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China is the world’s largest official creditor, but we lack basic facts about the terms and conditions of its lending. Very few contracts between Chinese lenders and their government borrowers have ever been published or studied. This paper is the first systematic analysis of the legal terms of China’s foreign lending. We collect and analyze 100 contracts between Chinese state-owned entities and government borrowers in 24 developing countries in Africa, Asia, Eastern Europe, Latin America, and Oceania, and compare them with those of other bilateral, multilateral, and commercial creditors. Three main insights emerge. First, the Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. Second, Chinese lenders seek advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring (“no Paris Club” clauses). Third, cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies. Even if these terms were unenforceable in court, the mix of confidentiality, seniority, and policy influence could limit the sovereign debtor’s crisis management options and complicate debt renegotiation. Overall, the contracts use creative design to manage credit risks and overcome enforcement hurdles, presenting China as a muscular and commercially-savvy lender to the developing world.

This article reviews recent economic and legal literature on sovereign debt in light of the COVID-19 shock. Most of the core theoretical contributions across the two disciplines hinge on immunity, and the sovereign borrower's consequent inability to commit to repay foreign creditors, as the distinguishing attribute of sovereignty. We highlight a persistent gap between sovereign debt theories grounded in immunity and empirical evidence that the governments of low- and middle-income countries borrow far more than theory would predict. On the other hand, the governments of advanced economies, generally viewed as outside the scope of this literature before the euro area debt crisis, have shown themselves to be far more commitment challenged than previously supposed. We conclude that the traditional split between a literature concerned with developing economy sovereigns that repudiate debt and one concerned with advanced economies that do not is no longer appropriate (if ever it was). We argue that shifting some attention away from immunity to a different attribute of sovereignty—authority—could help bridge the gap between the two literatures.

In response to debt crises, policy makers often feature Collective Action Clauses (CACs) in sovereign bonds among the pillars of international financial architecture. However, the content of official pronouncements about CACs suggests that CACs are more like doorknobs: a process tool with limited impact on the incidence or ultimate outcome of a debt restructuring. We ask whether CACs are welfare improving and, if so, whether they are pillars or doorknobs. The history of CACs in corporate debt suggests that CACs can be good, bad or unimportant depending on their vulnerability to abuse and the available alternatives, including bankruptcy and debt exchanges. The history of CACs in sovereign bond workouts is recent and thin. Without restructuring data, the empirical literature has focused on the ex-ante (pricing) effects of sovereign CACs. To the extent that CACs leave borrowing costs unchanged or even lower them, they are likely to be welfare improving. But the magnitude of the welfare effects cannot be inferred from these studies. Based on the evidence so far, we conjecture that sovereign CACs are like doorknobs: useful, but perhaps not essential. To date, there is no evidence of abuse of the sort observed in U.S. corporate bond restructurings in the 1920 and 1930s. The bulk of pricing studies suggests that any increases in borrowing costs are small. On the other hand, debt exchanges using transactional techniques other than CACs have had a decent track record, suggesting that CACs are not the only way to resolve a debt crisis in the absence of a treaty-based bankruptcy alternative. Future empirical work should focus on how CACs perform in debt restructuring rather than on their ex ante effects.

Standard contract terms are “sticky”: they rarely change, even if change appears to be in the parties’ interest. Multiple theories to explain stickiness do not reach consensus on its causes. We investigate the role of stickiness in sovereign bond contracts, where it would be especially costly and therefore puzzling. In our interviews with more than a 100 officials responsible for the bond contracts of twenty-eight countries, they linked reluctance to change non-financial contract terms and the imperative of following a “market standard” for such terms. When a term could be described as standard for the government’s debt stock or borrower cohort, its content often came across as secondary. Sovereign debt managers seemed willing to forgo some of the benefits of contract terms for dealing with contingencies and revealing private information to avoid negative signals and maintain the liquidity of primary and secondary debt markets. Interviews with investors suggested a similar focus on standard form and a limited engagement with contract substance.

