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1 Theoretical Underpinnings of Sovereign Debt

From: Sovereign Defaults Before Domestic Courts

Hayk Kupelyants

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2021. All Rights Reserved.date: 25 September 2021

Debt — Sovereign debt

(p. 11) Theoretical Underpinnings of Sovereign Debt

I.  Introduction

1.01  The status of sovereign debt has been and is likely to remain the subject of intense debates so long as there are impecunious governments. And that is for a good reason: how one conceptualises the nature of sovereign debt informs the attitude towards sovereign debt restructurings and litigation. While generalisations cannot do justice to the peculiarities of particular sovereign debt disputes, the determination of the character of sovereign debt and sovereign debt restructurings fosters a more consistent and foreseeable resolution of sovereign debt disputes.

1.02  The legal rules governing specifically sovereign debt restructurings are predominantly non-existent or, at best, in an inchoate form. Many issues are worryingly left to the pragmatic and ad hoc resolution by practitioners and to the interplay of bargaining powers, politics, and concatenation of events. It would not be an over-exaggeration to claim that no coherent framework exists to resolve sovereign debt crises. Against this background, properly conceptualising the nature of sovereign debt is especially important.

1.03  That said, the determination of the status of sovereign debt is by no means sufficient in and of itself to yield an all-embracing jurisprudential conception of sovereign debt litigation. However, an abstract evaluation of the nature of sovereign borrowing is crucial for the analysis of certain choices of law and substantive issues implicated in sovereign debt litigation that will be the focus of this book.

1.04  In what follows, this chapter sets out the theoretical underpinnings of sovereign borrowing and litigation. It first examines the dual nature of sovereign bonds and their restructurings that may be characterised as either private or public, and as either bilateral or multilateral. The chapter then analyses to what extent broader public policy arguments may successfully be adduced in sovereign debt litigation. The chapter also considers the extent to which the concept of insolvency can meaningfully be (p. 12) extrapolated to sovereign bankruptcies and whether the considerations of international comity may be adduced in sovereign debt litigation. Lastly, the chapter considers the role of financial markets as the regulators of sovereign debt disputes.

II.  Characterisation

1.  Commercial Character of Sovereign Debt Issuance

1.05  Long gone are the days when sovereign bonds were mere ‘engagements of honour’.1 The current understanding is that the creditor advancing funds to the State should not be left to the whims of the sovereign.2 Revealingly, the choice of ‘neutral’ laws (almost invariably English and New York laws) to govern sovereign bonds and the demise of absolute immunity of States furnish foreign bondholders with direct legal remedies against the sovereign debtor in default.3

1.06  Nowadays few would contest the binding nature of (valid) sovereign debt, except for the doctrine of odious debt.4 To do so would strike at the heart of the whole system of international finance. Yet, vestiges of the concept of sovereign debt as a mere ‘engagement of honour’ linger in the idea that the sovereign debt contract is somehow a contrat aléatoire,5 in a sense that, by simply lending to a sovereign, the creditor accepts the inherent risk of the debt being either reduced or repudiated.6 For many, the aléatoire character of sovereign debt flows either from the limited capacity that a bondholder has to enforce one’s legal rights through legal remedies,7 or from the legislative powers that a sovereign debtor enjoys to repudiate or (p. 13) at least modify its debt.8 A rising number of scholars claim that sovereign debt is, or at least should be, a ‘contingent claim’ or an ‘equity-like instrument’, essentially justifying the State’s default.9

1.07  After the initial hurdle of treating sovereign debt as binding is overcome,10 two conflicting strands emerge in the characterisation of sovereign debt. Sovereign debt may be conceptualised as a public instrument issued by the State in the exercise of governmental authority or, at the least, exhibiting features of a governmental act. In the alternative, sovereign debt may be considered a substantively commercial transaction designed to raise funds, irrespective of the identity of the issuer. Each of the two has its own undeniable merits, given the inherent conflict generated by a public entity’s recourse to private sources of funding.

1.08  The antinomy of the public/private character of sovereign debt has amply been debated in scholarly literature. In the nineteenth and most of the twentieth centuries, sovereign debt was predominantly treated as a sacred instrument through the medium of which the State undertook to raise public funds in addition to the taxation of its residents.11 Watrin claimed that sovereign debt is a ‘regulatory contract’ and sovereign debt litigation should be grounded in the principles derived from constitutional or administrative litigation.12 More recently, others have claimed that sovereign debt restructurings are an exercise of international public authority, the implication being that they should be treated with high deference by international tribunals and national courts.13

1.09  Others wholeheartedly support the private character of sovereign debt.14 For them, sovereign debt is no different from private debt and should be subject to essentially the same commercial law regime as governs the debt of private debtors.

(p. 14) 1.10  In pursuit of the middle ground, Borchard maintained that sovereign bonds are sui generis instruments which share private and public features.15 Despite its apparent appeal, such a qualification would arguably prove unsatisfactory in practice, for it blows both cold and hot. If the sui generis character of bonds is affirmed, then the question is in what circumstances should the private or public side prevail over the other side and whether such a determination would not be arbitrary in most, if not all, cases. For normative (not merely descriptive) purposes, a court would need to determine the dominant character of sovereign bonds.

1.11  Treating sovereign debt as an amalgamation of conflicting elements of public and private may give rise to a cognitive dissonance for the adjudicators. Conversely, establishing the nature of sovereign debt—as either private or public—enables the judges to solve ‘hard’ cases arising in sovereign debt litigation. Certainly, this might come at the expense of ignoring the other side of sovereign debt issuance, but this seems unavoidable. Sovereign debt does not possess the miraculous wave-particle duality of light, which can manifest as a wave and a particle at the same time.

1.12  Over time, the status of sovereign debt has undergone a paradigm shift. Wrought by the liberalisation of financial markets and the acknowledgement of an equal standing for private bondholders, the debt that a sovereign may incur is now treated as an essentially private transaction in all of its manifestations. Judge Guillaume has neatly summarised the historical development:

Les dettes souveraines créaient au 19 ème siècle des obligations d’un caractère très particulier du fait qu’elles émanaient d’Etats souverains. Elles étaient d’abord des dettes «souveraines». Au 21 ème siècle, il s’agit avant tout de «dettes», que l’on a fréquemment tendance à traiter en droit comme n’importe quelles autres dettes. Mais de nombreuses incertitudes demeurent et il est difficile de prévoir jusqu’où ira cette évolution de la jurisprudence.16

In the nineteenth century, the sovereign debts created very specific obligations since they emanated from sovereign States. They were ‘sovereign’ debts in the first place. In the twenty-first century, what matters is that they are ‘debts’, which are treated in law as any other type of debt. But several uncertainties persist, and it is difficult to predict where this evolution will stop. [Author’s translation]

1.13  The law applicable to the characterisation of sovereign debt. Although the character of sovereign debt is a jurisprudentially intriguing dilemma, properly understood, the issue falls to be determined by the legal system applicable (p. 15) to the sovereign debt. As the discussion below demonstrates, in the cases where English or New York laws govern the reciprocal rights and obligations of parties arising under a sovereign bond, these jurisdictions qualify sovereign bonds as a private, commercial transaction.

1.14  Pursuant to this logic, the characterisation that the law of the sovereign debtor might foist on the debt subject to a foreign law is largely irrelevant. Conversely, should the competent court conclude that the domestic law of the sovereign debtor governs sovereign bonds, the characterisation of the sovereign debt under the sovereign’s domestic law would be conclusive for the determination of substantive matters. That is, as is customarily the case in the conflict of laws, subject to the exception of public policy of the courts of the forum.17

1.15  So, too, is the issue of characterisation of sovereign debt for the purposes of application of the rules of private international law. The issue of characterisation is for the law of the forum and not for the law of the sovereign debtor. To cite one example, the domestic law of the sovereign debtor is irrelevant at the stage of characterising the sovereign debt in order to determine the law applicable to sovereign bonds in those cases when the law applicable to the bonds is yet to be resolved through the application of conflict of laws principles.18 The characterisation of sovereign bonds would be exercised in accordance with the law of the forum, ie English law if the matter were brought to the English court. The same would be true in respect of the assumption of jurisdiction under residual rules on jurisdiction.19 However, in cases when the EU Regulations apply, the characterisation becomes a matter of autonomous meaning of EU law.20

1.16  Characterisation under the applicable English (and New York) law. Under the law of these two jurisdictions, bonds issued by the State are in essence commercial instruments via which the State borrows money from private creditors. In this sense, sovereign bonds are private contracts subject to the common regime of contract and private law. Competent courts are bound to apply ordinary private law tools to the interpretation and performance of sovereign debt instruments.

1.17  At its strongest point, English and US courts alike have confirmed that sovereign borrowing is a commercial transaction in cases on the sovereign immunity of the borrower States.21 Can these holdings on the commercial (p. 16) nature of sovereign borrowing serve as a ground for a general affirmation of the commercial nature of sovereign bonds within English and New York laws, in particular in respect of the conflict of laws and substantive law? A consistent approach to sovereign borrowing requires an answer in the positive—the commercial nature of sovereign debt problems must be affirmed across the spectrum of areas where the issue may arise.22

1.18  Sovereign bond issuance is no longer perceived as a sovereign prerogative. It is rather a widespread tool for States and private companies alike to raise money on the capital markets. The sovereign usually subjects its debt to some municipal law,23 and submits to the jurisdiction of foreign courts with an accompanying waiver of State immunity. Sovereign bond disputes are undoubtedly justiciable24 and sovereign bond restructurings are conducted in compliance with the contractual clauses and provisions of the applicable municipal law. The Act of State doctrine does not apply to the sovereign default as the doctrine does not in principle extend to commercial transactions.25 Within this framework, the idea of a contrat aléatoire and contingent debt, described above, is out of step with fundamental contractual principles which propagate the binding nature of commercial contracts.

