ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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International Bankruptcy Courts

Why the UN Might Be Wrong

Instead of an international bankruptcy court to reform the wrongs of a debtor, a mere return to the first principles of law can save a nation from the indignity of being carted into court against its will.

In the aftermath of the Argentine crisis, the United Nations (UN) and the Group of 77 (G-77) have proposed that gaps created by sovereign debt crises in the global economy should be closed by an international bankruptcy court, an idea that was strongly supported by Harvard economist Jeffrey Sachs after the 1995 Mexican crisis and later on by the International Monetary Fund’s (IMF) then deputy Managing Director, Anne Krueger in a speech in New Delhi in 2001.1 The latest UN resolution comes at a time when the IMF is reconsidering excessive bailouts of debtor nations and wants to tighten the screws in cases where it finds that its money is being used to enable short-term creditors to exit without losses, leaving behind little or no money to implement budget cuts. The author however challenges the UN’s premise arguing that sovereign debt defaults have been and can be resolved without the blessings of international bankruptcy laws or tribunals.

Before the advent of bankruptcy laws, the properties (and even sovereignty) of the insolvent debtor used to be confiscated in order to maximise repayments to the creditor. Nowadays, the international community no longer maximises repayments because preserving the sovereignty of the debtor is held to be superior. At the same time, considering the very risky nature of economies and political situations of developing countries, it is a common assumption that sovereign debtors are less credible and prone to failure. The sovereign might nationalise key assets and institutions such as natural resources and banks, reduce tax rates, restrict imports, invest money in inefficient projects, or merely fund dictatorships—all of which are detrimental to the creditors. Thus it must be understood that from the very onset, creditors have to live with the possibility that the debt may get cancelled in the future.

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