China is the world’s largest official creditor, but basic facts are lacking about the terms and conditions of its lending. Very few contracts between Chinese lenders and their government borrowers have ever been published or studied. This paper is the first systematic analysis of the legal terms of China’s foreign lending. The authors collect and analyze 100 contracts between Chinese state-owned entities and government borrowers in 24 developing countries in Africa, Asia, Eastern Europe, Latin America, and Oceania, and compare them with those of other bilateral, multilateral, and commercial creditors. Three main insights emerge. First, the Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. Second, Chinese lenders seek advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring (“no Paris Club” clauses). Third, cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies. Even if these terms were unenforceable in court, the mix of confidentiality, seniority, and policy influence could limit the sovereign debtor’s crisis management options and complicate debt renegotiation. Overall, the contracts use creative design to manage credit risks and overcome enforcement hurdles, presenting China as a muscular and commercially savvy lender to the developing world.

This article argues that essential information about sovereign debt must be publicly accessible and intelligible. Sovereign debt is a public institution, and sovereign debt statistics are a matter of public interest. For most stakeholders, information about sovereign debt is hard to find, harder to understand, and often incoherent. The problem is particularly severe when it comes to domestic debt, non-financial terms, and creditor composition. The leading international data templates were originally designed for relatively narrow policy and commercial objectives, with public accountability as a limited side benefit. This helps explain many of the shortcomings in the prevailing data collection and disclosure regime. To avoid past mistakes and create a durable platform for public accountability, sovereign debt data collection and disclosure should be designed for its public constituents: first and foremost, the people of the borrowing country.

[S]overeign debt is a complex political institution, which cannot be reduced to creditor coordination or any other contract problem.

This chapter begins by defining sovereign default. It proceeds to untangle several common forms of default, including unilateral and negotiated default, and default that results in principal haircuts and payment reprofiling, and offers a clear taxonomy of default, using real-world examples when needed. The chapter then explores the various costs of sovereign default, and the factors that influence them. It considers some of the weaknesses and distortions within the existing framework of crisis prevention and resolution, highlighting the role of official bailouts and moral hazard, and the causes of delayed and inadequate debt relief (“too little, too late”). The chapter concludes with recommendations for reducing the incidence and cost of default.

The pari passu clause in sovereign bond contracts has spawned an improbably huge academic literature and a fast-growing jurisprudence, culminating in recent U.S. federal court decisions, which used the clause to block payments on nearly $30 billion in Argentinian debt. The academic literature, judicial opinions, briefs and expert reports going back to the mid-1990s all assume that no court had interpreted the pari passu clause in sovereign debt before the year 2000. It turns out that there were at least four instances of such interpretation in the twentieth century.This essay discusses litigation in Switzerland in the 1930s and a decade-long international arbitration in the 1970s, in which four different panels considered the meaning of pari passu clauses in German Young Loan bonds. All four panels interpreted the clause in ways that might well be consistent with those of the U.S. federal courts; however, the bondholders still lost.Documents from the League of Nations archives suggest that the 1930s lawsuit against the Bank for International Settlements as trustee for the German bonds influenced proposals for contract and institutional change in sovereign debt management, notably with respect to the role of the bond trustee. To the extent such reforms might have had a chance, World War II and its aftermath put them on hold until the turn of the 21st century. As the dust from Argentina's debt saga begins to settle, the old disputes over the meaning of pari passu offer unexpected lessons for debt enforcement and contract reform.

Standard contract terms are “sticky”: they rarely change, even if change appears to be in the parties’ interest. Multiple theories to explain stickiness do not reach consensus on its causes. We investigate the role of stickiness in sovereign bond contracts, where it would be especially costly and therefore puzzling. In our interviews with more than a hundred officials responsible for the bond contracts of 28 countries, they linked reluctance to change non-financial contract terms and the imperative of following a “market standard” for such terms. When a term could be described as standard for the government’s debt stock or borrower cohort, its content often came across as secondary. Sovereign debt managers seemed willing to forgo some of the benefits of contract terms for dealing with contingencies and revealing private information, to avoid negative signals and maintain the liquidity of primary and secondary debt markets. Interviews with investors suggested a similar focus on standard form, and a limited engagement with contract content.