1.19  If the commercial premise of sovereign bonds is accepted, then in principle it should not matter to what purpose the State allocates the money raised through the issuance of sovereign bonds. The arbitral tribunal in Poštová(p. 17) Banka v The Hellenic Republic was anxious to stress that sovereign debt is different in many respects from purely corporate debt.26 It then went on to highlight that the final use to which the money lent to the State is put did matter for the purposes of ascertaining jurisdiction under Art 25 of the ICSID Convention. Should the debt be used to repay the existing debt of the sovereign, the tribunal would not assume jurisdiction.27 On merits, the arbitral tribunal in Italy v Costa Rica took into account the amount of money that reached the Costa Rican government within the development assistance received from Italy and accordingly awarded lower damages.28

1.20  Similar enquiries into the final usage of the money lent are highly inapposite in the litigation before national (English and New York) courts. The arbitral tribunal in Italy v Costa Rica made it abundantly clear that its enquiry was not a technical, contractual analysis but analysis under international law guided by the considerations of equity.29 The correct approach under domestic law would be to ignore the purpose behind the debt issuance—only the form of the debt should matter.30

1.21  The characterisation of internal (domestic) debt is less certain. Much of domestic debt is issued under statutes (regulations)31 or through offering documents.32 While the characterisation of the domestic debt issued under statutes (regulations) is somewhat uncertain, hesitancy over the contractual nature of such bonds is in principle misplaced. Under US law, the terms inscribed in regulations or statutes that set the basis for the issuance of domestic bonds do not insulate those bonds from the application of contractual principles.33 Such statutory framework merely acts to incorporate terms and conditions into the contractual arrangement entered into between the government and private creditors.34

(p. 18) 1.22  Comparison with other jurisdictions. Few jurisdictions would disagree with the basic premise that the issuance of sovereign debt is unequivocally a commercial transaction.35 In Dame Hébert c Trésor Public (1938), the Cour d’Appel of Paris considered a dispute concerning the bonds issued by France in the United States. The court decided that the issuance of bonds was within the jurisdiction of administrative courts because the issuance of sovereign debt ‘interests the functioning of the public policy and demonstrates an intention to submit to a special legal regime of public law’.36 In the court’s view, French sovereign bonds were a matter of public policy as they had been issued for the protection of the national currency and constituted an operation of the French treasury. Another weighty reason cited by the court was that the bonds enjoyed special fiscal prerogatives. Seemingly, the only material repercussion of qualifying sovereign debt as administrative, apart from the attribution of competence to administrative tribunals, was the submission of such debt to the law of the sovereign debtor.37

1.23  The falsity of the reasoning is exposed the moment one remembers that, as the note to the case suggests,38 all public debt in principle interests the functioning of the treasury and fiscal prerogatives that bondholders may benefit from are not an indication of a special legal regime of public law but merely a waiver of a sovereign’s right to tax. Moreover, the purpose pursued in issuing sovereign debt is not conclusive in the determination of its character.

1.24  In 2015, the Tribunal de Grande Instance of Paris confirmed that the bonds issued and guaranteed by the Russian Empire in 1906 and 1908 were immune from the jurisdiction of French courts since they were acts taken in the exercise of governmental authority. The court’s only reason was that the Russian Empire accorded fiscal privileges to the bondholders in the (p. 19) course of issuance of bonds and that was something that a private person could not do.39

1.25  There is room for arguing that the peculiar judicial system of France, whereby public debt falls squarely within the competence of administrative courts, dictates the qualification of the debt as essentially public activity. Indeed, laws of 26 September 1793 and 17 July 1890 have specifically bestowed the jurisdiction over public debt on French administrative tribunals.

2.  Sovereign Debt Restructurings

1.26  Equally crucial is to correctly characterise sovereign debt restructurings. There is no doubt that the sovereign debt restructuring is a far cry from an ‘insolvency regime’ in the traditional understanding of the concept, used to denote a formalistic process of debt reduction applicable to individuals and companies. And English and New York courts treat external sovereign debt restructurings as essentially a kind of commercial activity.40

1.27  Italian, German, and Spanish courts have, however, approached sovereign debt restructurings as acts of a public nature. Thus, in a case opposing Italian bondholders and the Republic of Argentina, the Italian Corte di Cassazione agreed with the claimant that the issuance of sovereign bonds was private in nature. However, it (in)famously decided that the acts, which the Argentine government resorted to in the restructuring of its debt (particularly, a moratorium), were sovereign acts taken for the public purpose of protecting the primary need of economic survival of the population in the historical context of a serious national emergency. These acts were therefore shielded by sovereign immunity.41 This finding was later followed by the Spanish Court of Appeal in the Pérez Celis case.42 A German court has also found that the unilateral modification of bonds was a sovereign measure which attracted sovereign immunity.43 It was argued that the immunity point in the judgment of the Italian Corte di Cassazione was, however, at odds with established practice given that (p. 20) only the character of the underlying (original) transaction (in this case, issuance of bonds) should determine the commercial nature of a State’s activity.44 This characterisation is considered in Chapters 3 and 8.

1.28  Beyond that, as discussed in Chapter 6 (paras 6.45–6.51), Allied II, relying on a US Supreme Court authority on the cross-border insolvency of companies,45 recognised the effects of the Costa Rican debt restructuring and stayed legal proceedings. The same court then reversed itself in Allied III, on the basis that its earlier reasoning had run afoul of the US governmental interests expressed in an amicus curiae brief of the US government.46 However, the State in Allied was acting as a regulator and was not directly involved in the borrowing itself.

3.  The Antinomy of Bilateral/Multilateral in Sovereign Lending

1.29  In a typical situation, numerous bondholders subscribe to the sovereign bonds that the State floats on the national or international markets. The entire mass of bondholders is routinely composed of classes of bondholders with each class holding a particular sovereign debt issuance.

1.30  The ties that exist between fellow bondholders vis-à-vis each other, and vis-à-vis the debtor may be treated from two vantage points. First, from a bilateral perspective, whereupon the debtor is in a direct, singular contractual relation with each and every one of the bondholders, as are the bondholders vis-à-vis each other. The second perspective is multilateral in that the sovereign debtor’s contractual counterparty are a group of fellow bondholders, treated as a whole, and with mutual ties within the group of bondholders.

1.31  In the bilateral conception of sovereign debt, the rights of a bondholder are atomistic and are conceptually distinct from the rights of the remainder of fellow bondholders. Under this approach, the solution of the dispute between the debtor and a creditor who initiated litigation should not turn on the stance taken by the other creditors, unless specifically provided in the contractual text. Contractual clauses may establish certain forms of ties between the bondholders (majority action and sharing (p. 21) clauses being pertinent examples),47 provided, of course, that the wording of such clauses is unequivocal.48 The bondholders may also share stronger or weaker association as a result of the way the bond is issued, eg whether there is a trustee provision, or the bonds are issued as a dematerialised security.

1.32  In the multilateral conception of sovereign debt, the group of bondholders, having subscribed to the debt of the same sovereign debtor, is treated as a unitary group, as a community, whereby they share essentially the same financial interests, and for the purposes of vindicating legal rights under bonds, treated as a group of interconnected bondholders.49

1.33  English and New York legal systems, as they currently stand, are firm in asserting that the sovereign debt is a bilateral relation, except for cases expressly stipulated in the sovereign bond contract such that intercreditor relations are established among bondholders. A pertinent example is the majority action clause which vests the majority of bondholders with a wide-ranging power of binding the minority to the debt reduction as it sees fit. But, outside these contractual clauses, the sovereign debt is essentially a bilateral contract. Sovereign bonds do occasionally expressly provide for the independent (detached) character of sovereign bonds,50 it seems out of caution.

1.34  In syndicated loans, the interrelation between lenders is based on slightly closer ties. Pursuant to this logic, the Supreme Court of New York in Credit Français v Sociedad characterised syndicated lending as a joint venture and prevented a minority creditor from taking an individual action for repayment of contractual debt against the borrower.51 The characterisation of a (p. 22) syndicate as a joint venture is, however, a dubious proposition.52 Be that as it may, the dispersed group of bondholders does not have the same close association as the lenders in a syndicate. Treating them as some sort of joint venture is plainly erroneous.53

1.35  The position under English law is more reassuring. In an interesting twist, US courts, applying English law, came to a different conclusion in respect of the standing of minority creditors in a syndicate. In Commercial Bank of Kuwait v Rafidain Bank,54 decided under English law, the US Court of Appeals for the Second Circuit (‘Second Circuit’) held that the members of the syndicate had the right to sue the lender. The applicability of English law was later used to distinguish the holding in The Commercial Bank of Kuwait from other similar cases on syndicated loans governed by US law.55

III.  Relevance of Broader Public Policy Arguments

1.  Broader Public Policy Considerations and their Rejection in Sovereign Debt Litigation

1.36  Allied to the private characterisation of sovereign debt issuance is the question of whether a competent court, seised of a sovereign debt dispute, may (or even ought to) look beyond the terms of the contract or established market practices to the broader interests of the sovereign debtor and its population. Sovereign debtors and academics have shown much imagination in many guises so as to create space for the State’s budgetary and social needs, and in that way, affect the judicial determination of a sovereign debt dispute. They claim that lost in a morass of legal argument are a great many adverse consequences of sovereign debt litigation. Adverse consequences commonly cited include the duty of the borrower towards its population,56 the consideration of human rights in sovereign financing,57 the responsibility of the international community to fight global poverty (p. 23) and ensure socio-economic human rights in times of crises,58 the ethics of and fairness in dealing with an unsustainable debt burden.59 Comparable attacks against the purely commercial treatment of sovereign bonds may be derived from the positions of such economic and political theories as neo-Marxism, communitarianism, dependency theory, and others.

1.37  In this sense, the UN General Assembly—in spite of the opposition from major developed countries—adopted in September 2015 basic principles of sovereign debt restructurings driven by the idea that the existing system is inadequate to resolve the growing incidents of sovereign debt crises.60 In the 1970s, developing countries (the Group of 77) have expressed their commitment to the establishment of the New International Economic Order in the arena of sovereign debt that will seek to alleviate the pressures of unsustainable stock of debt by sharing the financial burden with creditor countries and the international community.61

1.38  A common theme among many scholars and policymakers is the unfairness of the practice of creditors harassing emerging market debtors into full repayment of the monies due. In an acknowledgement of the State’s perspective, sovereignty concerns are often voiced: the unsustainable debt affects the State’s autonomy62 and the State with debt ‘overhang’ will see its right to development constrained or completely suppressed. The common backdrop of these public policy considerations is to stress the effects of sovereign debt restructurings and the resulting austerity measures on the broader public and, concomitantly, to insist on a lesser role for the rights of creditors in sovereign debt restructurings.

(p. 24) 1.39  The debate is perhaps best captured by two conflicting conceptions of fairness: distributive fairness and procedural fairness.63 From a distributive viewpoint, it might seem unfair to some that creditors enrich at the expense of seriously indebted countries. Conversely, from the viewpoint of procedural fairness, the compensation of creditors who acquired their debt in a legal and procedurally valid manner is beyond doubt.

1.40  Many commentators query whether the court should be able to sweep under the rug considerations of distributive fairness in the adjudication of sovereign debt disputes. Taking a step back, a legitimate question that the foregoing discussion may prompt is why the commercial side of borrowing and case-specific methodology should not succumb to what may be a severe financial condition of the State. This draws on policy rather than a black-letter argument. The broader public policy repercussions of the sovereign debtor and its populace are undeniably weighty and of great import.

1.41  It is argued here that the courts should virtually never consider broader public policy arguments (justifications for which are not necessarily very convincing) to override contractual language and established legal rules. The reasons are both positive and negative.

