Comparability of Treatment: Where Do We Stand?

Inter-creditor issues have been blamed for protracted debt restructurings. A strict Comparability of Treatment (CoT) rule between all creditor groups has been suggested as a solution. This paper argues that the problem might be with the concept of CoT itself, and a strict CoT rule could actually make matters worse! Given diverse creditor preferences evidenced by a wide variety of debt contracts, an auction mechanism that elicits information and harnesses them to find an efficient allocation of new debt instruments would be more efficient than a simple CoT type rule. In addition, a strict CoT rule could have impacts on ex-ante debt structures, favoring costly debt dilution. Discussions on the enforcement of CoT would be better focused on how to avoid cementing the incentives for dilution into the foundations of the international financial architecture.