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

International Financial Law Review, 2009

12 Pages Posted: 10 Sep 2009 Last revised: 25 Dec 2014

G. Mitu Gulati

Duke University School of Law

Lee C. Buchheit

Cleary Gottlieb Steen & Hamilton LLP - New York Office

Date Written: August 11, 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.

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

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: https://ssrn.com/abstract=1470232

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
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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