Sovereign Debt Restructuring and Investment Protection

When a State is in immediate danger of defaulting on its sovereign bond payments, restructuring is often the only solution. Currently, however, there is no single forum to address issues related to debt restructuring. In 2003, the proposal to create a sovereign debt restructuring mechanism (SDRM) was rejected by IMF members. Besides, collective action clauses have become a common feature of newly issued bonds: they restrict the ability of individual bondholders to initiate disruptive litigation and are designed to streamline the restructuring process. In this scenario, investment rules can in some cases complicate countries' efforts to effectively implement a debt restructuring. The paper focuses on bondholders' recourse to investor-State dispute settlement (see Abaclat et al. v. Argentina, ICSID Case n. ARB/07/5 ). We contend that if investment arbitration might prove effective in protecting the financial interests of individual bondholders, it could also threaten the debt restructuring process. As the financial crisis is harshly demonstrating, the establishment of an orderly debt restructuring mechanism is one of the greatest common concerns of the international community.