sovereign debt restructuring: re-conceiving legal … · 2012-11-03 · second, sovereign finance...
TRANSCRIPT
SOVEREIGN DEBT RESTRUCTURING: RE-CONCEIVING LEGAL SOLUTIONS FOR IMPROVING
DEBT MANAGEMENT
by
Jeremy William Trickett
A thesis submitted in conformity with the requirements for the degree of Masters of Law
Faculty of Law University of Toronto
© Copyright by Jeremy William Trickett 2011
ii
Sovereign Debt Restructuring: Re-Conceiving Legal Solutions for Improving Debt Management
Jeremy W. Trickett
Masters of Law
Faculty of Law University of Toronto
2011
Abstract
The recent financial crisis and subsequent sovereign debt distress in the eurozone has
reinvigorated the debate over bailouts and sovereign debt restructuring. This paper analyzes
the effectiveness of two approaches to debt management in addressing the practical
challenges of debt workouts, particularly in relation to developing countries: a contractual
approach and a sovereign bankruptcy approach. The paper uses an economic analysis of
private law to analyze optimal solutions to those problems and proposes a flexible approach
to debt restructuring. Drawing on theoretical research and experience from professionals in
the technical aspects of the debt markets, the paper merges traditional solutions with the law
and development concept of “odious debt”. It argues that potential legal elaborations of the
concept of odious debt, shaped by a contractual approach, presents loan sanctions as an
effective ex ante solution to contemporary problems of sovereign debt management a current
climate of global sovereign debt distress.
iii
TABLE OF CONTENTS
1. INTRODUCTION ................................................................................................................................ 1
2. SOVEREIGN DEBT MANAGEMENT ............................................................................................. 5
2.1 The Financial Crisis .................................................................................................................... 8
2.2 Developing and Developed Market Convergence .................................................................. 10
3. CONTRACTUAL SOLUTIONS ....................................................................................................... 13
3.1 Contract Modification .............................................................................................................. 15
3.2 Collective Action Clauses ......................................................................................................... 17
3.2.1 New Interest in an Old Idea .................................................................................................. 18
3.2.2 Possibilities and Problems .................................................................................................... 20
3.2.3 Greece’s Sovereign Debt ....................................................................................................... 24
3.2.4 A Partial Solution .................................................................................................................. 26
4. SOVEREIGN BANKRUPTCY ......................................................................................................... 27
4.1 Status Quo ................................................................................................................................. 28
4.2 Domestic Bankruptcy: Collective Action, Standstills and Interim Financing .................... 30
4.3 The Challenge of Implementation ........................................................................................... 33
4.4 Balancing Bailouts and Barriers to Restructuring ................................................................ 35
5. ODIOUS DEBT & LOAN SANCTIONS ......................................................................................... 40
5.1 Odious Debt ............................................................................................................................... 41
5.1.1 Profligate Borrowers ............................................................................................................. 41
5.1.2 Odiousness: A Moving Target .............................................................................................. 41
5.1.3 Implementation ...................................................................................................................... 46
5.2 Loan Sanctions .......................................................................................................................... 48
5.2.1 Debt Management & Diplomacy .......................................................................................... 50
5.2.2 Ex post Benefits of an Ex Ante Approach ............................................................................ 51
5.2.3 Overcoming Challenges ........................................................................................................ 53
6. CONCLUSION ................................................................................................................................... 57
1
1. INTRODUCTION
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.1 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.2 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-
1 Fiscal deficits in advanced economies stood at about 1.1 percent of GDP in 2007 and rose to 8.8 percent in 2009. Fiscal policy continued to support economic activity in 2010. The average headline deficit in advanced economies was 7.75 percent of GDP. Shortfalls are emerging in some economies with respect to what was envisaged in medium-term fiscal adjustment plans, reflecting new stimulus measures (US), more pessimistic macroeconomic projections from the IMF (Canada and Portugal), natural disasters (Japan), and a worsened outlook for sub-national governments (Canada). In contrast, many EU advanced economies’ fiscal adjustment is expected to remain as planned, while Germany is expected to experience stronger growth. In all, the average deficit for advanced economies is expected to fall by 0.75 percent of GDP to seven percent. In cyclically adjusted terms, the improvement amounts to 0.25 percent of GDP, far less than projected by the IMF only months ago, given that deficits remain well above the levels that would stabilize debt ratios. See International Monetary Fund, “Shifting Gears: Tackling Challenges on the Road to Fiscal Adjustment” (2001) Fiscal Monitor, online: International Monetary Fund <http://www.imf.org/external/pubs/ft/fm/2011/01/pdf/fm1101.pdf>.
2 Carlos A. Primo Braga & Gallina A. Vincelette, eds, Sovereign Debt and the Financial Crisis (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011) [Braga, “Sovereign Debt”] at 2.
2
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.3
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 developing
economies. First, the flow of capital to both developed and developing sovereign debtors is of
paramount importance to the global economy: industrialized countries rely on it to finance their
budget deficits; developing countries, for economic growth. Any destabilization to this key
component of the international financial system makes credit less available and more costly.
Second, sovereign finance is uniquely unforgiving of mistakes. Unlike corporate and personal
debt, there exists no formal bankruptcy procedure with which sovereign debt can be restructured
according to pre-established rules. When a foreign debtor will not pay, a lender has few options.
There exists no international court to pass judgment on a default and no international police to
enforce its decision. Legally, sovereign debt is ineradicable, absent creditor consent. The
overarching concern is this: high sovereign external debt constitutes a serious drain on a
country’s scarce resources. Reckless sovereign lending and incompetent sovereign debt
restructuring have incalculable human costs, particularly for developing countries that are
3 Carmen M. Reinhart & M. Belen Sbrancia, “The Liquidation of Government Debt” (2011) Work Paper 11-10 Peterson Institute for International Economics at 2, online: Peterson Institute for International Economics <http://www.piie.com/publications/wp/wp11-10.pdf>.
3
especially sensitive to economic crises. Debt servicing costs can create a shortage of liquidity,
crowding out investment and social services spending and slowing saving.
This paper analyzes doctrinal and institutional mechanisms that have been proposed to address
the problems of sovereign debt management, particularly in relation to developing countries.
Evaluating the practical challenges of such proposals, it adopts an integrated approach by
drawing on theoretical research and experience from professionals in the technical and
operational aspects of the sovereign debt markets. The paper uses an economic analysis of
private law to analyze optimal solutions to those problems and proposes a flexible, case-by-case
approach to debt restructuring that allows states and their creditors to call on various tools, as
needed. The paper scrutinizes two options that help minimize bailouts: a free market option,
where sovereigns and their creditors use existing contractual characteristics of sovereign debt
documentation to effectively negotiate debt restructuring; and a statutory option, where
sovereigns and their creditors would be bound by a sovereign debt restructuring mechanism.
The paper merges these two traditional debt restructuring techniques with the law and
development concept of ‘odious debt’.4 It argues that potential legal elaborations of the concept
of odious debt, still chiefly an academic concept, can be shaped by contractual solutions to debt
restructuring to offer a more practical approach to stabilizing the sovereign debt markets. The
doctrine of odious debt usefully shifts the focus of debt restructuring mechanisms to creditor
motivations and behaviour. The paper revisits traditional notions of odious debt – debts incurred
against the interests of the citizens of a state, without their consent and with the awareness of the
creditor – focusing on the doctrine’s flexibility with regard to the expansion of the grounds for
odiousness. It considers applying loan sanctions to an expansive interpretation of the odious
debt doctrine and suggests that in the current climate of sovereign debt distress in the eurozone,
as well as political upheaval in North Africa and the Middle East, loan sanctions offer the
potential to reshape the sovereign debt capital markets in a way that promotes sustainable
development.
4 The term “odious debt” originally identified debt that a government contracted with a view to attaining objectives that were prejudicial to the interests of its local population or to successor governments.
4
Standing alongside the literature on odious debts is scholarship that formulates optimal regimes
for restructuring sovereign debt. The relationship between these two areas is under-theorized.
While some proposals call for a global sovereign bankruptcy regime, others prefer the status quo
whereby sovereigns experiencing financial distress attempt to negotiate the paring back of debt
obligations on an ad hoc basis. The relationship between the calls for a vibrant doctrine of
odious debt and a framework for restructuring sovereign debt has not been fully settled. This
paper enters the fray, proposing a combination of contractual solutions and loan sanctions as
imperfect but effective substitutes for the lack of a global sovereign debt restructuring regime.
5
2. SOVEREIGN DEBT MANAGEMENT
Restructuring sovereign debt is costly. It is also ineffective at preserving the value of private
creditors’ investment and at reducing the indebtedness owed by sovereigns to their private
creditors.5 Worse, debts owed by low-income countries (particularly in sub-Saharan Africa) to
private creditors are the most time-consuming to restructure and the most costly for private
creditors in terms of the “haircut” (a percentage discount in the face value of the bonds) they
must take.6 Combined with the fact that low-income states also receive little debt relief from
private creditors, the average defaulting state emerges from a restructuring with a ratio of debt
(owed to creditors)-to-gross domestic product (GDP) that is as high or higher than before a
default.7 What explains these patterns, and is it inevitable that they persist? If they do, it is
incumbent upon sovereign debt and development scholars to help design effective approaches to
debt-restructuring for domestic policy makers that can implement more desirable outcomes in the
future.
Much of the literature on patterns in debt restructuring focuses on the difficulties faced by
creditors in coordinating to make mutually beneficial agreements with the debtor. Debt is often
owed to a large number of private sector creditors. In the case of traditional loans, syndicated
loans are often negotiated with dozens of banks; with sovereign bonds, bondholders often
number in the thousands, are constantly shifting, and cover many jurisdictions.8 Restructuring
negotiations with uncoordinated creditors presents two significant collective action problems: (i)
classic “free rider” issues, where bondholders refrain from offering debt relief; and (ii) holdouts
5 Mark L. J. Wright, “Restructuring Sovereign Debts with Private Sector Creditors: Theory and Practice” in Braga, “Sovereign Debt”, supra note 2 at 296.
6 Ibid at 295. Private creditor haircuts average more than 50 percent for loans to low-income countries, compared with less than 30 percent upper-middle-income states.
7 Ibid at 296.
8 Ibid at 306.
6
by litigious, predatory creditors. This paper revisits both problems throughout its analysis of
contractual, bankruptcy and ex ante theoretic approaches to sovereign debt restructuring.
By the late nineteenth century, a time when bankruptcy generally meant liquidation and
liquidation often meant the recovery of only a small portion of what was owed, many bond
market participants had come to support the need for bondholder cooperation in a distressed
situation.9 In identifying the problem as one of facilitating a coordinated debt workout
(restructuring) for the benefit of all creditors, three solutions emerged: (1) contractual provisions
in bond documentation that permit a majority or supermajority of bondholders to direct the
course of negotiated debt work-out; (2) bankruptcy laws designed to shield debtors from hostile
legal action during debt restructuring; and (3) the use of the equitable powers of civil courts to
supervise negotiated debt restructuring while protecting borrowers and majority creditors from
exploitation by dissident minorities.10 At various times during the late nineteenth and early
twentieth centuries, all three solutions were tried.
From the late 1870s, English law-governed contracts began including “majority action clauses”
in bonds and their trust deeds, which allowed a supermajority of bondholders to agree to reduce
the amount due or to defer a payment date under a bond. US corporations did not follow this
practice, relying instead on courts to exercise their equitable powers to appoint a receiver while
the corporations’ creditors negotiated a debt workout. That is, until 1934 when the US Congress
enacted legislation that facilitated corporate reorganizations for industrial companies and which
became the current Chapter 11.11 After the recent financial crisis, the global financial
community is confronted with a remarkably similar problem. Sovereign issuers are today in a
comparable position to twentieth-century corporate bond issuers. Sovereign bankruptcy
proceedings are not possible for sovereign issuers today, just as they were not for most corporate
issuers in the early part of the last century.
9 Lee C. Buchheit, G. Mitu Gulati & Ashoka Mody, “Sovereign Bonds and the Collective Will” (2002) 51 Emory L J 1317 [Buchheit, “Sovereign Bonds”] at 1321.
10 Ibid.
11 Ibid at 1333. See United States Bankruptcy Code, 11 U.S.C. §§ 1101-1146 (1978).
7
From the late 1970s to the mid-1980s, the perceived inefficiencies that motivated proposals for
institutional and legal improvements in sovereign debt restructuring were inefficient debt
workouts caused by incentive problems on the creditor side. For the early contributors, the main
problem was a coordination failure between the public and private sectors. Whereas economic
literature was most concerned with the possibility of any decrease in the provision of financing
and free riding problems that impede debt work-outs, the legal literature (as represented by the
IMF Legal Department) was more concerned with a potential landslide of court actions as a
significant threat to orderly negotiations.12 After the 1994 Mexican peso crisis and Mexico’s
rescue package of loans and guarantees, valued at more than USD 40 billion, provided by
international financial institutions and G-7 governments, sovereign debt literature focused
mainly on debt panics and the attendant moral hazards.
Today, virtually all proposals for orderly debt workouts focus on an agreed need to avoid the
moral hazard attributed to debt crisis lending.13 The inefficiency of collective action problems
still being the primary consideration, the literature focuses on proposals to change creditor
incentives. Proposals include changes to international law to create rules or institutions under
which supermajority agreements could be imposed on hold-out creditors, new financing would
be given priority and in some proposals, the sovereign would be shielded from litigation during
the negotiation process.
Protracted and inefficient debt workout negotiations could, however, be as much a result of
debtor actions as those of creditors. Most scholars recognize that debtor incentives can become
an issue as a by-product of measures put into place to address collective action problems. Stays
of litigation or protection from holdout creditors imply a reduction in market discipline –
protections that could come to be abused by sovereign debtors. Some have suggested that such
concerns could be addressed through an international convention imposing rules on sovereign
debtors, but this applies only to statutory proposals for debt workouts. All that is required to
12 Kenneth Rogoff & Jeromin Zettelmeyer, “Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2001” (2002) IMF Working Paper WP/02/133 [Rogoff, “Bankruptcy Procedures”] at 28.
13 Ibid.
8
create incentives for debtors not to abuse such protections is the presence of an initial
inefficiency that threatens to impose costs on the debtor. This can be accomplished by the threat
of reverting to the status quo ante in the event that the debtor does not negotiate in good faith.14
A potential problem of debt workout procedures is the creation of a debtor moral hazard: the
undermining of debtor incentives ex ante to avoid defaulting on their debt. Debtor moral hazard
is often reduced to a sidebar issue given the reputational costs of defaulting (discussed below)
are so high so as to impose sufficient disincentives. Further, it is argued that even if the moral
hazard results in higher borrowing costs and reduced capital flows, this might nevertheless be
efficient: it may be more efficient to have more frequent, low-cost debt restructuring than
infrequent but substantial debt crises.15 While such efficiency might also be welfare-improving,
in that countries would avoid the financial disruption of massive crises, the problem remains that
sovereign lenders do not have the benefit of sovereign collateral or judicial contract enforcement
as they do at the domestic level. The high costs of a sovereign debt default are arguably the
market’s response to the borrower’s lack of collateral and judicially enforceable contracts.
2.1 The Financial Crisis
Most developing countries have shown remarkable resilience in the wake of the financial crisis.
The financing needs in emerging and low-income economies are projected to decline through
2012 due to lower pre-crisis debt levels, lower deficits and a lengthening of maturities.
However, the present value of public debt-to-GDP ratios for low-income countries has
deteriorated by five to seven percentage points compared with pre-financial crisis projections.16
A recent study undertaken by the World Bank and the IMF suggests potential adverse effects of
the crisis on countries’ debt burden indicators as a function of the depth and length of the crisis
14 Ibid at 30-1.
15 Ibid at 31.
16 Braga “Sovereign Debt”, supra note 2 at 2.
9
and the terms at which a country can obtain financing.17 Emerging and developing countries
experienced significant capital outflows as financial institutions have withdrawn liquid
investments to shore up their flagging balance sheets. As such, low-income countries,
particularly heavily indebted poor countries (HIPC), face important debt management
challenges. Policymakers in those countries confront unique problems relating to how they can
borrow in a disciplined way to militate against the need to structure their debt. The impact of the
current eurozone sovereign debt crisis on capital flows to developing countries raises a worrying
question: whether the 2008 financial crisis was a harbinger of a new generation of sovereign debt
crises in both developed and the developing countries.
