July 2000

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Special Comment

Sovereign Debt: What Happens If A Sovereign Defaults?

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Farisa Zarin Vincent Truglia David Levey Chris Mahoney

Sovereign Debt: What Happens If A Sovereign Defaults?

Summary
For the first time in 50 years, the international bond market is confronted with sovereign defaults. As each default, or near default, occurs, we at Moodys are being asked a series of questions that run common among the various situations. One area of growing interest is the extent of a creditors legal rights vis--vis the sovereign issuer. To put it simply: in case of a default or a restructuring, can a sovereign issuer be compelled to make good on its original debt obligations? This line of questioning is particularly germane, as the threat of legal action could alter the underlying incentives of creditors and the sovereign debtor, which in turn could affect restructuring negotiations. Although the purpose of this comment is to try and shed some light on the relevant issues, it should be noted at the very outset that Moodys neither professes nor assumes expertise in international law. The notions presented here are simply a restatement of the various sovereign immunity statutes, relevant court cases, legal scholarship, and customary practice as it has developed over the past years. This caveat notwithstanding, we will try to reply to five very specific questions that have repeatedly been asked of us: 1) Can a holder of sovereign debt sue a sovereign in case of a default or a restructuring? Quick and dirty answer: Yes. If the creditor was not party to the restructuring agreements and still retains full rights under the original terms of the debt, it can sue the sovereign.
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Special Comment

Author Farisa Zarin

Editor Susan Schwartz

Senior Production Associate Mark A. Lee

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Moodys Special Comment

2) Given the availability of legal recourse, can a holder of bonds (or bank loans) realistically expect to get monetary compensation? Quick and dirty answer: It depends. Like most contractual obligations, many questions can be answered through a close reading of the language of the instrument. But, on a very general level, a claimant can recover through legal channels if: a) the sovereign has assets in the country wherein the suit is brought; and, b) those assets are directly associated with the defaulting instrument. Needless to say, there are many factors that complicate the matter. 3) How does sovereign debt become more vulnerable to legal attack? Quick and dirty answer: Sovereign debt is generally governed by either New York State law or English law. With very few exceptions, issuers of bonds will adopt the documentation practices prevailing in the jurisdiction whose law is chosen to govern the bond and related documents. Generally speaking, New York law bonds do not permit debt rescheduling without the consent of all creditors. By contrast, English law bonds allow changes to payment terms when those changes are accepted by a supermajority of bondholders. Once the changes are approved, the restructuring terms are binding on all creditors. The absence of the supermajority clause in a debt instrument leaves the sovereign more susceptible to legal attack, as the sovereign cannot cram down a restructuring agreement on stubborn creditors. 4) Who would sue a sovereign? Quick and dirty answer: The most likely candidates are secondary purchasers of sovereign debt and small bond-holders. Generally referred to as the free-rider problem, legal claims against sovereigns are brought by creditors who do not participate in restructuring talks and who hold out on the payment rescheduling decision of the majority of debt holders. If the particular instrument does not have a supermajority clause, which crams down the new terms on the dissenting minority, uncooperative creditors remain in possession of their legal rights to force the sovereign into complying with the original terms of the debt. They should be able to sue in most cases. 5) Could a proliferation of lawsuits alter the incentives of creditors and sovereigns to lend, borrow, and restructure? Quick and dirty answer: As the bond market and the secondary debt market gain significance for sovereigns, the threat of suits increases. To date, claims against defaulting states have not made their way up through the US appellate system (i.e. the U.S. Supreme Court) because a binding judgment would ill serve the interests of either party. In fact, the standard course for legal action seems to be settling out of court. Traditionally, major lenders, specifically London Club banks and the IMF, have had long-term interests, which made rescheduling an attractive alternative to sovereign default. However, the proliferation of small, speculative creditors, interested in quick-fix returns, place debtor-sovereigns at greater risk of suits. The emphasis on the short-term, as opposed to the long-term, perspective may re-focus negotiation talks on the interests of all concerned parties, especially the small creditor.

I.

WHAT IS SOVEREIGN IMMUNITY?