Ukraine is poised to restructure its debt, but Russia may hold the best cards in the negotiation. Russia bought $3 billion in Ukrainian eurobonds in late 2013 to prop up a political ally, sincedeposed. As Russian President Vladimir Putin himself has pointed out, these bonds have unique terms that let Russia call for early repayment, putting it ahead of Ukraine’s private creditors. Meanwhile, Russia and its proxies hold enough bonds to block a restructuring vote or hold out, sticking more losses on other creditors. Russia has refused to restructure the bonds in the Paris Club of government-to-government creditors, claiming that they are commercial debt. In all, Russia has effectively arbitraged the prevailing sovereign debt regime, where public and private lending to sovereigns are separated by legal form and restructuring institutions. Because the bonds in question are governed by English law, the U.K. Parliament can limit the scope for abuse by making them unenforceable. Such legislation has ample precedent, and would compare favorably to traditional sanctions. Uniquely among sanctions,it would not only punish Russia, but could deliver immediate financial relief for Ukraine.

The Greek debt crisis prompted EU officials to embark on a radical reconstruction of the European sovereign debt markets. Prominently featured in this reconstruction was a set of contract provisions called Collective Action Clauses, or CACs. CACs are supposed to help governments and private creditors to renegotiate unsustainable debt contracts, and obviate the need for EU bailouts. But European sovereign debt contacts were already amenable to restructuring; adding CACs could make it harder. Why, then, promote CACs at all, and cast them in such a central role in the market reform initiative? Using interviews with participants in the initiative and those affected by it, as well as observations at policy and academic meetings, we attempt to shed light on the puzzle and draw implications for the role of contract techniques in market construction.

Sovereign immunity has served as a partial substitute for bankruptcy protection, but it has encouraged a minority of creditors to pursue unorthodox legal remedies with spillover effects far beyond the debtor-creditor relationship. The attempt to enforce Argentina’s pari passu clause in New York is an example of such a remedy, which relies primarily on collateral damage to other creditors and market infrastructure to obtain settlement from a debtor that would not pay. The District Court decision, now on appeal before the Second Circuit, may not make holding out more attractive in future restructurings – but it would make participation less attractive for creditors, and create uncertainty for trustees, clearing and payments systems. Contractual innovations that support debt restructuring, such as collective action clauses (CACs), will not diminish the impact of the remedy for the foreseeable future, among other reasons because they are not designed to work across the debt stock. The Greek debt restructuring, where over half of the foreign-law issues with CACs failed to clear the voting threshold, is a case in point. The latest pari passu episode illustrates the challenge of a purely contractual framework for debt restructuring: interpretation uncertainty, institutional barriers to contract change, and a well-resourced constituency with every incentive to take advantage of the combination, make for an irreducible risk. Options going forward range from contract reform to reviving treaty-based sovereign bankruptcy. The former will be slow and incomplete; the latter has dim political prospects. If the District Court decision stands, it strengthens the hand of sovereign bankruptcy proponents. This article suggests a mix of contractual and institutional reform focusing on financial markt infrastructure, as an interim fix for what remains a deeply dysfunctional regime.

