Political Risk and Sovereign Debt Contracts

35 Pages Posted: 23 Nov 2011 Last revised: 25 Dec 2014

Stephen J. Choi

New York University School of Law

G. Mitu Gulati

Duke University School of Law

Eric A. Posner

University of Chicago - Law School

Date Written: November 21, 2011

Abstract

Default on sovereign debt is a form of political risk. Issuers and creditors have responded to this risk both by strengthening the terms in sovereign debt contracts that enable creditors to enforce their debts judicially and by creating terms that enable sovereigns to restructure their debts. These apparently contradictory approaches reflect attempts to solve an incomplete contracting problem in which debtors need to be forced to repay debts in good states of the world; debtors need to be granted partial relief from debt payments in bad states; debtors may attempt to exploit divisions among creditors in order to opportunistically reduce their debt burden; debtors may engage in excessively risky activities using creditors’ money; and debtors and creditors may attempt to externalize costs on the taxpayers of other countries. We support this argument with an empirical overview of the development of sovereign bond terms from 1960 to the present.

Suggested Citation

Choi, Stephen J. and Gulati, G. Mitu and Posner, Eric A., Political Risk and Sovereign Debt Contracts (November 21, 2011). University of Chicago Institute for Law & Economics Olin Research Paper No. 583; U of Chicago, Public Law Working Paper No. 370. Available at SSRN: https://ssrn.com/abstract=1962788 or http://dx.doi.org/10.2139/ssrn.1962788

Stephen J. Choi

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Gaurang Mitu Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

Eric A. Posner (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-0425 (Phone)
773-702-0730 (Fax)

HOME PAGE: http://www.law.uchicago.edu/faculty/posner-e/

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