Sinopsis

Introduction

Sovereign Debt (SD) has always been a recurring issue since the creation of the modern States after Westphalia. The 19 century ended with some SD crises, that in the next century became more generalized, either as the result of the World Wars, the end of the empires, or the different economic shocks of the 1970s and 1990s. The SD crisis came to the developed nations, namely Europe, after the early 2010s, and it is going to stay, as the debt is building up across the world, and will continue growing after the current pandemic and the commitments toward a more sustainable society. At some point we will have to face it and deal with it. If there is a tag to describe this current century it may be the century in which debt became the commodity.

This work aims at analyzing the main views in the field of SD, describes the status quo, analyzes the current understanding of SD and explores the potential modifications that could be suggested to improve the situation, keeping these modifications within a feasible range. To understand SD one has to think out of the box and reach for a multidimensional approach to SD. Again, this is done in the confidence that the results of the legal suggestions submitted will be of more use than alternative endeavors and will be better shaped.

Most of the actual studies on SD are undertaken by economists, very few studies come from the legal camp, and there is an obvious lack of communication among them. The studies from the economists side are increasingly partial and limited to specific aspects of the complex reality behind SD, and colored by a mathematical apparatus –demanded by international organizations and central banks– that is used to generate model scenarios that aim at finding the magic sustainability number or the most accurate prediction of what is going to happen –predictions that by the way reveal themselves often wrong, it is true that either you know or you predict– the occasional venturing into law being considered a distraction into a minor discipline, symbolized in the despective use of the word regulation. Yet, these studies are helpful in the sense that they are providing useful data on SD defaults and restructurings. On the other side, the few purely legal studies on SD do not pay any attention to the economic background behind SD and deal with the few common places of the issue, such as holdouts and pari passu, often without a critical perspective and with an obvious globalist bias.

But talking about the legal aspects of SD and at the same time ignoring the current economic context is a futile exercise, or at least renders this literature partially incomplete as SD in itself is both an economic and legal concept, –even it has a remarkable political touch– not in vain SD is at the heart of two of the pillars of capitalism, the financial system and the monetary system. For that reason, and to integrate the different layers of the analysis, –although of course ultimately this book pursues a legal approach to SD–, the first chapter is devoted to describing some views on SD by selected economists and a description of the necessary aspects of the current economic situation in the world required to apprehend SD. This will be a recurring discourse expanded in the other two chapters, whenever deemed necessary, as again, it is deceiving to study SD just from the legal perspective and ignoring economics and to some extent also its governance implications and even politics in general. At the same time, SD is a very serious subject to be left at the mercy of economists.

The analysis of SD is also supplemented with a political dimension. SD is at the crossroads between imperialism and its contestation, a game played day in and day out around the world. The balance of power is also changing and wealth is moving eastwards to Asia. Some of the legal literature on SD ignores this dimension, and for that reason the solutions proposed, although surely offering some value, remain somehow theoretical exercises. SD’s continuity and even expansion is also based on the same fundamental cement that is still keeping together the system, the trust in fiat money and in the full faith and credit of the nation States, up to the point that SD may be the guarantee of the survival of the embattled Sovereign itself in the coming years. An approach to SD also has to take into account the real balance of powers in the new world in the 21 century, the struggles that are surfacing, and not staying anchored in the world as it was pictured right after Bretton Woods recycled via the Plaza Accord. Globalization has impacted the world in a way that we could not have imagined a few years ago. New transnational corporations and above all huge investment funds that have more capitalization than that of many Sovereign States play their cards against nation States incapable of reacting. The world financial markets are increasingly concentrated, and some of their operations are controlled by algorithms (maybe even at some point AI will replace the market completely when predictability will be streamlined) that achieve independent life and celebrate it going wild, as the popular upheavals in the form of millenial Robinhooders or @wallstreetbets meet their fate. But above all, markets have also never been so affected by central banks.

The book that the reader has in his hands is divided into three chapters. The first chapter is devoted to the current economic background, in which we answer some questions that have to be addressed, such as why debt has been incurred; if debt in itself is good or bad; the views on SD of economists and schools (some of them prominent, others not so well known by the general public but extremely influential); and how the increasing amount of SD has been dealt with via unconventional monetary policies and what have been the dire consequences of using these policies –and if there is a way out of them or not–.

