by the pre-established supermajority across all series. The current industry standard (proposed by the International Capital Market Association (ICMA) in 2014 and then endorsed by the International Monetary Fund)¹⁰ requires a supermajority of 75 per cent of the total aggregate number of bondholders to allow cross-series modification, disregarding the individual voting results of each class or series.

Exit consents

Exit consent is the technique by which holders of bonds in default who, deciding to accept an exchange offer, at the moment of accepting said offer, grant their consent to amend certain terms of the bonds that are being exchanged. By using the exit consent technique, the exchange offer is conditioned to a minimum threshold of creditors’ acceptance and the amendments to the terms are performed once the required majority has been obtained. By means of these amendments, the defaulted bonds subject to the exchange offer become less attractive (in legal and financial terms), forcing a greater number of bondholders to accept the exchange offer. Otherwise, if holdout bondholders do not accept the exchange offer, they will be holding an impaired bond not featuring some of the original contractual enhancements. It is important to stress that this technique is used in conjunction with a voluntary exchange offer.

In the absence of CACs, the terms and conditions usually required to amend a sovereign bond issued under New York law are:

• a 51 per cent nominal value quorum in the first meeting or a 25 per cent quorum on any subsequent adjourned meeting; and
• 662–3 per cent of the nominal value of the series to amend any other than payment term.

Under English law, amendments require:

• simple majority of the nominal value of each series to adopt resolutions; and
• the quorum required to amend any other terms will be two or more persons holding or representing not less than 50 per cent of the nominal value of the series.

Ecuador used exit consents to modify certain non-payment terms in order to make old bonds less attractive in its restructuring in 2000. The participation in the proposed exchange offer implied voting in favour of a list of amendments to the non-payment terms,¹¹ including:

• the requirement that all payment defaults must be cleared as a condition for any rescission of acceleration;
• the provision restricting Ecuador from purchasing any of the Brady bonds while a payment default is continuing;
• the covenant prohibiting Ecuador from seeking a further restructuring of Brady bonds;
• the cross-default clause;
• the negative pledge covenant; and
• the covenant to maintain the listing of the defaulted instruments on the Luxembourg stock exchange.¹²

Ecuador also made some additional commitments to enhance the exchange offer (ie, the sweeteners previously mentioned), including:

• mandatory prepayment arrangement after 11 and six years for the 2030 and 2012 bonds, to provide liquidity to investors¹³ and to reduce the debt to a sustainable size; and
• mandatory ‘reinstatement’ of principal clause, which obliged Ecuador to issue additional bonds in the same amount of the debt reduction obtained through the exchange offer in the event that an interest default occurs during the first 10 years of the new issuance to discourage casual defaults on the new bonds by giving the government an incentive to make payments.¹⁴

In the end, 97 per cent of its bondholders agreed to participate in Ecuador’s exchange offer.¹⁵

Sovereign debt litigation

In the context of a sovereign restructuring, why would a creditor accept an exchange offer for much less favourable terms? Any creditor, before rejecting an exchange offer (or even before the use of CACs is attempted) has to analyse its legal options. Certain useful questions to consider in this analysis are: can a sovereign be sued? Where can a sovereign de sued? Does the state enjoy sovereign immunity? Finally, and most importantly, if successful, how can a judgment against a sovereign be enforced?

Can a sovereign be sued? (act of state)

The act of state doctrine precludes the courts from inquiring into the validity of the public acts of a recognized foreign sovereign power which have been committed within its own territory¹⁶. The application of the act of state doctrine necessitates a case by case analysis. This is based on the sensitivity of foreign policy given the legal and political issues¹⁷ involved. Generally, there are two prerequisites: that the sovereign’s action is taken within its own territory and that the application takes place within the sovereign’s own territory.¹⁸ Typically, illegality of a sovereign’s act under its own law does not prevent application of the act of state doctrine.¹⁹

In Alfred Dunhill of London Inc v Republic of Cuba, the US Supreme Court held that for purely commercial acts, sovereigns would not be afforded act of state doctrine protection.²⁰ Consequently, the act of state doctrine will rarely prevent courts from inquiring into the validity of a sovereign’s attempts to force refinancing of its obligations to sovereign bondholders. In Libra Bank Ltd v Banco Nacional de Costa Rica, the New York federal appeals court considered whether the act of state doctrine required recognition of a Costa Rican Central Bank resolution restraining external payments in foreign currencies and thus whether the resolution would protect a Costa Rican bank subject to an action to collect brought by an English corporation as Agent for 16 banks.²¹ The appeals court rejected the act of state doctrine defence, holding that the situs of the debt owed was the US, given that

