Sovereign Defaults in Court: The Rise of Creditor Litigation 1976-2010

Abstract:     
Sovereign debt is widely seen as non-enforceable and immune from legal action. This paper comes to a different conclusion, by documenting the changing environment for sovereign debt enforcement via courts. We construct a comprehensive dataset of lawsuits filed against defaulting governments in the US and the UK between 1976 and 2010. The data show a drastic rise of creditor litigation against sovereigns: Case numbers, case volumes, and attachment attempts have all more than doubled over the past decade. In recent years, 50% of sovereign defaults have triggered creditor lawsuits. What explains this rise in legal disputes? And why is there such a large variation across crises? To answer these questions we assess the determinants of litigation based on a standard theoretical framework. We find that creditors are more likely to file suit in large debt restructurings, when governments impose high losses (“haircuts”), and when the defaulting country is more vulnerable to litigation (open economies and those with a low legal capacity). We conclude that the rise in litigation can be attributed to both legal and economic developments. Legal disputes are likely to remain an important challenge in future debt crises.

Number of Pages in PDF File: 39

Keywords: sovereign debt, legal disputes, litigation, enforcement

working papers series