What Explains Sovereign Debt Litigation?

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. What Explains Sovereign Debt Litigation? Terms of use: Documents in AbstractWe study the occurrence of holdout litigation in the context of sovereign defaults. The number of creditor lawsuits against foreign governments has strongly increased over the past decades, but there is a large variation across crisis events. Why are some defaults followed by a "run to the courthouse" and others not? What explains the general increase in lawsuits? We address these questions based on an economic model of litigation and a new dataset capturing the nearuniverse of cases filed against defaulting sovereigns. We find that creditors are more likely to litigate in large debt restructurings, when governments impose high losses ("haircuts"), and when the defaulting country is more vulnerable to litigation (open economies and those with a low legal capacity). We conclude that sovereign debt lawsuits can be predicted reasonably well with a simple framework from the law and economics literature.JEL-Code: F340.

Hidden Holdouts: Contract Arbitrageurs and the Pricing of Collective Rights

“…When a country is close to default, contract terms that make it more (or less) likely that holdouts will be able to block a restructuring for the specific bond can provide substantial positive (or negative) value to the holders of that specifc bond. As described earlier, the large and disproportionate recoveries that holdout specialists have obtained via the exercise of contract terms in the recent restructurings of Argentina and Greece are vivid examples of this -something that the broader data bears out (Schumacher, Trebesch & Enderlein 2015& 2018a.…”

“…Hence, scholars examining the question of sovereigns' inclinations toward default could put aside the risk of legal enforcement as a consideration (e.g., Aguiar & Amador 2014). This changed in the mid 1970s when the leading jurisdictions issuing sovereign bonds, the US and the UK, passed sovereign immunity laws that allowed sovereigns acting in a commercial capacity to be sued in the same fashion as other commercial actors (Schumacher, Trebesch & Enderlein 2015& 2018a. Today, as the successes of holdout creditors in the restructurings of Argentina…”

Pre-emptive sovereign debt restructuring and holdout litigation

“…Litigation fails with probability 1 − φ, in which case the holdout creditor receives nothing. Following Schumacher et al (2015), φ can be interpreted as a measure of the strength of creditor rights. Holdouts are costly for the economy and reduce output by the fraction f (µ) ∈ [0, η], where µ is the ratio of holdout creditors to all bondholders.…”

“…Our work is related to the literature on creditor litigation in sovereign debt, notably Haldane, Penalver, Saporta, and Shin (2005), Engelen and Lambsdorff (2009), Pitchford and Wright (2012), Bai and Zhang (2012), and Schumacher, Trebisch, and Enderlein (2015). But these papers focus on the ex post renegotiation stage rather than the ex ante implications for sovereign borrowing and the design of the bankruptcy framework.…”

Financial Disputes in International Courts

“…The same argument applies to sovereign debt or contractual disputes even though they are often initiated by a wider and more dispersed group of claimants. 102 It is inevitable that, in these situations, creditors will look to international courts as a way to bypass the limitations of domestic law.…”