An Empirical Overview of Modern Sovereign Debt Litigation
In December, I attended a terrific conference examining historical parallels to the European debt crisis. I was there to talk about the early-20th century antecedents of modern collective action clauses, the magic contractual potion - or is it snake oil? - that will banish holdout litigants from the kingdom forever more. There were some really great papers, including this one (Sovereign Defaults in Court: The Rise of Creditor Litigation 1976-2010, by Julian Schumacher, Christoph Trebesch, and Henrik Enderlein), which may interest many Credit Slips readers.
One of my interests involves how changes in sovereign immunity law influence bond contracts, and I have written about that relationship here. Schumacher et al. address a related but quite distinct subject: the determinants of sovereign debt litigation. Why are some restructurings followed by a flood of lawsuits when others produce few or none? Are poorer countries more likely to be targeted? Does the size of the haircut matter? They have assembled a comprehensive dataset, which includes essentially all lawsuits filed in London and New York since the advent of the modern era of sovereign immunity (which they date to the 1976 enactment of the Foreign Sovereign Immunities Act in the US). My synopsis of their findings after the jump.
- A substantial rise in creditor litigation in recent years, with the majority of all debt-crisis-related lawsuits occurring since 2000.
- An unsurprising shift in the identity of plaintiffs, from banks in the 1980s to distressed debt investors (hedge funds, vultures, insert your term of choice) today. What caught my eye was the magnitude of the shift. Since 2000, these investors have accounted for over 90% of lawsuits (not counting duplicative filings by the same plaintiff).
- That some debtors and defaults produce disproportionate litigation. Care to guess who takes the prize as most sued debtor? (Hint: 4-syllables; sounds kind of like "Marvin Tina.")
- That steeper haircuts are associated with a higher risk of litigation, for reasons that are unclear but that (as the authors note) may be due to the fact that deep discounts make litigation more profitable.
On the other hand, some of the paper's findings are a bit surprising given the modern obsession with holdout litigation and the widespread opprobrium targeted at the creditors who engage in it. For example:
- A sizeable majority of restructurings produce no litigation at all. None. (At least in courts in New York or London, but these are presumably the main enforcement jurisdictions.) The probability of litigation following a restructuring has increased in recent years, however.
- The authors do not find evidence to support the claim that poor countries (which they define to mean HIPC countries) are more likely to be sued. They do find, however, an inverse relationship between government effectiveness, as measured by the World Bank's governance indicators, and the probability of being sued. In other words, less effective governance is associated with a higher probability of being sued.