“Safe assets” describes a variety of financial claims on public or private sector entities that are used in financial markets as if they were risk-free. Government debt, central bank debt and money are publicly produced safe assets. Bank deposits, highly rated corporate debt, repos and asset-backed securities are privately produced safe assets. An influential strand of post-crisis economic thinking recasts safe assets as central to financial instability.Safe assets pose a high-stakes legal problem. Statutes, regulations, and private contracting practices allow, encourage, and constrain both the production of these financial contracts and market actors’ ability to use them as if they were safe. If safe assets are under- or overproduced, or misused, or if safety is misperceived, the law is at least partly to blame. Analysis and policy design suffer for lack of an overall legal framework for thinking about safe assets. This chapter considers the legal dimension of safe assets, and points to the policy and regulatory implications to be examined in future work. We offer a three-part framework for understanding the mechanisms by which the law fosters the production of safe assets, nurtures the development of the markets in safe assets, and promotes the continuing safety of safe assets in multiple states of the world. First, the law makes some assets less risky, for example, by mandating capital cushions for issuers of safe assets or giving investors in those assets repayment priorities. Second, the law labels some assets as safe, reducing or eliminating market participants’ incentives to discover their risk attributes. Third, the state guarantees the safety of assets when it perceives them to be important for the financial system as a whole. The law authorizes and frames the design of such guarantees.For any given asset, governments both recognize the safety attributes that arise through private ordering and enhance them with regulation, labeling, and guarantees. If all goes well, the three categories of tools feed a virtuous cycle: e.g., when low-risk assets are labeled safe, it increases demand, broadens the investor base, boosts liquidity, and reduces the cost of funding for their issuers. When the tools are misaligned, they can contribute to instability. Investors might herd into risky assets mislabeled as safe, then flee in panic when the perception of safety vanishes, with spillover effects on the broader economy. The government may have no choice but to step in with guarantees ex post, creating distortions and moral hazard.This chapter traces how the three categories of legal tools constructed four categories of safe assets – government debt, bank debt, repurchase agreements, and asset-backed securities – and how this construction unraveled in crisis. Each time, poor coordination among long-established legal and regulatory tools, rather than the tools themselves, stood out as a problem.The chapter outlines how dynamically aligning the three types of legal rules that construct safe assets might enlarge the macroprudential regulatory toolkit without creating brand new regulatory tools but would require additional research to function.

A few weeks ago, two of us posted a draft research paper on the pricing of Venezuelan sovereign bonds. We wanted to know to what extent bond prices incorporated information about contract terms, and whether any such price effect might vary depending on the financial condition of the borrower. Venezuela makes a good case study because it has a number of New York-law bonds outstanding with different contract terms, and because it is experiencing severe financial distress. In particular, Venezuelan sovereign bonds have different voting thresholds for restructuring, and different pari passu clauses. The bonds issued before 2003 require unanimous (100%) consent of the bondholders to change financial terms, and have pari passu clauses that can be used, Argentina-style, to enforce payment. Those issued after 2003 can be restructured with the vote of either 85% or 75% of the bondholders, and have pari passu clauses that make for weaker enforcement tools. Neither the prenor the post-2003 bonds permit aggregated voting across different bond series.

Whether bond contract terms are priced is a classic question at the intersection of law and finance. One contract provision, the Collective Action Clause or CAC in sovereign bonds, has been the subject of extensive analysis in an effort to answer this question. The research, much of it quantitative, has yielded seemingly contradictory results. In this article, we come at the pricing question from a different perspective: we ask government officials responsible for executing their countries’ bond issuance strategies, how and why they choose particular contract terms in their bonds, and specifically about the relevance of pricing information to their choices. Contrary to the theories behind the empirical studies—which hold that contract terms such as CACs should affect governments’ borrowing costs, and that governments should choose terms to minimize these costs—debt managers report that they and the investors who buy their debt normally prefer contracts designed to minimize any impact of terms such as CACs on bond prices. In other words, contracts are deliberately designed to reduce the salience of terms described as “legal” (as distinct from “financial”), and to make it difficult to detect their impact on price in any given issue. The implication is that this approach would allow for the development of optimal contracts over time, without detracting from a government’s long-term debt management strategy.