A sovereign debtor is not the same as any other type of debtor. The same rules do not apply because historically sovereigns have had rights, which were, in essence, absolute in nature. Blacks Law Dictionary defines sovereignty as: The supreme, absolute, and uncontrollable power by which any independent state is governed. The power to do everything in a state without accountability, - to make laws, to execute and to apply them, to impose and collect taxes and levy contributions, to make war or peace, to form treaties of alliance or of commerce with foreign nations, and the like.1

1 Blacks Law Dictionary, Sixth Edition, pg. 1396 (1990).

Moodys Special Comment

Linked to this notion of sovereignty is that of sovereign immunity, a judicial doctrine that precludes bringing suit against a government without its consent. Nevertheless, there are two broad exceptions to sovereign immunity, which, when combined, are referred to as the modern restrictive theory of sovereign immunity. Those exceptions are: a) where a sovereign explicitly waives its immunity and agrees to be sued in the jurisdiction of another country; and, b)where the sovereigns actions are commercial in nature. Many countries, either through implementing statutes, deciding case law, or by virtue of being signatories to international conventions and covenants, have adopted the modern restrictive theory of sovereign immunity.2

A. Can a Holder of Sovereign Debt Sue in Case of Default?

If a sovereign defaults, either on a bond or a bank loan, it is not immune to legal process by its creditors. Bonds and bank loans are considered commercial in nature, regardless of the ultimate use of funds. Consequently, in case of a default, a creditor may bring action in any country where the commercial activity exception of sovereign immunity is recognized.3 However, for all practical purposes, US and UK courts are the favored venue. This is primarily because both countries have opened their court systems to such claims, and because most bond instruments or bank loan agreements contain clauses which recognize UK and or US jurisdiction. Out of the two court systems, the majority of cases seem to be brought before US courts, possibly because of the more litigious nature of its legal tradition. Furthermore, New York State law bonds generally require creditor unanimity when restructuring which renders unlikely the desirable outcome of an exchange offer, explained in greater detail below. As a result of the greater frequency with which US Courts have been accessed, the discussion here with respect to sovereign immunity will focus on the relevant US statutory and judicial decisions. It should, nevertheless, be noted that the same paradigm holds, more or less, for other countries.

1) US Sovereign Immunity Law

The US Foreign Sovereign Immunities Act (FSIA)4 adopts the modern restrictive theory of immunity and thus provides that in the United States foreign sovereigns are immune from law suits, unless: 1) the sovereign has waived its immunity; or 2) the subject of the suit concerns a commercial activity. Most bonds and bank loan agreements contain clauses that expressly waive any right of immunity and in many instances recognize New York law and New York courts for legal proceedings.5 After a period of uncertainty over the status of sovereign debt, the United States Supreme Court made clear in Republic of Argentina v. Weltover6 that sovereign borrowing is commercial activity. More important, in Weltover, the Court decided that a national of any state could bring a suit against any sovereign in a US court so long as there exists some connection between the commercial activity and the United States. That nexus was very loosely defined. It is sufficient, for example, if the interest payments received by a creditor, before the bonds default, was made payable to an account physically located in the United States. As a result of both the FSIA and the US Supreme Court decision, any creditor may successfully take a defaulting sovereign to court in the United States.7

2 The restrictive view of sovereign immunity was adopted by the United States Department of State after World War II, under which foreign governments are not entitled to absolute immunity for their actions. 3 See generally, Thinking the Unthinkable; Attaching Sovereign Assets, International Financial Law Review October 1984; United States, The US Foreign Sovereign Immunities Act (FSIA) 28 U.S.C.S. 1602 et seq.; 1972 European Convention on State Immunity; United Kingdom, Section 3, state Immunity Act 1978; France, signatory, see case law, e.g., Eurodif v. Iran, Cour de Cassation 14 Mars 1984; Spain, signatory, see case law, e.g, El Encinar De Los Reyes, SA v. Government of the United States, municipal court number 24 of Madrid of April 4, 1963; Canada, State Immunity Act; Japan, driven only through bilateral treaties. 4 US Foreign Sovereign Immunities Act, FSIA, USCS 28, Chapter 97, section 1602-1611. 5 That is to say, personal jurisdiction, subject matter jurisdiction, conflict of law issues are expressly addressed and conceded in most debt instruments. 6 112 S.Ct. 2160 (1992). 7 Again, this is true if the creditor can establish the nexus, as defined by the Supreme Court, with the US. There are instances wherein the debtor sovereign strictly guards against such a nexus through ensuring that no interest is payed out in the U.S. Additionally, it is important to note that similar practice has been accepted in most other jurisdictions.