The sovereign financing needs in developed countries, let alone the current European sovereign
debt crisis, begs the question of how states’ burgeoning sovereign debt will, given the current
financial climate, be repaid. Borrowing connotes a legal obligation to repay. A baseline
assumption for the effective operation of debt capital markets is that debts will be honoured
according to their terms, unless there is a good reason why they cannot or should not be
honoured. Where this assumption erodes, market forces inevitably administer an appropriate
penalty to debtors that fail to borrow responsibly: faced with loan defaults or bond restructuring
and an increasing dissatisfaction among creditors, profligate sovereign borrowers will eventually
pay a price in terms of reduced market access, higher interest rates and tighter financial
covenants.18
However, given the time that such market-directed retributive justice can take to operate, it may
not be sufficient to promote short-term prudence on the part of sovereign borrower or their
creditors. One problem with fashioning a remedy for many types of irresponsible behaviour in
this area is that a conventional legal remedy is destined to be insufficient. Notwithstanding the
17 Leonardo Hernández & Boris Gamarra, “Debt Sustainability and Debt Distress in the Wake of the Ongoing Financial Crisis: The Case of IDA-Only African Countries” in Braga, “Sovereign Debt”, supra note 2 at 129.
18 Ibid.
10
development of the restrictive theory of sovereign immunity,19 norms of sovereign lending are
largely extra-legal:20 “[b]reach those norms and the sanction will be imposed by investors, debt
traders and diplomats – not judges.”21 As such, principles of responsible sovereign borrowing
must influence how these creditors are treated when debt is restructured according to the free-
market, contractual approach.
2.2 Developing and Developed Market Convergence
Over the last decade, a growing number of emerging market and low-income countries entered
the international capital markets for the first time, including Bahrain, Bulgaria, Czech Republic,
Egypt, Gabon, Georgia, Ghana, Hungary, Indonesia, Kazakhstan, Poland, Sri Lanka, Vietnam,
and Ukraine.22 The proceeds of debut sovereign bond issues are used for a multiplicity of
purposes, from infrastructure project finance (Bahrain and Sri Lanka), to relieving budgetary
pressures (Ecuador and Egypt), to repaying existing debt (Indonesia, Poland, and Ukraine) or
19 Prior to 1970 sovereign states were accorded absolute immunity. However, in the 1970s, a theory of restrictive immunity developed in the UK following the 1952 “Tate letter” doctrine in the US. The crux of restrictive immunity theory is that where a state is engaged in commercial or private acts, it loses the right to immunity and is subject to process in the jurisdiction in which it carries on such acts. The theory is referred to in judgments of the Supreme Court of Canada in Congo (Republic) v. Venne, [1971] S.C.R. 997, 22 D.L.R. (3d) 669 (S.C.C.) by both Ritchie J. for the majority and Laskin J. (as he then was) in dissent and acknowledged in lower courts in Canada. There is little doubt that this rule is generally accepted on the international level, but the law with respect to exceptions to sovereign immunity in Canada is not clear. In the UK, there is a general proposition that the English courts have no jurisdiction over states unless one of the exceptions to immunity set out in sections 2 to 11 of the State Immunity Act 1978, c. 33 applies (section 1(1)).
20 Mitu Gulati & Lee C. Buchheit, "Responsible Sovereign Lending and Borrowing", Paper prepared for the United Nations Conference on Trade and Development Project on Promoting Responsible Sovereign Lending and Borrowing (2010), online: UNCTAD <http://www.unctad.org/en/docs/osgdp20102_en.pdf> [Gulati, “Responsible Sovereign Lending”] at 17. 21 Ibid.
22 Udaibir S. Das, Michael G. Papaioannou & Magdalena Polan, “Strategic Considerations for First-Time Sovereign Bond Issuers” (2010) IMF Working Paper WP/08/261 at 3, online: International Monetary Fund <http://www.imf.org/external/pubs/ft/wp/2008/wp08261.pdf>.
11
Paris Club23 debt (Gabon).24 Prior to the financial crisis, debut issuers were gaining access to the
international capital markets with increasing issue amounts and relatively lower interest rates,
thanks to generally strong macroeconomic conditions, international financial liquidity and strong
investor appetite for higher risk investments and new asset classes.25
As domestic debt issuances rose, so did innovations in risk management. In developing
countries, credit derivatives contracts to transfer credit risk among market participants grew from
zero in the mid-1990s to USD 39 billion in 2010 (just short of the USD 42 billion high in the
fourth quarter of 2009).26 Though small, relative to advanced economies, derivatives markets in
emerging economies have expanded rapidly: in 33 emerging market economies, the average
daily turnover of derivatives was USD 1.2 trillion in April 2010, an increase of 300 percent since
2001; 25 percent over the past three years, despite the financial crisis.27
It has been predicted that the shift from foreign to domestic borrowing and rise of such new risk
transfer instruments portends a fundamental change for many countries reducing vulnerability to
currency crises, multiplying debt management options for governments, developing domestic
financial markets, and expanding access to credit.28 If there is indeed a positive correlation
23 The Paris Club is an informal group of 19 permanent member creditors who provide debt rescheduling, which is debt relief by postponement or, in the case of concessional rescheduling, reduction in debt service obligations during a defined period (flow treatment) or as of a set date (stock treatment).
24 Supra note 22 at 3.
25 Ibid.
26 Bank for International Settlements, Monetary and Economic Department, “BIS Quarterly Review: International banking and financial market developments” (March 2011), online: Bank for International Settlements <http://www.bis.org/publ/qtrpdf/r_qt1103.pdf> at 22, Bank for International Settlements, Monetary and Economic Department, “BIS Quarterly Review: International banking and financial market developments” (December 2010), online: Bank for International Settlements <http://www.bis.org/publ/qtrpdf/r_qt1012.htm> [BIS, “December 2010”] at 21. Issuance increased in all regions except Latin America and the Caribbean, where it fell by eight percent on the back of sharply lower issuance by non-financial corporations in Mexico.
27 Ibid.
28 Anna Gelpern, “Domestic Bonds, Credit Derivatives, and the Next Transformation of Sovereign Debt” (2008) 83 Chicago-Kent L Rev 147 [Gelpern, “Domestic Bonds”] at 150.
12
between investor interest and institutional quality, the shift might signal new trust in emerging
market institutions, including legal infrastructure. While there is far from a true convergence
with the deep, liquid markets that developed economies enjoy, the change in developing and
emerging economies is significant, as measured by proxy as growth in local-currency, locally-
held, locally-issued, or local law-governed debt.29
As domestic debt being issued by poor and middle-income countries has grown,30 lawyers and
economists working in the area were concerned with how these bonds, usually denominated in
foreign currency and governed by New York or English law, would be restructured in the event
of a crisis.31 The replacement of bank loans with widely-held bonds as the dominant source of
external sovereign debt finance significantly complicated the process of restructuring a
sovereign’s debt in the event of a debt crisis, given that a diverse investor base holds the debt. It
was expected that, in an economic crisis, sovereign issuers entering the debt markets for the first
time would now face serious collective action problems in attempting to negotiate with a
restructuring of outstanding debt.32 Such a problem calls for solutions that fall into two broad
categories: contractual solutions and statutory analogues to domestic bankruptcy.
29 Ibid.
30 According to the Bank for International Settlements (BIS), the outstanding stock of domestic bonds in these countries went from one trillion dollars in 1995 to over four trillion dollars in 2006, with public sector borrowing close to three-quarters of the new total. In Mexico, domestic government debt went from just over 20 percent of total debt stock in 1995 to nearly 80 percent in 2007. See Bank for International Settlements, “Financial stability and local currency bond markets” (2007) Committee on the Global Financial System, online: Bank for International Settlements <http://www.bis.org/publ/cgfs28.pdf>.
31 Gelpern, “Domestic Bonds”, supra note 28 at 148.
32 Ibid.
13
3. CONTRACTUAL SOLUTIONS
The fear of sovereign defaults that permeates the debt capital markets in the eurozone, along with
the anger over bailouts given to distressed countries, has prompted intense debate over sovereign
debt crisis management. To a large extent, this is a debate about contracts. Sovereign issuers
can theoretically include a host of restructuring-related terms in their bond documentation, an
approach that was originally associated with Professors Barry Eichengreen and Richard Portes
and the G-10 Deputies Working Group.33 Today, eurozone politicians are promoting a particular
subset of such terms as a tool for effective sovereign debt crisis management: collective action
clauses (CACs).34 Inconceivable as it may seem that contractual provisions can avert a global
financial crisis, the idea is not new. CACs were touted as the solution to global financial crisis
after the Mexican and Asian financial crises in the mid-to-late 1990s, and have emerged again in
the aftermath of the global financial crisis. The following discussion evaluates the effectiveness
and the limitations of such terms in facilitating efficient sovereign bond restructuring.
Sovereigns face many of the same problems as other debtors in lending relationships. Where the
sovereign encounters financial difficulties, both the sovereign issuer and its creditors might be
better off agreeing to restructure repayment obligations (thereby promoting financial stability)
than to demand full repayment (and risk receiving nothing upon default).35 However, unlike
other lending relationships, bondholders are a dispersed group of creditors. Whereas most
33 See e.g. Barry Eichengreen, “Restructuring Sovereign Debt” (2003) 17:4 Journal Econ Persp 75, and G-10, “Report of the G-10 Working Group on Contractual Clauses” (2002), online: Bank for International Settlements < http://www.bis.org/publ/gten08.pdf>.
34 See Council of the European Union, Press Release, “Statement by the Eurogroup” (28 November 2010), online: Council of the European Union <http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/118050.pdf>.
35 See Udaibir S. Das et al, “Managing Public Debt and Its Financial Stability Implications” in Braga, “Sovereign Debt”, supra note 2 for research on the correlation between debt management techniques and financial stability, viewed as a function of the level of debt stock, debt profile, investor base, development of the capital markets and institutional factors.
14
contracts are made between parties who know each other’s identity prior to contracting,
sovereign debt investors rarely know each others’ identities – a blindness that extends to the
secondary markets, where bondholders’ identities are constantly shifting.
The changing identity of a sovereign’s investors is not problematic where the sovereign can meet
its payment obligations. However, where the sovereign cannot service its debt, the actions of
one bondholder can dramatically affect the interests of other bondholders.36 Where a bondholder
has unfettered discretion to accelerate payment on its bonds following an event of default, other
bondholders’ options could be quickly curtailed, leaving the majority to the mercy of the
bondholders who take the first mover’s advantage. Sovereign bonds present clear coordination
problems that prevent bondholders from being in a position to be informed about, participate in,
and agree to a restructuring – even where such restructuring might be mutually beneficial.37
The difficulty with coordinating a bond restructuring where bondholders are geographically
dispersed rests on a particular market practice in the drafting of sovereign bond legal
documentation in New York: the inclusion of bondholder unanimity provisions requiring all
bondholders to agree to any change to a bond’s financial terms.38 In the absence of a sovereign
equivalent to bankruptcy, this would make New York law-governed bonds effectively
restructuring-proof.
36 Buchheit, “Sovereign Bonds”, supra note 9 at 1317.
37 See e.g. Jeffrey Sachs, Theoretical Issues in International Borrowing (Princeton: Princeton University Press, Princeton Studies in International Finance, 1984) [“International Borrowing”] at 54. However, the accepted view that unanimity provisions act as a complete bar to restructuring was questioned by the successful debt exchanges in Ecuador, Uruguay and Argentina, suggesting that the coordination problems may be overstated. See Anna Gelpern & Mitu Gulati, “Snake Oil” (2012) 75 Law & Contemp Probs [forthcoming in 2012], online: Duke Law Scholarship Repository <http://scholarship.law.duke.edu/faculty_scholarship/2362> [Gelpern, “Sovereign Snake Oil”]. 38 See Anna Gelpern & Mitu Gulati, “Innovation after the revolution: foreign sovereign bond contracts since 2003” (2009) 4 Cap Mrkts L J 85. See also Buchheit, “Sovereign Bonds”, supra note 9 at 1324-25.
15
3.1 Contract Modification
In their work on contract modification, Michael Penny and Professors Varouj Aivazian and
Michael Trebilcock present an analytical paradox in the law of contract modification: on the one
hand, modifications should be presumptively invalid because they may encourage opportunistic
behaviour; and, on the other hand, they should be presumptively valid because they represent the
parties’ assessment of their own best interests. To analyze this contradiction from an economic
framework, the authors distinguish between two alternative cases in which contract
modifications might be sought: (1) cases where there is no change in the underlying economic
conditions governing the contract, except that the promisee acquires a power over the promisor
and, ex post, uses that power to extract higher returns; and (2) cases where changes in the
underlying economic conditions prevent the promisee from its promised performance without a
modification of the contract. They find that in pure strategic modification cases the static
efficiency gains to the contracting parties from modification (relative to default) are outweighed
by the long-run or dynamic efficiency losses from encouraging opportunistic behaviour:
Only in cases where the efficient allocation of risks is indeterminate…or where the risk in question is extremely remote so that the expected costs of bearing it do not induce significant efficient precautionary responses, is it likely that the static efficiency gains from recontracting will outweigh the dynamic efficiency losses from permitting the reallocation of risks through modifications exacted and acceded to in large part because of limitations in the remedial system available to parties on breach.39
Thus, where modifications to the terms and conditions of sovereign bonds are sought due to
supervening changes in the economic environment, debt restructuring can represent mutually
advantageous positive-sum circumstances. The Coase theorem implies that in competitive
markets with no transaction costs, parties to a conflict over property rights will negotiate the
most efficient set of terms.40 Therefore, if re-negotiating the terms of a sovereign bond ex post is
mutually advantageous to the parties, it will lead to an optimal restructuring of the bond terms
39 Varouj A. Aivazian, Michael J. Trebilcock & Michael Penny, “The Law of Contract Modifications: The Uncertain Quest for a Bench Mark of Enforceability” (1984) 22 Osgood Hall L J 173 at 191.
40 See R. H. Coase, “The Problem of Social Cost” (1960) 3 J L & Econ 1.
16
and conditions.41 This suggests that contract modifications are necessary for the attainment of
Pareto efficiency. However, achieving Pareto efficient allocations depends on whether
contractual modifications are permissible.42 This is not a given in the sovereign bond context
where, even if legally permitted, unanimity provisions can practically prevent modifications ex
post.
Notwithstanding the fact that a sovereign bond’s rating is dependent upon a host of factors and
varies significantly from country to country, the risk of default is generally considered to be
remote at the time of issuance (otherwise, there would be no access to the market). In such
circumstances, modifications of the terms of those bonds may be Pareto efficient in that possible
losses from a default to both the sovereign issuer and the bondholders can be at least partially
avoided and long-run incentives for efficient risk-bearing by future contracting parties may not
be significantly distorted. However, where a default is imminent (such as an economic crisis),
this assumption falls away. Bondholders may hold up the sovereign issuer in such
circumstances, demanding concessions by trading on the fact that the country’s fiscal health
leaves the country with no choice but to restructure its debt.
Commenting on similar strategic cases of modification that give rise to the problem of
opportunism, Aivazian, Trebilcock and Penny hypothesize that “[m]odifications entered into in
these circumstances are not Pareto efficient forms of recontracting, but are at best zero-sum
games.”43 However, in the sovereign bond context, sovereign immunity acts as a constraint on
such behaviour because, after a default, bondholders cannot secure the relief required to put
themselves in the same position as if principal and interest on the bonds had been fully paid.