Sovereign wealth funds—state-controlled transnational portfolio investment vehicles—began as an externally imposed category in search of a definition. SWFs from different countries had little in common and no desire to collaborate. This article elaborates the implications of diverse public, private, domestic, and external demands on SWFs, and describes how their apparently artificial grouping became a site for innovation in international law-making.

Practitioners and academics agree: bond contract terms are highly standardized and hard to change. The dominant theory of contract change, based on network and learning analysis, posits that market participants value uniformity. Everyone uses standard terms; everyone knows what they mean. Market participants who trade boilerplate contracts have no trouble pricing them. Lawyers who draft contract boilerplate can predict how judges might interpret it. The down side of boilerplate is excess uniformity: change is Key points

The pari passu clause in sovereign bond contracts has spawned an improbably huge academic literature and a fast-growing jurisprudence, culminating in recent U.S. federal court decisions, which used the clause to block payments on nearly $30 billion in Argentinian debt. The academic literature, judicial opinions, briefs and expert reports going back to the mid-1990s all assume that no court had interpreted the pari passu clause in sovereign debt before the year 2000. It turns out that there were at least four instances of such interpretation in the twentieth century.This essay discusses litigation in Switzerland in the 1930s and a decade-long international arbitration in the 1970s, in which four different panels considered the meaning of pari passu clauses in German Young Loan bonds. All four panels interpreted the clause in ways that might well be consistent with those of the U.S. federal courts; however, the bondholders still lost.Documents from the League of Nations archives suggest that the 1930s lawsuit against the Bank for International Settlements as trustee for the German bonds influenced proposals for contract and institutional change in sovereign debt management, notably with respect to the role of the bond trustee. To the extent such reforms might have had a chance, World War II and its aftermath put them on hold until the turn of the 21st century. As the dust from Argentina's debt saga begins to settle, the old disputes over the meaning of pari passu offer unexpected lessons for debt enforcement and contract reform.

An influential literature in economics explores the phenomenon of “safe assets” – when participants across financial markets act “as if” certain debt is risk free – as well as its role in the global financial crisis and its implications for post-crisis reform. We highlight the role of private ordering in constructing safe assets. Private ordering, including contractual devices and transaction structures, contributes to the creation of these debt contracts, to their collective treatment in financial markets as low risk investments, and to the making of deep and liquid markets in them. These contracts and transaction structures also provide a template for understanding the role of government regulation in constructing safe assets. Safe asset supply and demand does not occur organically. Rather, whether through private or public ordering, three types of legal tools operate to construct safe assets: 1. Making Assets Safe: one set of tools contributes to the production of safe assets by regulating the cash flows into and out of an issuer of safe assets to increase the likelihood of full and prompt payment to investors. These tools might take the form of: engineering the asset side of an issuer’s balance sheet to reduce the risk of inputs in safe assets; engineering the liability side of an issuer’s balance sheet to give holders of safe assets priority over other claimants on the issuer; or creating and regulating the secondary market for safe assets. 2. Labeling Assets Safe: another set of legal tools focuses on the demand for safe assets by granting special status to these contracts when held on the books of investors. These tools create liquid markets for certain assets by either: signaling the low risk of default by issuers of those assets; or coordinating the collective treatment of those assets as having low risk and high liquidity. 3. Guaranteeing Asset Safety: financial intermediaries and governments can also guarantee the performance of safe assets, putting their own credit on the line. Guarantees may be ex ante or ex post, explicit or implicit. A comparison of private and public ordering in safe asset markets reveals how difficult it is to separate the two. Indeed, much of private ordering relies on statute and regulation. Public ordering succeeds at creating safe assets when it enables private ordering and herding by investors into safe asset markets. Understanding this complex interplay between public and private tools becomes vital for understanding how safe asset markets operate, how they fail, and how they must be reformed. The Article concludes with two lessons. First, it deconstructs the notion that there is purely private or public ordering in safe asset markets. Second, it underscores a kind of first law of thermodynamics for safe assets: neither private nor public ordering can banish risk altogether from safe asset markets or financial markets in general. They merely move risk around or, worse, obscure risk until it rematerializes.