Moodys Special Comment

B. Can a Creditor Get Payment in Case of a Favorable Judgment?

That a claim can be brought, although fascinating from an academic stance, is mute if the claimant is unable to recover. Under US law, creditors could obtain a pre-judgment attachment of the assets of a foreign state to secure payment in case of a favorable judgment.8 Consistent with the rest of the statute, however, only the sovereigns commercial assets may be attached.9 The statute places further restrictions on the commercial assets that can be successfully attached. It is true that a sovereign can waive immunity to all its commercial assets. However, if such a waiver is not explicitly made, the statute strictly limits the claimants access to property which: 1) is physically located in the United States, and 2) is or was used for the commercial activity upon which the claim is based.10 Although the courts have not had an opportunity to clarify what is meant by commercial activity upon which the claim is based, it is safe to assume that, in case of a sovereign default, only those assets directly related to the defaulting bond would be attachable. For all practical purposes, if a claimant were to choose to press on with the suit and arrive at a judgment, he or she would be limited to a small pool of assets. Moreover, because of the various contractual obligations that creditors have to one another, which will be discussed in greater detail below, the pro rata portion that the individual creditor would receive at the end of a legal proceeding may be close to nothing. Yet, the threat of a decision against the sovereign has, until now, been viewed as sufficiently damaging such that sovereigns have found it more advantageous to settle out of court.

II.

DEFAULT, RESTRUCTURINGS, AND THE SECONDARY MARKET

Countries have always borrowed and lent money to one another. Over the course of centuries, there have been many instances where the debtor nation was unable to make good on its obligations. In Moodys 1995 Special Comment, Sovereign Risk: Bank Deposits vs. Bonds, we presented a comprehensive survey tracing the evolution of sovereign lending, borrowing and occasional defaults. We noted in that comment, that generally, when making a decision on whether to default, a sovereign balances the internal repercussions of fiscal and monetary constraints against the external consequences on short-term borrowing and access to the capital market.11 Because only few players lent to sovereigns, if a sovereign were to default, it would temporarily be marked with a scarlet letter for unreliability within that small group. But, through international pressure, negotiations, or the simple passing of time, the sovereign would eventually have access to external capital. Lawsuits were never a threat.12

A. Historical Perspective on Restructuring Unilateral or Negotiated

Traditionally, a heavily indebted country could either renegotiate with its creditors or unilaterally reschedule its debt simply by announcing the new terms. On the surface, unilateral rescheduling might seem to be an appealing option for a sovereign debtor.13 Yet, the fear that unilateral action on existing debt, tantamount to a default, would close the debtor nations access to credit rendered this alternative unsavory. This disincentive was generally overstated for several reasons. For example, sovereigns were unlikely to endure lasting suffering if they reneged on their debts. Lenders to sovereigns were large banks or other countries, which were more interested in future economic indicators. Furthermore, the fear that trade credits to the sovereign nation would be damaged ignored the underlying long-term interests of these creditors in maintaining open lines of trade with the country in question. Nevertheless, the misper8 It is important to note that section 1611(b)(1) states: the provisions of the statute on waiver relating to property do not apply to the property of a foreign state if the property is that of a foreign central bank or monetary authority held for its own account unless such bank or authority, or its parent government, has explicitly waived its immunity from attachment in aid of execution. It has been argued, therefore, that pre-judgment attachment is simply not possible where central banks are concerned, because the statute is silent on this point. For a detailed discussion on the extent to which central banks are immune, see Ernest Patrikis, Sovereign Immunity and Central Bank Immunity in the United States, 159-167 and, Whitney Debevoise, Comment at 168 171 in Robert C. Effros (ed.), Current Legal Issues Affecting Central Banks, Volume 1. 9 The statute, and indeed international law, deem all political property, such as embassies or homes of UN mission chiefs, off limits. 10 U.S.C.S., Chapter 97, Section 1610. This is especially relevant to Brady Bonds, as they are collateralized by US Treasury notes. 11 When a sovereign defaulted, historically, its ability to borrow was drastically impaired, but only in the short run. 12 Although, on occasion, military invasions occurred. See, e.g., Charles Lipson, International Debt and National Security; Britain and America, p, 189 226, in The International Debt Crisis in Historical Perspective, eds., Barry Eichengreen and Peter H. Lindert 13 Unilateral reschedulings were not uncommon during the sovereign bond defaults of the nineteenth century and the 1930s. A government in financial distress could, and often did, simply announce a rescheduling of its bonds to its bondholders. In its decree, the government would announce modifications of the terms of the original loan and offer the new terms to the existing bondholders. Because the original obligations provided no other remedy, there was no realistic choice but to accept the changed terms.