1.42  In terms of positive reasons, the pecuniary and non-pecuniary interests of the sovereign debtor are not the sole interests to be considered by foreign courts asked to adjudicate on the dispute. The interests of financial markets, bondholders, creditor States, and other actors should not be discarded with ease. Their interests might and often do clash with the interests of the debtor. A predisposition towards the interests of the impecunious debtor may have unpredictable and backfiring consequences, affecting established market perceptions, the interest rate, rights, and expectations of bondholders. Disregarding contractual rights might cause unpredicted harm and reduce already feeble creditor rights. For one, it may prejudice other States willing to have access to financial markets by raising interest rates prevalent on the market. The financial predicament of the State does not justify recourse to a discretionary, equity-based adjudication of sovereign debt disputes.

1.43  There is scope for the argument that the interests of the State are already met by the widespread practice of collective action clauses (CACs). The contractual ex ante drafting, especially its enhanced variations,64 ensures that holdout creditors are left with little space for harassing sovereign (p. 25) debtors, even if the contractual drafting is the second best after the fully fledged bankruptcy regime for sovereign debt.

1.44  Faced with conflicting interests and considerations, one is well advised to err on the side of caution and give full force to the contractual agreement to repay the money as due—embodiment of the principle of pacta sunt servanda.

1.45  In terms of negative reasons, the courts are not well suited to weigh various conflicting and irreconcilable public policy considerations that might arise in sovereign debt litigation (subject to the policy considerations embedded in the law (para 1.52). The District Court for the Southern District of New York (‘District Court’) in A.I. Creditor expressed the general sentiment that it was not the task of the judiciary to evaluate the payment difficulties of a sovereign debtor, but that of the executive branch65 (or perhaps the international community). Even if payment capacity may be assessed through expert opinions, courts do not have the necessary mandate to do so. Reisman correctly points out that arbitral tribunals (and, by analogy, national courts) should confine themselves to their case-specific methodology and refrain from deviating from it to give effect to the ‘systemic implications’ of their decisions.66 It is a matter to be left to the collective wisdom of the legislative power of States and international organisations.

1.46  The courts forthrightly endorse the view advocated here. In the litigation of sovereign debt disputes, the prevailing consideration is the financial side of the case. Public policy arguments raised by the debtor generally receive short shrift from courts.67 Rendering a decision by reference to vague policy reasons, bordering on judicial legislation, would defy the commercial predictability of English and New York laws. The basic underpinning of English commercial law is ‘contract law minimalism’, which shuns extralegal considerations in commercial cases and aspirations to redistribute wealth through commercial contract law.68 Worthington and Mellon present the unsurprisingly constrained role that public policy (p. 26) played in the context of the insolvencies of multinational corporations in England.69

1.47  In this context, considerations of the sort described above—human rights, the right of the State to development, and the interests of the populace—cannot be determinative in the litigation of sovereign bond disputes, which is by definition commercial, at least in English and New York courts.

1.48  That said, the UK has accorded the interests of some highly indebted countries additional protection. Indeed, the debt of heavily indebted States has been given special treatment with the introduction of the Debt Relief (Developing Countries) Act 2010. The Act curtails any preying on the debt of sovereign borrowers falling under the definition of Heavily Indebted Poor Countries (HIPC). It should, however, be stressed this is an exception confirming the general rule.

1.49  It is worth stressing in this connection that this is not entirely bad news for the State. The proposition adduced here is a double-edged sword. Not only is the sovereign debtor unable to rely on public policy considerations to get a preferential, contra legem treatment, but, for the same reasons, the creditors may not adduce extralegal arguments and considerations to flex the legal rules in their favour.70

1.50  Some scholars have attempted to hide policy-charged arguments cloaked in black-letter law arguments. Those who espouse this view find no difficulty in devising esoteric arguments to support the duty of courts to consider systemic implications of their decisions. Some argue that the creditors are under a positive obligation to partake in sovereign debt restructurings and under a negative obligation to refrain from initiating legal actions against the sovereign debtor, irrespective of the contractual rights available under sovereign bonds.71 The position described tends to derive a duty to renegotiate incumbent upon private bondholders from various sources: the requirement of peaceful settlement of disputes,72 human rights obligations,73 and even the threat to peace falling within the (p. 27) province of the UN Security Council.74 Others refer to the emerging customary law or general principles of law of sovereign debt restructurings that private creditors should abide by.75 Continuing the line of imaginative arguments, some scholars contend that creditors are under a legal obligation to negotiate with the sovereign debtor in distress in good faith and to avoid untimely legal actions out of considerations of cooperation, solidarity, and equity.76 More broadly, Muir-Watt argues for global governance through conflict of laws in, among other spheres, sovereign debt.77

1.51  Strikingly, many of these principles adduced by those supporting the reform of sovereign debt adjudication are too multifaceted and lack the necessary specificity.78 Whether there is customary law crystallised in the field of sovereign debt needs to be viewed with strong scepticism. As Waibel shows in the context of UNCTAD Principles on Responsible Sovereign Borrowing and Lending, the claims of customary law of sovereign debt restructurings lack opinio juris,79 and are properly characterised as international ‘soft’ law.80

2.  Embedded Public Policy Considerations in the Private Law Reasoning

1.52  Some may rebut the foregoing by saying that over-reliance on commercial law tools for the resolution of fundamental issues in sovereign debt adjudication is an apologist view of the status quo, and hijacks considerations of human rights and sovereignty. At what point the private law reasoning (p. 28) leaves the State devoid of any bankruptcy shield is of serious concern to many scholars.

1.53  In reality, the recognition of the private character of sovereign debt does not make the premise of this book necessarily pro-creditor oriented. Private law mechanisms are well tuned to protecting the sovereign debtor and the ordinary deployment of the debt restructuring process.81 The application of the private law logic prevents the debtor from raising overreaching defences based on the allegedly public character of the sovereign debt.

1.54  To assuage the concerns of many, it bears emphasising that the commercial courts in England and New York will not close their eyes to public policy considerations in all of their manifestations, thereby acknowledging the debtor State’s perspective. It is true that courts will often be confined to their legal straitjacket. Nevertheless, it will be shown over the course of this book that public policy considerations do find subtle expression in private law tools. Indeed, public policy cuts in multiple directions. For one, the rules on State immunity from enforcement shield from attachment all State assets that are not in use for commercial purposes, which represent the lion’s share of the sovereign debtor’s assets. The onerous rules on State immunity make the litigation of sovereign debt disputes the pursuit of an absolute minority of creditors and often of none. Next, as discussed in Chapter 3, the English courts, in the discretionary exercise of their powers, will pay necessary tribute to the broader repercussions of their decisions by refusing to issue interim and post-judgment measures against impecunious sovereigns. So, too, the English courts will stay legal actions in deference to sovereign debt restructurings out of concern lest the employment of majority action clauses, designed to facilitate the process of reducing sovereign indebtedness, is thwarted.82 The monograph contains other comparable examples which sustain the latitude that a sovereign debtor may enjoy in the adjudication of its default before English and New York courts.

1.55  As public policy considerations in favour of the sovereign debtor tiptoe into the realm of private law mechanisms, so too do the interests of minority bondholders threatened by rogue sovereign debtors. As Chapter 7 shows, the English courts have designed common law mechanisms to protect the interests of minority bondholders in particularly excessive and abusive restructurings.

1.56  As might be recalled, the premise of the statutory approach to sovereign debt is that legal gaps in the regulation of sovereign debt restructurings (p. 29) are to be filled through statutes or international treaties that institute a sovereign debt restructuring mechanism. Alas, such legislative action might not be forthcoming in practice any time soon.

1.57  It is the premise of this book that judicial, case-by-case innovation is the path of least resistance for filling the legal vacuum. Although true that judicial innovation will not modify the system fundamentally, this is not to say that the system is broken in the first place. Admittedly, the system might need some ‘tinkering’, which may be achieved in many ways, including by judicial innovation.

IV.  Insolvency Analogy

1.58  Over the course of history, many States have been de facto bankrupt—historical examples abound.83 Against this factual background, many have proposed the idea of a sovereign debt bankruptcy mechanism that would provide an orderly mechanism for the restructuring of sovereign debt, analogous to the regime applicable to the bankruptcy of individuals and companies.84 The proposals to establish a sovereign debt bankruptcy mechanism have been unsuccessful so far.

1.59  Taking a more audacious stance, some scholars have attempted to extrapolate the domestic concept of bankruptcy to State insolvencies. They argue that when the State in distress faces a situation analogous to the insolvency of individuals or companies, the principles of (national) insolvency ought to be extended to sovereigns. In the view of these scholars, the adjudicator—the national court or arbitrator—should recognise the state of bankruptcy of the sovereign debtor and refuse to issue or enforce a judgment (or arbitral award) in deference to the state of insolvency of the debtor. This would be the case in local personal and corporate insolvencies where proceedings are stayed on the making of a winding-up order.85(p. 30) What these proposals put forward is a judicially established and supervised bankruptcy regime which would operate as a stay on judicial proceedings in deference to the insolvency of the State.

1.60  The reasoning that is based on the analogy between a sovereign insolvency and corporate insolvency has very little, if any, legal foundation.86 While there might be room to argue there is a general principle that foreign judgments and arbitral awards will not be issued/executed when the debtor is insolvent,87 there is little doubt that international law, as it stands now, does not recognise the bankruptcy analogy in the context of sovereign debt.88 Certainly, the analogy is unlikely to make its way into English law,89 unless, of course, Parliament paves the way for it, as was the case with the Debt Relief (Developing Countries) Act 2010.

1.61  Examples of judicially imposed insolvency regimes are close to non-existent. In the early twentieth century, in the absence of a statutory regime applicable to railroads, the US courts devised an equitable remedy to protect insolvent railroads.90 The remedy—equitable receivership—consisted of appointing a receiver for the insolvent railroad that would take all the measures necessary to reorganise the financially insolvent railroad. The appointment of the receiver acted as an automatic stay on legal actions against the insolvent railroad. In this context, equity receiverships have been cited as a convincing model for the national courts to engage with a sovereign’s financial distress.91 However, as Lubben correctly points out, the model of railroad receiverships may not effortlessly apply to the scenario of a sovereign in distress, partly due to the fact that the former model (p. 31) was conceived as in rem proceedings targeted at the railroad as a bundle of immoveable properties.92

1.62  Notwithstanding the dearth of judicial authority applying national insolvency principles in the absence of a statutory premise (and even the legality of such analogies),93 a residual sense of unease remains for two main reasons. First, the bankruptcy analogy has little to commend itself. As Lauterpacht argued in his seminal work Private Law Analogies, bankruptcy procedures differ in the content of their rules. Consequently, there is no uniform law of insolvency to begin with.94 Further, it is no secret that sovereign debt insolvencies and insolvencies of individuals and companies vary in many respects.95

1.63  Secondly, bankruptcy laws are themselves subject to limitations that seek to give meaningful protection to the rights of creditors.96 If one were to extrapolate the bankruptcy regime from domestic laws, one could not cherry-pick the components of the insolvency regime favourable to the sovereign debtor. Put otherwise, to apply the insolvency analogy, the acts of the insolvent State need to comply with some basic standards or safeguards of insolvency law (such as notice to creditors, fair and equitable treatment of all creditors).97 One such safeguard is the presence of an impartial third party—the bankruptcy court. The lack of an impartial bankruptcy court that will oversee the bankruptcy procedure of the debtor casts a shadow on the analogy of domestic insolvency.98 Equally, it is beyond doubt that the courts of a foreign State cannot declare another State bankrupt, appoint a trustee over the debtor State, and seize its (p. 32) assets99 as an insolvency court has the power to do in respect of private companies.