• Banco Nacional had consented to jurisdiction in New York;
• the loan agreement was construed under New York law;
• payments were due at a New York bank; and
• Banco Nacional had US$2.5 million in various New York bank accounts at the time the resolutions were entered.²²

In the UK, the position with respect to the act of state doctrine is similar to the US. Fox notes that the main difference is that in the UK the act of state doctrine operates as a defence to litigation, while in the US, it operates as a defence but may also be used as a ‘basis for a substantive remedy’.²³

Where can a sovereign be sued?

Another aspect to analyse is which applicable law and jurisdiction governs the bonds that the creditor holds. As mentioned before, when a sovereign’s accumulated debt reaches unsustainable levels, economic crises strikes in and any government’s first reaction could be declaring the ‘economic emergency’ through a law or an executive order, just like happened in Argentina in 2001. Economic crises affecting emerging markets usually impact deeply in society, especially in the most vulnerable classes. In this scenario, emergency laws tend to restrict the possibility of domestic enforcement against a sovereign. Therefore, bonds (Eurobonds or Global Bonds) are usually governed by foreign law and they submit to one or more foreign jurisdictions. Therefore, in order to escape sovereign interference, avoid the domestic courts. Foreign courts will not let domestic laws interfere with a foreign law governed bond.

Does the state enjoy sovereign immunity? (sovereign immunity)

Even under New York and English law and jurisdiction, it is important to understand if the debtor will be entitled to claim immunity from suit or execution.

Sovereign immunity is a legal doctrine that has its origin in the ancient English principle that the monarch can do no wrong and, by which, a sovereign is immune from civil proceedings or criminal prosecution. In 2012, NML Capital filed an attachment request before the courts of Ghana for an Argentine army ship (Fragata Libertad) in a desperate attempt to recover unpaid debt from Argentina. In short, the International Tribunal for the Law of the Sea ordered the local courts of Ghana to release the ship, arguing that the ship was a military asset and, thus, that it benefited from sovereign immunity.

In the US, sovereign immunity is determined principally by the Foreign Sovereign Immunity Act 1976. In the UK, the international law principle of sovereign immunity is determined principally by the State Immunity Act 1978. Both pieces of legislation broadly grant sovereign immunity to sovereigns unless they are acting in a commercial capacity. In a 1992 US Supreme Court case concerning the Republic of Argentina, it was confirmed that the commercial activity exemption applies when the state issues sovereign debt (eg, a Eurobond), as it is a commercial activity.²⁴

Although there is no doubt that issuing bonds in the international capital markets by a sovereign is considered a commercial activity (and therefore not subject to sovereign immunity), it is common practice that the governing law and jurisdiction clause in an issuance of debt instruments is complemented with a waiver of sovereign immunity to avoid any possible misinterpretation.

Enforcement

Even if immunity is waived by the sovereign, another problem remains. If a creditor chooses to sue the sovereign debtor, after obtaining a favourable judgment, it will still have to enforce such judgment. The only mechanism to enforce this judgment if the sovereign does not honour the court ruling is by executing property.

The problem is that sovereigns usually do not have many sizeable assets located abroad. Many assets have diplomatic immunity, immunity as result of being military in nature (eg, the Fragata Libertad) or assets that belong to an instrumentality of the government excluded from the scope of the waiver.

For example, in EM Ltd v Banco Central de la República Argentina, the US Court of Appeals for the Second Circuit refused to enforce a claim for US$2.4 billion against Argentina by collecting funds held by the Argentine Central Bank in New York. Although Argentina waived its sovereign immunity under the disputed bonds, the Second Circuit District Court found that the waiver did not include the assets of the Argentine Central Bank. Since the bank was an agency (instrumentality) of the sovereign state, it was immune from suit under the Foreign Sovereign Immunities Act.²⁵

However, more recently, a federal judge in the state of Delaware determined that an instrumentality of the Bolivarian Republic of Venezuela, the state-owned oil company PDVSA, was an alter ego of Venezuela and, as such, its assets in the United States were attachable as assets of Venezuela.²⁶

Case study: Lessons for the Latin American region

Having addressed the main aspects related to the transactional nature of sovereign debt restructuring and having also analysed he potential risks in a litigation context, this section will analyse Uruguay’s debt re-profiling. This has been Latin America’s most successful restructuring case owing to the fact that it prevented a default, the high degree of creditor participation, how quickly it was performed, the betterment of the contractual documents and other factors. The main purpose in presenting this case study is to draw lessons that can be used throughout the region.