A second chapter sets the basics of SD, its mapping, adds considerations on its political constraints, defends a balanced approach taking into account both the interests of the Sovereign and its creditors and explains both the public approach and the private approach to SD default and restructuring, taking sides with the private or contractual approach as the best solution for the SD crises. The defense of the contractual approach as the best solution goes against an increasing trend pushed by some international organizations and other groups in favor of a public bankruptcy proceeding to be applied to the Sovereigns. Here it is defended that the current system of dealing with SD in which there is not a public procedure has been working reasonably, even if there are several noisy exceptions that are just that, exceptions, but that have been intentionally amplified. We emphasize that most of the SD crises of the last decade have been sorted out via the contractual approach and there is no need to change it, –only to refine it–. The chapter also includes two sections in which there is an assessment of the litigation in front of the ICSID –coupled with the denial that SD is a foreign investment– and the idyosincratic litigation against everything that comes from the ECB. It is also proven beyond doubt that the holdout situation is not really a big problem. The criticism to the public approach is further stepped in, firstly by demonstrating that the model that is being suggested for the proposed changes, the US Bankruptcy Code, is inadequate, then adding methodological considerations on regulation and contracts (tapping L&E and its nemesis Critical Legal Studies) and showing that bankruptcy itself –the alledged alternative to a contractual approach– in the views of the valentior pars dotrinæ has been paradoxically contractualized. In particular L&E mainstream scholarship concludes that bankruptcy regulation is not as efficient as it purports to be, and that de iure condendo an alternative contractual approach ex ante is welcomed –although it collides with the waiver prohibition in the current law–. If this is the case, why then try to impose a bankrupcty procedure to the Sovereigns –what in itself is even stranger as its two premises, liquidation and the need of a collective procedure, do not concur–.

The second chapter also adds other methodological considerations on game theory –as an integration of the two relevant negotiation links in the SD restructuring, that of the Sovereign with the creditors and that of the creditors among themselves, this latter frequently ignored by the legal studies– that could be applied to the scenario and yield results. Game theory has been applied a little in the field, but its furtherance gives us direction on how to play the SD game and in this sense will predict the parties’ movements (as long as they are rational) taking into account their strategies and payoffs. Then SD is considered against the background of the main lines of the reform of the international financial market architecture, and in particular the Basel framework that made SD an object of desire, what obviously has consequences. The chapter finishes stressing the role that SD plays in two key areas, repo markets and also in derivative markets.

The third and final chapter is a roadmap to the application of the contractual solution to SD default and restructuring, in the form of law applicable to the agreements themselves and as gap-filling provision to incomplete SD contracts, dealing with some of the typical loci communes in SD litigation. The first set of additions comes from traditional Contract law, –the preferred one is New York law where most of the litigation takes place as it is the deepest market for financing–. But the contractual approach is enhanced via transnational private law (TPL) that has formed in the last years a truly lex mercatoria debitoris soberanis. TPL has addressed some of the most difficult issues in SD default and restructuring, such as the creditors consent for the restructuring, via the collective action clauses (CAC) that are even recognized by the public law approach as necessary. There are other typical clauses that aim at protecting creditors that mimick the same objectives that creditors have tried wrongly to get via considering SD as an investment, and it also encompasses a study of the controversial pari passu clause and places it in its right context. Then there is a specific reference to the ways in which the SD crisis is handled via reprofiling or restructuring, with a section especially devoted to the gratuitous termination of SD that sooner or later will have to be applied to some extent. TPL also helps to clarify the forum in which to litigate SD, a domestic forum, not arbitral courts.

As during the research it was made clear that the Sovereign fulfils some basic functions to its citizenry, –and the role of human rights of its citizens is considered and put in perspective– there is also a specific need to protect these rights as another element in the SD equation. So the research analyzes different options to improve Sovereign’s protection, exploring different techniques, ones that could be used, others that are discarded. A priori in the menu there are immunities, non-assignability of the SD bonds, the theory of the commons, the macro prudential policies and the consideration of the Sovereign as a pretended G-SIFI in terms of issuing specific convertible SD bonds and seting up buffer capitals. The third chapter finishes with a section, compatible with the contractual approach, dealing with the possibility of selecting a third-party mediator that could help in the negotiation process, a choice that could be reserved for the BIS after eliminating for several reasons the otherwise natural candidate, the IMF.

Índice

INTRODUCTION

CHAPTER I
THE CURRENT MACROECONOMIC BACKGROUND

1.1.A world in debt

1.2.Why debt has been incurred

1.3.Is debt a bad or a good thing?

