Sovereign defaults in court

Abstract

For centuries, defaulting governments were immune from legal action by foreign creditors. This paper shows that this is no longer the case. Building a dataset covering four decades, we find that creditor lawsuits have become an increasingly common feature of sovereign debt markets. The legal developments have strengthened the hands of creditors and raised the cost of default for debtors. We show that legal disputes in the US and the UK disrupt government access to international capital markets, as foreign courts can impose a financial embargo on sovereigns. The findings are consistent with theoretical models with creditor sanctions and suggest that sovereign debt is becoming more enforceable. We discuss how the threat of litigation affects debt management, government willingness to pay, and the resolution of debt crises.

Sovereign Debt in the 21st Century: Looking Backward, Looking Forward

“…A further notable success of holdout creditors Greece 2012, where almost half of the holders of foreign-law Greek bonds refused to participate in the debt restructuring and were fully repaid instead (see Figure 15). But Argentina and Greece are not outliers, as shown in Schumacher, Trebesch, and Enderlein (2018) and Fang, Schumacher, and Trebesch (2020). Legal threats and holdout tactics played a significant role in almost all recent debt crises, including in Ukraine 2015 and in the ongoing defaults of Lebanon and Venezuela (see also Buchheit and Gulati 2017).…”

“…Legal scholars have long emphasized that domestic defaults are easier to resolve, mainly because bonds issued under local law can be amended by an act of parliament, as happened in Greece 2012 (Buchheit and Gulati 2018). 54 There is no such "local law advantage" for debt issued in foreign jurisdictions, where creditors are protected by the rule of law abroad and have more options for legal enforcement via courts (see Section 9 as well as Chamon, Schumacher, andEnderlein 2018). Beyond the legal realm, governments can also exert "moral suasion" on their domestically regulated banks and institutions, meaning they can pressure them into purchasing domestic sovereign debt or into accepting a debt exchange offer.…”

“…For example, creditorfriendly judgments in the Argentina lawsuit caused a significant decline of Argentine bond and stock prices (Ahmed andAlfaro 2017, Hebert andSchreger 2017). In addition, Schumacher, Trebesch, and Enderlein (2018) show that litigation is associated with a loss of market access for debtor countries. Since the early 2000s, no sovereign was able to tap international bond markets while at the same time facing the legal threat of asset seizures through foreign courts.…”

Foreign-Law Bonds: Can They Reduce Sovereign Borrowing Costs?

“…More recently, the Austrian government retroactively inserted CACs into the bonds of an Austrian wind-down entity. Randl and Zechner (2016) estimate that following this legislative action, the spread between domestic and foreign-law bonds 1 See IMF (2013); Frankel (2014); Hébert and Schreger (2017); Schumacher et al (2018) 2 Greek law no.…”

From Health Crisis to Financial Distress

“… See Pitchford and Wright (2012),Fang et al (2021),Schumacher et al (2021).29 For examples of one-time successful restructurings, seeCruces and Trebesch (2013) and the update inAsonuma and Trebesch (2016).…”