Debt restructuring can be rendered impracticable where provisions require bondholder unanimity
in order to effect any change to a bond’s terms. This is partly due to the fact that when viewed
from an ex post perspective, unanimity provisions exacerbate the bondholder coordination
41 Supra note 39 at 206.
42 Ibid at 191.
43 Ibid at 198.
17
problems. However, viewed ex ante, a unanimity requirement is more justifiable in the sense
that it sends a signal to market participants that a default is unlikely. Given the inherent
challenge of accurately assessing the risk profile of a sovereign’s debt, the market might value
that signal and agree to lend on more favourable terms.44
In any case, potential opportunistic bondholders have two options: a renegotiated payment of the
remaining interest and principal or a default. Performance of the contract in the sovereign bond
context is clearly preferable to a complete default. Drawing an analogy from the conclusion
offered by Aivazian, Trebilcock and Penny (in the context of laws that do or do not permit
contractual modification), the optimal circumstance in bond structuring are contractual terms that
promote efficiency by eliminating incentives that lead to socially wasteful gaming behaviour and
related transaction costs.45
Absent statutory bankruptcy, a sovereign constrained by unanimity provisions might simply
refrain from launching a debt restructuring. In addition to the coordination difficulty,
bondholders can leverage unanimity to extract side payments. That is, certain bondholders may
refuse to consent to a restructuring and later demand a side payment from those bondholders who
negotiated and wish to proceed with the restructuring. Holdout bondholders might also refuse to
participate in negotiations where, for example, there is the possibility of a taxpayer bailout.
CACs are intended to solve these problems by facilitating the coordination of a dispersed group
of creditors.
3.2 Collective Action Clauses
CACs can be classified into four broad categories: modification clauses; creditor committee
clauses; trustee clauses; and non-acceleration provisions. Modification clauses bind all
44 W. Mark C. Weidermaier & Mitu Gulati, “How Markets Work: The Lawyer’s Version” (2011) 1886435 UNC Legal Studies Research Paper at 10, online: Social Science Research Network <http://ssrn.com/abstract=1886435>, citing F. Weinschelbaum & J. Wynne, “Renegotiation, collective action clauses and sovereign debt markets” (2005) 67 J Int’l Econ 47.
45 Supra note 39 at 198.
18
bondholders to changes in the terms and conditions of their bonds that are approved by a certain
percentage of bondholders. Creditor committee clauses re-introduce the 19th and early 20th
century practice of permitting major capital exporting countries to establish committees to
negotiate with sovereign issuers on behalf of dispersed bondholders. Depending on the
particular iteration of such a clause, it might permit bondholders to delegate the authority to a
committee to negotiate on their behalf. Trustee clauses commonly address a multiplicity of
administrative tasks that must be performed during the life of a sovereign bond. Generally, a
fiscal agent owes duties to the sovereign issuer, not to the bondholders, although some bond
documentation might empower a trustee to institute litigation against the issuer in response to a
default. Finally, bond documentation used in the last ten years often includes non-acceleration
provisions whereby bondholders are prevented from accelerating payment of principal unless
approved by a specified percentage of bondholders (typically 25 percent). Though applicable to
each type, the following analysis focuses on modification clauses.
3.2.1 New Interest in an Old Idea
As early as the late 19th and early 20th centuries, England was developing majority-voting
provisions.46 Standard form New York law-governed bonds always required bondholder
unanimity and it was not until the mid-1990s that proposals were made to include CACs in such
sovereign bonds. In 2002 the G-10 invited a panel of sovereign debt specialists to draft a model
CAC for use in sovereign bonds,47 but the use of CACs in debt contracts is an endogenous
variable; when they were originally proposed, the question was raised as to how creditors and
debtors could be persuaded to adopt them. While the Republic of Kazakhstan issued New York
law-governed bonds in 1997 that permitted a supermajority of bondholders to amend key terms
46 The need for bondholder cooperation arose when railroads and industrial corporations began issuing bonds in large numbers. The combination of widely dispersed bond holdings and costs of restructuring made it inefficient to allow a single creditor to force the liquidation of the debtor. CACs were first introduced into corporate bonds issued in the London market in 1879. In the United States, majority action clauses were never widely utilized, and investors relied instead on the intervention of the courts. For a history of the emergence of CACs in the English market, see Buchheit, “Sovereign Bonds”, supra note 9 at 1324-25. See also Eichengreen, supra note 33 at 84-84. 47 G-10, “Report of the G-10 Working Group on Contractual Clauses” (2002), online: Bank for International Settlements < http://www.bis.org/publ/gten08.pdf>.
19
and conditions, it was Mexico that was the first major sovereign issuer since the 1920s to include
a CAC in its landmark 2003 New York law-governed sovereign bond issue. Soon after that
February issue, the majority of the New York sovereign market was including CACs.
Subsequently, debt capital markets participants worldwide began to take notice of and to discuss
the use of CACs in sovereign bond boilerplate.48
In the wake of the eurozone sovereign debt crisis, the finance ministers of major European states
recently released a statement requiring that all euro-area sovereign bonds contain an identical
CAC by 2013 in order to preserve market liquidity and facilitate restructuring, where necessary.
Those CACs are intended to be consistent with those commonly used under UK- and US-law governed
contracts after the G-10 report on CACs, and will include:
aggregation clauses allowing all debt securities issued by a Member State to be considered together in negotiations. This would enable the creditors to pass a qualified majority decision agreeing a legally binding change to the terms of payment (standstill, extension of the maturity, interest-rate cut and/or haircut) in the event that the debtor is unable to pay.49
The CAC prescription does not indicate how the inclusion of market CACs will be
accomplished. It is possible that the EU could promulgate a model text for the clause. There is
certainly precedent for such an approach, as bonds governed by English law or issued in the
European markets generally follow the industry-wide accepted practices (including a CAC
model clause) established by the International Capital Market Association (ICMA), an industry
trade group.50 The eurozone CAC could also be enshrined in EU law or treaty or be legislated at
the domestic level.
48 Gelpern, “Sovereign Snake Oil”, supra note 37 at 6.
49 Supra note 34.
50 International Capital Markets Association, “Standard Collective Action Clauses (CACs) for their Terms and Conditions of Sovereign Notes”, online: International Capital Markets Association <http://www.icmagroup.org/ICMAGroup/files/3c/3cc80d90-da99-4562-8ef2-f604a8e5963e.PDF>.
20
With regard to the eurozone sovereign bond CAC, there will be a need to ensure that the market
standard CAC is interpreted in a consistent manner, even when lawsuits involving CAC-
interpretation are brought in different jurisdictions. Otherwise, the move toward greater
contractual coordination may be spoiled by ambiguous, and possibly contradictory, interpretation
in courts across the region. As such, the CAC, no matter what the sovereign bond document,
should be governed by and construed in accordance with a single body of laws. In light of the
history of CACs and market practice, the law of England is the obvious choice to be the
governing law of the eurozone CAC. This could be achieved by specifying in the contract that
the CAC shall be governed by the laws of England and Wales, even if the other provisions in the
bond are governed by the laws of another jurisdiction (likely the issuer’s domestic law).
3.2.2 Possibilities and Problems
CACs encourage private sector burden-sharing by introducing into bond documentation majority
voting provisions and collective-representation clauses so that restructuring can take place even
where all bondholders are not in agreement. The approach here is Coasian in spirit. Achieving
efficiency with CACs depends on the costs of forming a qualified majority and renegotiating the
debt. Collective action clauses support efficient renegotiation of sovereign debt contracts,
whereas unanimity requirements give rise to rent-seeking behaviour in a bond restructuring due
to holdouts.51 CACs are often presented as a solution to such socially costly delays in
renegotiations, which arise under unanimity provisions.
In the absence of barriers to negotiation between the bondholders of different series of bond
issues (not an insignificant assumption, given the diversity of bondholders), mutual gains to
creditors from restructuring negotiations imply that CACs are all that is needed to achieve a
constrained efficient equilibrium.52 That is, where bondholders are incentivized to negotiate, an
international bankruptcy regime might be redundant. The recent bond restructuring by the
51 Kenneth M. Kletzer, “Sovereign Bond Restructuring: Collective Action Clauses and Official Crisis Intervention” (2003) IMF Working Paper WP/03/134 at 4.
52 Ibid at 21.
21
government of Belize is illustrative. After announcing an impending debt rearrangement in
August 2006, the government began intensive consultations with its creditors and endorsed an
exchange offer by December 2006. Because of a CAC in the country’s dollar-denominated, New
York law-governed bonds, the total amount covered by the financial restructuring represented
98.1 percent of eligible claims. Belize was the first sovereign in over 70 years to use a CAC to
amend the terms and conditions of its bonds in a sovereign debt restructuring. Its CAC required
written consent of holders of at least 85 percent of the bonds, and 87.3 percent accepted the
exchange offer. After the exchange offer closed, Belize’s bond ratings were upgraded.53
CACs are straight forward contractual provisions that can be included in bond documentation
relatively easily. CACs’ main advantage as a tool in debt restructuring lies in their ability to
address the problem of holdout creditors by allowing a majority to bind all bondholders. The use
of a contractual approach can discipline creditors by preventing rent-seeking behaviour. CACs
are useful legal solutions in bond documentation (less so for syndicated loans), but fall short of
providing a panacea.
A leading argument against a contractual approach is that CACs raise borrowing costs by
signalling to the market that a sovereign is willing to restructure.54 While the empirical evidence
is mixed on the impact of CACs on bond spreads, some studies show that there are no price
differentials between bonds with the provisions and bonds without them.55 Those findings are
supported by Mexico’s adoption of a CAC in 2003, where that country paid no price penalty.56
There are other, however, debt restructuring issues that CACs cannot address.
53 Yuefen Li, Rodrigo Olivares-Caminal & Ugo Panizza, “Avoiding Avoidable Debt Crises: Lessons from Recent Defaults” in Braga, “Sovereign Debt”, supra note 2 at 251.
54 Gelpern, “Sovereign Snake Oil”, supra note 37 at 7. 55 See e.g. Barry Eichengreen & Ashoka Mody, “Would Collective Action Clauses Raise Borrowing Costs? An Update and Additional Results.” (2000) University of California, Berkeley, Center for International and Development Economics Research (CIDER) Working Paper C00/114.
56 Gelpern, “Sovereign Snake Oil”, supra note 37 at 7.
22
While mutual gains to creditors from restructuring negotiations might imply that CACs can
achieve a constrained efficient equilibrium, the contractual approach does not address any
difficulties for coordination of creditor rights across creditor country borders. A traditional CAC
dictates the actions of only those holders of bonds governed by the particular documentation in
question. This is problematic because a sovereign debt restructuring will likely involve multiple
issuances and multiple tranches of bonds, with bondholders in a myriad of jurisdictions. Thus,
CACs make it difficult to achieve inter-creditor equity.57 Proposals for a global sovereign
bankruptcy regime, discussed in section 4, are designed to fill this gap by providing an
international analogue to national bankruptcy proceedings. Still, there is an alternative solution
within the contractual approach: the use of a master bond issuance document, such as a fiscal
agency agreement, under which multiple series of bonds can be issued pursuant to the same
standard conditions. 58 This is market practice in Europe with the use of medium term note
programs for the issuance of bonds.
Often, a key feature of bankruptcy proceedings is that not every creditor needs to agree to the
negotiated deal in order to be bound by it, rendering single creditors powerless to hold up a deal
in an attempt to get better treatment. The need for such a provision was reinforced by the highly
publicized US case of Elliott Associates L.P. v. Banco de la Nacion and Republic of Peru,59
arising out of the Peruvian Brady Plan debt restructuring. Elliott Associates, L.P. (Elliott), an
investment fund specializing in high-risk securities, owned nearly USD 20.7 million of loans for
about USD 11.5 million, and Peru’s debt restructuring proceeded with Elliott holding out. After
a negotiated workout was agreed with Peru’s other creditors, Elliott sued in New York for full
payment of principal and accrued interest. They successfully obtained orders blocking Peru’s
57 Christoph G. Paulus, “A Standing Arbitral Tribunal as a Procedural Solution for Sovereign Debt Restructurings” in Braga, “Sovereign Debt”, supra note 2 at 318.
58 Argentina, for example, had 152 bond issues outstanding at the time of its restructuring in 2005. See Lee C. Buchheit & Mitu Gulati, “Drafting a Model Collective Action Clause for Eurozone Sovereign Bonds” (2011) 6 Cap Markets LJ 317 at 322.
59 194 F.3d 363 (2d Cir. 1999).
23
international transfers via Euroclear for payment to bondholders under the debt restructuring.60
The court permitted this approach, concluding a pari passu clause in the agreement regulating
the repayment of Peruvian foreign debt meant all creditors were to share pro rata in any
repayment. Funds that were supposed to pay interest on the newly rescheduled debt were frozen,
with the result that Peru settled with Elliott to avoid defaulting on its bonds. The result was that
a pari passu clause was interpreted in a manner that awarded a holdout creditor at the expense of
other creditors who had reached a negotiated settlement.61 The case clearly strengthens the
position of holdout creditors and underscores the potential difficulty in restructuring sovereign
debt solely with CACs.
Since traditional CACs cannot address holdouts where individual bondholders are not obliged to
negotiate restructurings of the debt or to accept new terms of an exchange offer, many have
argued for the creation of sovereign bankruptcy. CACs can partly address the issue by using a
particular formulation that requires a qualified majority of holders of all bonds to agree to a
restructuring, rather than a qualified majority of each bond issue. Still, the effectiveness of
CACs has historically been limited to situations where the sovereign borrowings are relatively
simple. Scholars like Professors Patrick Bolton and David Skeel suggest that it is not accidental
that the sovereigns that use such clauses in debt restructuring tend to be small countries with a
relatively simple debt profile. CACs can work if the sovereign has issued only a few different
bonds, but the bond-by-bond restructuring strategy is less effective where the issuer has
numerous different outstanding bonds, with different maturities and payout terms, as do all
developed states.
From a legal perspective, the most obvious difficulty is that the contractual approach fails to
present an enforceable priority regime. Similarly, CACs do not necessarily address the need for
60 Holger Schier, Towards a Reorganisation System for Sovereign Debt: An International Law Perspective (Leiden: Martinus Nijhoff Publishers, 2007) at 202.
61 The settlement, worth USD 55.7 million, was five times the amount that Elliott had paid for the debt less than five years earlier. See G. Mitu Gulati & Kenneth N. Klee, “Sovereign Piracy” (2001) 56 The Business Lawyer 635 at 650.
24
a standstill while a sovereign is renegotiating its outstanding payment obligations with
bondholders.62 If bondholders are unable to create a priority structure, market inefficiencies (like
bond dilution) will follow.
Most worryingly, CACs might actually leave sovereigns with too much debt.63 Bondholders
balance the benefits of a debt reduction against the costs of a reduction in expected debt
repayments. Thus, creditor-friendly debt restructuring could result in inefficiently low debt
forgiveness. Arguably, this is where statutory bankruptcy approaches to debt restructuring
(discussed in section 4) gain credence, as they can be more debtor-friendly where this kind of
inefficiency is a concern.
3.2.3 Greece’s Sovereign Debt
Prior to 2004, Greek bonds issued under English law contained CACs that permitted
modification of bond payment terms with the agreement of bondholders representing at least 66
percent of the bonds. Individual bondholders were also permitted to accelerate their bonds
following an event of default. After 2004, Greece altered this clause in its English law-governed
bonds to permit amendments to payment terms with the consent of holders of at least 75 percent
of an issue. Bonds issued after that time required that bondholders representing 25 percent of the
bonds vote in favour of acceleration.64 Although almost 90 percent of Greece’s sovereign bonds
are governed by Greek law, the EUR 25 billion debt issued under the law of another jurisdiction
(mostly under English law) do contain some type of CAC. 65
62 Patrick Bolton & David A. Skeel, Jr., “How to Rethink Sovereign Bankruptcy: A New Role for the IMF?” in Barry Herman, José Antonio Ocampo & Shari Spiegel, eds, Overcoming Developing Country Debt Crises (Oxford: Oxford University Press, 2010) [Bolton, “Sovereign Bankruptcy”] at 458.
63 Ibid at 774.
64 Lee C. Buchheit & G. Mitu Gulati, “Restructuring a Nation’s Debt” (2010) 46 Int’l Fin Rev [Buchheit, “Restructuring”] at 2.
