The New Vulture Culture: Sovereign debt restructuring and trade and
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Government borrowing has been a feature of the world economy since the founding of nation states, and a cornerstone of the development process as well. However, developing country debt crises are also increasing phenomena. Inevitably, with each financial crisis one or more nations find themselves restructuring or defaulting on its sovereign debt commitments. While an important part of the crisis mitigation toolbox in developing countries, sovereign debt restructuring could be deemed illegal under various trade and investment treaties, especially those negotiated with the United States.
Debt crises can be a function of government profligacy, unpredictable swings in global markets, or both. Although sovereign debt restructuring and default have been a constant feature of the global economy for centuries, the fact that there is not a comprehensive and uniform regime for governing debt workouts has been seen as one of the most glaring gaps in the international financial architecture. The lack of a clear regime for restructuring has accentuated financial crises.
Does the incorporation of sovereign debt as a covered investment in some international trade and investment treaties hinder the ability of debtor nations and their creditors to work out their debt obligations in an efficient manner that facilitates economic development? The question has received relatively little attention in both the economic policy community focusing on financial crises and by the trade/investment treaty community. The memory of numerous defaults and restructurings in the 1990s, Argentina's restructuring after its crisis in 2001, and the current European crises have triggered a new wave of thinking regarding the interactions between financial crises and trade/investment treaties.
GDAE's research in this area examines the extent to which trade
and investment treaties restrict the ability of nations to restructure their debt in the event of a crisis.
The central findings of this research are the following:
- sovereign debt is often a "covered" investment under treaties, thus
- sovereign debt restructuring is seen as grounds for private bondholders to file arbitral claims under treaties,
- safeguards under trade and investment treaties are limited, particularly in the United States, meaning that it is not clear which measures provide for policy space for effective restructuring in times of crises, and
- if claims against sovereign debt restructuring become more widespread they could threaten the regime for financial crisis recovery that is already very fragile.
Download the full report: The New Vulture Culture: Sovereign Debt Restructuring and Trade and Investment Treaties
Download the UNCTAD Policy Brief based on the report: Sovereign Debt Restructuring and International Investment Agreements
Videos and Press:
Kevin P. Gallagher gave an interview to the Real News Network explaining this Working Paper. The interview also covered trade and investment treaties, the Greek debt crisis, and the US debt ceiling. Watch the full interview.