When Governments Write Contracts: Policy and Expertise in Sovereign Debt Markets

Abstract

At least three times in the past two decades, national governments and institutions at the regional and international levels have tried to reform sovereign bond contracts to facilitate debt restructuring. Increasingly, these efforts have focused on promoting majority modifications clauses, a species of collective action clause (CAC) that facilitates a binding debt restructuring. Rather than legislate or regulate, governments have convened expert commissions, produced model CACs, and aggressively marketed these clauses to debtors and creditors. When events prove the existing CAC template inadequate or irrelevant, the process begins anew. This paper considers this mode of government intervention, which has a long pedigree dating to at least the 1930s. Public officials have long justified contract reform initiatives by invoking a narrative of market failure in which market actors do not understand the relevance and importance of CACs. We cast doubt on this narrative and explore why contract reform holds such allure as a policy tool.