65 Ibid.
25
The euro area recently announced its second rescue plan for the country, agreeing to cover
Greece’s funding gap until 2014 with IMF and private sector involvement. European leaders’
approach to Greece’s financial crisis exemplifies EU chief architect Jean Monnet’s wise
assessment that “people only accept change when they are faced with necessity, and only
recognize necessity when a crisis is upon them.”66 As Greece restructures its outstanding bonds,
this portion of its debt can rely on the CACs to minimize the number of non-participating
creditors so that the requisite supermajority of bondholders of a particular debt issue can cause
all bondholders to tender to an exchange or a revised payment schedule.67
There was generally unfavourable market reaction to the announcement of the rescue plan, some
emerging market and other non-European countries expressing concern that in the package for
Greece private bondholders are being asked to take too small of a write-down. The move to
create an orderly process for eurozone sovereign defaults are already threatening the peripheral
bond markets: Greek, Irish and Portuguese yields have moved sharply higher and reduced
volumes are being traded. 68 The reforms, which will force private investors to share the burden
of defaults, also prompted Standard & Poor’s to cut long-term credit ratings of Greece and
Portugal, making Greece the lowest-rated sovereign in the world.69 It is argued that CACs
already affect investment decisions. If all eurozone government bonds from July 2013 will be
required to include CACs outlining a framework for default and giving a majority of creditors
the authority to trigger a restructuring, peripheral bonds will become even less appealing to
investors by focusing their minds more intently on defaults. Market indications suggest that fund
managers are not buying existing peripheral bonds, under the assumption that they could suffer
similar haircuts to those bonds issued after 2013. A possible reason why the market has reacted
66 Gertrude Tumpel-Gugerell, “The financial crisis – looking back and the way forward”, (speech delivered at the European Economic and Social Committee and European Trade Union Confederation conference “Rien ne va plus? Ways to rebuild the European Social Market Economy” 22 January 2009), online: European Central Bank <http://www.ecb.int/press/key/date/2009/html/sp090122.en.html>.
67 Buchheit, “Restructuring”, supra note 64 at 9.
68 David Oakley, “Bond dealers skeptical about eurozone plans”, The Financial Times, Capital Markets (29 March 2011), online: The Financial Times <http://www.ft.com/home/us>. 69 David Oakley, “Greek rating now worst in the world”, The Financial Times, Capital Markets (13 June 2011), online: The Financial Times <http://www.ft.com/home/us>.
26
negatively to the requirement that eurozone bonds contain CACs by 2013 is that it dispenses
with the pledge by policymakers that defaults would be avoided at all costs.
3.2.4 A Partial Solution
Although only rough in outline, the CAC consensus being ushered in by the recent eurozone
pronouncement might create the contractual regime that many legal scholars have been calling
for. If the vision of the more enthusiastic of their ranks were accurate, there would be no need
for significant additional reforms. As set out above, however, there are sufficient reasons to
suspect that the virtues of CACs were oversold. CACs have worked well in emerging markets
and so offer hope for developing states that share some of the same hurdles in accessing the
markets. CACs are now common in most emerging markets in Latin America, Asia, Central and
Eastern Europe. Mexico, Brazil, Indonesia, South Korea, Poland and the Czech Republic issue
bonds with CACs to reassure investors because they can reduce yields as they offer creditors a
collective force and prevent a small minority of so-called hold-outs blocking a default. Thus,
CACs are an easily-implemented market solution that facilitates restructuring negotiations that
could otherwise, like in Argentina, drag on for years. CACs by themselves will never guarantee
successful debt workouts, even in the face of their inclusion as boilerplate in sovereign debt
documentation. CACs do, however, provide an effective tool in promoting efficient debt
workouts – a tool that should be used in conjunction with other tools that foster collaboration
among debtors and creditors.
27
4. SOVEREIGN BANKRUPTCY
Some sovereign debt scholars promote majority voting provisions, believing in the need for
effective debt workouts in the event of financial distress, while others extol the benefits of tough
restrictions on ex post renegotiation and argue that we should maintain the status quo, not in
spite of, but because of the difficulty sovereigns experience in restructuring their debt. Still
others promote a statutory option, whereby sovereign debtors and their creditors are bound by an
international convention that establishes transparent rules for debt restructuring. The motivation
for much of the debate can be traced to the Mexican debt crisis of 1994-95.70 Despite the
successful resolution of the crisis through an IMF bailout, followed by Mexico’s prompt
repayment, the massive emergency assistance raised concerns that bailouts could cause
significant distortions in the sovereign debt capital market. These concerns led to a shift away
from the assumption that the IMF should act as an international lender of last resort (ILLR).
Such concerns over bailouts resurfaced in the wake of the recent financial crisis, when the near-
collapse of the financial intermediation system lead to unprecedented public support operations
like capital injection by treasuries (such as the Troubled Asset Relief Program in the US) and
liquidity support from central banks.
This section addresses proposals to replace the existing, ad hoc approach to sovereign debt
restructuring with a permanent, global regime. Such an ambitious approach has significant
appeal for its ability to strike a balance between negotiated debt reductions (through private
sector involvement) and debt bailouts (through the involvement of multilateral institutions). The
discussion does not attempt to assess the political feasibility of a sovereign bankruptcy
institutional solution, but rather its potential effectiveness in addressing the problems that arise
with a contract-based approach to sovereign debt restructuring.
70 Mexico’s sovereign debt crisis followed the government’s devaluation of the peso in December 1994. The devaluation lead to an economic crisis in which the country experienced increased inflation,
28
4.1 Status Quo
When a domestic debtor fails to meet its payment obligations under a contract, domestic
bankruptcy law generally serves to resolve the liquidity problem, balancing the interests of the
debtor against those of the creditor. Most advanced countries have such a bankruptcy regime
which, due to its consistent enforcement, creates legal certainty. Legal certainty, in turn, helps
creditors assess the probability of recovery and price risk accurately. All of this tends to lead to
lower borrowing costs.71 However, there is no sovereign analogue to the corporate creditor’s last
resort.
If a sovereign defaults on its loan or bond payments and a lender or bondholder seeks to
accelerate repayment, no formal and compulsory priority regime governs their claims. Instead, a
borrower’s conduct is directed by a handful of tacit conventions driven more by policy issues
than by legal principles. In the loan market, ILLRs are granted priority over other external
creditors, partly because they provide loans when no other lender would, in an attempt to
maximize other creditors’ recovery. While a defaulting debtor would be expected to treat its
external creditors equitably, the lack of authoritative international statute establishing a priority
system among creditors has lead to the Paris Club attempt to address the problem by promoting a
clause of “comparability of treatment”, whereby:
Paris Club creditors do not expect the debtor’s agreements with its other creditors to exactly match the terms of the Paris Club’s own agreement. Instead, given the diversity of creditors, they require that the debtor seek terms “comparable” with the Paris Club’s agreement. They also require the debtor to share with them the results of its negotiations with other creditors.72
recession and a peso whose value was cut in half. The Mexican bailout was effected by way of more than USD 40 billion in loans and guarantees, provided by the IMF, the BIS, the US and the Bank of Canada.
71 Lex Rieffel, Restructuring Sovereign Debt: The Case for Ad hoc Machinery (Washington, DC: Brookings Institution Press, 2003) at 16.
72 Paris Club, “Annual Report 2008” (2008) at 23, online: Club de Paris <http://www.clubdeparis.org/sections/communication/rapport-annuel-d/annual-report-2008/downloadFile/file/AnnualReport2008.pdf>.
29
In the context of a debt restructuring, a defaulting borrower has discretion to discriminate
between its unsecured lenders. Yet, creditors facing a defaulting sovereign can be reluctant to
attempt recovery through litigation due to the presence of multilateral financial institutions like
the IMF, which could provide bailout packages to distressed debtors and, more importantly,
because engaging sovereigns in litigation, let alone seizing their assets, is highly problematic.
Even the acceptance of a restrictive approach to sovereign immunity in treaty law as well as in
several national statutes has not induced creditors to favour court proceedings over negotiating
work-outs. The enforcement of sovereign debt obligations is not governed by definite legal
rules.
Sachs’s influential 1984 Princeton study, “Theoretical Issues in International Borrowing” helps
elucidate some of the inefficiencies that justify a centralized resolution to sovereign debt crises.
Sachs presents some of the collective action problems associated with international debt
including free rider problems, suggesting “even in bank syndicates significant free rider
problems remain.”73 The 1985 US Court of Appeals case Allied Bank International v. Banco
Credito Agricola de Cartago74 is a clear example of how a single creditor might hold out. In that
case, a restructuring agreement was reached with all but one of the members of its syndicate of
39 financial institutions after the government of Costa Rica suspended payments on its debt. The
holding that the attempt to repudiate private, commercial obligations is inconsistent with the
orderly resolution of international debt problems makes clear that, in the US, Chapter 11-style
protections did not apply to sovereigns. Sachs observed that:
Individually, these creditors have an incentive to call in their claims against the overextended debtor countries, even if doing so injures the economic performance of the debtor so much that the creditors suffer collectively. Preventing such a destructive race to liquidate assets is one of the major purposes of a bankruptcy code, which restricts the ability of individual creditors to act against the group interest. Unfortunately, countries cannot file for Chapter 11 protection.75
73 Sachs, “International Borrowing”, supra note 37 at 33.
74 757 F.2d 516 (2d Cir. 1985).
75 Jeffrey Sachs, “Managing the LDC Debt Crisis” (1986) 2 Brookings Papers on Economic Activity 397 at 418.
30
Given the uncertainty of the status quo, there is significant interest in centralized solutions to
sovereign debt crises. After nearly two decades of opposition to sovereign bankruptcy proposals,
the IMF suddenly adopted a sovereign bankruptcy approach in 2001, advocating framework
based in many respects on Chapter 11 of the US Bankruptcy Code. The overhauled policy
envisioned a single forum where debt reduction and the amount of emergency lending would be
decided simultaneously.76 A sovereign insolvency framework was hardly a new idea but the
strategy (the Sovereign Debt Restructuring Mechanism (SDRM)) facilitated significant debate
once the IMF was on board. There were strong reservations from creditors, including the US
Treasury, academics and non-governmental organizations, stemming partly from the fact that the
proposal was shaped by the IMF’s institutional self-interest in protecting its role in international
finance.77 The proposal was shelved at the G-1078 meetings in April 2003, despite many
unresolved questions regarding the role of the IMF in an SDRM regime.
4.2 Domestic Bankruptcy: Collective Action, Standstills and Interim Financing
Arguably, the most important ex post function of bankruptcy is to solve creditors’ coordination
problems; ex ante, the benefit of a bankruptcy is in its ability to protect creditors’ priorities. The
possibility of a bankruptcy can profoundly affect the conduct of a corporate debt workout long
before bankruptcy proceedings are commenced. There is widespread interest in sovereign
bankruptcy given that financially distressed states face many of the same problems as do
76 Bolton, “Sovereign Bankruptcy”, supra note 62 at 180.
77 Kunibert Raffer, Debt Management for Development: Protection of the Poor and the Millennium Development Goals (Cheltenham: Edward Elgar Publishing Limited, 2010) at 39.
78 G-10 refers to the group of countries that have agreed to participate in the IMF borrowing arrangement, General Arrangements to Borrow (GAB), which was established in 1962 when the governments of eight IMF members (Belgium, Canada, France, Italy, Japan, the Netherlands, the UK, and the US, along with the central banks of Germany and Sweden), agreed to make resources available to the IMF for drawings by both participants and nonparticipants. The BIS, European Commission, IMF and Organisation for Economic Co-operation and Development are all official observers of the activities of the G10.
31
personal and corporate debtors, including creditor coordination.79 Thus, literature on sovereign
bankruptcy proposals rests in large part on reasoning by analogy to domestic bankruptcy.80
The concept of a bankrupt corporate debtor in need of working capital is well understood in
domestic bankruptcy law; just because one is bankrupt does not mean one does not need funding.
The sovereign debt markets offer an attractive analogue to the domestic realm, particularly where
a sovereign is suffering from a debt overhang liquidity crisis, the likes of which both developed
and emerging economies are experiencing sovereign debt distress.81 Among other scholars,
Jeffrey Sachs argues that this type of financial crisis is an ideal circumstance for an ILLR, but
that the role of the ILLR is not necessary per se.82 Rather, domestic bankruptcy law shows that
an ILLR would be a sufficient but unnecessary solution. What is needed is a legal regime.
Applied to the sovereign context, this commends a system of bankruptcy for states that are
financially insolvent but still need working capital. However, if the international financial
architecture is to be reformed according to domestic notions of bankruptcy, such a regime must
at least address the problems that the contractual approach fails to solve: providing an
enforceable and predictable system for the reorganization of outstanding bonds while also
addressing the problem of investor moral hazard.
79 Patrick Bolton & David A. Skeel, Jr., “Inside the Black Box: How Should a Sovereign Bankruptcy Framework be Structured?” (2004) 53 Emory L J 763 [Bolton, “Black Box”] at 763. 80 Ibid. See also Rogoff, “Bankruptcy Procedures”, supra note 12 at 28. See also Jeffrey D. Sachs, “The International Lender of Last Resort: What are the Alternatives?” (Address delivered at the Harvard Center for International Development and Galen L. Stone Professor of International Trade at Harvard University (June 1999), online: Federal Reserve Bank of Boston <http://www.bos.frb.org/economic/conf/conf43/181p.pdf>.
81 A state suffers from debt overhang when its debt is so large that any earnings generated by new investment projects are entirely appropriated by existing debt holders, so that even projects with a positive net present value cannot reduce the stock of debt. The term originated in corporate finance literature. See e.g. Stewart C. Myers, "Determinants of Corporate Borrowing" (1977) 5 J of Fin Econ 147.
82 Jeffrey D. Sachs, “The International Lender of Last Resort: What are the Alternatives?” (Address delivered at the Harvard Center for International Development and Galen L. Stone Professor of International Trade at Harvard University (June 1999), online: Federal Reserve Bank of Boston <http://www.bos.frb.org/economic/conf/conf43/181p.pdf>.
32
Bankruptcy enables creditors, who may be numerous and widely scattered (as are sovereign
bondholders) to collectively respond to a debtor’s financial distress. To prevent debtors from
avoiding collective action and engaging in strategic litigation against the debtor, bankruptcy laws
generally provide for a stay on debt repayments and on creditors’ collection activities during
bankruptcy proceedings. However, there is no equivalent international regime that can impose
such a standstill, nor is this something that a contractual, CAC-driven, approach to restructuring
can solve. In fact, even if it were practically possible, drawing an analogy from domestic
standstill is problematic, given an important difference between domestic corporate debt and
sovereign debt: the latter is very difficult to enforce.
Only in the past 50 years have sovereigns borrowing outside of their own territory become
answerable in foreign courts for the performance of the debt contracts.83 Since the 1970s, it has
been possible to bring an action against a sovereign, but attachment of a sovereign’s assets
remains problematic.84 While creditors might be in a position to obtain foreign court judgments
against their defaulting sovereign debtors, those judgments are essentially unenforceable for the
very reason that the defendants are sovereign. Absent sovereign bankruptcy, the law of
sovereign debt relates mostly to what the international community expects sovereigns to do by
way of honouring their financial commitments, and only marginally about the rules that national
courts apply when a sovereign debtor is sued under a commercial debt instrument.85
A traditional debt contract is worth more than the paper it is printed on because of the framework
of laws and institutions that underpin its enforcement. But sovereign debt is different because
there is no such institutional support that ensures enforcement. So, why do sovereigns repay the
debt owned by private foreign creditors? If there is no legal framework that makes defaulting
costly, sovereign borrowers should not be incentivized to service their outstanding bonds.
Where a debtor has no incentive to repay, this should reduce investor appetite for the riskier
sovereign debt. Faced with financial distress or even a bond restructuring and an increasing
83 Gulati, “Responsible Sovereign Lending”, supra note 20 at 1-2.
84 Supra note 5 at 307.
85 Ibid.
33
dissatisfaction among creditors, profligate borrowers will eventually pay a price in terms of
reduced market access, higher interest rates and tighter financial covenants. However, the reality
is that lenders continue to extend credit and investors continue to buy sovereign bonds in the face
of the risk.
