As Anna Gelpern observes on The Credit Slips blog, there is no real political support for an international bankruptcy court for sovereigns. What less daunting solutions might there be? The obvious one is that bond-issuing sovereigns can change the language of their issuing documents. Couldn't they simply stop using the pari passu language that the holdouts have been employing in the New York courts? Well, yes, although something more than simply deleting that Latin phrase will be necessary. Fortunately, some very bright legal minds have given a lot of thought to the draftsmanship involved. Most bonds issued by sovereigns nowadays have collective action clauses. These explicitly allow for a restructuring in which some supermajority of the creditors can vote to accept a "haircut," as it is called, and holdouts will then be stuck receiving the same payments with the same haircut, too. Without a CAC, the situation is as if a drive-in movie theatre were proh...
Posts
In Eco 101 you probably learned that one of the big issues that arises whenever there is an effort at collective action in the absence of a central authority is the free-rider problem, otherwise known as "positive externalities." Let's go over it again, because some of us (myself included) have allowed our memories of Eco 101 lessons to become ... less than fresh. Textbook analogy: An entrepreneur creates a drive-in movie theatre, because it is cheaper just to put up a screen than to build a whole building. At first things work fine but over time cinephiles discover that they don’t have to drive into the entrepreneur’s lot and pay him in order to watch the movie: they can enjoy the same movie for free by parking on the opposite side of the street. The entrepreneur either internalizes the benefit (puts up walls) or he goes out of business. So external benefits, that is, benefits available to freeloaders, threaten the viability of the whole enterprise. That is on...