Moodys Special Comment

ception that breaking existing debt obligations endangers a countrys credibility and creditworthiness proved to be a strong disincentive. As a result, renegotiations were the usual course of business.14 Interestingly, a stronger deterrent of default or unilateral action is the creditors legal claim. Historically, investors in sovereign debt have been in a weak position because they were compelled to accept any new terms.15 Today, however, it is highly doubtful that a creditor, who for example is aware that a collateral agent bank is in possession of interest collateral, would submit to detrimental terms rather than pursue some other more aggressive course.

B. The Secondary Market

In the 1980s, sovereign debt began to be traded at a discount.16 This trend spawned and fostered an international secondary market, which has since grown exponentially. The growth of this market has brought a series of positive effects. For example, secondary trading has allowed conservative banks to exit unstable cycles of crises, rescheduling and involuntary lending by transferring risks. The secondary debt market has also given financial analysts an incentive to monitor and collect information about sovereigns issuing debt, the absence of which played a significant part in the early 1980s crisis as banks made bad loans. Yet, it is this same secondary purchaser of sovereign debt who resorts to the courts in case of defaults.

1) Collective Action Clauses (CACs) Creditor Solidarity

Although the secondary buyer has purchased the debt at a fraction of its face value, it nevertheless assumes all the rights of its predecessor, including the legal right to receive principle and interest payments under the original terms. Whether a buyer will sue to win special treatment, rather than enter a restructuring agreement, is based on two important considerations. The first, of course, is whether the secondary purchaser will be able to assert its interests at the various restructuring negotiations. Generally speaking, it cannot. On a very practical level, it can either take the restructured agreement, or it can sue. The second consideration before a small holder of sovereign debt is, therefore, the contractual and binding language in the debt instrument. Original debt agreements could include a number of provisions that bind the fortunes of the secondary purchaser to that of his fellow creditors.17 The presence or absence of these collective action clauses (CACs)18 is significant because their underlying purpose is to align the interests of large creditors. As banks and countries have historically been the primary source of capital to sovereigns, CACs have helped link their interest so that they act as one negotiating unit. But, the emergence of and the increasing potency of the secondary market have undermined CACs and restructuring negotiations because sovereigns are faced with numerous small creditors with quick-fix short-term interests.

14 See, e.g., Barry Eichengreen and Richard Portes, After The Deluge: Default, Negotiation, and Readjustment during the Interwar Years, in Barry Eichengreen and Peter H. Linder, The International Debt Crisis in Historical Perspective. 15 See id. Short of government action or negotiations through bond-holder committees, there was little that the individual creditor could do. 16 As it had before the 1930s. 17 See Appendix I for three of the more prevalent such clauses. 18 See, supra, note 20. The presence of collective action clauses (CACs) is somewhat determined by the practices of the place where the bond is issued. The two competing jurisdictions are, of course, New York, where CACs, and in particular supermajority clauses, are as a matter of practice not inserted into the language of the bond instrument, while in London, and under English Law, as a matter of practice, CACs are included in the language of the bond.

Moodys Special Comment

2. Free-Riders19
Most emerging market sovereign bonds and bank loans are issued either in New York or in London, and therefore they explicitly recognize either New York State Law or English law, respectively. It should be noted at the outset, that regardless of where a bond is issued, it is the language of the bond instrument that governs. However, as a matter of practice, when bonds are issued in London as opposed to New York certain super-majority clauses are inserted into the bond instrument. Consequently, sovereign debt issued in New York, generally speaking, does not allow for subsequent changes to its payment terms or restructuring without the consent of each creditor. Because of the unanimity requirement, New York Law bonds are more difficult to restructure than their counterpart. By contrast, sovereign debt instruments issued in London, and thus under English law, will usually contain language that makes changes to the terms of the original debt binding on all creditors if those changes were approved by a supermajority of creditors (usually 662/3% or 75%).20 When a sovereign issuer is confronted by New York laws unanimity requirement or when it is uncertain about its ability to secure the necessary supermajority approval under English law, it may turn to alternative means. Through the use of the exchange offer,21 the sovereign debtor offers to exchange its existing debt for new instruments. Creditors willing to accept the offer are lifted out of the old debt. Creditors unwilling to accept the offer remain in full possession of their legal rights and remedies under the original debt instrument.