Where enforcement is difficult, repudiation should be equally difficult.86 However, governments
repay, in part because creditors can interfere with countries’ foreign commerce, refuse to invest
or to extend new loans, and tarnish the sovereign’s reputation.87 The sovereign debt literature
points to two main incentives to repay: the sovereign’s market reputation and sanctions. The
reputation incentive relates mainly to a sovereign’s ability to borrow again in the future, but can
equally extend to a state’s reputation outside of the issuer/investor or borrower/lender
relationship; bond defaults and restructuring can act as a signal to the private sector about the
state of the economy that might affect private sector investment decisions.88
4.3 The Challenge of Implementation
Both the contractual alternative to bailouts and the bankruptcy option address the holdout
problem of sovereign debt restructuring. The statutory option, however, does it more effectively,
in that it applies to all of a sovereign’s debt, and more predictably, in that it would establish a set
of rules applicable to all market participants. Predictability should be more efficient, as debt
markets do not function efficiently when bondholders and lenders are uncertain what will happen
to their claims upon a debt default. Also, by facilitating debt restructuring, a bankruptcy regime
could reduce the potential for the nation to engage in morally hazardous behaviour.
86 See Jeremy Bulow & Kenneth Rogoff, “Sovereign Debt: Is to Forgive to Forget?” (1989) 79 Am Econ Rev 43. 87 Anna Gelpern, “Odious, Not Debt” (2007) 70 Law & Contemp Probs 101 [Gelpern, “Odious, Not Debt”] at 110.
88 See Harold L. Cole & Patrick J. Kehoe, “Reviving Reputation Models of International Debt” (1997) 21 Federal Reserve Bank of Minneapolis Quarterly Review 21.
34
The sovereign bankruptcy approach also promises to address an essential problem of debt
restructuring which CACs cannot address: interim debtor funding. Just as access to interim
financing is a crucial determinant of the outcome of the restructuring process for corporate
debtors,89 it is an important consideration for sovereign debtors experiencing a liquidity crisis.
Debtor-in-possession financing would provide a functional alternative to bailouts, which have
become so controversial lately. The financing could be provided by an international multilateral
institution like the IMF, but such an official creditor would not be necessary. Just as bankruptcy
courts do not make loans to debtors at the domestic level an ILLR could focus on ensuring that
certain future debt issued by the sovereigns would have priority over the pre-bankruptcy debt.
While there does not exist an official mechanism for giving priority to new debt, it is conceivable
that an international regime could make such arrangements.
There are significant flaws in a sovereign bankruptcy approach to debt restructuring. Most relate
to its practicality. Any international regime would have to be activated voluntarily by the debtor
sovereign so as not to offend the principle of sovereignty. Further, it would be difficult to
determine when the regime could be invoked. There would need to be sovereign equivalents to
domestic rules that require insolvency on a cash flow basis (in the same way that individual
bankrupts are given a living allowance out of their wages) in order to file a petition for
bankruptcy. In order to minimize its impact on the capital markets, it would need to be restricted
to circumstances in which sovereigns were restructuring unsustainable debt.
The most vigorous opponents of an SDRM are the bondholders themselves: the international
financial institutions who underwrite sovereign bonds in New York and London.90 The criticism
regarding the impractical nature of a global bankruptcy mechanism is well-founded, but even
more important is the impact that such proposals could have at this time of extreme risk-aversion
in debt markets. Capital flows are uncertain and proposals to create a global legal regime at this
point in time might create increased investor anxiety. Further, there is a serious flaw in the plan
89 Empirical evidence suggests that those with access to interim financing are more likely to reorganize than those that lack this access. See David A. Skeel, Jr., “Creditors’ Ball: The “New” New Corporate Governance in Chapter 11” (2003) 152 U Pa L Rev 917 at 936.
90 Bolton, “Black Box”, supra note 79 at 764.
35
from the perspective of law and economics, mentioned in “Sovereign Debt Management”,
above. There is a risk that a bankruptcy regime would facilitate sovereign default – the last thing
that is needed in the current state of sovereign distress and market fluctuation. Just as bailouts
create creditor-side moral hazard, sovereign bankruptcy does the same for sovereigns. Given the
proclivity of sovereigns to over-borrow and their immunity from suit, this is no small matter.
Restricting the legal mechanisms whereby sovereigns can restructure encourages sovereigns to
repay what they owe.
Focusing exclusively on ex post considerations, however, a bankruptcy regime like the IMF’s
SDRM cannot effectively respond to debtors’ and creditors’ concerns that sovereign bankruptcy
will result in higher costs of borrowing and a lower volume of debt for emerging-market
countries. What is necessary to address such a defect is an emphasis on ex ante effects of
sovereign debt restructuring. Existing bailout approaches to sovereign debt crises often assures
that bondholders will be made whole. Were a sovereign bankruptcy regime imposed,
bondholders could no longer count on a handout when sovereigns encountered financial distress.
Clearly, there is scope for moderated strategy that balances the status quo against the promotion
of an ambitious and impractical sovereign bankruptcy regime. CACs provide such an
intermediate strategy for addressing sovereign financial distress; their inclusion in all sovereign
debt contracts (a serious possibility, given the recent eurozone pronouncement) would provide a
simpler and less intrusive way to restructure sovereign debt, when necessary.
4.4 Balancing Bailouts and Barriers to Restructuring
The theory that bailout-based policies require ever-larger funds and encourage sovereign debtors
to borrow larger amounts than is otherwise fiscally prudent was, once again, confirmed by the
recent financial crisis. For example, financial support operations after the crisis contributed
strongly to the surge in issuance by OECD governments of both conventional and contingent
liabilities.91 The explosion in the supply of public debt happened at a time when even sovereign
91 Hans J. Blommestein, “Public Debt Management and Sovereign Risk during the Worst Financial Crisis on Record: Experiences and Lessons from the OECD Area”, in Braga, “Sovereign Debt”, supra note 2 at 449-50.
36
issuers were experiencing liquidity problems in the secondary markets. Given the increasing
financial commitment that a pure ILLR policy requires and because of the moral hazard it
introduces to the sovereign debt capital markets, it is now widely understood that bailouts need
to be supplemented by at least a partial ‘bail-in’ of the private sector – that is, where
governments compel banks to recapitalize from within using private capital, rather than with
public money.92
The current practice of putting barriers in the way of restructuring has important downsides even
before the prospect of a default arises. Because it is difficult to establish enforceable priorities in
sovereign debt, prospective investors insist on substitutes such as a rapid repayment schedule.
High restructuring costs can have beneficial ex ante effects, but not always in the sovereign debt
context; sovereign debtors are already incentivized to limit restructuring. A better approach
would consider the ex post costs of financial distress, such as the perverse effects of debt
overhang in the event debt cannot be restructured, rather than only ex ante costs.
Section 3 of this paper evaluated the effectiveness of contractual innovations in addressing the
principal legal and economic factors bearing on sovereign debt and debt crises. As discussed,
most legal and economic commentators in this area focus on the collective action problems that
are inherent in a sovereign bond restructuring. However, an equally important problem is the
lack of enforcement of seniority. As a baseline, a sovereign bankruptcy regime should strictly
enforce first-in-time priority. In the absence of enforceable priorities, when a sovereign
experiences financial distress, any new debt comes at the expense of existing creditors. Not only
is there an increased risk of default, but an expanding pool of creditors decreases their pro rata
share of the state’s resources (forcing each creditor to accept a greater haircut) and hinders
creditor coordination when the time comes to restructure.
There is no doubt that the discussion around statutory framework solutions will resume with the
next major debt crisis. The current European sovereign debt crisis has already highlighted just
how susceptible states are to liquidity crises induced through financial panic, and will likely be
92 Patrick Bolton & David A. Skeel, Jr., “Redesigning the International Lender of Last Resort” (2005) 6
37
used, as have other crises in the past, to reopen the debate on sovereign bankruptcy and the role
to be played by ILLRs. If there was empirical evidence that the greatest proportion of defaults
result from risks over which sovereigns typically have little control – intervening forces such as
global economic crises – a strong case could be made for a single rule so as to economize on
transaction costs involved in sovereigns and debtors negotiating debt workouts. This militates in
favour of a bankruptcy regime.
However, it is difficult to assess the merits of proposed supranational bankruptcy approaches,
particularly in emerging and developing countries, without a clear understanding of the utility of
the contractual provisions that already exist in most sovereign bonds. Whatever the future of
these proposed international bankruptcy regimes, the changes to which they aspire take time and
cannot address the serious problems currently facing the sovereign debt capital markets. With
the recent spate of countries – most prominently Greece, Spain, Portugal and Ireland – teetering
on the brink of financial collapse, the question of how to address sovereign debt default is the
most pressing issue on the global financial agenda. Europe's financial market contagion is
infecting systemically important eurozone members. European policymakers must make greater
strides toward experimenting with what tools we have now, rather than focusing solely on
solutions that could take decades to implement. All of this favours of examining the tools we
already have to promote orderly workouts and applying them in novel ways to contemporary
problems.
Given the time that market-directed retributive justice can take to operate, it may not be
sufficient to promote short-term fiscal prudence on the part of sovereign borrowers or their
creditors. As attractive as a regime of sovereign bankruptcy appears, one problem with
fashioning a solution for a complex debt capital market is that a conventional legal remedy is
destined to be insufficient. Notwithstanding the development of the restrictive theory of
sovereign immunity,93 norms of sovereign lending are largely extra-legal. As such, principles of
Chicago J of Int’l L 179 at 179.
93 See note 19.
38
responsible sovereign lending and borrowing must influence how these credits are treated in debt
restructuring.
Academics and practitioners who dismiss a full-blown sovereign bankruptcy regime recommend
two main alternatives: either maintaining the status quo, relying on the benefits of restricting ex
post renegotiation or relying on majority voting provisions, as discussed in section 3. The key
benefit of tough restructuring rules stems from their ex ante effect. Where sovereigns know that
they cannot easily renegotiate their debt ex post, they are incentivized to repay the obligations.
The observation that high ex post renegotiation costs can impose discipline on a borrower is well
taken. However, this assumes that sovereigns will choose a level of debt that optimally balances
their ex ante borrowing costs with their ex post costs of financial distress. As discussed, this is
not the reality of sovereign borrowing: instead of choosing a level of debt that optimally balances
borrowing costs, sovereigns are susceptible to committing themselves to excessively high
restructuring costs.
Sovereign debt is time consuming and costly for all parties to restructure, and much research is
dedicated to explaining why this is. Unfortunately, much less work attempts to uncover the
causes of the dramatic rises in indebtedness to private creditors experienced by low-income
countries following a default.94 While it is important to understand why the private sector
experiences loss of value in debt restructuring negotiations, this is only half of the picture.
Understanding how increased indebtedness plagues post-restructuring sovereigns, particularly in
low-income countries, should be a priority for future research.
Incentives are political and politicians are concerned about short-term issues such as how much
they can borrow, rather than long-term ramifications such as the potential consequences of
default, as the current administration will usually be gone by the time any repayment difficulties
arise. Politicians may also borrow in order to further their own goals (for example, in the run-up
to an election), even where there are no gains to the public. Policies aimed at limiting over-
borrowing, one of the main sources of sovereign debt crises, must recognize that borrowing
94 Supra note 5 at 296.
39
decisions are inherently political decisions. Sovereign debt management is more complicated in
low-income countries than it is in developed countries because the former have a limited ability
to sustain debt but are arguably more in need of funding so as to promote various development
goals.
40
5. ODIOUS DEBT & LOAN SANCTIONS
During the 2009 coup d’état ousting Honduran president Manuel Zelaya, the United Nations
General Assembly adopted a resolution denouncing the coup; the US and EU halted some forms
of non-humanitarian aid; and multilateral institutions, including the World Bank and the Inter-
American Development Bank, stopped lending to the state. These events raise a question that is
central to the law and development discourse on sovereign debt forgiveness: should an
undemocratic regime bind the state and its people to its financial commitments? Creditors often
lend to (and institutional investors invest in) states without regard to governmental legitimacy.
This permits undemocratic governments to do with the proceeds what they like and neglect
repayment, thereby saddling their successors with debt.
Addressing claims that sovereign debts are illegitimate after a succession is an important issue
because successions occur with some regularity – a fact the recent ‘Arab spring’ reinforces.
Succession has many faces: it can result in a new international legal personality for a state (East
Timor, Montenegro), in fundamental changes to the government (Burma and, recently, Egypt),
or in foreign-assisted regime change (Afghanistan, Iraq, and possibly Libya). The worlds of
state politics and sovereign debt capital markets intersect when, during successions, debts are
subject to claims of odiousness. This intersection is important because it relates directly to the
well-being of citizens in what are often the poorest countries, and because the sums at stake are
not insubstantial: upon the dissolution of the Soviet Union in 1991, for example, the country
owed USD 67 billion in external debts; and when Saddam Hussein was forcibly removed from
power in Iraq, his regime owed over USD 100 billion in external debt – more than three times its
GDP.95
95 Michael Kremer & Seema Jayachandran, “Make Odious Debt Too Risky to Issue”, The Financial Times (8 May 2003), online: The Financial Times <http://www.ft.com/home/us>.
41
This section builds on the scholarship on the odious debt debate and advocates loan sanctions as
a system by which so-called “odious” regimes are publicly identified ex ante, and any
subsequent loans granted to those regimes are voidable once that regime loses power. An ex
ante approach can help reduce a sovereign’s debt burden while minimally disrupting the
international debt capital markets by permitting creditors to choose whether to participate in the
ex ante approach, thereby internalizing the costs and benefits of odious debt relief. It concludes
that while institutionalizing ex ante solutions globally is complex and may be impracticable in its
popular iterations, the concept can act as an effective organizing principle for generating political
will to address external debt burdens afflicting developing and emerging market countries.
5.1 Odious Debt
5.1.1 Profligate Borrowers
Unlike with a corporate borrower, sovereigns cannot look to death, dissolution or bankruptcy to
discharge imprudent borrowing. Sovereign debts continually devolve to subsequent generations
of citizens, long after the individuals who borrowed the money have left office. Under a strict
application of the doctrine of state succession, sovereign debt is congenital and ineradicable.96
Thus, successor governments and the citizens they represent (who are, by necessity, never
consulted when money is borrowed by predecessor regimes), are wholly reliant on the
forbearance of their predecessors. The question of odious debt relates to the inheritance by one
regime of the unpaid debts of another, and whether there are any circumstances in which such
debts can be denied.
5.1.2 Odiousness: A Moving Target
“Odious debt” identifies government debt that was incurred with a view to attaining objectives
prejudicial to the interests of the state’s citizens or successor governments. It is generally agreed
that this definition establishes three threshold conditions. First, the population must not have
96 Lee C. Buchheit, G. Mitu Gulati & Robert B. Thompson, “The Dilemma of Odious Debts” (2007) 56 Duke L J 1201 [Buchheit, “Dilemma”] at 1207.
42
consented to the transaction (drawing a loan or issuing debt) in question. Second, there must be
absence of benefit to the population in both (i) the purpose of the transaction, as creditors should
not be punished for good faith loans that were misspent by corrupt governments, and (ii) in fact,
as principles of unjust enrichment would require populations that derive benefits from bad faith
loans to repay them. Third, the creditor must be aware of the absence of consent and benefit.97
Thus, the doctrine achieves three important results: (1) it reaffirms the responsibility of states to
repay the debt obligations incurred by their governments through a presumption of payment; (2)
it shifts the burden of proving entitlement to relief onto successor governments; and (3) it
significantly binds the conduct that could constitute grounds for avoidance.98
Drawing an analogy to the individual level, the doctrine’s logic is persuasive: just as an
individual cannot be called to repay money that someone fraudulently borrowed in his or her
name, a state should not be responsible for debt that was incurred without its citizens’ consent
and that was not used for their benefit. However, given the extent to which aid and debt relief
have permitted looting by dictators, the efficiency gains from preventing excessive debt would
be greater than the efficiency gains from forgiving odious debt ex post.99 Given this
presumption, it is surprising that there is a paucity of practical financial innovation attempting to
deal with the problem of over-lending and over-borrowing outside of the realm of debt
forgiveness.
The doctrine of odious debt derives from the idea of conferring distinct legal personality to a
state, on the one hand, and to its apparatus (government) on the other.100 It was also based on the
construction of popular sovereignty as the basis for judging the legitimacy of the actions of the
state apparatus as well as on the contractual character of the obligation, as it was understood in
97 Sabine Michalowski, Unconstitutional Regimes and the Validity of Sovereign Debt: A Legal Perspective (Aldershot: Ashgate Publishing Limited, 2007) at 33.
