Abstract
Sovereign debt is widely regarded as non-enforceable and immune from legal action. This paper takes a different perspective and builds a comprehensive new dataset on creditor lawsuits filed against defaulting sovereigns since 1976. The data show a drastic rise of sovereign debt litigation. In recent years, almost 50% of sovereign defaults involved legal disputes abroad, compared to just 5% in the 1980s. Our case studies and econometric results also indicate significant externalities outside the courtroom: litigation is associated with (i) a loss of access to international capital markets, (ii) a decline in international trade, and (iii) delays in crisis resolution. We conclude that the legal consequences of sovereign defaults are much greater than commonly thought. This is consistent with theoretical models with sanctions and creditor retaliation.
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