By the end of 2001, Argentina faced economic recession, a collapse in its banking system, and an external sovereign debt crisis. While preemptive action earlier in the year might have made one or more of these crises less severe, preemption was a political orphan at home and abroad. The country's long-standing relationship with the International Monetary Fund brought with it a mutual dependence: the IMF had come to embrace Argentina as a symbol of the success of its policy advice, and Argentina had come to rely on the IMF's endorsement and occasional financial support to navigate the choppy international markets. That relationship deepened along with Argentina's growing difficulties in the run-up to default. IMF support was used to put off a correction of the overvalued currency and to postpone a major debt restructuring. A new Argentine policy regime--and a new, more adversarial relationship with the IMF--emerged only after devaluation and default. KEYWORDS: Argentina, financial crises, banking crises, debt restructuring, International Monetary Fund. ********** Argentina's relationship with the International Monetary Fund (IMF) has been remarkably long-standing and intense. For fourteen of the twenty years preceding Argentina's crisis in 2000, its economic policy operated within an IMF program. Even after the initial success of its currency board arrangement and debt restructuring in the early 1990s, Argentina relied on the IMF's endorsement and occasional financing to navigate choppy international markets. As the IMF came under criticism for its handling of Asia's financial crisis, it set aside early doubts about Argentina's currency board arrangement and embraced the country as a symbol of the success of IMF policy advice. When external shocks left the Argentine peso overvalued at the end of the 1990s, neither Argentina's political system nor its relationship with the IMF could adjust successfully to a financial crisis that proved far deeper than either Argentina's elite or the IMF had recognized. Between 1999 and 2001, Argentina's economic slump transformed into a deep financial crisis. Two theories for Argentina's malaise dominated the policy debate. One held that Argentina was suffering from a crisis of confidence. Another held that the crisis was mostly fiscal. Both theories were too simplistic. They ignored the central importance of an overvalued currency and the heavy use of the dollar in domestic financial contracts. They also failed to recognize the extent to which the "convertibility" system (Argentina's currency board arrangement) had become an organizing device for Argentina's politics--not just an anchor for monetary policy--and how access to external financing had provided the critical glue that held together the political economy of "convertibility." (1) Argentina's political system was unwilling to act preemptively to reduce the scale of what in many ways was an unavoidable crisis. At no time was there a political consensus to incur the costs of exiting convertibility immediately to avoid a bigger, deeper, and more costly exit later. Neither was there a consensus to shrink Argentina's economy and drive down wages and prices to abide by the constraints of a currency board, particularly once those constraints started to bite in the face of reduced capital inflows. Argentina's leaders preferred to hope that its difficulties were temporary: they drew on IMF financing, spent reserves, and then resorted to increasingly desperate attempts at financial engineering to postpone a payments crisis. Default and devaluation did not immediately bring political consensus on how to allocate financial pain. A desire to avoid probable losses transformed into an inability to allocate losses already incurred and demands for compensation from all sides. All the major players initially hoped that someone else would get stuck with the bill. The denouement of Argentina's crisis turned out to be as protracted as its buildup. …

After Mexico’s meltdown in 1994–95, the markets and the policy establishment braced for the next big crisis – widely expected to feature external sovereign bonds. However, the next crisis turned out to be altogether different. A year after the fall of the Thai baht in August 1997, 65% of Thailand’s companies were illiquid, and nearly a quarter were insolvent; non-performing bank loans approached 30% of GDP. The figures were comparable for Korea and even worse for Indonesia, where nearly 80% of all firms were illiquid and 65% were technically insolvent. Yet Asian governments had been running budget surpluses and managed relatively light debt loads. Asia’s was a crisis unlike its Latin American predecessors. With no concern for government debt default, this new kind of crisis manifested itself in widespread runs and defaults on direct cross-border debts of Asian banks and companies. Systemic bank and corporate distress can take different forms and come about in different ways. Bank and corporate crises need not even coincide. For example, in an economy where banks mostly finance the government and companies rely on non-bank funding sources (securities markets, retained earnings or private capital), pervasive corporate failure need

