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The Gathering Storm: Contingent Liabilities in a Sovereign Debt Restructuring

20 Pages Posted: 17 Jul 2013 Last revised: 25 Dec 2014

Lee C. Buchheit

Cleary Gottlieb Steen & Hamilton LLP - New York Office

G. Mitu Gulati

Duke University School of Law

Date Written: August 21, 2013

Abstract

The contingent liabilities of a sovereign, such as guarantees of the debts of third parties, can normally be kept off the balance sheet of the sovereign guarantor. That is their charm. As the debt to GDP ratios of many developed countries approach red-zone levels, contingent liabilities are increasingly being favored over direct, on-the-balance-sheet, borrowings.

But what happens if a country carrying large contingent liabilities needs to restructure its debt? The borrower dare not leave its contingent claims out of the restructuring. To do so would risk undermining the financial predicates of the sovereign’s economic recovery program should the beneficiaries of the guarantees demand payment in full after the restructuring closes.

Attempting to shoehorn sovereign contingent liabilities into a debt restructuring, however, is a particularly challenging task. There are few precedents for how to do so, and no good precedents. The explosion in the size of contingent sovereign obligations since the financial crisis began in 2008 inevitably means that these issues will need to be confronted sooner or later, probably sooner.

Suggested Citation

Buchheit, Lee C. and Gulati, G. Mitu, The Gathering Storm: Contingent Liabilities in a Sovereign Debt Restructuring (August 21, 2013). Available at SSRN: https://ssrn.com/abstract=2292669 or http://dx.doi.org/10.2139/ssrn.2292669

Lee C. Buchheit (Contact Author)

Cleary Gottlieb Steen & Hamilton LLP - New York Office ( email )

One Liberty Plaza
New York, NY 10006-1470
United States

Gaurang Mitu Gulati

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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