Sovereign Debt Restructuring Mechanism

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BANKING LAW 12TH TRIMESTER

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Sovereign Debt Restructuring Mechanism:
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Is It Time For A New Order?
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ANALYSING IMF’S SOVEREIGN DEBT RESTRUCTURING MECHANISM: A MISMATCH DURING THE FINANCIAL DOWNTURN

SUBMITTED BY:
SARTAJ K. SINGH I.D. NO.: 1675
&
NAMRATA SHAH I.D.NO.: 1676

4TH YEAR
B.A.LL.B. {HONS.}
DATE OF SUBMISSION: 16TH MAY 2012

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TABLE OF CONTENTS

1.0 INTRODUCTION2
2.0 ANALYSIS OF THE SOVEREIGN DEBT RESTRUCTURING MECHANISM IN EU: THE BAILOUT AND LENDING SYSTEM3
2.1 THE CONCEPT OF SOVEREIGN DEBT & THE RESTRUCTURING MECHANISM4
2.2 THE CURRENT SOVEREIGN DEBT CRISIS IN THE EUROPEAN UNION5
2.3 ROLE OF THE IMF IN TACKLING THE CRISIS5
3.0 INSIGHT OF THE IMPORTANCE OF A SDRM: THE PUBLIC LAW ALTERNATIVE10
3.1 SDRM: A NEED BASED PUBLIC LAW APPROACH10
3.2 SDRM: DETERMINING A BETTER MODEL TO REPLACE THE CONTEMPORARY11
3.3 BENEFITS OF A STATUTORY FRAMEWORK FOR SDRM13
4.0 SDRM MODEL: THE EMULATED AND EVOLVED ALTERNATIVE13
4.1 THE INGREDIENTS OF THE IMF PROPOSAL14
4.2 LEARNING FROM EXPERIENCE: THE CASE OF MEXICO AND URUGUAY15
4.3 EVOLVING AN IDEAL SDRM16
5.0 CONCLUSION17
6.0 BIBLIOGRAPHY19

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1.0 INTRODUCTION
“If the facts don’t fit the theory, change the facts.” The above mentioned words though said by Albert Einstein would not be the plausible plan of action that can be adopted while dealing the recent sovereign debt crises which has affected the European Union in the aftermath of the 2008 financial crisis. In light of the debt-stricken conditions of multiple European nations, the role of the International Monetary Fund (IMF) is set yet again to undergo change with its debt reforms mechanisms taking prominence. In the past, the IMF has been given the responsibility of reconstructing and reforming economies after crises however, the difference that arises with the present sovereign crisis is that developed countries like Greece, Italy and Ireland, the contributories to the IMF in the past have been affected. The present sovereign debt restructuring mechanism is three fold consisting of surveillance, technical assistance and financial lending. With such a change in the circumstances and ongoing crises, the existing theories and mechanisms based on ad hoc measures to deal with the bankruptcies of economies are a misfit thereby demanding a change in the theory of the mechanism itself. After the Asian crises and the globalised world, there were reforms proposed to IMF’s sovereign debt restructuring model in 2002. The alternatives proposed were either adopting a contractual method based on collective action clauses or a statutory model based on certainty. However, due to the split in the reformative action to be finally accepted and the US opposition to the statutory model, the present ad-hoc model based on bail-outs has been in vogue which has created problems for the European Union as well, therefore necessitating a modification in the foundations of the SDRM. The scope of the paper has been limited to evaluate the sufficiency of the ad-hoc bailout and lending system which acts as the sovereign debt restructuring mechanism [hereinafter ‘SDRM’] followed by the IMF to deal with the current EU crisis as a continuation of its age-old policy and not the causes of the financial downturn. The researchers hypothesize that in light of the urgency of dealing with the sovereign debt crisis, there is a need to ensure a structured SDRM with some legislative foundation rather than rely on the ad hoc alternative measures adopted in the present. The paper has been sub-divided as follows: First, an overview of the present bailout alternative mechanism seeking to...
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