1.64  Dismissive of the efforts to stretch the insolvency analogy, Zahavi reviewed the practice and the case law on the recovery by bondholders of their contractual debt. She concluded that sovereign debt litigation by minority bondholders does not pose a real risk for the debtors. The chances of successful debt recovery on the judgment against the State are very low. This is due, in no small measure, to the stringent rules on State immunity. As a result, the creditors have very little bargaining power vis-à-vis the State which enjoys extensive powers in the design of the restructuring. This led Zahavi to the conclusion that those who need enhanced protection are the creditors and not the State. By the same token, the function of domestic bankruptcy laws, alongside the award of a fresh start to the debtor, is to maximise the expected return of creditors. Imposing a standstill on the remedies available to creditors might take away the little bargaining power that creditors, as a group, possess.100

1.65  Third, the invocation of insolvency is no panacea even under the domestic law of insolvency. In Mazur Media Ltd v Mazur Media GmbH, Collins J refused to stay English proceedings that were commenced on the ground of an exclusive jurisdiction clause pending the insolvency proceedings in Germany. The apparent rationale was the mandatory character of the exclusive jurisdictional clause under the Brussels I Regulation.101

1.66  There is a more general point to be made in this context. A logically consistent analogy requires the comparison of comparable phenomena. In the absence of a bankruptcy regime, contrasting sovereign debt with modern insolvency regimes based on insolvency statutes is like comparing apples and oranges. It seems more appropriate to draw on historical times pre-dating the adoption of insolvency statutes. Historically, before the advent of insolvency statutes provided a fresh start for indebted individuals courts did not even imagine discharging insolvent debtors or designing some collective procedures for debt relief. It was common practice to imprison bankrupt individuals102—Dickens’s infamous debtor prison springs to mind.

(p. 33) 1.67  Lastly, some scholars have argued in favour of internationalising the Chapter 9 insolvency regime which regulates the insolvency of municipalities in the US.103 The Chapter 9 regime allegedly grants more leeway to the US municipality than Chapter 11 insolvency proceedings. For this reason, the regime is offered as a better fit for the sovereign debt context. The reasoning suffers from the same flaw as the personal bankruptcy analogies: the competent court in Chapter 9 insolvencies exercises the gateway function by approving the restructuring plan and examining its fairness.104 Such supervision is blatantly absent in the case of sovereign debt restructurings. Additionally, unlike the financial predicament of municipalities, the US legal system does not cater for the bankruptcy of US States. Congressional bills to introduce such a regime have come to naught.105

V.  The Doctrine of Comity and its Limits in Sovereign Debt Litigation

1.68  Sovereign debtors have relied, with varying rates of success, upon the defence of the comity of nations in the US judicial practice on the enforcement of sovereign debt. The doctrine of comity applies in those cases where pressing on with the final resolution of a dispute might harm the US government’s amicable working relationships with other States and hence the courts are called upon to extend the courtesy of staying legal actions to the defendant sovereign in distress. The conventional rationale behind the doctrine of comity is that the US judiciary should be cautious not to trespass on the spheres which are deemed to be the province of the executive branch.

(p. 34) 1.69  The application of the doctrine of comity in sovereign debt litigation is certainly evocative of the public character of the sovereign debt and, if applied consistently, would indicate that the sovereign debt may, in specific contexts, be subject to a sui generis legal reasoning. Its rejection, on the other hand, would be yet another indication of the application of private law tools.

1.70  The doctrine of comity has been relied upon to recognise decrees taken by the State to regulate the debt of its nationals,106 to stay proceedings,107 and to shield the sovereign from interim measures.108 At its first invocation in the context of sovereign debt, the doctrine of comity received short shrift in Allied Bank Int’l v Banco Credito Agricola de Cartago109 and later in Pravin Banker Associates, Ltd v Banco Popular Del Peru and the Republic of Peru.110 In Libra Bank Ltd v Banco Nacional de Costa Rica,111 the court discarded the application of the comity defence and denied any effect to the Costa Rican decrees which, as it was decided, subjected the debt of private creditors to an expropriation without adequate compensation. Principle suggests that comity is certainly a consideration in the decision-making of the judge but not one which will be decisive.112

1.  Application of the Doctrine of Comity of Nations in English Litigation

1.71  An element that divides the litigation in the United States from England is that the doctrine of comity of nations, as understood by English courts, would most probably not serve as a free-standing ground for ordering stay of proceedings in deference to a sovereign debt restructuring. The main application of the doctrine of international comity is found in limiting the use of some allegedly intrusive tools of English commercial litigation, such as anti-suit injunctions,113 freezing (p. 35) orders,114 etc.115 In any case, the doctrine of comity will rarely hold sway.116

1.72  In English law, the function of comity lies in refining the existing rules, rather than acting as a ‘general and rhetorical appeal to comity’.117 Comity acts negatively, and not positively. In Yukos v Rosneft, the Court of Appeal considered that comity requires something as a matter of ‘restraint rather than abstention’.118 Asking for a stay of proceedings out of considerations of comity would call for abstention rather than restraint and is likely to trespass on the intrinsic limits of the doctrine of comity as perceived under English law.

1.73  Hamblen J, in a case on the debt which was transferred by the Bank of Portugal in the restructuring of a highly indebted bank, agreed with the claimant in that case that ‘at least at the jurisdictional stage, it is doubtful that there is room for the application of a comity doctrine such as that of act of state in circumstances where it has been determined that the court has jurisdiction under the Brussels Regulation as it is a “civil or commercial matter” ’.119

1.74  Given the limited applicability of the doctrine of international comity under English law, Chapter 3 will argue for the stay of judicial proceedings on the grounds of the case management powers of English courts. English judges are more accustomed to resorting to their case management powers than a non-binding rule of public international law in the form of the doctrine of international comity. This does not, of course, prevent them from paying lip service to considerations of comity in the litigation against impecunious sovereigns. However, the framework of case management powers is a more neutral and tenable framework for the stay of proceedings in sovereign debt disputes.

(p. 36) VI.  Relevance of Pricing-In

1.75  There is a widespread perception of financial markets as a great price machine that accurately prices financial risks. In modern times, many are convinced that omniscient financial markets are capable of ex ante pricing-in the vagaries of the market. It is a belief shared by many sovereign debt professionals that increased interest rates compensate creditors for the higher risk of default, and by that the market is able to regulate the deficiencies of the regime governing sovereign debt markets.

1.76  The assertion is properly conceptualised in the context of the permanent struggle between conflicting views on the efficiency of markets. Although many shades and variations in economic theories exist, the two contrasting views—laissez-faire liberalism and the State-centred view of market regulation—reveal different perceptions of the role that financial markets have in regulating sovereign debt markets through interest rates.

1.77  On the one hand, the laissez-faire liberalism portrays markets as omniscient and infallible orders that regulate commercial transactions and accurately price in the risks that market actors assume in the course of their business. Hayek advocated non-interference into what he framed as ‘spontaneous orders’, of which financial markets are an archetypical example. Central planning would, in his view, disrupt ‘spontaneous orders’ because top-down regulation would seek to control ‘a system of interdependent actions determined by information and guided by purposes known only to the several acting persons but not to the directing authority’.120

1.78  On the other hand, financial markets are fallible and irrational.121 Indeed, at every single crisis one can attest to the fallacy of the rational market hypothesis on which regulators ground the international financial edifice.122 Indeed, the field of behavioural economics has come to challenge the assumption of rationality of market players.123 Incomplete information and political volatility defy the absolute rationality of financial markets and their ability to effectively price in the risks incurred.124

(p. 37) 1.79  No doubt, the struggle between the two views is a permanent struggle and the differences in practice would appear to be one of degree and not kind. Thus, the views in economics differ as to how fallible (or infallible) the market is and how accurate the price adjustment is.125 The Chicago school of economics, to mention only one school of thought, is based on the concept that economic actors err, but are correct on average.

1.80  Conceding certain rationality and effectiveness to financial markets leaves the question of the extent to which such rationality and effectiveness exist in sovereign debt markets. Some practitioners and commentators alike perceive that financial markets may police the conduct of and exact discipline from sovereign debtors, or at least mitigate the effects of their wrongdoings, both ex post and ex ante. So far as the ex post control is concerned, between the nineteenth to early twentieth century, bondholders’ self-help organisations were noticeably efficient in ensuring that their members were paid by a government in default as a precondition for further access to finance.126 In a broader sense, many scholars have stressed the ability of financial markets to foreclose capital markets for sovereign debtors in default and in that way force them to comply with their contractual obligations.127 The reputation of sovereign debtors and the related threat of seeing capital markets foreclosed make States think twice before defaulting.

1.81  While the reputational concerns might play a certain role in sovereign debt disputes, the threat of foreclosing capital markets is somewhat exaggerated since markets are in principle forward-looking.128 The prospects of the repayment of sovereign debt—the question that creditors care about the most—mostly turns on factors other than the previous record of repayment of a sovereign, such as the state of economy of the debtor and external financial conditions.129

(p. 38) 1.82  This section focuses instead on the ex ante control of financial markets. Why does this matter? By way of example, consider the choice of law clauses commonly inserted in sovereign bonds. The established practice is that sovereigns subject their bonds either to their domestic law or to the foreign law of a financial centre (commonly English or New York laws). When the bonds are governed by the domestic law of the sovereign, creditors holding such bonds are subject to the risk that the sovereign debtor may modify its own domestic law through an act of parliament in order to reduce the magnitude of its financial indebtedness. This risk has provoked many discussions as to the legality and acceptability of such unilateral modifications of domestic-law bonds and is addressed in detail in Chapter 5.