Uruguay (2003): A story of success

During 2002, Uruguay’s economy was heavily impacted by the 2001 Argentine crisis. As explained by Buchheit and Pam, Uruguay decided to pre-emptively attack the liquidity problem before the situation would deteriorate into a default.²⁷ Uruguay’s restructuring has been described by Beattie²⁸ as one that is almost straight out of the US Treasury Wall Street Rulebook of ‘voluntary market-based’ solutions, even if, in the end, the value of the bonds reached default levels.

Uruguay’s total outstanding amount of debt was approximately US$5.3 billion, composed by 19 series of international bonds subject to English and New York law and was denominated in US dollars, euros, yen, British pounds and Chilean pesos.²⁹ Approximately, 50 per cent of the outstanding debt was held by retail investors and the same percentage was held by domestic investors.

Uruguay’s exchange offer avoided default by obtaining the desired maturity stretching a complex but rapid re-profiling. The exchange offer was announced on 10 April 2003 and was completed on 29 May 2003, resulting in a successful restructuring with a bondholders’ acceptance of 93 per cent. In 2003, after the debt exchange, the economy resumed growth with a 2.5 per cent rise in GDP.

The substantial aspect of Uruguay restructuring consisted in a debt re-profiling, in which Uruguay offered the bondholders to exchange the bonds for the ‘Bonos Extensión’, which was a new bond in the same currency of origin, bearing the same interest rate, with a five-year deferral on the original maturity date of the old bond, and the ‘Bonos Liquidez’, which offered greater liquidity than the old bonds since they were expected to be traded in the secondary debt market and they would provide a benchmark for future issues.³⁰

In separate but cross-conditioned transactions, Uruguay requested holders of yen-denominated bonds (Samurai bond), which contained a CAC, to amend its payment terms to extend the maturity date.³¹ The CACs were successfully used to extend the maturity from 2006 to 2011 and to raise the interest rate from 2.2 per cent to 2.5 per cent.³²

Uruguay’s exchange offer is a good textbook example, not only because it was successful but also because it included several innovative legal techniques,³³ such as:

• ‘check the box’ exit consents;
• amendment of the waiver of immunity clause;
• incorporation of CACs in all the new bonds;
• aggregation;
• vote packing;
• disenfranchisement; and
• a prohibition of the use of exit consents coactively.

‘Check the box’ exit consents

As opposed to the Ecuadorian case in the year 2000 that used a coercive exit consent, the use of exit consents in the case of Uruguay was consensual. This means that creditors were able to choose if they want to grant their exit consents besides accepting the commercial terms of the offer. The way by which creditors gave their consent to the use of exit consents was by the sole fact of ticking a box, thereby it was referred as the ‘check the box’ exit consents. The use of exit consents by this innovative way of getting the consent of creditors was widely accepted in all the series, except in one where it was rejected by 13 per cent of its holders.

Amend the waiver of immunity

Uruguay sought the consent of the bondholders to amend three clauses of the old bonds to:

• remove the cross-default clause;
• delist the bonds that require to be listed on a stock exchange; and
• amend the waiver immunity clause.

In the case of Uruguay, it was the first time that the waiver immunity clause was amended. The remaining two were also amended in the 2000 Ecuador restructuring. The aim in amending this clause was to reinstate the immunity under English and New York law, respectively. The rationale behind this was to avoid the seizure of interest payments by creditors that do not participated in the restructuring as it happened to Peru’s Brady bonds in the Elliott Associates LP case.³⁴

Incorporation of CACs in all the new bonds

Uruguay included CACs in all its new bonds resulting from the exchange offer. This meant that in the hypothetical case that Uruguay needed to restructure again its bonds, any term of the bonds could be amended with the consent of holders of 75 per cent of the aggregate principal amount of each series. It is worth mentioning that Uruguay bonds were subject to New York law. Uruguay followed the proposed CAC by the G10 working group in 2002. This model class has been superseded by the ICMA 2014 single-limb CAC, endorsed by the IMF.

