Why are Developing Nations so Slow to Play the Default Card in Renegotiating Their Sovereign Indebtedness?
(2005) Chicago Journal of International Law 347-362
25 Pages Posted: 15 Jun 2017
Date Written: January 1, 2005
Before 1982 sovereign debtors regularly defaulted on their debts. Since the debt crisis that commenced in that year, sovereign defaults have been rare and usually quite quickly remedied, even though crises have been occurring with increasing frequency. This article seeks to answer why there might have been this change, and whether it is in the debtors’ interests.
The party with the most power in any negotiation is the party that needs the negotiated result the least. To display this power, a party must be willing to walk away from the negotiating table. As the House of Lords has found, each party “[is] entitled, if he thinks it appropriate, to threaten to withdraw … or to withdraw in fact, in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms.”
Yet, in sharp contradistinction to the historical pattern, in the past twenty-five years developing nation debtors have been consistently reluctant to stop servicing their debt, to default, even when doing so might well have increased their power in the renegotiation of their debt. Why might this be so? And has this been a productive approach to debt renegotiation? This article seeks to answer these two questions.
In seeking these answers the best place to begin is with some history.
Keywords: sovereign debtors, default, debt crisis, debt renegotiation
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