Some Examples of Creditor Agreement Clauses (CACs)

A) Cross-Default Clause Cross default clauses link together the sovereigns various creditors by making it an event of default if it defaults on any other debt agreement to which it is a party. In such an event, creditors armed with cross default clauses will be entitled to declare a default, rendering all relevant loans subject to acceleration. These provisions are pressed upon debtor nations on the grounds that all creditors, including commercial creditors, should be treated in pari passu, notwithstanding that they may individually be party to diverse agreements. The existence of such clauses could encourage large creditors, which, when considered individually, to participate in consensual renegotiations, to align interests and behave as one unit in negotiation. Conversely, it could induce smaller creditors to act independently and begin prompt litigation to enforce existing debt agreements. As it links various debt instruments to one another, it could also provide a larger pool of assets for the creditor to attach in case of a judicial proceeding. The presence of sharing clauses, however, may still make it unattractive for an excluded creditor to sue in its own right. B) Sharing Clause Through a sharing clause each creditor agrees to share any funds received from the debtor pro rata, with all other parties to the syndicate, or possibly all other commercial creditors. The clause will typically cover both voluntary payments by the debtor and proceeds from judicially imposed judgments. The motive behind this type of language in a debt instrument is to ensure that no creditor receives more favorable treatment than others and to encourage creditors not to hold out from renegotiation. This goal is particularly relevant in situations where commercial creditors are fearful that the proceeds from new credits are being used to pay off pre-existing loans in a manner prejudicial to their interests. In combination with the crossdefault clause, this could mean sharing with hundreds of banks and other creditors whatever sum a court seizes and makes accessible, leaving a small pro rata fraction left in the hands of the original suing party. Of course, out-of-court settlements do not necessarily fall under either of the scenarios described above. C) Super-Majority or Required Banks Clause Super-majority or requiredbanks clauses, set forth a threshold percentage of banks, or bond holders, required to take certain actions pursuant to an original or renegotiated debt agreement. The particular actions for which consent is required will vary, as will the percentage threshold for different actions. These clauses typically require that a majority or supermajority of all creditors agree to a renegotiations plan in order to bind non-consenting creditors to the new plan.

19 The International Financial Institutions Financial Advisory Commission, submission by Lee C. Buchheit, Cleary, Gottlieb, Steen & Hamilton Sovereign Debtors and Their Bondholders, (January 14, 2000). (The majority of this section is based on the cited work.) 20 See Yianni, Resolution of Sovereign Financial Crises: Evolution of the Private Sector Restructuring Process, in Bank of England, Financial Stability Rev. 78, 80-81 (June 1995), for a more detailed discussion on the differences between US and English practices. 21 For a more detailed discussion of exchange offers and Moodys analysis thereof, see Moodys Approach to Evaluating Distressed Exchange, Special Comment, July 2000.

Moodys Special Comment

Obviously, the dilemma in using exchange offers for carrying out sovereign restructuring is that it does not bind abstaining debt holders. Due to peer pressure and regulatory coaxing, the free-rider problem was trivial in the commercial bank debt restructurings of the 1980s. But, today, because so much of sovereign debt has traded into the hands of non-banks and with the prevalence of Brady transactions (structured as exchange offers), the hold-out problem may be a concern.22

III.

LITIGATION THREATS COULD ALTER THE INCENTIVE TO RESTRUCTURE

Original debt-holders, such as big banks, have rid their balance sheets of distressed debt by trading them off to secondary purchasers.23 Because this debt is bought and sold at less than its face value, its secondary-market price more accurately reflects realistic prospects for repayment. Nevertheless, countries are still liable for the face value of the debt. This disparity translates into the possibility of enormous profits for purchasers of discounted debt. Small creditors have, in essence, bought cheap securitized debt with an eye on the potential upside. The upside comes in the form of quick-strike suits. It is interesting to note that in the face of the recent defaults and restructurings, although legal action has clearly been possible, there have been relatively few published cases.24 This is probably because speculative purchasers are unlikely to want a binding appellate court decision. A precedent declaring that such lawsuits are, for whatever reason, not viable would take away a fairly potent weapon in the creditors arsenal. Nor would sovereign defendants want to risk having an appeals court declare in a published opinion that these suits are proper as that would make the threat of legal recourse even more credible, necessitating higher settlement offers. Put simply, both sides benefit from the uncertainty that shrouds this type of litigation. To date, these suits are used primarily as coercive tactics.25 The desire to settle remains strong for both sides.26

