An elusive safeguard with loopholes: sovereign debt and its “negotiated restructuring” in international investment agreements in the age of global financial crisis


Kei Nakajima


Financial crises often compel indebted countries to restructure their external public debt in order to ease their economic burden. Since this is usually quite disadvantageous to the creditors, they consequently sometimes begin “holdout” litigation so as to obtain the face value of their original bonds with interest. In this context, investor-state arbitration has been seen as an attractive alternative to litigation for creditors because the recognition and enforcement of arbitral awards is far more effective than those of foreign judgments. Yet such a holdout strategy would undermine an orderly process of debt workout because a successful holdout by some creditors will necessarily bring other creditors to take the same step to obtain remedies. The question therefore is, how is it possible to strike a proper balance between the protection of creditors and the macroeconomics policy leeway needed by defaulting states. One solution to prevent such holdout arbitration is to arrange for the coverage of sovereign debts in international investment agreements. This article analyses the development of such arrangements in investment treaties with special reference to provisions dealing with a “negotiated restructuring” of public debt, and it concludes that a proper balance between public and private interests as expected by contracting parties is struck by such agreements.