Working Paper: CEPR ID: DP12777
Authors: Julian Schumacher; Christoph Trebesch; Henrik Enderlein
Abstract: For centuries, defaulting governments were immune from legal action by foreign creditors. This paper shows that this is no longer the case. Building a dataset covering four decades, we find that creditor lawsuits have become an increasingly common feature of sovereign debt markets. The legal developments have strengthened the hands of creditors and raised the cost of default for debtors. We show that legal disputes in the US and the UK disrupt government access to international capital markets, as foreign courts can impose a financial embargo on sovereigns. The findings are consistent with theoretical models with creditor sanctions and suggest that sovereign debt is becoming more enforceable. We discuss how the threat of litigation affects debt management, government willingness to pay, and the resolution of debt crises.
Keywords: sovereign default; enforcement; government financing; debt restructuring
JEL Codes: F34; G15; H63; K22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Erosion of sovereign immunity (K13) | Increase in creditor lawsuits against defaulting governments (F34) |
| Creditor lawsuits against defaulting governments (F34) | Disruption of government's ability to issue debt (H63) |
| Legal disputes in the US and UK (K41) | Increase in costs associated with sovereign default (H63) |
| Presence of litigation (K41) | Decrease in market access for governments (F69) |
| Attachment attempts (C92) | Decrease in market access for governments (F69) |
| Creditor litigation (G33) | Deterrent for sovereign borrowing (F34) |
| Litigation (K41) | Strategic hold-up effect where creditors block new borrowing (D86) |