International Finance and Sovereign Debt

Abstract

Sovereign borrowers differ from private borrowers. Among other differences, creditors lack strong legal enforcement rights against sovereigns, and there is also no bankruptcy to ensure a collectively-binding debt adjustment. Because of these differences, the academic literature on sovereign debt tends to downplay the relevance of law and legal techniques. In particular, the literature does not pay much attention to the terms of sovereign loan contracts. The assumption seems to be that contract terms do not matter without strong legal enforcement rights. Yet this assumption is at odds with the evidence from practice. For hundreds of years, sovereign borrowers and their lenders have negotiated detailed loan contracts as if the terms matter. Drafters have also revised loan contracts to account for changes in the political, economic, and legal climate. This chapter explores the role that contracts play in the market for sovereign debt, focusing on clauses found in sovereign bonds.