98 Larry Catá Backer, “Odious Debt Wears Two Faces: Systemic Illegitimacy, Problems, and Opportunities in Traditional Odious Debt Conceptions in Globalized Economic Regimes” (2007) 70 Law & Contemp Probs 1 at 3. 99 Seema Jayachandran & Michael Kremer, “Odious Debt” (2006) 96:1 Am Econ Rev 82 at 91.
100 Supra note 98 at 8.
43
civil law jurisdictions.101 Augmented by the Russian academic Alexander Sack, this Aristotelian
construction of state debt, the state, and its apparatus as autonomous institutions, and the rules
under which each would be tied to the others, has become a general construction of international
law. Sack’s functional approach based on a separation between state and its apparatus assumed
that validity of indebtedness had to be based on the compliance by the apparatus of its
obligations to the state (and its citizens) in the context of the incurrence (and use) of any funds
secured by debt.102
A debt is odious, then, not because of the illegitimacy of the state apparatus but because of the
absence of a legitimate relationship between the debt and the state itself. Legitimacy is based on
demonstrating the application of the trust relationship between the state and its apparatus in
relation to the debt. Odious debts cannot be considered void; rather, they become a form of
private debt, in that the rights to repay follow the agents of the apparatus that engaged in an
illegitimate action in the name of the state. For Sack, a successor regime has a double burden of
showing that the contested debt was not incurred for the public benefit and that the creditors
were aware of the private nature of the loan they were making.103 Therefore, discharging such
burden shifts to creditors, who must show that some or all of the proceeds actually served a
public purpose.
More recent work on odious debt moves beyond the conventional construction of the doctrine.
Whereas Sack’s approach calls for a loan-by-loan analysis, the complexity of today’s debt capital
markets requires that contemporary odious debt emphasize the odious nature of regimes, rather
than circumstances surrounding each loan. All loans to a dictatorial regime would, therefore, be
presumptively odious and liable to repudiation.104 Sack’s approach could, he recognized, expand
well beyond its original confines, using evolving moral- and human-rights notions. Sack argued,
for example, that German bond debt used to buy territory seized from Poland was not odious.
101 Ibid. Whereas common law focused on compensation for contractual breach, civil law tended to view contract obligations more strictly.
102 Ibid at 9. 103 Supra note 97 at 41-2. 104 Buchheit, “Dilemma”, supra note 96.
44
Though the funds went to an odious purpose (the colonization by Germans of formerly Polish
territory), the Polish landowners were paid, and the funds remained in the hands of the Polish
polity. While morally repugnant, the debt should not have been deemed odious as a matter of
law.105 Proponents of the odious debt doctrine use this example to support its substantially
broader reach.106 This paper’s proposal of ex ante declarations of odiousness constitutes a bridge
between the traditional and the expanded concepts of odious debt.
This new conception is illustrated in a corruption case where a tribunal at the International
Centre for the Settlement of Investment Disputes denied a claim by Nasir Ibrahim Ali, a Dubai-
based Canadian businessman, against the Kenyan government over a contract dispute after it
discovered the contract had been secured illegally through a USD 2 million bribe paid to former
President Daniel arap Moi.107 The tribunal rejected the argument that Mr. Ali’s money
constituted a personal gift, even one ostensibly intended for public use, holding that the money
was paid as a bribe to further the interests of Mr. Ali and of President Moi in his personal
capacity, and not to benefit Kenyan citizens. The tribunal held that the state was not liable for an
obligation incurred for the benefit of its head of state, and rejected the notion that the bribe might
have been excused by “any local custom in Kenya purporting to validate bribery committed . . .
in violation of international public policy.”108 This case reflects not only a typical “odious” loan
to a despot to the benefit of his personal purse but also “the power of the Western-oriented
universalism inherent in the doctrine as it has come to be extended to corruption.”109
105 Supra note 98 at 14.
106 Patricia Adams, “Iraq’s Odious Debts” (2004) 526 Policy Analysis, online: Cato Institute: <http://www.cato.org/pubs/pas/pa526.pdf> at 4.
107 World Duty Free Company Ltd v. Kenya, ICSID Case No ARB/00/7; IIC 277 (2006), online: Investment Claims, <http://www.investmentclaims.com/subscriber_article?script=yes&id=/ic/Awards/law-iic-277-2006&recno=1&searchType=Quick&query=kenya>.
108 Ibid at para 172.
109 Supra note 98 at 15.
45
Along with scholarship advocating a wider interpretation of odiousness and such arbitral
decisions, the original concept of “odious” debt has transformed into “illegitimate” debt. It is
held that debt is legitimate only when incurred by democratically elected governments abiding
by all international human rights norms, and only to the extent such debt actually benefits the
citizens of the state.110 However, this approach assumes the legitimacy of the systems through
which debt is incurred. That is, it assumes the legitimacy of the global capital markets – an
assumption subsumed under the general presumption that all sovereign debts must be repaid.
Generally, international law requires a successor government to honour the public debt incurred
by predecessor regimes.111 Many creditors lend to governments without regard to their
legitimacy, and successor governments typically repay the loans. For example, South Africa is
repaying apartheid-era debt, assuming that repudiation would negatively affect its access to the
capital markets.112 Given that successor governments to odious regimes do not repudiate odious
debts, an alternative is needed – one in which creditors will not originate debt if that debt could
be repudiated by successor governments without loss of access to credit. It has been shown that
under such equilibrium, potential dictators might in fact be dissuaded from overthrowing
representative governments.113
110 Ibid at 8.
111 Vikram Nehru & Mark Thomas, “The Concept of Odious Debt: Some Considerations” in Carlos A. Primo Braga & Dörte Dömeland, eds, Debt Relief and Beyond: Lessons Learned and Challenges Ahead (Washington, DC: The World Bank, 2009) [Braga, “Debt Relief”] at 206.
112 As President of South Africa, Nelson Mandela and the African National Congress were pressured not to renounce apartheid-era debt and the government distanced itself from calls to repudiate that debt based on the doctrine of odious debt, as it was considered important not to default on debts in order to attract critical foreign investment. See Robert Howse, “The Concept of Odious Debt in Public International Law” (2007) United Nations Conference on Trade and Development Discussion Paper No. 185, online: UNCTAD <http://www.unctad.org/en/docs/osgdp20074_en.pdf> at 13.
113 Supra note 99.
46
5.1.3 Implementation
The doctrine of odious debt remains a minority view among legal scholars.114 First, whether or
not international law recognizes the doctrine is controversial.115 If odious debt is to be
considered law, it would be customary international public law.116 This would require that the
doctrine be applied in practice by states consistently over time.117 Like many concepts in
international law, odious debt has been shaped by multiple normative sources: formal concepts
of sovereignty and statehood, notions of political justice and accountability, ideas of fair dealing
and equity in contractual relations. While odious debt has been used by a handful of states,118
there has been no consistent use by states over time, nor has the doctrine established the
subjective element (opinio juris) of customary international law through state pronouncements
such as official statements, laws, or treaties.119 There are further difficulties in international law.
An expanded definition of odious debt requires that, at the time at which the loan contract was
made (or, in the case of bonds, when the notes were purchased), the creditor knew or ought to
have known that the funds were intended for purposes contrary to the interests of the population.
Not only is proving subjective knowledge of this kind a difficult proposition, but there is also no
obvious international legal rule that establishes an appropriate standard for creditor behaviour in
this respect.
114 Ibid at 83. 115 Supra note 97 at 34. 116 Gelpern, “Odious, Not Debt”, supra note 87 at 105. 117 Statute of the International Court of Justice annexed to the Charter of the United Nations, 26 June 1945, art. 38(1)(b). 118 The repudiation by the US of Cuba’s debts with Spain is a significant example of debt cancellation based on the doctrine of odious debt. Those debts were incurred by Spain to finance its operations in Cuba during the Spanish-American War of 1898. Other examples include Mexico’s refusal in 1867 to assume Austria’s debts, which were contracted to strengthen its power over Mexico; the UK’s refusal in 1902 to assume the debts of the Boer Republics, which were contracted to finance their war against Britain; and the refusal of Germany to assume Polish debts after World War I. See supra note 97 at 34-5. See also Buchheit, "Dilemma”, supra note 96 at 1212-13.
119 Supra note 111 at 208-09.
47
Next, as a matter of political feasibility, it is questionable whether consensus in the international
community could easily be achieved where such political judgments about existing regimes and
their capacity to participate in international economic relations. Odious debt’s failure to gain
popularity is also partly due to the concern that the concept could prove a slippery slope:
countries might declare even legitimate debt as odious in order to renege. Further, in models of
the doctrine that call for an independent adjudicating body with the power to declare debt void,
such a body could nullify legitimate debt if it placed a high value on the welfare of a particular
debtor country.120
The objective of ensuring that a government uses the proceeds of its debt issuances (or external
loans) for the benefit of their country’s citizens is laudable. Policies promoted by civil society
organizations probably do little to reduce the costs of defaulting on illegitimate loans, but the ex
ante approach does offer a viable solution to the problem of borrowing for illegitimate purposes.
The approach would also minimize the impact on non-odious governments, thereby creating
minimal distortion to global sovereign debt management. However, an odious debt framework is
not a costless solution. An odious debt framework could, if implemented, have a dampening
effect on certain states undertaking development projects, if there is fear in the market that the
state government might be declared odious. Such a chilling effect would clearly be counter-
productive for an approach to sovereign debt finance aimed squarely at facilitating sustainable
development in developing countries.
Finally, even an effective ex ante odious debt regime would not obviate the problem of
fungibilty. That is, debt provided for a non-odious purpose may indirectly contribute to odious
purposes, in that the sovereign is enabled to free other funds that would otherwise be needed for
non-odious purposes and put them to odious purposes.121 This militates in favour of a system
whereby the entirety of a state’s future debt is odious, rather than one that is applied on a case-
by-case (debt-by-debt) basis. However, it should be borne in mind that a state that is cut off
from the external loan market or from issuing debt into the bond markets because it is deemed
120 Supra note 99 at 82. 121 Supra note 112 at 18-9
48
odious, might simply extract available internal resources more ruthlessly, exacerbating domestic
problems. Clearly, the economic costs of odious debt are not trivial and, as such, call for further
and better consideration by stakeholders in the sovereign debt debate.
The problem of debt incurred by odious regimes to finance morally repugnant activities is as
ancient as the sovereign debt market. The problem has yet to be solved and the doctrine of
odious debt might not be the solution, for it is not without definitional vagueness, legal
complexity, and political impracticality. However, the concept is valuable in its contribution to
the ex ante approaches to stabilizing developing countries’ debt capital markets. The readily
available alternatives of loan sanctions in conjunction with contractual solutions to creditor
coordination achieve a similar financial outcome.
5.2 Loan Sanctions
Low income, heavily indebted countries have benefitted significantly from debt relief programs
promulgated under the HIPC: by 2009, they had proffered debt relief of USD 117 billion in
nominal terms for 35 countries, which lead directly to a decrease in debt their servicing payments
and an increase in pro-poor growth programs.122 The debt relief movement rests on the argument
that debt impoverishes poor countries, preventing growth,123 and debt relief can have immediate
and positive impact on economic growth. Notwithstanding the sincerity of motives underlying
debt relief for the world’s poorest states and the economic impact debt cancellation can provide,
the fundamentals that lead to the accumulation of unsustainable debt burdens remain unaffected.
Debt forgiveness fails to address a root cause of the problem: over-lending. Further, while
donors grant debt relief to countries under the various HIPC policy initiatives, countries with
122 Dörte Dömeland & Carlos A. Primo Braga, “Introduction” in Braga, “Debt Relief”, supra note 110 at 1.
123 Joseph E. Stiglitz, Making Globalization Work (New York: W.W. Norton & Company Ltd., 2006) at 227. However, the link between debt relief and growth is tenuous; it is also arguable that because money is fungible, debt relief enables governments to spend more on good and bad things alike. To bolster this argument, scholars like William Easterly point to debt relief clients such as Angola, Ethiopia and Rwanda who all have heavy military spending programs: see William Easterly, The Elusive Quest for Growth (Cambridge, MA: The MIT Press, 2002) at 22.
49
debt obligations incurred by arguably illegitimate predecessors are not eligible for such debt
relief.124 Thus, the debt relief movement has also come to rest on the doctrine of odious debt.
The doctrine traditionally focused on the circumstances under which a successor state could
avoid the obligation to pay the debts incurred by a predecessor state, particularly where
succession occurred after civil wars, revolutions, or other contests for control of government.
Joseph Stiglitz suggests shifting the onus of relieving states of debt overhang from debtors to
lenders,125 thus moving the focus of debt relief from effect to source. However, it is facile to
assert that “[l]enders should make sure that any loan is limited to the amount the country can
repay”126 because institutional lenders are, by definition, profit-maximizing and encourage
indebtedness because it is profitable. As a solution, Stiglitz proposes international bankruptcy
law, as described in section 3, to solve the need for a systemic, transparent way of restructuring
debt and establishing debt forgiveness criteria.127 However, international bankruptcy laws alone
would not necessarily align creditors’ and debtors’ incentives to curtail over-lending.128 It might
be more effective to align creditor and debtor interests within the loan markets at the source of
the debt. One tool within this market that receives little attention is the loan sanction.
While the application of odious debt to ex ante approaches has been proposed in the realm of
traditional lending, this approach could equally be extended to cover sovereign bonds. States
participating in the sanctions would disallow assets held abroad by legitimate successor
governments from being seized to enforce repayment of this debt. The courts of participating
countries would not enforce these contracts.
124 Ibid.
125 Ibid at 216.
126 Ibid at 228.
127 Ibid at 233.
128 Financial innovation can help align lender and debtor incentives: Argentina’s GDP bond ties interest payments to economic growth, incentivising creditors to encourage the state’s economic growth. However, no matter how ingeniously a debt product might be tailored, the sovereign debt capital markets are not necessarily accessible by the world’s poorest countries, nor does it address the mounting loans that create debt overhang.
50
For loan sanctions to work, a declaration would need to be made that successor governments to a
named regime would not be bound by that regime’s debt obligations incurred post-declaration.
The hope is that such a declaration would prevent illegitimate debts from being incurred. A
declaration that encourages successor regimes to renounce odious debts would serve to
discourage foreign lenders and bond investors in the first place. The deterrence effect would
affect investors, whether or not they signed on to the declaration, as expected likelihood or
repayment should decline. While some lenders and investors might issue loans and purchase
bonds no matter what, the ex ante approach would still help successor governments repudiate
illegitimate debt by eliminating much of the reputational risk associated with such a decision.
5.2.1 Debt Management & Diplomacy
Whereas most financial sanctions impose legal penalties on entities that transact with the
sanctioned regime at the time of the transaction, the ex ante loan approach does not operate by
penalizing firms at the time they enter into illegitimate contracts. Rather, states declare that they
will not punish successors to illegitimate regimes for refusing to recognize illegitimate debt
obligations. If all countries whose law is customarily used to adjudicate debt contracts (usually
English law and New York law) subscribe to such a declaration, a creditor that lends or investor
that purchases bonds in defiance of the declaration would encounter difficulty enforcing the
terms of the contract; seeking to enforce the debt obligation, the courts would find the contract to
be void and, therefore, unenforceable. A creditor could always seek enforcement in another
legal system, but there would be significant uncertainty as to how and, indeed, whether the debt
contracts would be enforced.
Stiglitz recognizes that loan sanctions can be more effective than trade sanctions129 and indeed, a
declaration that contracts are not binding on successor regimes has at least two advantages
relative to trade sanctions. Trade sanctions are often ineffective because they create incentives
for evasion by third parties. Further, they often harm the population of the target country as
much as the targeted regime. Loan sanctions, particularly when applied against regimes that are
129 Supra note 123 at 230.
51
repressive and corrupt, can potentially overcome these problems. By declaring ab initio that
future loans to sanctioned regimes are illegitimate, lending states would discourage repayment of
odious debt and, in turn, discourage lending to sanctioned regimes.130 Ex ante loan sanctions
would be self-enforcing by putting states on notice that future loans would be considered the
responsibility of that regime and could not be transferred to successor governments. However,
loan sanctions would not shut out legitimate regimes from accessing the markets, thus addressing
calls to deal with the problems of both over-borrowing and over-lending.