1.83  While it is hard to place a precise monetary value on a choice of law clause, there is a perception that the governing law affects the interest rate of sovereign bonds. A proponent of the ‘market-as-regulator’ approach, in the face of such circumstances, may argue that the market should have priced in the sovereign risk inherent in the bonds governed by domestic law; that the investors willing to accept such risk received a higher interest rate in exchange for incurring the risk of unilateral modification of the domestic bonds they hold;130 and that the loss resulting from a unilateral modification ought to be treated as legitimate and irrecoverable; otherwise, the creditors would be unduly enriched. Similar arguments may apply to other types of legal boilerplate.

1.84  The debate sketched here prompts two questions. First, as a factual enquiry, have the markets been able to price in the risks inherent in the issuance and purchase of sovereign bonds? An answer in the negative will at least cast some doubt on the hypothesis that financial markets are able to price in the risk of default and omnisciently police sovereign bonds markets. Second, as a legal enquiry, assuming a court comes to the conclusion that the risk has indeed been priced in, one is still left with a separate question, namely whether the evidence to the pricing-in is admissible or relevant to the determination of the legality of sovereign default or other wrongdoing.

1.85  Evidence as to the pricing-in of risks. It is safe to say that investors incur an undeniable risk by investing into sovereign bonds,131 in spite of the paradoxical (p. 39) banking capital requirements that treat them as risk-free investments.132 However, even though the legal boilerplate might matter each time a dispute arises and is brought before a court, market players may, and often are, ignorant of the risks that boilerplate contractual clauses entail. Such ignorance or ‘optimism bias’ is an inherent feature of human behaviour, especially in the context of factual contingencies that are not very likely to materialise.133 Probability insensitivity134 casts a big shadow of doubt on the likelihood of investors pricing in the risk of default in calm times, unless the chance of default is foreseeable at the moment of the issuance of bonds. The scepticism towards the ability of financial markets to price in sovereign risk is corroborated by the lack of empirical evidence.

1.86  At this point, a line has to be drawn between the pricing of general default (political) risk, on the one hand, and the pricing of the manipulation of contractual provisions, on the other. For the first category, empirical research finds that spreads on the sovereign debt depend on two groups of factors combined: common explanatory variables, such as international risk factors, liquidity, quantitative easing, and country-specific macroeconomic variables, such as the debt-to-GDP ratio, inflation, tax base, level of investments, risk of exiting a currency union such as the eurozone.135 In good times, global factors predominantly affect the pricing of bonds;136 in times of crises, country-specific factors tend to intensify.137

1.87  For the second category—the pricing-in of specific contractual provisions—their pricing by financial markets is much more doubtful. While it is safe to say that certain terms and conditions of bonds are invariably priced in, such as maturities, the pervasive question is whether others, for instance, dispute-resolution-related clauses, are priced, too.

1.88  When one looks at private bond issuances, there are indications that financial markets do indeed price in bond covenants of various sorts.138 The (p. 40) rationale behind the pricing of bond covenants is that the premium on bond covenants is positively correlated to the relative ease with which a disgruntled bondholder may enforce the breach of bond covenants should it wish to enforce the promise to abide by the bond covenant.

1.89  By contrast, covenants contained in the bonds issued by a sovereign debtor may be different. For one, the implicit guarantee of bailouts may make contractual boilerplate irrelevant,139 although a rational actor does not expect a bailout to occur with certainty. The peculiar context of sovereign bond restructurings and litigation is that the remedies available to ordinary sovereign bondholders may often seem unrealistic in the light of benign sovereign immunity regimes and other defences available to the State against legal actions in foreign courts. There is an intuitive perception of impracticality of legal action against sovereigns which casts doubt on whether the investors would actually go the extra mile to examine intricate bond provisions and price them accordingly.

1.90  Over the years, scholars have examined the pricing of various contractual provisions contained in sovereign bonds. Weidemaier analysed the pricing of the bonds that included sovereign immunity waivers (post-1976: the year of the adoption of the US Foreign Sovereign Immunities Act that introduced relative immunity) and those that did not (pre-1976 when the absolute sovereign immunity was the rule). His evidence rejects the hypothesis that private bondholders priced in sovereign immunity waivers.140

1.91  In the 1990s to early 2000s, a debate raged on the effect that the introduction of majority action clauses141 would have on the pricing of bonds. Empirical studies concluded on the whole there is little evidence of a significant impact of CACs on pricing. Even when the introduction of CACs was found to impact the pricing of bonds, the views differed as to what type of States might benefit from the pricing flexibility delivered by the CACs. One perspective was that the CACs decrease the borrowing costs of financially strong debtors. Conversely, others claimed that the effect of the CACs was to decrease the borrowing costs of financially less viable debtors.142 The third view was that such an effect only occurred (p. 41) for mid-level-rated States.143 Evidence also suggests that the pricing will vary depending on the legal system chosen as the governing law and the forum for litigation.144 The lower yield of bonds with CACs is explained by the fact that bondholders prefer bonds where the majority can modify the payment terms of bonds.

1.92  The evidence on the pricing of pari passu clauses was equally inconclusive,145 although the analyses related more to the pricing of judicial decisions that construed pari passu clauses in one way or another. Choi and Gulati’s research into the pricing of subordination in sovereign bonds concluded that the effect of subordination was priced when the sovereign debtor was in the vicinity of default—in good times, markets did not attach a monetary value to the contractual boilerplate.146 The odious character of bonds may also be priced in.147

1.93  On the pricing of choice of law clauses, a study by Gulati, Choi, and Posner compared one Greek law governed bond with one English law governed bond, and found that they had different spreads over the course of Greece’s financial predicament and restructuring. Because Greece could modify Greek law governed bonds, and, conversely, was unable to modify English law that governed the remaining bonds, Greek law governed bonds were supposedly a riskier investment for bondholders and, as a consequence, offered higher yields to bondholders willing to assume that risk. Interestingly, the authors observed that the choice of governing law was priced in in Greek law bonds pre-crisis and not only at a later stage when the default of a State became more or less imminent.

1.94  From this data, the authors concluded that a European-wide mechanism for the orderly treatment of sovereign defaults should adjust the size of haircuts (p. 42) on private investors in correlation with the risks undertaken by investors.148 In a later piece of research, Gulati, Trebesch, and Zettelmeyer admit that the pricing variations between domestic- and foreign-law governed bonds may have been propelled primarily by choice of court agreements, which invariably go hand in hand with choice of law clauses. Under this interpretation of the data, investors, strictly speaking, priced in the forum for the litigation of disputes and not the governing law.149

1.95  A later piece of research by Clare and Schmidlin, drawing on a much larger sample than the study by Choi, Gulati, and Posner and covering Europe-wide securities, claimed that the governing law was priced on the secondary market of bonds when the sovereign debtor, following the primary issuance of the bonds, became prone to default. Their research indicates that in ‘good times’, ie when the sovereign debtor is not expected to default, the market barely prices in the governing law variable (such limited pricing may well be due to the noise in the information)150 and if the pricing happens, it occurs in ‘bad times’.

1.96  As a general proposition, the ‘good times’ of sovereign debt issuance will most often coincide with the periods of primary issuance of bonds since private lending is mostly procyclical151 and the costs of issuance of bonds in ‘bad times’ may be prohibitive.152 Conversely, the pricing of bonds, which mostly occurs in ‘bad times’, will often coincide with the trading of bonds on the secondary market.153

(p. 43) 1.97  Legal import of the pricing-in of risks. Assuming financial markets do indeed price in sovereign risk, the threshold question to be addressed first is at what point in time should the courts consider the pricing: the time of issuance or the trading on the secondary market? It seems that English courts would be more open, if at all, to accepting the financial data on the pricing of bonds as of the time of issuance of bonds.154 The price of bonds traded subsequently on the secondary market is by and large irrelevant. Principle suggests that the trading on the secondary market among creditors cannot affect the rights and obligations of the State. The sovereign is not privy to the sale of bonds after to the issuance of bonds and does not derive any (direct) benefits from the trade on the secondary market. The rights and obligations of the State (and bondholders alike) do not float freely in the air and change their content along with the fluctuations of the secondary market of sovereign bonds. This legal conclusion, with markets mostly pricing in bond covenants only in ‘bad times’—which is often likely to coincide with the trading on the secondary market—leads to the conclusion that the pricing of bonds is very unlikely to affect legal rights and obligations as cemented during the primary market issuance.

1.98  This notwithstanding, for those instances when the primary markets do indeed price in the risks inherent in the subscription to sovereign bonds on the primary market, there is ambiguity as to the legal significance of the pricing-in of sovereign risk. The black-letter law reaction would assert that the argument of the supporters of the ‘market-as-regulator’ sits uncomfortably with the principle that the evidence preceding the conclusion of contract cannot be adduced for the purposes of contract interpretation.155

1.99  There are two more general points to be made. First, is the pricing of boilerplate contractual provisions always commensurate to the risks undertaken? Prospectuses offering bonds to the general public commonly set out the information necessary for calculating the probability of the occurrence of default. That said, sovereign debt markets may be dominated by impervious information asymmetries or the creditors might fail to process all the available information necessary for the accurate pricing of sovereign bonds, or, more precisely, the probability of triggering of boilerplate provisions. Commentary indicates that bond markets do not accurately reflect economic fundamentals.156 This makes the idea of accurate pricing (p. 44) of boilerplate provisions, or, more precisely, the risk of their triggering all the more doubtful. Sovereign defaults may at times be caused by exogenous economic shocks that are unforeseeable at the time of issuance of bonds.157 On occasion, the State may default opportunistically—even though having the capacity to pay—which is hard to predict forensically.

1.100  Second, does the spread of ten to twenty basis points mean that the investor is to be taken to have acquiesced in the default or other wrongful activity of the State? It is argued that the pricing-in of the governing law implies that the bondholders accept the risk and recognise the legality of the modifications of domestic-law governed bonds.158 Perhaps more plausibly, it may simply indicate that the bondholders acknowledge the risks of sovereign default and the risk (and costs) that they would incur in challenging the measures to which the sovereign debtor resorts to through litigation/arbitration. It is thought that investors typically price in the political risk and the risk of default in the yields of government bonds, yet that by no means implies that they are willing to accept the risk once it materialises and renounce their rights under the bonds.

1.101  Having said all that, the evidence as to the pricing-in of risks may very rarely play a secondary role in the reasoning of judges. Thus, in Braka v Bancomer, a US depositor claimed repayment of deposits placed in a Mexican foreign State-owned bank and later subjected to an exchange control regulation. The judge was anxious to stress that the higher interest rate justified the risk of investing in a foreign bank and eventually found that the Act of State doctrine precluded the adjudication of the dispute over the payment of deposits.159 Judges are not advised to feel compelled by the theoretical argument of higher interest rates. These are often mere speculation, unsupported by any empirical analysis calculating the extent of interest rates.