1.4.Sovereign Debt in the view of leading economists and schools

1.4.1.Adam Smith

1.4.2.Karl Marx

1.4.3.Thomas Piketty

1.4.4.John Maynard Keynes

1.4.5.Friedrich A. Hayek

1.4.6.Marriner Eccles

1.4.7.Irvin Fisher

1.4.8.Abba Ptachya Lerner

1.4.9.Modern monetary theory

1.4.10.Some reactions form the orthodoxy

1.5.Dealing with Sovereign Debt: the unconventional monetary policies

1.6.The consequences of resorting to unconventional monetary policies

1.7.The way out of unconventional monetary policies

CHAPTER 2
THE CONSTITUENTS OF SOVEREIGN DEBT/SOVEREIGN DEBT IN A CONTEXT. THE PREFERENCE FOR THE CONTRACTUAL APPROACH

2.1.Mapping of sovereign debt

2.2.Sovereign Debt and the political constraints

2.3.The balance between the Sovereign and the creditors

2.4.The current Sovereign Debt scenario

2.4.1.Introduction

2.4.2.The noisy litigation

2.4.2.1.Argentina

2.4.2.2.Greece

2.4.2.3.Ukraine

2.4.2.4.Bank crises in Iceland and Cyprus

2.4.2.5.The challenge to Sovereign Debt bonds purchased by the ECB

2.4.2.6.Sovereign Debt litigation in front of the ICSID and the ECHR

2.4.3.Holdouts, the problem that wasn’t

2.4.4.The actual situation regarding sovereign debt

2.5.The public approach to Sovereign Debt default and restructuring

2.5.1.The different positions

2.5.2.A critical view of the public approach to Sovereign Default and restructuring

2.5.2.1.General criticism

2.5.2.2.The inadequacy of the us bankruptcy code as a model for Sovereign Debt default and restructuring

2.6.A preliminary methodological approach to contracts

2.6.1.General background

2.6.2.Its application to the SD domain. Rules vs standards. The SD bond as a contractual right, not property right (investment)

2.6.3.Toward a contractual approach to bankruptcy

2.6.4.Game theory as a useful tool to analyze Sovereign Debt negotiation

2.6.4.1.Introduction

2.6.4.2.Game theory analysis and Sovereign Debt

2.7.The ongoing reform of the international financial architecture

2.7.1.The main lines of the reform

2.7.2.The basel framework and the treatment of Sovereign Debt

2.7.3.The debate over the reform of the current regulatory treatment of SD in the basel framework

2.7.4.The role of Sovereign Debt in derivative markets and repo markets

CHAPTER 3
THE CONTRACTUAL APPROACH TO SOVEREIGN DEBT DEFAULT AND RESTRUCTURING

3.1.A contracts approach to sovereign debt. Introduction

3.2.The merits of private law and its application

3.3.Contract law

3.3.1.Contract law as default regulation for Sovereign Debt

3.3.1.1.Contract formation and essentialia negotii

3.3.1.2.Contractual information

3.3.1.3.Accountability

3.3.1.4.Privity of contract

3.3.1.5.Breach of contract

3.3.1.6.Impossibility, commercial impracticability or frustration of purpose

3.4.The transnational private law approach to sovereign debt default and restructuring

3.4.1.Transnational private law as a tool to enhance the contractual approach to Sovereign Debt

3.4.2.The lex mercatoria debitoris soberanis

3.4.3.Collective action clauses

3.4.4.The application to unconscionability and transparency

3.4.5.Restitution as a right to the creditor

3.4.6.Mimicking a collective proceeding. Cross-default clauses. Cross-acceleration clauses. Stay of proceedings and engagement clauses

3.4.7.Necessity

3.4.8.Litigation based upon discrimination among Sovereign Debt bondholders and the role of pari passu. Mimicking creditor’s protection

3.4.9.Privileges, credit preferences and guarantees. The negative pledge clause

3.4.10.Reprofiling and restructuring as two significant applications of contract law

3.4.11.Gratuitous termination of debt and debt jubilee

3.4.11.1.The Hamilton moment

3.4.11.2.Sovereign Debt cancellation and the jubilee

3.4.12.Transnational private law, Sovereign Debt and human rights

3.4.13.Transnational private law and the domestic forum

3.5.The protection of the Sovereign

3.5.1.The protection via Sovereign immunities

3.5.2.Non-assignability of Sovereign Debt bonds

3.5.3.The Sovereign and the theory of the commons

3.5.4.The Sovereign and the macro prudential policies (mpp). Reform of the international financial architecture. International financial standards

3.5.5.The application of the macro prudential policies to the Sovereign. The Sovereign as a g-sifi

3.6.The master of ceremonies

SELECTED BIBLIOGRAPHY