Topic: Sovereign Debt – Too Hot To Handle?

A Sovereign Chapter 9 Filing?

As the crisis in our financial system slowly fades out, a new and possible more severe crises emerge; the sovereign debt crisis.

These problems have been highlighted lately by countries like Dubai, Greece, Iceland and Spain, among others. There’s no clear solution on the table, yet. And the measures discussed by our politicians are mostly short-term-quick-fix arrangements. So, we need permanent solutions on how to handle this long term problem. The extensive need and political opportunity have aligned, and the risks of not taking action are too serious to be ignored.

We need good ideas. If you have any suggestions, please share.

“In 2001, Anne Krueger of the IMF proposed a Sovereign Debt Restructuring Mechanism (SDRM) where a super-majority of creditors would vote to negotiate new terms under a restructuring agreement,” researcher Anna Gibson with the international think tank Re-Define writes in a blog post.

Anna Gibson suggest a global sovereign bankruptcy law, similar to the US chapter 9 bankruptcy code:

“This includes the internationalization of Chapter 9 of the US bankruptcy code, originally intended to provide financially distressed municipalities with protection from creditors. Like municipalities, sovereign nations are unable to be liquidated, and thus their approach to debt resolution must come with realistic outcomes in mind for both debtors and creditors, whilst the model also includes the treatment of both bilateral and multilateral debt, a considerable deficiency of the SDRM proposed by IMF,” she writes.

What do you think?

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11 Comments

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11 responses to “Topic: Sovereign Debt – Too Hot To Handle?

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  7. cjenscook

    I see you launched at the Full Moon, but the black background could do with lightening up, I think!

    If you are looking for ideas, mine are based on 25 years of market regulation and development, six of them as a director of a global energy exchange, and ten in the area where markets and the Internet intersect.

    As someone said in Iran not long ago, we can’t solve 21st century problems with 20th century solutions. Yet we continue to think that legal models, such as Companies, which originated in the early 17th century, and a central bank-centric credit model originated in France by a Scottish gambler in 1719 are still appropriate today.

    As Nassim Taleb and Willem Buiter agree, since more debt is unsustainable, the solution must lie in equity.

    My approach to a sovereign Chapter 9 would be a debt/equity swap. But not equity as we know it.

    For instance Iceland could consolidate all public debt into a new single consolidated class of undated redeemable credit Units. Not unlike the UK’s anachronistic undated Consols and War Loan.

    They would pay a return – possibly index-linked, probably energy-linked – on these Units, and could redeem them at any time.

    That would both not only drastically cut Iceland’s financing cost, but also it would be a first class investment, because it is:

    (a) Secure – since affordability = certainty;

    (b) Liquid -since there would be one single class of quasi equity, rather than classes of debt fragmented by dates and interest rates; and if investors don’t buy, Iceland probably could buy them back.

    In other words an Icelandic National Equity.

    It’s not Rocket Science – I think of it as ‘Open’ Capital.

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