SOVEREIGN DEBT

Sovereign Debt Restructuring: Re-Conceiving Legal Solutions for Improving Debt Management for Banks

Table of Contents

CHAPTER NO 1: INTRODUCTION3

Background3

Research Question6

CHAPTER NO 2: LITERATURE REVIEW7

Bank Performance and Risk7

Debt Maturity Bank regulation8

Capital Structure and Returns9

Sovereign Debt Crisis12

CHAPTER NO 3: RESEARCH DESIGN15

Data Sources and Research Limitations15

Quantitative and Qualitative Approaches for Conducting Research15

Research Instruments17

Data Types17

Time Scale18

CHAPTER NO 1: INTRODUCTION

Background

Emerging concurrently with food and fuel crises, the financial crisis that began in 2007 and intensified in the fourth quarter of 2008 developed into a global economic crisis that has rekindled interest in sovereign debt crises among scholars and policymakers alike. Almost four years after the onset of the crisis, global financial stability is still not assured and significant policy challenges remain to be addressed. Countries are taking aggressive measures to address the impact of the crisis, variously easing monetary policies, recapitalizing financial systems, bailing out corporations, and overhauling financial regulatory systems. In addition to monetary strategies, governments have adopted counter-cyclical fiscal policies, introducing fiscal stimulus packages. Balance sheet restructuring in developed countries is incomplete and proceeding slowly and leverage is still high, which will inevitably force policymakers in those countries to make difficult choices.

In 2008, the net sovereign borrowing needs of the UK and the US were five times higher than the average of the preceding five years. The International Monetary Fund (IMF) predicts that gross financing needs in advanced economies, which surged in 2010, will rise further in 2011 and remain high in 2012. Government interventions led to an increased supply of sovereign debt, with serious implications for growth and debt sustainability outlooks in both high and low income countries. Historically, periods of high indebtedness have been associated with a rising incidence of defaults and public debt restructuring, the evidence correlating high levels of public debt with lower growth.

A lacuna exists in the international capital markets when it comes to institutional mechanisms addressing the consequences of sovereign debt crises, which has long been recognized as problematic by practitioners and scholars in the international financial community. The financial and social disruptions caused by recent sovereign debt crises serve to emphasize the importance of devising workable mechanisms to facilitate sovereign debt restructuring. There is a need for reform in sovereign debt management that takes into account the legitimacy of borrowing while also acknowledging the diversity of debt products and sovereign debt creditors in a way that apportions risk among market participants. That is, reform should compel private creditors to share the risk of the issuing sovereign debt and facilitate their participation in debt restructuring. There are two main reasons for attempting to reach a common understanding of the responsibilities of sovereign borrowers and their lenders, particularly with regard to economies like United Kingdom. First, the flow of capital to both developed and sovereign debtors like UK is of paramount importance to the global economy: industrialized countries rely on it to finance their budget deficits; countries like United Kingdom, for economic growth. Any destabilization to this key component of the international financial system makes credit less available and ...