Abstract

http://ssrn.com/abstract=1470232
 
 

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The Coroner's Inquest: Ecuador's Default and Sovereign Bond Documentation


G. Mitu Gulati


Duke University - School of Law

Lee C. Buchheit


Cleary Gottlieb Steen & Hamilton LLP - New York Office

August 11, 2009

International Financial Law Review, 2009

Abstract:     
Conventional wisdom is that sovereigns will rarely, if ever, default on their external debts in circumstances where it is clear that they have the capacity to pay. The first line of defense against the errant sovereign is its concern about reputation. It may have to tap the external debt markets again in the future; and there is the fear that the markets will extract revenge. But reputational constraints do not always work because some governments heavily discount future costs in favor of current benefits. When reputational constraints fail, however, a second line of defense is supposed to come into play. That line of defense is comprised of contractual and legal remedies. Both lines of defense broke down in the case of Ecuador’s default in late 2008. The breakdown of the second line of defense is significant because this was the first time that the modern theory of supermajority creditor control of sovereign debt problems was tested in practice. This Article begins the coroner’s inquest into the reasons for this breakdown and how similar situations might be averted in the future.

Number of Pages in PDF File: 12

Keywords: sovereign debt, Ecuador, sovereign bond default, international bonds

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Date posted: September 10, 2009 ; Last revised: September 16, 2009

Suggested Citation

Gulati, G. Mitu and Buchheit, Lee C., The Coroner's Inquest: Ecuador's Default and Sovereign Bond Documentation (August 11, 2009). International Financial Law Review, 2009. Available at SSRN: http://ssrn.com/abstract=1470232

Contact Information

Gaurang Mitu Gulati (Contact Author)
Duke University - School of Law ( email )
Box 90360
Duke School of Law
Durham, NC 27708
United States
Lee C. Buchheit
Cleary Gottlieb Steen & Hamilton LLP - New York Office ( email )
One Liberty Plaza
New York, NY 10006-1470
United States
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