Protection of the Poor and the Millennium Development Goals
Chapter 6: Debtor Rights and Fairness to Creditors in Rule of Law-based Insolvency Systems
According to the Working Group on International Financial Crises (1998, p. 15): insolvency laws are designed to balance the rights and interests of various constituencies in apportioning the burdens of insolvency in a manner consistent with a country’s policies and goals, including social objectives that may include, for example, the preservation of employment opportunities. While there may be variations in countries’ approaches, there are certain key principles and features that could be considered as important to an effective insolvency regime for commercial firms. A government should consider initiating a temporary suspension of debt payments only when it is clear that, even with appropriately strong policy adjustments, the country will experience a severe fiscal, financial or balance of payments crisis and the government or a substantial portion of the private sector will be unable to meet its contractual obligations in full and on time. In such circumstances, the initiation of an orderly, cooperative and comprehensive workout, while inherently costly, could best serve the collective interest of the debtor, its creditors and the international community. Such suspension of debt payments is, by the way, a membership right of all IMF members. As repeatedly pointed out above, traditional sovereign debt management differs fundamentally and inexplicably from the mechanisms that became part and parcel of any civilized insolvency procedure. Solutions and techniques tested and developed over centuries before they were finally found optimal are precluded when it comes to SCs. This produces both economic inefficiencies and injustice, as the record of creditor dominated ‘solutions’...