Towards Corporate Equity in Sovereign Debt Finance

Abstract

Sovereigns are unique market participants in the global financial system, and sovereign debt markets largely operate in a legal and regulatory void. As a result, sovereign finance is a laboratory for contractual and institutional design, which raises unique challenges and opportunities. This Article adds an important and timely perspective by examining the concept of equity in sovereign debt finance. Governments, unlike corporations, rely almost exclusively on debt to finance their investments and operations. GDP-linked securities, which provide interest payments indexed to the sovereign issuer’s rate of growth, are sovereign debt instruments with certain equity-like characteristics. This Article considers whether innovation towards sovereign equity can help mitigate problems associated with sovereign debt crises. To address this question, we analyze the use of GDP-linked securities in recent sovereign debt restructurings by Argentina and Greece. Drawing on this analysis, we explore more broadly the legal implications of sovereign equity, and conclude that these applications offer opportunities to help manage sovereign finance in the absence of international financial regulation.