While some states have made moves to rein in loans and investments in particular countries,
there is no public sign of a multilateral effort to produce a unified approach to odious debt. Loan
and debt sanctions are an additional tool that might be especially effective where trade sanctions
fail (such as in 1985 when the United Nations Security Council imposed trade sanctions on
South Africa, but the apartheid regime continued to borrow from private banks throughout the
1980s)131. In such situations, loan sanctions might present an effective tool to prevent the
development of debt overhang and, as such, may be worthy of experimentation. In both the loan
and bond markets, a reduction in funding to odious regimes could have negative short-term
effects similar to those created by trade sanctions. However, the loan sanctions could deliver
long-term benefits to citizens by reducing the country's debt burden, thus ensuring that sovereign
debt is managed sustainably. The prospect of sustainable growth and development outweighs
any short-term hardship from less money flowing into the country.
5.2.2 Ex post Benefits of an Ex Ante Approach
Presumably, where repayment of debt obligations by a successor government is uncertain,
investors will seek compensation for the risk. Thus, the potential loss of a flow of future profits
to the lender would be priced into the cost of bond spread (or loan interest rate). The higher the
130 Similarly, states could disallow the enforcement of odious debt by refusing to permit seizure of assets. Suppose a body that has the power to prevent seizure of assets to enforce repayment of certain loans receives utility from repaying creditors, and utility from spending money on social programs for citizens. It has been shown that decision-maker’s acting ex ante, would not allow odious loans and also incentivise lending when it benefits the population – that is, when the government is not odious. 131 Supra note 112 at 13.
52
probability of regime change, the wider the spread (or higher rate) creditors will require. At a
point, the risk of regime change will be so high that creditors will not lend and the market for
sovereign debt will dry up. Thus, loan sanctions should work no matter the length of an odious
regime remains in power. In fact, given that loan sanctions encourage the pricing of risk into the
relevant interest rate, an odious regime should be worse off even if it continues to receive loans
throughout its term. However, this might not apply to all odious regimes. Perversely, bonds
issued by the most ruthless of odious regimes, which might be stable from the perspective of
market participants, would be more attractive investment that bonds issued by odious regimes
that wield power more ineffectively.
Still, loan sanction theory can positively inform other areas of the sovereign debt markets and
developing states. Governments participating in enforcing loan sanctions could also condition
foreign aid to a successor government on its not making payments to fulfill illegitimate contracts.
This is an extension of the research of economics professors Seema Jayachandran and Michael
Kremer, which suggests that ex ante declarations can discourage potential odious lenders without
unravelling the debt capital markets. They hypothesize that loan sanctions can eliminate the
penalty a country faces for repudiating debt incurred by a sanctioned regime. Further, creditors
would anticipate this event and therefore would not issue loans to a sanctioned regime in the first
place.132 This reasoning is equally applicable to institutional investors investing in sovereign
debt.
Jayachandran and Kremer hypothesize that loan sanctions imposed on an odious regime can also
be welfare-improving for the population of that country relative to the population’s welfare
under an equilibrium in which the odious government is not sanctioned and borrows
indiscriminately. This suggests that an advantage of ex ante loan sanctions, relative to trade
sanctions, is the impact on the welfare of the target country’s citizens. A state’s population bears
a smaller debt burden when a loan sanction is in place, because it would not have to repay odious
debt that is outstanding when the dictator is toppled.133 As discussed, a declaration that contracts
132 Supra note 99 at 90-1.
133 Ibid at 90.
53
will not be considered transferable to future governments should restrict the regime’s access to
the international capital markets in the short term. While this might have an impact on the state’s
citizens through the state’s reduced investment, it offers the benefit of not having to repay in the
long term. Where financing disproportionately benefits a small, exploitive minority, the benefit
of not having to repay the debt will presumably outweigh the cost of forgone investment and the
state’s population will be better off in the long run.
5.2.3 Overcoming Challenges
The flexible concept of odiousness renders it inherently difficult to determine what criteria
should dictate whether a state is deserving of loan sanctions. Rather than being adopted
overnight, it is more likely that loan sanctions would be imposed against future odious regimes,
from which a general policy could evolve.134 A wide body of internationally agreed norms and
treaties provide some basis for decision-making. Sanctions could be used against regimes that
use military coercion, abuse human rights, suppress democratic freedoms or demonstrate
widespread mismanagement of funds. Other standards would develop through subsequent
normative discourse and negotiation, expanding and clarifying the criteria to use loan sanctions.
Re-examining (and lifting) sanctions once a regime makes significant improvements to such
conditions would be difficult, given it introduces a subjective legitimacy standard. However, the
ex ante imposition of sanctions would require a more open discussion, thereby leading to a less
political decision than the ex post subjective determination of whether past sovereign debt
constitutes odious debt and should be forgiven.
Next, there is the question of who declares that contracts are non-transferable. What
international body has sufficient legitimacy to impose sanctions, especially considering the
multiplicity of institutional investors and the fact that the debt obligations will undoubtedly have
been traded in the secondary markets? In the absence of a multilateral body, it is a normative
question as to which states would need to be involved in order to plausibly deter financial flows
to sanctioned regimes and lend the ex ante approach legitimacy. With regard to who could
134 Ibid at 91-2.
54
implement the declaration, the answer depends on the penalties faced by a successor government
that chooses not to uphold contracts.
It may be difficult to achieve consensus among states; where any major state does not make an
ex ante declaration, the target regime could effectively be protected from other states’ loan
sanctions. Firms in countries that do not support the declaration may still curtail their behaviour
for self-interested financial reasons. Recall that the UN Security Council imposed trade
sanctions on South Africa’s apartheid regime in 1985, while the state continued borrowing from
private banks throughout the 1980s.135 However, given that loan sanctions will increase risk and,
therefore, bond spreads, a country pursuing contracts with an illegitimate government primarily
for commercial reasons might find these contracts less attractive if other governments do not
consider a successor government to be bound by them. Further, in contrast to traditional trade
sanctions, even if lenders and investors continue to do business with a regime that is subject to
loan sanctions, the people of the country benefit later on. When a successor government takes
over, it will be encouraged to repudiate the remainder of the contracts (that is, not repay loans
and renegotiate asset-sale contracts on better terms), which will benefit the people of the country
financially.
While eliminating creditors’ ability to seize assets would not necessarily eliminate lending to a
sanctioned country, it could coordinate players so that the lending does not in fact take place.
Given that the UK and the US host the majority of sovereign debt contracts, it has been argued
that a declaration by those countries would be sufficient to materially improve the bargaining
positions of successor regimes that wished to renegotiate these contracts and thus to weaken
firms’ commercial incentives to enter into the contracts.136 If, for example, the US, the EU,
Japan, and the United Nations Security Council all imposed loan sanctions on an odious regime,
it is plausible that this would help coordinate creditors and debtors on an equilibrium in which
135 Supra note 99 at 82-3. However, this potential collective action problem did not diminish the political role that trade sanctions played, nor do these problems take away from the similar role that loan sanctions could play.
136 See Center for Global Development, “Preventing Odious Obligations: A New Tool for Protecting Citizens from Illegitimate Regimes” (2010), online: Center for Global Development <http://www.cgdev.org/content/publications/detail/1424618>.
55
loans to the dictator would not be repaid, and therefore would not be extended in the first
instance.137
While making decisions regarding debt legitimacy ex ante does address potential time
consistency problems, it cannot address the problem of political bias – either for or against the
odious regime by the decision maker.138 The decision to impose sanctions would always be a
political matter, and an ex ante approach could not eliminate the need to make subjective
determinations of state legitimacy. This is a less political task than the current approach of
making ex post judgements of regimes, but the problem of bias remains with ex ante approaches.
Given that countries could declare legitimate debt odious in order to renege, models to
implement the doctrine call for an independent adjudicating body with the power to declare debt
void. The problem of institutional bias in such independent body could also be anticipated and
curtailed “by requiring a supermajority of the deciding body’s members to prevent seizure of
assets. With a supermajoritarian voting rule, if members’ biases are not completely correlated,
the decisive voter would be less biased.”139
For the ex ante loan sanction approach to function, declarations of illegitimacy would also have
to be generally accepted domestically. Successor regimes would have to consider contracts
signed under the predecessor government to be illegitimate. Empirical studies suggest that this is
not assured. Successor governments, concerned about their reputation, tend to accept
responsibility for debt, independent of the nature of the preceding regime.140 Failure to repay
137 Supra note 99 at 90. 138 Ibid at 90-1. 139 Ibid.
140 Ibid at 85-6. For example, Daniel Ortega, leader of the Sandinista government that succeeded the government of Anastasio Somoza in 1979, told the United Nations General Assembly that his government would repudiate Somoza’s debt (of which between USD 100 and USD 500 million was said to have been looted) but he reconsidered when Cuban allies advised against alienating Nicaragua from Western capitalist countries.
56
debt hurts a country’s reputation, and a country values its reputation for reasons that go beyond
access to credit.141
Notwithstanding these problems, it is important to note that loan sanctions could be a valuable
addition to the toolkit of international diplomacy and development and, therefore, are worthy of
further experimentation. Despite significant debt relief provided to a set of developing countries
through the HIPC Initiative, the hope that debt relief would translate into significantly more
resources (and, thus, economic growth) appears not to have been realized.142 Assuming that the
poorest countries cannot grow without reducing their debt burden,143 and that debt forgiveness
has not proven to be an entirely effective solution, the poorest states need solutions to help them
escape debt overhang. Loan sanctions fill an apparent lacuna in the debt relief and development
movements by shifting the focus of sovereign debt restructuring from its complex, technical
details to creditor motivations and behaviour. At a time of unprecedented political upheaval in
developing states emerging contemporaneously with a global financial crisis and sovereign debt
distress, such behavioural analysis could support a range of prescriptions to deal with odious
debt.
141 Harold L. Cole & Patrick J. Kehoe, “Reputation Spillover Across Relationships: Reviving Reputation Models of Debt” (1996) National Bureau of Economic Research Working Paper No. 5486, online: The National Bureau of Economic Research <http://www.nber.org/papers/w5486>.
142 William Easterly, “Debt Relief? Think Again” (2001) 27 Foreign Policy 127 at 127.
143 Supra note 123 at 225.
57
6. CONCLUSION
The recent financial crisis has seriously depressed global economic activity,144 increased
economic volatility, and heightened risks associated with unsustainable sovereign debt and
sovereign debt downgrades. Rising borrowing requirements in high income countries has
created strong competition for capital,145 particularly for low and middle-income countries that
lack diverse economies, deep financial markets, and sufficient resources to respond to the crisis
alone. Notwithstanding the remarkable resilience of many low-income economies since the
crisis, the future is uncertain. The current sovereign debt crisis in the eurozone demands an
analysis of effective debt restructuring alternatives to costly bailouts, like the IMF-sponsored
bailout of Greece. The inquiry is important not only because of the recent financial crisis and
current sovereign debt distress, but also because sovereign debt restructuring occurs constantly:
“serial default on external debt – that is, repeated sovereign default – is the norm throughout
every region in the world…”146
The axiomatic understanding that it takes multiple policy instruments to pursue multiple policy
objectives is particularly apt in the context of sovereign debt restructuring. Improving debt
management so that it can better mitigate and resolve sovereign debt crises depends on the
availability of a multiplicity of tools. The status quo calls upon too few tools to accomplish
144 The debt-stricken euro-area economy slowed in the second quarter of 2011, expanding by only 0.2 percent. Italy grew by 0.3 percent, Spain, by 0.2 percent, while France stagnated and Germany’s GDP rose by only 0.1 percent: “Economic and Financial Indicators: Overview”, The Economist (20 August 2011).
145 Phillip R. D. Anderson, Anderson Caputo Silva & Antonio Velandia-Rubiano, “Public Debt Management in Emerging Market Economies: Has This Time Been Different?” in Braga, “Sovereign Debt”, supra note 2 at 408. 146 Carmen M. Reinhart & Kenneth S. Rogoff, “This Time It’s Different: A Panoramic View of Eight Centuries of Financial Crises” (2008) 13882 National Bureau of Economic Research Working Paper, online: National Bureau of Economic Research <http://www.nber.org/papers/w13882>.
58
increasingly complicated tasks, which is not helped by the fact that changes in the sovereign debt
capital markets occur gradually.
This paper explores the two predominant legal debt restructuring alternatives to bailouts: the free
market, contractual approach and the statutory sovereign bankruptcy approach. The inability of
the former to offer a panacea and the difficulty of implementing the latter has left countries with
ad hoc, and often ineffective, responses to sovereign debt crises. The analysis reveals that the
contractual approach to debt restructuring is imperfect but effective. Recognizing that sovereign
debt defaults are costly for sovereigns and their creditors, the paper rejects traditional unanimity
clauses in favour of CACs as a partial ex ante solution that can be immediately implemented to
facilitate future debt workouts. While CACs do address holdout problems, contracts are
inadequate substitutes for the theoretical benefits of sovereign bankruptcy.
Both the contractual and bankruptcy options address the holdout problem of sovereign debt
restructuring; but the statutory approach does it more effectively. Unlike the use of CACs,
bankruptcy also helps solve the interim deficit financing problem, while providing a transparent
and predictable, legally enforceable system of first priority. The bankruptcy analysis, however,
makes a significant assumption: that states and their creditors would be bound by an international
convention. Notwithstanding the fact that states should want to ratify a convention that
addresses both holdout and funding problems, political considerations currently render the
implementation of a sovereign bankruptcy regime particularly difficult.
The volatile outlook of the global debt markets has highlighted the importance of developing and
maintaining a diverse range of financing sources and strengthening debt-management
frameworks.147 This paper demonstrates that the machinery for mitigating bond defaults and
facilitating efficient restructuring is not elusive. There is, however, scope to further develop ex
ante solutions to mitigate sovereign debt distress. The goal of this article has been to merge the
traditional solutions to sovereign debt restructuring with the theoretical approach suggested by
the doctrine of odious debt. The analysis implies a need for international law and public policy
147 Phillip Anderson and Eriko Togo, “Government Debt Management in Low-Income Countries” in Braga, “Debt Relief”, supra note 111 at 303
59
to recognize the existing complexity of sovereign obligations and to consider creditor co-
responsibility in the debt capital markets.
The rich academic discussion of the doctrine of odious debt is useful because it shifts the focus
from technical restructuring procedures to creditor motivations and behaviour. The analysis
could support a range of prescriptions to deal with odious debt, a concept whose time has come
in the current climate of developing state political unrest and global sovereign debt distress. The
odious debt debate points to a useful analytic device, but falls far short of providing a practical
policy proposal. This is the benefit of loan sanctions in ex ante crisis prevention.
Notwithstanding potential obstacles, loan sanctions are deserving of addition to the toolkit of
international law, diplomacy and development.
60
BIBLIOGRAPHY
LEGISLATION
State Immunity Act 1978, c 33.
Statute of the International Court of Justice annexed to the Charter of the United Nations, 26 June 1945.
United States Bankruptcy Code, 11 U.S.C. §§ 1101-1146.
JURISPRUDENCE
Allied Bank International v. Banco Credito Agricola de Cartago, 757 F.2d 516 (2d Cir. 1985).
Congo (Republic) v. Venne, [1971] S.C.R. 997, 22 D.L.R. (3d) 669 (S.C.C.).
Elliott Associates L.P. v. Banco de la Nacion and Republic of Peru, 194 F.3d 363 (2d Cir. 1999).
World Duty Free Company Limited v. Republic of Kenya (ICSID Case No. ARB/00/7).
SECONDARY MATERIAL: MONOGRAPHS
Addison, Tony, Henrik Hansen & Finn Tarp. Debt Reliff for Poor Countries (New York: Palgrave Macmillan, 2004).
Braga, Carlos A. Primo & Gallina A. Vincelette, eds. Sovereign Debt and the Financial Crisis, (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011).
Carlos A. Primo Braga & Dörte Dömeland, eds. Debt Relief and Beyond: Lessons Learned and Challenges Ahead (Washington, DC: The World Bank, 2009).
Easterly, William. The Elusive Quest for Growth (Cambridge, MA: The MIT Press, 2002).
Herman, Barry, José Antonio Ocampo & Shari Spiegel, eds. Overcoming Developing Country Debt Crises (Oxford: Oxford University Press, 2010).
