Sovereign default as trigger of responsibility

Abstract

This chapter explores whether defaults on sovereign bonds or sovereign debt restructurings trigger the defaulting country's international responsibility. This chapter examines four specific treatment standards: most-favoured nation (MFN) treatment, national treatment, expropriation, and fair and equitable treatment. It is important to keep in mind that these treatment standards differ across individual BITs. Most-favoured nation and national treatment The national treatment and MFN clauses in BITs allow bondholders to assert discrimination based on nationality. National treatment clauses could oblige the issuing country to grant the same treatment to covered foreign bondholders as to its domestic bondholders, or to all creditors more generally. MFN clauses could allow foreign bondholders to benefit from more-favourable privileges granted to third-country bondholders. Modern sovereign bonds are atomised debt instruments. Countries will often know neither the identity nor the nationality of their bondholders. When a sovereign debt restructuring becomes necessary, this informational constraint is often severe. Discriminating between domestic and foreign bondholders was easier when nationals of the issuing country bought mainly domestic bonds and foreign citizens bought mainly external bonds. Yet this division has become less clear-cut over time. Even if a country desired to treat its bondholders unequally, purposeful discrimination against foreign bondholders within a single bond issue, while not impossible, is difficult in practice.