(p. 45) VII.  Rethinking Sovereign Debt Adjudication in Light of the Theoretical Framework Outlined

1.102  This book is predicated on the idea that sovereign debt is essentially a commercial activity, and that the courts should employ private law tools to determine rights and obligations under sovereign bonds. The chapter, however, acknowledged that in some cases public policy considerations may find expression in private law tools.

1.103  The remaining chapters in this book will reflect upon the existing problems in sovereign debt adjudication through the prism of private law. What the pursuit of familiar private law mechanisms will typically do in most cases is simply confirm what is already well known and commonsensical. In this monograph, however, private law mechanisms will instead be resorted to with the single purpose of resolving the salient and under-researched issues that arise in sovereign debt litigation.(p. 46)


1  Twycross v Dreyfus (1877) 5 Ch D 605, 611, 616.

2  Edwin Borchard, ‘International Loans and International Law’ (1932) 26 Proceedings of the American Society of International Law at its Annual Meeting (1921–69) 135, 147.

3  Holger Schier, Towards a Reorganisation System for Sovereign Debt: An International Law Perspective (2007) 6–8.

4  On which see Chapter 6.

5  Germain Watrin, Essai de construction d’un contentieux international des dettes publiques (1929) 23; De Dreux-Breze v France (Appl No 57969/00) ECtHR 15 May 2001, 9.

6  Note that the idea of aléa in sovereign bonds is independent of the question of the pricing-in of the risk of sovereign default (paras 1.75–1.101), as the latter finds acquiescence in the sovereign default only as a result of a soar in interest rates charged at the time of issuance of debt, whereas the former sees something inherently risky/aléatoire in sovereign bonds.

7  Georges van Hècke, Problèmes juridiques des emprunts internationaux (1964) 24–25.

8  Albert Wuarin, Essai sur les emprunts d’Etats et la protéction des droits des porteurs de fonds d’Etats étrangers (1907) 34.

10  The point on the aléa will be treated later in this chapter, 1.18.

11  See, eg, Gaston Jèze, ‘Les défaillances d’Etat’ (1935) 53 Recueil des Cours 377, 392–93.

12  Watrin (n 5) 13, 19, 33.

13  Armin von Bogdandy and Mathias Goldmann, ‘Sovereign Debt Restructurings as Exercises of International Public Authority: Towards a Decentralized Sovereign Insolvency Law’ in Carlos Espósito, Yuefen Li, and Juan Pablo Bohoslavsky (eds), Sovereign Financing and International Law: The UNCTAD Principles on Responsible Sovereign Lending and Borrowing (2013) 39–70.

14  See, eg, Karl Strupp, ‘L’intervention en matière financière’ (1925) 8 Recueil des Cours 1, 67.

15  Borchard (n 2) 15–17.

16  Guilbert Guillaume, ‘La défaillance financière des Etats devant les juges et les arbitres internationaux’ (2013), Public Lecture, para 14 (on file with author).

17  See Chapter 5 applying the public policy exception to domestic-law governed bonds.

18  See Chapter 4 applying English rules of conflict of laws to the determination of the law governing domestic bonds.

19  See Chapter 3.

20  Ibid.

21  NML Capital Ltd v Republic of Argentina [2011] UKSC 31, para 111; Cardinal Financial Investment Corporation v Central Bank of Yemen, 2000 WL 699384, 13–14 (Longmore J holding that the issuance of promissory notes by the State’s central bank, with the purpose of backing up State-to-State borrowing, was not an act done in the exercise of sovereign authority); Trendtex Trading Corporation v Central Bank of Nigeria [1977] QB 529 (in respect of letters of credit); Weltover v Argentina, 504 US 607 (1992). See also FA Mann, ‘The Law Governing State Contracts’ (1944) 21 BYBIL 11, 13.

22  See, for instance on the issue of apparent authority, Themis Capital, LLC v Democratic Republic of Congo and Central Bank of the Democratic Republic of the Congo, 881 F Supp 2d 508, 526 (SDNY, 2012). Certain forms of sovereign debt evidence stronger public traits as a result of the higher degree of official involvement (State-to-State debt, IMF loans) and it would be wrong to treat them as commercial transactions in most cases, but those are outside the scope of coverage of this book.

23  But see Chapter 4 on the absence of choice of law clauses in domestic sovereign debt.

24  Crédit Français International SA v Sociedad Financiera de Comercio, 490 NYS 2d 670, 677 (Sup Ct NY 1985); NML Capital Ltd v Republic of Argentina [2009] EWHC 110 (Comm), para 58; Peter Cresswell, William Blair, and Philip Wood (eds), Butterworths Encyclopaedia of Banking Law (2013) F-456–58.

25  For details, see Chapter 6. Campbell McLachlan, Foreign Relations Law (2014) 530; Alfred Dunhill of London, Inc v The Republic of Cuba, 425 US 682 (1976); Yukos Capital SARL v OJSC Rosneft Oil Co [2012] EWCA Civ 855, paras 92–94. The District Court in Allied Bank, discussed in Chapter 3, applied the Act of State given that the Costa Rican government intervened to cater for the illiquidity of a State-owned bank—the dispute was not thus concerned with the sovereign debt sensu stricto; Costa Rica was acting in the capacity of public regulator.

26  Poštová Banka, a.s. and Istrokapital SE v Hellenic Republic, ICSID Case No ARB/13/8, Award, 9 April 2015, paras 318–24. The award was upheld by the ad hoc committee (Poštová Banka, a.s. and Istrokapital SE v Hellenic Republic, ICSID Case No ARB/13/8, Decision for Partial Annulment, 29 September 2016).

27  Ibid paras 361–65.

28  Loan Agreement between Italy v Costa Rica, Decision of 27 June 1998, Reports of International Arbitral Awards, Vol XXV, 75.

29  Ibid 72–74.

30  See, eg, George W. Cook (U.S.A.) v United Mexican States, Reports of International Arbitral Awards, 30 April 1929, Vol IV, 510; s 3(3) of the State Immunity Act (1978).

31  See, eg, in the United States—the Uniform Offering Circular; in China—Regulations on Treasury Bonds of the People’s Republic of China.

32  See, eg, Mexican Tesobonos, Argentine Bonods.

33  Von Hoffmann v City of Quincy, 71 US 535 (1866) (treating the loans issued under statutes as contracts).

34  In Perry v United States, 294 US 330, 348 (1935), the bonds issued by the United States, commercial in nature, referred to US circulars simply ‘for a statement of the further rights of the holders of bonds of said series’. That said, the distinction between bonds issued pursuant to a statute and those contracted in absence of a statutory framework might be of relevance in international investment arbitration (see Continental Casualty v Argentina, ICSID Case No ARB/03/9, Award, 5 September 2008, para 302).

35  Hersch Lauterpacht, ‘The Problem of Jurisdictional Immunities of Foreign States’ (1951) 28 BYBIL 220, 253, 257–58; van Hècke (n 7) 27–28.

36  Paris, 20 juin 1938, Dame Hébert c Trésor Public, Clunet 1939, 104 (translation is mine). For other French cases, see Lauterpacht (n 35) 262.

37  Van Hècke (n 7) 27. However, the debt owed by the State might not pertain to the public law regime if the debt arises from an assignment of a private debt to the State, whereupon the debt will be treated as a private obligation (Conseil d’Etat, 21 juillet 1972, Veuve Hermann, Rev crit DIP, 1974 330, 333).

38  (1939) Clunet 105.

39  Tribunal de Grande Instance, Association Fédérative Internationale des Porteurs d’Emprunts Russes v La Fédération de Russie, 4 novembre 2015.

40  See, eg, Themis Capital, LLC et al v Democratic Republic of Congo and Central Bank of the Democratic Republic of the Congo, 881 F Supp 2d 508, 526 (SDNY 2012) (‘Restructuring debt is a commercial transaction, a paradigmatically private act’); NML v Argentina, [2011] UKSC 31, para 108 (per Lord Collins).

41  Corte di Cassazione, 27 May 2005, decision no 11225 of 27 May 2005, RDIPP, 2005, 1091.

42  Auto de la Audicencia Provincial de Madrid, Sección 18ª, núm 192/2007, de 19 de septiembre.

43  Case VI ZR 516/14, Judgment of 8 March 2016.

44  Beatrice Bonafé, ‘State Immunity and the Protection of Private Investors: The Argentine Bonds Case before Italian Courts’ (2006) 16 IYBIL 165, 170–76; cf Corte Constitucional, 15 July 1992 (assuming that State guarantees are commercial in nature, cited in Anna de Luca, ‘L’immunità degli stati stranieri dalla giurisdizioni civile’ in Natalino Ronzitti and Gabriella Venturini (eds), Le immunità guirisdizionali degli stati e degli altri enti internazionali (2008) 23).

45  Canada Southern Railway Co v Gebhard, 109 US 527 (1883).

46  See Chapter 3.

47  On such clauses see Chapter 2; Lee Buchheit and Ralph Reisner, ‘The Effect of the Sovereign Debt Restructuring Process on Inter-Creditor Relationships’ (1988) 2 U Ill L Rev 493, 495–500, 511–16.

48  Nacional Financiera, SNC v Chase Manhattan Bank, 2003 WL 1878415 (SDNY 2003) (deciding in an action against other creditors alleging breach of the pari passu clause that the contract did not create mutual obligations among creditors).

49  See, eg, Henry Batiffol, Les Conflits de lois en matière de contrats (1938) 106–07 (treating sovereign debt holdings as subject to one single law, as the sovereign debt is in principle unitary). See also George Sausser-Hall, ‘La clause-or dans les contrats publics et privés’ (1937) 60 Recueil des Cours, 651, 753.

50  Yucyco Ltd v Republic of Slovenia, 984 F Supp 209, 220 (SDNY 1997) (citing s 14.3 of the Yugoslavian New Financing Agreement of 1988, namely that ‘the amounts payable at any time … to each Creditor shall be a separate and independent debt and each Creditor shall be entitled to protect and enforce his rights arising out of this Agreement, and it shall not be necessary for any other Creditor to be joined as an additional party in any proceedings for such purpose’).

51  Crédit Français International SA v Sociedad Financiera de Comercio, 490 NYS 2d 670, 684 (Sup Ct NY 1985).

52  Buchheit (n 47) 503–04; Philip Rawlings, ‘The Management of Loan Syndicates and the Rights of Individual Lenders’ (2009) 24(4) JIBLR 179, 182; Charles Proctor, The Law and Practice of International Banking (2010), para 21.27.

53  A.I. Credit Corp v Government of Jamaica, 666 F Supp 629, 631–32 (SDNY 1987) (holding that the bondholder had individual standing against Jamaica).

54  15 F.3d 238, 243 (2d Cir 1994).