Financial systems and public treasuries are communicating vessels: strength or weakness in one flows to the other, and back. This chapter considers the implications of this insight using case studies from Europe, Asia, and Latin America. The connection is not unique to Europe, although it does not always result in feedback effects, or the 'doom loop' that has made headlines since 2010. Events now known as banking or government debt crises often have had elements of both, and could have gone either way. Policy and political choices determined their path. In all cases, governments were as indispensable for resolving banking crises as banks were for resolving sovereign debt crises. As capital movements have become more rapid and global, the bank-government link has turned more destructive, prompting proposals to break it for good. Some of these proposals may adjust, elaborate, or displace the link. None would break it. Instead of chasing the fantasy of total separation, the policy goal should be to reduce destruction and harness the link in the name of financial stability.

Sovereign debt crises occur regularly and often violently. Yet there is no legally and politically recognized procedure for restructuring the debt of bankrupt sovereigns. Procedures of this type have been periodically debated, but so far been rejected, for two main reasons. First, countries have been reluctant to give up power to supranational rules or institutions, and creditors and debtors have felt that there were sufficient instruments for addressing debt crises at hoc. Second, fears that making debt easier to restructure would raise the costs and reduce the amounts of sovereign borrowing in many countries. This was perceived to be against the interests of both the providers of both creditors and major borrowers.This report argues that both the nature and our understanding of sovereign debt problems have changed, over the course of the last decade, in a direction that creates a much stronger case for an orderly sovereign bankruptcy regime today than ten years ago. Pre-crisis policy mistakes are now recognized to be a much more severe problem for borrowing countries than the costs or limited availability of private financing. Recent court rulings – particularly a recent U.S. ruling that gives "holdout creditors" that decline a restructuring offer the right to interfere with payments to the creditors that accept such an offer. This will complicate efforts to resolve future debt crises on an ad hoc basis. Finally, sovereign debt crises are no longer just a problem in emerging markets, but a core concern in advanced countries as well – particularly in the Euro area. If the Euro is to survive, this will require both better ways to resolve debt crises and stronger, market-based incentives that prevent debt problems from occurring in the first place.To address these problems, policy proposals are presented at two levels: for the Euro area, and globally. A Euro area sovereign debt restructuring regime could be developed by amending the Treaty establishing the European Stability Mechanism (ESM). This would both restrict the scope for lending to highly indebted countries without also restructuring their debts, and protect Euro area members receiving ESM financial assistance from legal action byholdout creditors. At the global level, a number of proposals are discussed, ranging from a coordinated introduction of "aggregate collective action clauses" that would allow a supermajority of bondholders across all bonds to amend bond payment terms to an amendment of the IMF articles that would limit the legal remedies of holdouts when a debt restructuring proposal has been accepted both by a majority of creditors and endorsed by the IMF.

The traditional view of sovereign debt as a relationship between a developing country government and and its foreign private creditors is increasingly out of date. Financial institutions and individuals inside the borrowing countries are are becoming more and more important as creditors to their governments. At the same time, as countries remove restrictions on cross-border capital flows, foreign creditors are participating more actively in domestic law, local-currency debt markets. These developments imply fundamental changes in lending decisions and, where the loan goes bad, in the sovereign debt workout process.

This paper, prepared for UNCTAD’s initiative on responsible sovereign lending and borrowing, considers concrete strategies for implementing the Principles. It draws on studies in soft law and new governance, and on the recent experience in promoting best practices in international finance, including project finance, extraction revenue management, foreign aid, sovereign investment, and sovereign borrowing in the capital markets. It recommends maintaining the current non-binding character of the Principles, while embedding implementation in multi-stakeholder arrangements for ongoing disclosure, assessment, interpretation, and adaptation. This strategy has the best chance of changing behavior in sovereign lending and borrowing by creating constituencies for implementation and sustained compliance.

