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Preferred or Not Preferred: Thoughts on Priority Structures of Cr...

Preferred or Not Preferred: Thoughts on Priority Structures of Creditors

Adapting domestic insolvency procedures to sovereign states one must tackle the question whether some form of creditor differentiation, such as creditor classes, should exist internationally. International Financial Institutions (IFIs) themselves have always claimed to enjoy preferred creditor status, even alleging that the task of development financing could not be fulfilled without such unconditional preference. This is untrue. There exists no legal base for preferred creditor status, and IFIs know it, as one can even read on their own homepages. No legal hindrance exists to reduce multilateral debts like all other debts, no legal norm demands preferred treatment. In fact, most IFIs are statutorily obliged to grant relief sooner than the private sector, but have simply refused to obey their statues. This paper provides arguments indicating that subordination may be both legally and economically necessary. The main conclusion is that either there should be only one class of creditors in sovereign insolvency or – if there is a differentiation - IFI-claims should be subordinated.