Providing credibility around the world: effective devices of the Cape Town Convention

Abstract

This paper analyzes the characteristics and effects of the Cape Town Convention, which provides legal protection for investors in relation to asset-based aircraft financing. Some countries lack credibility for investors, who believe that the protection level of creditor rights in the country differs before and after investment. This time inconsistency problem results in credit rationing. Airlines in such countries cannot access the credit market, particularly the international capital market. This paper first examines why developing countries have been suffering from a lack of credibility and from credit rationing, and then explores how the Convention resolves this problem. We focus on two devices: the white list system and the system of declarations. The former gives the contracting states incentive not to break the Convention. The latter is considered to promote the ratification of the Convention by potential contracting states. These devices enable the Convention to attract a number of states.