Aggregation

By the aggregation mechanism, amendments to any terms (including payment terms) can be incorporated to one or more series of bonds simultaneously. In order to approve the amendment, a double majority is required:

• 85 per cent of the aggregate principal amount of all affected series; and
• 66.66 per cent of each specific series.

In the current industry model CAC (ICMA’s 2014 single limb CAC), this has been simplified by removing the double threshold and reducing the supermajority to 75 per cent.

Vote packing

Uruguay agreed not to issue new debt securities or reopen any existing series of debt securities with the intention of placing such debt securities with holders that were expected to support any modification proposed by Uruguay.³⁵ The aim was to avoid new bonds being placed in the hands of investors that would vote in favour of a proposed amendment, thereby diluting the bondholders’ holding.

Disenfranchisement

By disenfranchising bonds owned or controlled by Uruguay or any public sector instrumentally of Uruguay, such bonds are to be disregarded in a vote on a modification to the terms of the new bonds. Prior to any vote, Uruguay shall deliver to the trustee a certificate signed by an authorised representative of Uruguay, specifying any debt securities that are owned or controlled by Uruguay or any public sector instrumentality.³⁶ This has become an important issue on sovereign debt restructuring as result of Ecuador’s behaviour in 2009.

On that occasion, Ecuador allegedly performed an aggressive secondary market repurchase via intermediaries when the price for the defaulted 2012 and 2030 bonds hit rock-bottom. Then, when a voluntary exchange offer was completed, the degree of participation was very high because Ecuador did not disenfranchise the bonds allegedly held by the government itself (or someone under its control). Estimates in the case of Ecuador placed the holding at 50 per cent of all outstanding series, therefore having a great impact on the exchange outcome.

Prohibition of the use of exit consents coactively

To avoid the use of exit consents in future potential restructurings in a coercive way, the terms of the bonds required that any modifications to the payment terms of the bonds proposed in the context of a future exchange offer cannot make the terms of that exchange offer less favourable that the current terms.

Conclusion

Successfully completed exchange offers (eg, Ecuador 2000, Uruguay 2003, Argentina 2005-2010, Belize 2006, Jamaica 2010) can be used to argue that the use of decentralised market-oriented techniques work (ie, CACs, exchange offers and the use of exit consents). These different countries have been selected because they serve as an ample sample of different types of restructuring episodes, including a pre-emptive debt re-profiling, default (with and without nominal value reductions) and the use of CACs and exit consents. In all these cases, the degree of participation in the exchange offer (ie, the rate of acceptance) has been above 90 per cent (Ecuador 97 per cent Uruguay 93 per cent, Argentina 93 per cent after two rounds of exchanges, Belize 97 per cent and Jamaica 99 per cent).

Despite the fact that none of these exchange offers achieved 100 per cent, it can be claimed they have been successful due to the high degree of participation, in all of them being well above 90 per cent. This is the result of contractual creativity in a scenario where the lack of an insolvency regime shapes the debtor–creditor dynamics.

As evidence demonstrates, episodes of sovereign bond restructuring have been resolved quickly, without severe creditor coordination problems and involving little litigation – the only significant exception being Argentina, a ‘serial defaulter’ and a ‘rogue debtor’. So why try to mend something that is not broken?

The ad hoc market-centred voluntary approach of exchange offers should be endorsed. If CACs are already included in the debt instruments, they can simply be amended by the required contractual majority. However, it can benefit from complementary contractual sweeteners (to entice creditors to participate) and the use – if required – of exit consents (to increase the degree of participation of those creditors that were not convinced by the contractual sweeteners).

Although it is fairly straightforward to obtain a favourable judgment, enforcing it is completely different. Although the litigator’s imagination has no boundaries, a sovereign usually does not have many attachable assets abroad. Even those few assets that are located abroad (ie, diplomatic missions, central bank reserves, payments to and from international financial institutions (eg, IMF), military assets), usually enjoy certain type of immunity. Therefore, unless there are certain exceptional circumstances, a bondholder of a sovereign state should be better off participating in a restructuring arrangement where it can have certain leverage as a group.

Finally, sovereign debt restructuring often has political dimensions, including the need for additional financing in order to keep the economy running. As Gelpern has clearly stated, ‘it is impossible to separate politics and finance in sovereign workouts’.³⁷

The author would like to thank Guido Demarco for his research assistance. Any errors or omissions are only attributable to the author.

Notes