55  Beal Savings Bank v Sommer, 8 NY 3d 318, 331 (NY 2007).

56  Principle I.1, Agency, Principles on Promoting Responsible Sovereign Lending and Borrowing, UNCTAD, 2012.

57  Juan Pablo Bohoslavsky and Jernej Letnar Cernic (eds), Making Sovereign Financing and Human Rights Work (2014); Matthias Goldmann, ‘Human Rights and Sovereign Debt Workouts’ (2014) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2330997); Sabine Schlemmer-Schulte, ‘Fragmentation of International Law: The Case of International Finance & Investment Law Versus Human Rights Law’ (2012) 25 Pac McGeorge Global Bus & Dev LJ 409. We reserve our opinion on the issue of impact of foreign financing on regimes involved in gross human rights violations, on which see, Juan Pablo Bohoslavsky, ‘Report on Financial Complicity: Lending to States Engaged in Gross Human Rights Violations’ (2015) UN General Assembly A/HRC/28/59, esp para 35.

58  Margot Salomon, Global Responsibility for Human Rights: World Poverty and the Development of International Law (2007); Dimitris Chorafas, Sovereign Debt Crisis: The New Normal and the Newly Poor (2011).

59  Christian Barry, Barry Herman, and Lydia Tomitova (eds), Dealing Fairly with Developing Country Debt (2007).

60  UN General Assembly, ‘Basic Principles on Sovereign Debt Restructuring Processes’ (2015) UN Doc A/69/L.84.

61  Milan Bulajic, ‘Indebtness of Developing Countries and New International Economic Order’ in Detlev Dicke (ed), Foreign Debts in the Present and a New International Economic Order (1986) 64–65, 71. See also Programme of Action on the Establishment of a New International Economic Order, UNGA Resolution 3202 (S/VI), 1 May 1974, para II.2.f. and g.

64  See Chapter 2.

65  A.I. Credit Corp v Government of Jamaica, 666 F Supp 629, 633 (SDNY 1987).

66  Michael Reisman, ‘ “Case Specific Mandates” versus “Systemic Implications”: How Should Investment Tribunals Decide?—The Freshfields Arbitration Lecture’ (2013) 29(2) Arb Intl 131.

67  See, eg, NML Capital, Ltd v Republic of Argentina, 727 F.3d 230, 245–48 (2d Cir 2013) (rejecting Argentina’s various ‘public interest’ arguments); Lightwater Corp, Ltd v Republic of Argentina, 2003 US Dist LEXIS 6156, 13 (SDNY 2003) (dismissing the defence of necessity); Libra Bank Ltd v Banco Nacional de Costa Rica, 570 F Supp 870, 882 (SDNY 1983).

68  Jonathan Morgan, Contract Law Minimalism: A Formalist Restatement of Commercial Contract Law (2013), esp 87, 148, 158 (stressing the ineptitude and counterproductiveness of redistributing wealth through contract law).

69  Sarah Worthington and Grainne Mellon, ‘Statutory Rules, Common Law Rules and Public Policy in the Global Financial Crisis’ (2010–11) 29 Penn St Intl LR 613, 613–25 (but it should be noted that on pp 625–33 they take a more expansive view of the role of public policy in judicial lawmaking).

70  But see the recent pari passu litigation in the US, discussed in Chapter 7.

71  Although not sharing this premise, Chapter 3 concludes that in contracts with majority action clauses the creditors are indeed under an obligation of standstill, pending the decision by the majority bondholders to refuse or to accept the exchange offer.

72  Michael Bothe and Josef Brink, ‘Public Debt Restructuring—The Case for International Economic Co-operation’ (1986) 29 GYIL 86.

73  Jörn Kämmerer, ‘Der Staatsbankrott aus völkerrechtlicher Sicht’ (2005) 65 ZaöRV 651, 657 cited in Bogdandy and Goldmann (n 13) 56.

74  Matthias Goldman, ‘Sovereign Debt Crises as Threats to the Peace: Restructuring under Chapter VII of the UN Charter?’ (2012) 4 Go JIL 153.

75  Bogdandy and Goldmann (n 13) 64–30; Juan Pablo Bohoslavsky, Yuefen Li, and Marie Sudreau, ‘Emerging Customary International Law in Sovereign Debt Governance?’ (2014) 9(1) CMLJ 55.

76  Dominique Carreau, ‘Rapport du directeur d’études de la section française du centre’ in Dominique Carreau and Malcolm Shaw (eds), La Dette extérieure: The External Debt (1995) 17; Matthias Goldmann, ‘Good Faith and Transparency in Sovereign Debt Workouts’ (2014) 10–13 (available at http://www.unctad.info/upload/Debt%20Portal/DWM%20Good%20Faith%20and%20Transparency%2020131223.pdf).

77  Horatia Muir-Watt, ‘Private International Law as Global Governance: Beyond the Schize, from Closet to Planet’ (2011) 5 (available at http://works.bepress.com/horatia_muir-watt/1).

78  Odette Lienau, ‘Legitimacy and Impartiality in a Sovereign Debt Workout Mechanism’ (2006) Cornell Law Faculty Publications, Paper 1110, 31.

81  As will be seen in Chapters 3 and 7.

82  See Chapter 3.

83  Michael Waibel, ‘Staateninsolvenzen in historischer Sicht’ in Georg Kodek and August Reinisch (eds), Staateninsolvenz (2012) 55.

84  Kenneth Rogoff and Jeromin Zettelmeyer, ‘Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976–2001’ (2002) IMF Staff Papers 49; Netanella Zahavi, ‘Sovereign Default: Analyses and Remedies’ (JSD thesis, Yale Law School 2005) 108–51; François Gianviti, Anne Krueger, Jean Pisani-Ferry, André Sapir, and Jürgen von Hagen, ‘A European Mechanism for Sovereign Debt Crisis Resolution: A Proposal’ (2010) Bruegel Blueprint Series Vol 10.

85  Bogdandy and Goldmann (n 13) 64–70; John Fischer Williams, ‘Le droit international et les obligations financières internationales qui naissent d’un contrat’ (1923) 1 Recueil des Cours 289, 344–46; Schier (n 3) 258–61; Dimitrij Euler and Giuseppe Bianco, ‘Breaking the Bond: Vulture Funds and Investment Arbitration’ (2013) 31(3) ASA Bulletin 558, 568–69.

87  Frontier Petroleum Services Ltd v The Czech Republic, UNCITRAL, Final Award, 12 November 2010, paras 527–30.

88  Georg Schwarzenberger, ‘State Bankruptcy and International Law’ in Wybo Heere, International Law and its Sources. Liber Amicorum Maarten Bos (1988) 139, 144; cf, on the contrary, Michael Waibel, ‘La faillite souveraine en droit: Un Etat peut-il faire faillite?’ in Audit, (ed), Insolvabilité des Etats et dettes souveraines (2011), 56–61; Michael Waibel, Sovereign Defaults before International Courts and Tribunals (2011) 92–93, 97–98, but see p 152 for contrary considerations (citing C. Itoh Middle East E.C. v The People’s Republic of the Congo and the Congolese Redemption Fund, ICC Arbitration No 6219, 31 July 1990).

89  The analogy was rejected in F.G. Hemisphere Associates LLC v Republic of Congo [2005] EWHC 3103 (Comm), paras 7–8, 13.

90  David Skeel, Debt’s Dominion: A History of Bankruptcy Law in America (2003) 48–70, 104–06.

91  Lee Buchheit and Mitu Gulati, ‘Sovereign Bonds and the Collective Will’ (2004) 51 Emory LJ 1317, 1322.

92  Stephen Lubben, ‘Out of the Past: Railroads and Sovereign Debt Restructuring’ (2004) 35 Geo J Intl L 845, 855–57.

93  See Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36, esp paras 38, 83.

94  Hersch Lauterpacht, Private Law Sources and Analogies of International Law (1927) 253, citing pleadings from Venezuelan Preferential Claim (1904).

95  For differences, see ILA, ‘State Insolvency: Options for the Way Forward: Hague Conference Report’ (2010a) 19ff; Marc Lewyn, ‘Foreign Debt—Act of State Doctrine—Unilateral Deferral of Obligations by Debtor Nations Is Inconsistent with United States Law and Policy: Allied Bank International v. Banco Credito Agricola de Cartago’ (1985) 15 Ga J Intl & Comp L 657, 666.

96  Andreas Witte, ‘The Greek Bond Haircut: Public and Private International Law and European Law Limits to Unilateral Sovereign Debt Restructuring’ (2012) 9(2) Manchester J Intl Econ L 307, 332.

97  Zahavi (n 84) 221–47.

98  Andrei Shleifer, ‘Will the Sovereign Debt Market Survive?’ (2003) 93(2) Amer Econ Rev 85, 89; Ricki Tigert, ‘Allied Bank International: A United States Government Perspective’ (1985) 17 NYU J Intl L & Pol 511, 522.

99  Republic of Zaire v J.C.M. Duclaux, Court of Appeal of The Hague, 18 February 1988, (1989) 20 NYIL 296, 300; W.L. Oltmans v The Republic of Surinam, Netherlands Supreme Court, 28 September 1990, (1992) 23 NYIL 442.

100  Zahavi (n 84) 157–209, 216, 221–32, 236.

101  [2004] EWHC 1566 (Ch), paras 69–70. See also Jefferies International Limited v Landsbanki Islands HF [2009] EWHC 894 (Comm), paras 24–29 (refusing to stay proceedings in deference to the failure of an Icelandic bank).

102  See, eg, John Tribe, ‘Discharge in Bankruptcy: An Examination of Personal Insolvency’s Fresh Start Function in English Law: Part 2’ (2012) 25(8) Insolv Int 117, 118.

103  Kenneth Rogoff and Jeromin Zettelmeyer, ‘Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976–2001’ (2002) 49(3) IMF Staff Papers 470, 482–83, 485; Kunibert Raffer, ‘What’s Good for the United States Must Be Good for the World: Advocating an International Chapter 9 Insolvency’ in Bruno Kreisky Forum for International Dialogue (ed), From Cancún to Vienna: International Development in a New World (1993) 64. See also Susan Block-Lieb, ‘Austerity, Debt Overhang and the Design of International Standards on Sovereign, Corporate and Consumer Debt Restructuring’ (2015) 22(2) Ind J Glob L Stud 487 (offering the analogy with household debt).

104  See Chapter 7.

105  David Skeel, ‘State Bankruptcy from the Ground Up’ in Peter Conti-Brown and David Skeel (eds), When States Go Broke: The Origins, Context, and Solutions for the American States in Fiscal Crisis (2012) 191. See also in respect of the bankruptcy regime of Puerto Rico, ‘Goodlatte and Marino Statement on Recent Developments Regarding Puerto Rico’ (2015) (available at http://judiciary.house.gov/index.cfm/press-releases?id=73F4990C-4D3D-4BD8-B360-D642875054AC).