Jochnick, Chirs & Fraser A. Preston, eds. Sovereign Debt at the Crossroads: Challenges and Proposals for Resolving the Third World Debt Crisis (Oxford: Oxford University Press, 2006).
Michalowski. Sabine. Unconstitutional Regimes and the Validity of Sovereign Debt: A Legal Perspective (Aldershot: Ashgate Publishing Limited, 2007).
Olson, Mancur. The Logic of Collective Action: Public Goods and the Theory of Groups (Cambridge, MA: Harvard University Press, 1971).
Raffer, Kunibert. Debt Management for Development: Protection of the Poor and the Millennium Development Goals (Cheltenham: Edward Elgar Publishing Limited, 2010).
Rieffel, Lex. Restructuring Sovereign Debt: The Case for Ad Hoc Machinery (Washington, DC: Brookings Institution Press, 2003).
Sachs, Jeffrey. Theoretical Issues in International Borrowing (Princeton: Princeton University Press, Princeton Studies in International Finance, 1984).
61
Schier, Holger. Towards a Reorganisation System for Sovereign Debt: An International Law Perspective (Leiden: Martinus Nijhoff Publishers, 2007).
Stiglitz, Joseph E. Freefall: America, Free Markets, and the Sinking of the World Economy (New York: W. W. Norton & Company Ltd., 2010).
---. Making Globalization Work (New York: W.W. Norton & Company Ltd., 2006).
Stiglitz, Joseph E. et al. Stability with Growth: Macroeconomics, Liberalization, and Development (Oxford: Oxford University Press, 2006).
Toussaint, Éric & Damien Millet. Debt, The IMF and the World Bank: Sixty Question , Sixty Answers (New York: Monthly Review Press, 2010).
SECONDARY MATERIAL: ARTICLES
“Economic and Financial Indicators: Overview”, The Economist (20 August 2011).
Adams, Patricia. “Iraq’s Odious Debts” (2004) 526 Policy Analysis, online: Cato Institute: <http://www.cato.org/pubs/pas/pa526.pdf>.
Aivazian, Varouj A., Michael J. Trebilcock & Michael Penny, “The Law of Contract Modifications: The Uncertain Quest for a Bench Mark of Enforceability” (1984) 22 Osgood Hall LJ 173.
Anderson, Phillip R. D., Anderson Caputo Silva & Antonio Velandia-Rubiano. “Public Debt Management in Emerging Market Economies: Has This Time Been Different?” in Carlos A. Primo Braga & Gallina A. Vincelette, eds. Sovereign Debt and the Financial Crisis, (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011).
Backer, Larry Catá. “Odious Debt Wears Two Faces: Systemic Illegitimacy, Problems, and Opportunities in Traditional Odious Debt Conceptions in Globalized Economic Regimes” (2007) 70 Law & Contemp Probs 1.
Bank for International Settlements, “Financial stability and local currency bond markets” (2007) Committee on the Global Financial System, online: Bank for International Settlements <http://www.bis.org/publ/cgfs28.pdf>.
Bank for International Settlements, Committee on the Global Financial System, “Financial stability and local currency bond markets” (2007) 28 CGFS Papers, online: Bank for International Settlements <http://www.bis.org/publ/cgfs28.pdf>.
---. “Research on global financial stability: the use of BIS international financial statistics” (2010) 40 CGFS Papers, online: Bank for International Settlements < http://www.bis.org/publ/cgfs29.pdf>.
Bank for International Settlements, Monetary and Economic Department, “BIS Quarterly Review: International banking and financial market developments” (December 2010), online: Bank for International Settlements <http://www.bis.org/publ/qtrpdf/r_qt1012.htm>.
---. “BIS Quarterly Review: International banking and financial market developments” (March 2011), online: Bank for International Settlements <http://www.bis.org/publ/qtrpdf/r_qt1103.pdf>.
Bellas, Dimitri, Michael G. Papaioannou & Iva Petra. “Determinants of Emerging Market Sovereign Bond Spreads: Fundamentals vs Financial Stress” (2010) IMF Working Paper WP/10/281, Monetary and Capital Markets Department, online: International Monetary Fund <http://www.imf.org/external/pubs/ft/wp/2010/wp10281.pdf>.
Blommestein, Hans J. “Public Debt Management and Sovereign Risk during the Worst Financial Crisis on Record: Experiences and Lessons from the OECD Area”, in Carlos A. Primo Braga & Gallina A.
62
Vincelette, eds. Sovereign Debt and the Financial Crisis (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011).
Bolton, Patrick & David A. Skeel, Jr. “How to Rethink Sovereign Bankruptcy: A New Role for the IMF?” in Barry Herman, José Antonio Ocampo & Shari Spiegel, eds, Overcoming Developing Country Debt Crises (Oxford: Oxford University Press, 2010).
---. “Inside the Black Box: How Should a Sovereign Bankruptcy Framework be Structured?” (2004) 53 Emory LJ 763.
---. “Redesigning the International Lender of Last Resort” (2005) 6 Chicago J of Int’l L 179.
Bolton, Patrick & Olivier Jeanne. “Structuring and Restructuring Sovereign Debt: The Role of a Bankruptcy Regime” (2007) IMF Working Paper WP/07/192, online: International Monetary Fund <http://www.imf.org/external/pubs/ft/wp/2007/wp07192.pdf>.
Buchheit, Lee C. & G. Mitu Gulati. “Restructuring a Nation’s Debt” (2010) 46 Int’l Fin Rev.
---. “Drafting a Model Collective Action Clause for Eurozone Sovereign Bonds” (2011) 6 Cap Markets L J 317.
Buchheit, Lee C., G. Mitu Gulati & Ashoka Mody. “Sovereign Bonds and the Collective Will” (2002) 51 Emory L J 1317.
Buchheit, Lee C., G. Mitu Gulati & Robert B. Thompson, “The Dilemma of Odious Debts” (2007) 56 Duke L J 120.
Bulow, Jeremy & Kenneth Rogoff. “Sovereign Debt: Is to Forgive to Forget?” (1989) 79 Am Econ Rev 43.
Callaghy, Thomas M. “Innovation in the Sovereign Debt Regime: From the Paris Club to Enhanced HIPC and Beyond”, The World Bank Operations Evaluation Department, online: World Bank, <http://lnweb90.worldbank.org/OED/oeddoclib.nsf/DocUNIDViewForJavaSearch/ 4BC77E9BEC2CAAFC85256E4A00536A04/$file/hipc_wp_sovereign_debt.pdf>.
Center for Global Development, “Preventing Odious Obligations: A New Tool for Protecting Citizens from Illegitimate Regimes” (2010), online: Center for Global Development <http://www.cgdev.org/content/publications/detail/1424618>.
Centre for International Sustainable Development Law, “Advancing the Odious Debt Doctrine” (2003) CISDL Working Paper, online: Centre for International Sustainable Development Law <http://www.cisdl.org/pdf/debtentire.pdf>.
Coase, R. H. “The Problem of Social Cost” (1960) 3 JL & Econ 1.
Cole, Harold L. & Patrick J. Kehoe. “Reputation Spillover Across Relationships: Reviving Reputation Models of Debt” (1996) National Bureau of Economic Research Working Paper No. 5486, online: The National Bureau of Economic Research <http://www.nber.org/papers/w5486>.
---. “Reviving Reputation Models of International Debt” (1997) 21 Federal Reserve Bank of Minneapolis Quarterly Review 21.
Council of the European Union, Press Release, “Statement by the Eurogroup” (28 November 2010), online: Council of the European Union <http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/118050.pdf>.
Das, Udaibir S. et al. “Managing Public Debt and Its Financial Stability Implications” in Carlos A. Primo Braga & Gallina A. Vincelette, eds, Sovereign Debt and the Financial Crisis (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011).
63
Das, Udaibir S., Michael G. Papaioannou & Magdalena Polan. “Strategic Considerations for First-Time Sovereign Bond Issuers” (2010) IMF Working Paper WP/08/261, online: International Monetary Fund <http://www.imf.org/external/pubs/ft/wp/2008/wp08261.pdf>.
Dömeland, Dörte & Carlos A. Primo Braga. “Introduction” in Carlos A. Primo Braga & Gallina A. Vincelette, eds, Sovereign Debt and the Financial Crisis (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011).
Easterly, William. “Debt Relief? Think Again” (2001) 27 Foreign Policy 127 at 127.
Eichengreen, Barry. “Restructuring Sovereign Debt” (2003) 17:4 Journal Econ Persp 75
Gelpern, Anna. “Banks, Governments, and Debt Crises.” in Great Decisions (2011) Foreign Policy Association, 49-60, online: Social Science Research Network <http://ssrn.com/abstract=1736100>.
---. “Domestic Bonds Credit Derivatives, and the Next Transformation of Sovereign Debt” (2008) 31 Chi Kent L Rev 147.
---. “Domestic Bonds, Credit Derivatives, and the Next Transformation of Sovereign Debt” (2008) 83 Chicago-Kent L Rev 147.
---. “Odious, Not Debt” (2007) 70 Law & Contemp Probs 101.
Gelpern, Anna & Mitu Gulati. “Innovation after the revolution: foreign sovereign bond contracts since 2003” (2009) 4 Cap Mrkts L J 85.
---. “Public Symbol in Private Contract: A Case Study” (2006) 84 Wash U L Rev 1627.
---. “Snake Oil” (2012) 75 Law & Contemp Probs [forthcoming in 2012], online: Duke Law Scholarship Repository <http://scholarship.law.duke.edu/faculty_scholarship/2362>.
G-10. “Report of the G-10 Working Group on Contractual Clauses” (2002), online: Bank for International Settlements < http://www.bis.org/publ/gten08.pdf>.
Gulati, G. Mitu & Kenneth N. Klee. “Sovereign Piracy” (2001) 56 The Business Lawyer 635 at 650.
Gulati, Mitu & Lee C. Buchheit. "Responsible Sovereign Lending and Borrowing", Paper prepared for the United Nations Conference on Trade and Development Project on Promoting Responsible Sovereign Lending and Borrowing (2010), online: UNCTAD <http://www.unctad.org/en/docs/osgdp20102_en.pdf>.
Howse, Robert. “The Concept of Odious Debt in Public International Law” (2007) United Nations Conference on Trade and Development Discussion Paper No. 185, online: UNCTAD <http://www.unctad.org/en/docs/osgdp20074_en.pdf>.
Hernández, Leonardo & Boris Gamarra. “Debt Sustainability and Debt Distress in the Wake of the Ongoing Financial Crisis: The Case of IDA-Only African Countries” in Carlos A. Primo Braga & Gallina A. Vincelette, eds, Sovereign Debt and the Financial Crisis (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011).
International Capital Markets Association, “Standard Collecting Action Clauses (CACs) for their Terms and Conditions of Sovereign Notes”, online: International Capital Markets Association <http://www.icmagroup.org/ICMAGroup/files/3c/3cc80d90-da99-4562-8ef2-f604a8e5963e.PDF>.
International Monetary Fund, “Shifting Gears: Tackling Challenges on the Road to Fiscal Adjustment” (2001) Fiscal Monitor, online: International Monetary Fund <http://www.imf.org/external/pubs/ft/fm/2011/01/pdf/fm1101.pdf>.
64
Kletzer, Kenneth M. “Sovereign Bond Restructuring: Collective Action Clauses and Official Crisis Intervention” (2003) IMF Working Paper WP/03/134, online: International Monetary Fund <http://www.imf.org/external/pubs/ft/wp/2003/wp03134.pdf>.
Kremer, Michael & Seema Jayachandran. “Make Odious Debt Too Risky to Issue”, The Financial Times (8 May 2003), online: The Financial Times <http://www.ft.com/home/us>.
---. “Odious Debt” (2006) 96 Amer Econ Rev 82.
Kruger, Mark & Miguel Messmacher. “Sovereign Debt Defaults and Financing Needs” (2004) IMF Working Paper WP/04/53.
Li, Yuefen, Rodrigo Olivares-Caminal & Ugo Panizza. “Avoiding Avoidable Debt Crises: Lessons from Recent Defaults” in Carlos A. Primo Braga & Gallina A. Vincelette, eds, Sovereign Debt and the Financial Crisis (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011).
Myers, Stewart C. "Determinants of Corporate Borrowing" (1977) 5 J of Fin Econ 147.
Nehru, Vikram & Mark Thomas. “The Concept of Odious Debt: Some Considerations” in Carlos A. Primo Braga & Dörte Dömeland, eds, Debt Relief and Beyond: Lessons Learned and Challenges Ahead (Washington, DC: The World Bank, 2009).
Oakley, David. “Bond dealers skeptical about eurozone plans”, The Financial Times, Capital Markets (29 March 2011), online: The Financial Times <http://www.ft.com/home/us>.
---. “Greek rating now worst in the world”, The Financial Times, Capital Markets (13 June 2011), online: The Financial Times <http://www.ft.com/home/us>.
Paris Club, “Annual Report 2008” (2008) at 23, online: Club de Paris <http://www.clubdeparis.org/sections/communication/rapport-annuel-d/annual-report 2008/downloadFile/file/AnnualReport2008.pdf>.
Paulus, Christoph G. “A Standing Arbitral Tribunal as a Procedural Solution for Sovereign Debt Restructurings” in Carlos A. Primo Braga & Gallina A. Vincelette, eds, Sovereign Debt and the Financial Crisis (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011).
Reinhart, Carmen M. & Kenneth S. Rogoff, “This Time It’s Different: A Panoramic View of Eight Centuries of Financial Crises” (2008) National Bureau of Economic Research Working Paper 13882, online: National Bureau of Economic Research <http://www.nber.org/papers/w13882>.
Reinhart, Carmen M. & M. Belen Sbrancia, “The Liquidation of Government Debt” (2011) Working Paper 11-10 Peterson Institute for International Economics at 2, online: Peterson Institute for International Economics <http://www.piie.com/publications/wp/wp11-10.pdf>.
Rogoff, Kenneth & Jeromin Zettelmeyer. “Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2001” (2002) IMF Working Paper WP/02/133, online: International Monetary Fund <http://www.imf.org/external/pubs/ft/staffp/2002/03/pdf/rogoff.pdf>.
Sachs, Jeffrey D. “The International Lender of Last Resort: What are the Alternatives?” (Address delivered at the Harvard Center for International Development and Galen L. Stone Professor of International Trade at Harvard University (June 1999), online: Federal Reserve Bank of Boston <http://www.bos.frb.org/economic/conf/conf43/181p.pdf>.
---. “Managing the LDC Debt Crisis” (1986) 2 Brookings Papers on Economic Activity 397.
---. “Theoretical Issues in International Borrowing,” Princeton Studies in International Finance 54 (Princeton: Princeton University Press).
65
Skeel, Jr., David A. “Can Majority Voting Provisions Do It All?” (2003) 52 Emory L J 417.
---. “Creditors’ Ball: The “New” New Corporate Governance in Chapter 11” (2003) 152 U Pa L Rev 917.
Trebecsch, Christoph. “The Cost of Aggressive Sovereign Debt Policies: How Much is the Private sector Affected?” (2009) IMF Working Paper WP/09/29.
Tumpel-Gugerell, Gertrude. “The financial crisis – looking back and the way forward”, (speech delivered at the European Economic and Social Committee and European Trade Union Confederation conference “Rien ne va plus? Ways to rebuild the European Social Market Economy” 22 January 2009), online: European Central Bank <http://www.ecb.int/press/key/date/2009/html/sp090122.en.html>.
Weidermaier, W. Mark C. & Mitu Gulati. “How Markets Work: The Lawyer’s Version” (2011) 1886435 UNC Legal Studies Research Paper at 10, online: Social Science Research Network <http://ssrn.com/abstract=1886435>.
World Bank, The. “Round Table on Conceptual and Operational Issues of Lender Responsibility for Sovereign Debt” (2008) Meeting Notes, online: The World Bank <http://siteresources.worldbank.org/INTDEBTDEPT/Resources/468980- 1184253591417/OdiousDebtPaper.pdf>.
Wright, Mark L. J. “Restructuring Sovereign Debts with Private Sector Creditors: Theory and Practice” in Carlos A. Primo Braga & Gallina A. Vincelette, eds, Sovereign Debt and the Financial Crisis, (Washington, DC: The International Bank for Reconstruction and Development/The World Bank, 2011).