Sovereign debt restructuring has long featured on the international policy agenda. This paper reviews past efforts to improve the framework for the timely, orderly resolution of cases of sovereign debt distress; it notes that important progress has been achieved toward that goal through the development of a so-called “voluntary” approach. The paper is motivated, however, by concerns that this progress is threatened by several recent difficult cases that could set the precedent for the future. It seeks to contribute modestly to the debate. Its review of past practice is, admittedly, unsatisfying: there is no simple, foolproof means by which to reconcile the need for good faith with the pursuit of self-interest. Nevertheless, the conclusion that the paper draws out is stark. Creditors seeking to impose prescriptive standards for borrower good faith, either through the adoption of creditor engagement clauses or limitations on borrowers’ access to IMF resources, may have to accept some limitations on contract enforcement as quid pro quo. It makes little sense to enforce standards of good behaviour on borrowers in an environment in which a small subset of creditors can disrupt a restructuring that is broadly acceptable to most creditors in an attempt to extract rents from non-cooperation. At the same time, any review of creditor-borrower engagement should consider the question of IMF lending. The implication of these observations is potentially controversial. If private creditors want good faith from sovereign borrowers, they may have to accept limitations on self-interest. In other words, they may want to reconsider the case for a Sovereign Debt Restructuring Mechanism.