A. Change in Incentives
The players in renegotiations have historically been the sovereign debtor, Western banks, (the London Club), the governments of creditor nations (the Paris Club), and multi-lateral organizations such as the IMF. Over the past several decades, these players have devised a variety of methods to quell the panic that surrounds imminent sovereign default.27 These measures, in essence, have attempted to strike a balance between the limited ability of debtor nations to service external debt with the desire of creditor institutions, especially private banks, to recoup some part of their losses in this market. That the courts and the legal process are being employed as tactical tools by secondary purchasers for quick-cash settlements indicates that the motivators behind rescheduling and restructuring have changed, or at the very least are beginning to change. The driving consideration in restructuring has traditionally been the long-term interests of the large creditors. These interests are, at their core, tempered by political concerns. The chaos that would ensue if one government were to sue another government, for example, in a US court is difficult to imagine. It goes without saying, that in case of such a suit diplomatic relations
22 CIBC Bank and Trust Company (Cayman) Ltd. V. Banco Central do Brasil, 886 F. Supp. 1105 (S.D.N.Y. 1995) hereafter, Darts Litigation. An example of the use of legal action as a threat against the Sovereign is that of the Darts Family against Brazil, for an explanation of that case see Theodore Allegaert, Recalcitrant Creditors Against Debtor Nations, or How to Play Darts, 6 Minn. J. Global Trade 429 (Summer, 1997), pg. 446-447. (The controversy that brought the potential profitability of secondary purchases of LDC (less-developed countries) debt to the worlds attention arose between Brazil and Floridas Dart family. The Darts instructed traders to begin buying Brazilian debt paper unobtrusively on the secondary market, which they then assigned to a specially created Cayman Islands bank. Within a year, after buying from creditor banks at prices between 25 and 40 cents on the dollar, the Cayman bank became the fourth largest single holder of Brazilian Debt. In 1993, however, Brazil cut a deal with large US bank creditors to convert 35% of its outstanding debt, including the Darts holdings, into other bonds at substantially less than face value. The Darts refused to accede to this. Instead, the Darts brought suit in federal court in New York a year later, seeking accelerated repayment of principal and interest on their bonds. Ultimately, the two sides reached a settlement.) 23 Banks have tried to exit by securitizing the debt and by engaging in debt-for-debt or debt-for-equity swaps. 24 Despite the scarcity in case law, litigation by individual creditors are much more common than would otherwise be assumed. See, e.g., Christine A. Bogdanowicz-Binder, The Role of Financial Advisors in Bank Debt Reschedulings, 23 Colum. J. Transnatl L. 49, 54 (1984); see also, e.g., Weston Compagnie de Finance et dInvestissement, S.A. v. La Republica del Ecuador, 823 F. Supp. 1106, 1108 (S.D.N.Y. 1993) (suit by Swiss financial institution, a substantial part of the business of which involved the acquisition and trading of Latin American debt); Banque de Gestion Privee-Sib v. la Republica de Paraguay, 787 F. Supp. 53, 54 (S.D.N.Y. 1992). 25 See e.g. Supra note 22, Darts Litigation. 26 Such dynamics seem to operate anytime lawyers develop a novel or unusual type of nuisance suit. See, Theodore Allegaert, Comment, Derivative Actions by Policyholders on Behalf of Mutual Insurance Companies, 63 U. Chi. L. Rev. 1063, 1066 n. 15 (1996). 27 Most notably the Brady bonds. In March 1989, US Secretary of the Treasury, Nicholas Brady, announced a plan under which the United States government would back efforts to resolve the sovereign debt crisis. This included the Brady bonds, which were the securitization of sovereign debt into marketable bonds of long maturity, backed by US treasury securities.

Moodys Special Comment

would be damaged on various fronts. These same political barriers are not in place for small-stake bondholders and secondary purchasers. Furthermore, until this point in time, a kind of a taboo has existed. Very few creditors would dare to take a sovereign to court. However, as the quasi-mythological stature of a sovereign entity diminishes, as secondary creditors become more courageous, and as their lawyers sharpen their legal arguments, the threat of suits in case of a default or an exchange offer will become dauntingly real. The result could mean acceleration, at least in the short run, in the rate at which these suits are brought.

Moodys Special Comment

Special Comment

Sovereign Debt: What Happens If A Sovereign Defaults?

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