This article examines the current credit crisis against the background of recent financial meltdowns in wealthy and emerging markets. I argue that resolving systemic financial crises entails a core set of policy decisions that is consistent across recent experience in Asia, Latin America, United Kingdom and United States. First, faced with the possibility of mass defaults, officials must decide whether to adopt case-by-case or blanket solutions. Second, if private contracts must be modified, should modification be mandatory or voluntary? Third and hardest, officials must decide how to allocate losses from crisis: who gets relief, and who pays for it. Emergency crisis containment measures have profound distributional consequences. The current legal framework for crisis resolution makes it much easier to inject billions of dollars in large institutions than to amend residential mortgage contracts. I suggest that this is partly a consequence of treating each crisis as an unprecedented emergency, and of conflating the tasks of prevention and resolution. Cross-country experience reveals that systemic crisis response is necessarily fraught with moral hazard and political risk. Crisis measures often contravene peacetime policy wisdom. But governments and private actors invoke these extraordinary measures routinely. Acknowledging that crises will return, rules will be suspended, and emergency measures will be used should prompt a critical examination of when, how, and to whose benefit.

Political support for Argentina's currency board rested on distributing the early gains from ending hyper-inflation and the spending made possible with access to external credit. When these gains were exhausted and external shocks left the peso overvalued, neither Argentina's political system nor its economy could adjust. The needed adjustment went well beyond simple fiscal tightening: it required deciding who would incur the financial losses associated with the deep contraction needed to correct a real over-valuation in a heavily indebted economy. By 2000, Argentina faced the prospect of further economic contraction, a banking crisis and an external sovereign debt crisis. Even if none of the three crises was avoidable, preemptive action might have made one or more of them less severe. Yet preemption was a political orphan - no political constituency in Argentina argued to bring some pain forward for a chance of less pain down the road, and the IMF and G-7 preferred continued financing to the political risk of supporting a new macroeconomic strategy.

The willful US fiscal crackup of 2012-13 will impose costs unless politicians' change their behavior and return to practicing good governance. In the past, the United States ran deficits, or put off some harder long-term choices, but basic budgetary processes worked. Everyone worldwide, whether a VA patient in Louisville or a US Treasury bondholder in London, could count on the US government making its payments. As a result, the US economy had lower interest rates and greater stability than anywhere else, and the dollar was everyone's envy and safe haven, which brought more investment into the United States. But the repeated failure of Congress to pass budget legislation, or to bring the debt ceiling into line with spending, and ultimately explicitly threatening default on US government debt, has made US fiscal politics no better than anyone else's—and in some ways a lot worse, damaging the US reputation for safety and stability. In fact, there is no other known example of a solvent democracy flirting with default through sheer political stubbornness. While many democracies with fragmented party systems spend themselves into crashes, the crashes only came when they had run out of credit, not as a self-inflicted wound. The essays in this volume make clear that the direct costs of the recent fiscal follies are already substantial. David J. Stockton argues, for example, that the fiscal uncertainty of 2013 took 1 percent off of US real GDP and increased unemployment by 0.5 percent. The continuing uncertainty about US fiscal decision-making, and the recurrent risk of a repeat, has dragged down American productive investment. Worse still, global markets have priced in a default risk on US treasuries, where there had been none. US taxpayers will consequently foot the bill for higher rates demanded by markets on newly issued US government debt from now on. The most overlooked and perhaps most lasting harmful effect of the fiscal follies will be the severely diminished ability of the United States to conclude international economic negotiations. People and their elected representatives can legitimately disagree with each other about the speed and seriousness needed to tackle US public debt problems. There is no room for disagreement, however, that a budget process that threatens recurrent deadlock and even possible default on US government debt is seriously harmful to American wellbeing and international standing.