Sovereign debt restructurings often face prolonged delays due to the absence of clear, universally accepted rules determining creditor priority, experts say. Unlike domestic insolvency systems such as the United States’ Chapter 11, which sets explicit guidelines on how creditors are ranked after default, the international sovereign debt landscape relies on informal conventions. This lack of a standardized framework complicates negotiations and impedes timely debt relief for countries in financial distress.

Currently, certain multilateral institutions, notably the International Monetary Fund (IMF), are generally regarded as preferred creditors. They are typically repaid in full and are excluded from debt restructuring talks. Conversely, bondholders—who lend at higher interest rates reflecting the risks of sovereign defaults—are usually expected to accept significant reductions, or "haircuts," on their claims.

However, this binary classification does not capture the full complexity of creditor composition in many indebted countries. For numerous sovereigns, the largest creditors are neither the IMF nor bondholders but rather multilateral development banks and official bilateral lenders. These groups occupy a more ambiguous status in creditor hierarchies, with some considered preferred lenders and others treated akin to bondholders. The criteria determining this privileged position vary from case to case and are not codified in any formal treaties or contracts.

This ambiguity can cause restructuring negotiations to stall and become contentious. For example, Zambia’s debt restructuring process—ongoing more than five years after its 2020 default—has been entangled in disputes over whether Afreximbank, a regional multilateral development bank, should be classified as a preferred or commercial creditor. Similar uncertainties are expected to arise in Venezuela’s debt restructuring efforts.

Reza Baqir has argued that the current system is unsustainable amid a creditor landscape that is increasingly diverse and complex. He urges global institutions like the IMF and multilateral forums such as the Global Sovereign Debt Roundtable to establish a clearer, more transparent framework to govern creditor treatment. Such a framework, Baqir suggests, should rest on three principles.

First, lenders of last resort, such as the IMF—entities willing to provide financing when others will not—should remain outside restructuring processes to ensure their continued readiness to assist countries facing sovereign distress. Without this protection, no institution might be willing to lend under such conditions.

Second, preferential treatment for official bilateral and multilateral creditors should be linked to the terms of their lending rather than the identity of the lender. Creditors who have extended loans on concessional terms, such as lower interest rates, should receive smaller haircuts. This approach would apply a transparent, measurable standard to assess creditor seniority based on the degree of financial concession provided.

Third, financing extended at market rates by private creditors should generally receive less favorable treatment compared to concessional official financing.

While some large multilateral development banks may oppose reforms that could raise their borrowing costs, Baqir warns that uncertainty itself imposes costs through delays, litigation, and political maneuvering. He emphasizes that a modernized, robust framework is essential to improving the efficiency and fairness of sovereign debt restructuring under today’s global financial conditions.