Sovereign borrowers needing debt relief in the twenty-first century must face three sets of creditors—commercial lenders (usually bondholders), traditional Paris Club government creditors and non-Paris Club bilateral creditors like China. Each of these groups will secretly hope to extract preferential restructuring terms from the sovereign debtor when the negotiations begin but each will publicly insist on receiving a treatment that is no worse than that given to the other groups when the negotiations end. And until they are satisfied that no other creditors are getting or will get better terms, they will refuse to conclude a restructuring of their own claims.

In recent sovereign debt workouts, this atmosphere of mutual suspicion among the three major creditor groups has given the debt restructuring process an arthritic, bordering on paralytic, appearance. The resulting delays can stymie the sovereign borrower’s hope of a speedy recovery from the crisis.

Breaking this logjam will require a measure that the sovereign debtor can implement unilaterally without first seeking the consent of each creditor group. One such measure could involve inclusion in the early restructuring agreements of a binding and enforceable provision ensuring that if another creditor group later succeeds in extracting better terms from the borrower, those sweeter terms will retroactively benefit the creditors that had already signed a restructuring deal.

Lee C. Buchheit & G. Mitu Gulati, Enforcing Comparable Treatment in Sovereign Debt Workouts, 18 Capital Markets Law Journal 71–77 (2023).