Vanderbilt Law Review

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This Article is about boilerplate language located at the back of contracts drafted by the world's largest law firms. The clauses in question are process provisions that regulate the amendment of sovereign debt contracts. These paragraphs have been drafted and redrafted by generations of corporate lawyers, yet they have changed little in their broad outlines in more than a century of use. Now they take center stage in the global financial arena, where they govern billions of dollars (and pounds, euros, and yen) of sovereign debt in default and billions more in imminent risk of default. Officials, academics, and even some of the lawyers who drafted the clauses now want the clauses removed because they make defaulted debt difficult to restructure.

How did this arcane preserve of the bond lawyer come to be the cutting edge in the evolution of international financial architecture? Whereas private debt defaults lead to bankruptcy, sovereign debt defaults lead to informal, often lengthy standstills. The creditors can wait out the period of distress, expecting eventual economic recovery to lead to a resumption of payments. But, for the most part, payment resumption requires that creditors come to the negotiating table to rewrite the defaulted debt contracts. Such a "composition" or "restructuring" scales down the sovereign's obligations and causes it to return to health quickly. In theory, this makes both the sovereign and its creditors better off.