106  See Chapter 6.

107  See Chapter 3.

108  Ibid.

109  757 F.2d 516 (2d Cir 1985) (discussed in detail in Chapter 6).

110  109 F.3d 850, 854 (2d Cir 1997) (discussed in detail in Chapter 3).

111  570 F Supp 870 (SDNY 1983).

112  See Chapters 3 and 6. See also NML Capital Ltd et al. v Republic of Argentina, 08 Civ. 6978 (SDNY 2015) (‘Comity does not suggest abrogating those judgments, or creating exceptions to the Injunction designed to enforce them’); Export-Import Bank of the Republic of China v Grenada, 2012 US Dist LEXIS 116531 (SDNY 2012), 5–6 (referred to the doctrine of comity as one of the factors in deciding to award interim relief).

113  Airbus Industrie CIE v Patel [1999] 1 AC 119, 138; Star Reefers Pool Inc v JFC Group Co Ltd [2012] EWCA Civ 14.

114  Babanaft International Co SA v Bassatne [1990] Ch 13, 32; Masri v Consolidated Contractors International (UK) Ltd and others (No 2) [2009] QB 450, 466 (refusing to make a worldwide freezing injunction against third parties in respect of assets located abroad).

115  Lord Collins of Mapesbury et al (eds), Dicey, Morris & Collins on the Conflict of Laws, vol 1 (2012) 6–10. In Masri v Consolidated Contractors International Co SAL [2011] EWCA Civ 746, paras 49–53, the Court of Appeal partially overruled a decision appointing a receiver over foreign assets on the grounds of comity. In The Abidin Daver [1984] AC 398, 412 comity was cited to support the developing doctrine of forum non conveniens.

116  See, eg, Pearl Petroleum Company Limited v The Kurdistan Regional Government of Iraq [2015] EWHC 3361 (Comm), para 52.

117  Adrian Briggs, ‘Principle of Comity in Private International Law’ (2012) 354 Recueil des Cours 65, 92.

118  Yukos Capital SARL v OJSC Rosneft Oil Company [2012] EWCA Civ 855, para 87.

119  Goldman Sachs International v Novo Banco [2015] EWHC 2371 (Comm), para 112. See also Chapter 3.

120  Friedrich Hayek, Law, Legislation and History: Rules and Order (1973) 51.

121  See, eg, Dan Awrey, William Blair, and David Kershaw, ‘Between Law and Markets: Is there a Role for Culture and Ethics in Financial Regulation’ (2012) LSE Law, Society and Economics Working Papers 14/2012, 5–6.

122  For the evolution of ideas on the rational market hypothesis, see Justin Fox, The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street (2009).

123  For the application in bond markets, see Bodo Herzog, ‘A Behavioural Model of European Bond Markets’ (2014) 3(3) J Stock Forex Trad 2014.

124  Michael Tomz, Reputation and International Cooperation: Sovereign Debt across Three Centuries (2007) 11.

125  Brian Snowdon, Howard Vane, and Peter Wynarczyk, A Modern Guide to Macroeconomics: An Introduction to Competing Schools of Thought (1994) 414.

126  Marc Flandreau, ‘Sovereign States, Bondholders Committees, and the London Stock Exchange in the Nineteenth Century (1827–68): New Facts and Old Fictions’ (2013b) 29(4) Oxford Rev Econ Policy 668; Rui Pedro Esteves, ‘The Bondholder, the Sovereign, and the Banker: Sovereign Debt and Bondholders’ Protection before 1914’ (2013) 17 Europ Rev Econ Hist 389.

127  Jonathan Eaton and Mark Gersovitz, ‘Debt with Potential Repudiation: Theoretical and Empirical Analysis’ (1981) 48(2) Rev Econ Stud 289; Michael Tomz, Reputation and International Cooperation: Sovereign Debt across Three Centuries (2007).

128  Joseph Stiglitz, ‘Sovereign Debt: Notes on Theoretical Framework and Policy Analyses’ (2002) Initiative for Public Dialogue Working Paper Series 12–13.

129  Ibid 13. For empirical evidence, see Ugo Panizza, Federico Sturzenegger, and Jeromin Zettelmeyer, ‘The Economics and Law of Sovereign Debt and Default’ (2009) 47(3) J Econ Lit 651, 675–77, 687.

130  See in this sense Michael Waibel, ‘Opening Pandora’s Box: Sovereign Bonds in International Arbitration’ (2007) 101 AJIL 711, 754–55; Melissa Boudreau, ‘Restructuring Sovereign Debt under Local Law: Are Retrofit Collective Action Clauses Expropriatory?’ (2012) 2 HBLR Online 164, 181.

131  JP Morgan Chase Bank v Springwell Navigation Corporation [2008] EWHC 1186 (Comm) (an inherent risk was present in investing into Russian government bonds, or instruments linked to the Russian government bonds, that collapsed in 1998).

132  Gemma Varriale, ‘Basel Plan to Curb Banks’ Sovereign Debt Faces Challenges’ (3 February 2015) IFLR.

133  Christine Jolls, ‘On Law Enforcement with Boundedly Rational Actors’ in Francesco Parisi and Vernon Smith (eds), The Law and Economics of Irrational Behavior (2005) 273–79.

134  The general unwillingness to anticipate the occurrence of negative events.

135  For an overview, see Luís Oliveira, José Dias Curto, and João Pedro Nunes, ‘The Determinants of Sovereign Credit Spread Changes in the Euro-Zone’ (2012) 22 Int Fin Markets, Inst and Money 278, 279–80.

136  Francis Longstaff, Jun Pan, Lasse Pedersen, and Kenneth Singleton, ‘How Sovereign Is Sovereign Credit Risk?’ (2011) 3(2) Am Econ J 75.

137  Oliveira et al (n 135) 279–80.

138  Michael Bradley and Michael Roberts, ‘The Structure and Pricing of Corporate Debt Covenants’ (2003) 25–28 (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=585882). See also Khalil Torabzadeh, John Roufagalas, and Criss Woodruff, ‘Self-Selection and the Effects of Poison Put/Call Covenants on the Reoffering Yields of Corporate Bonds’ (2000) 9 Intl Rev Econ Fin 139.

139  Marcos Chamon, Julian Schumacher, and Christoph Trebesch, ‘Foreign Law Bonds: Can They Reduce Sovereign Borrowing Costs?’ (2014) Mimeo, fn 6.

140  Mark Weidemaier, ‘Sovereign Immunity and Sovereign Debt’ (2014) 1 U Ill L Rev 67, 100–01

141  On which see Chapter 2.

142  Michael Bradley and Mitu Gulati, ‘Collective Action Clauses for the Eurozone’ (2014) 18(6) Rev Fin 2045, 2051–54, 2097. See also Elena Carletti, Paolo Colla, Mitu Gulati, and Steven Ongena, ‘Pricing Contract Terms in a Crisis: Venezuelan Bonds in 2016’ (2016) 11(4) CMLJ 540.

143  Alfredo Bardozzetti and Davide Dottori, ‘Collective Action Clauses: How Do They Affect Sovereign Bond Yields?’ (2014) 92 J Intl Econ 286.

144  Elena Carletti, Paolo Colla, Mitu Gulati, and Steven Ongena, ‘The Price of Law: The Case of the Eurozone Collective Action Clauses’ (2016) (available at http://scholarship.law.duke.edu/faculty_scholarship/3543).

145  Stephen Choi, Mitu Gulati, and Eric Posner, ‘Pricing Terms in Sovereign Debt Contracts: A Greek Case Study with Implications for the European Crisis Resolution Mechanism’ (2011) 6(2) CMLJ 163, 171–72; Michael Bradley, James Cox, and Mitu Gulati, ‘The Market Reaction to Legal Shocks and their Antidotes’ (2010) 39 J Leg Stud 289 (presenting more conclusive evidence).

146  Stephen Choi and Mitu Gulati, ‘The Pricing of Non-Price Terms in Sovereign Bonds: The Case of the Greek Guarantees’ (2016) JLFA 1.

147  Stéphanie Collet and Kim Oosterlinck, ‘Pricing the Odious in Odious Debts’ (2016) Discussion Paper DP11653.

148  Stephen Choi, Mitu Gulati, and Eric Posner, ‘Pricing Terms in Sovereign Debt Contracts: A Greek Case Study with Implications for the European Crisis Resolution Mechanism’ (2011) 6(2) CMLJ 163.

149  Mitu Gulati, Christoph Trebesch, and Jeromin Zettelmeyer, ‘International Finance and Sovereign Debt’ in Francesco Parisi (ed), Oxford Handbook of Law and Economics: Volume 3 (2017) 493.

150  Andrew Clare and Nicolas Schmidlin, ‘The Impact of Foreign Governing Law on European Government Bond Yields’ (2014) (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2406477).

151  Yuefen Li and Ugo Panizza, ‘The Economic Rationale for the Principles on Promoting Responsible Sovereign Lending and Borrowing’ in Carlos Espósito, Yuefen Li, and Juan Pablo Bohoslavsky (eds), Sovereign Financing and International Law: The UNCTAD Principles on Responsible Sovereign Lending and Borrowing (2013) 29.

152  Ugo Panizza, Federico Sturzenegger, and Jeromin Zettelmeyer, ‘The Economics and Law of Sovereign Debt and Default’ (2009) 47(3) J Econ Lit 651, 664–67. Flandreau sees in this the deficiency of financial markets, in that their ability to discriminate comes in only when it is too late—in times of crises (Marc Flandreau, ‘Do Good Sovereigns Default? Lessons of History’ in Sovereign Risk: A World without Risk-Free Assets? (2013a) BIS Papers No 72, 19).

153  See also Chamon et al (n 139) 3–4 (confirming the finding that the States in distress pay a premium for domestic-law bonds).

154  Bank of New York Mellon (London Branch) v Truvo N.V. and others [2013] EWHC 136 (Comm), paras 83–85.

155  Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, paras 28–42 (but see the caveat in para 33).

156  Antonello D’Agostino and Michael Ehrmann, ‘The Pricing of G7 Sovereign Bond Spreads: The Times, They Are A-Changin’ (2013) ECB Working Paper Series No 1520.

157  Contrast with the empirical analysis showing no correlation between exogenous market factors and the default risk of a sovereign, Alexandre Jeanneret, Eric Paget-Blanc, and Slim Souissi, ‘Sovereign Defaults by Currency Denomination’ (2014) 4–5 (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2365059).

158  See Waibel (n 130) 754–55; Boudreau (n 130) 181.

159  589 F.Supp 1465, 1471 (SDNY 1984). See also West v Multibanco Comermex, 807 F.2d 820, 833 (2d Cir 1987).