Academic Research
Publications
Capital Markets Law Journal (2024)
Belize conducted a debt-for-nature swap operation in 2021 that was heralded as a model for facilitating both debt relief and action on climate change. The country was able to commit an estimated US$107 million for conservation projects at the same time it restructured its unsustainable debt. The transaction relied on two essential, yet intertwined features: first, the backing of the United States’ Development Finance Corporation and, secondly, Belize’s environmental conservation undertakings with real financial and legal consequences. The legal commitments made in the debt-for-nature swap outstripped the typical commitments made by sovereigns in green, social and sustainable bonds and sustainability-linked bonds.
Routledge (2023)
The book sheds light on the perhaps most important legal conundrum in the context of sovereign debt restructuring: the holdout creditor problem. Absent an international bankruptcy regime for sovereigns, holdout creditors may delay or even thwart the efficient resolution of sovereign debt crises by leveraging contractual provisions and, in an increasing number of cases, by seeking to enforce a debt claim against the sovereign in courts or international tribunals.
Following an introduction to sovereign debt and its restructuring, the book provides the first comprehensive analysis of the holdout creditor problem in the context of the two largest sovereign debt restructuring operations in history: the Argentine restructurings of 2005 and 2010 and the 2012 Greek private sector involvement. By reviewing numerous lawsuits and arbitral proceedings initiated against Argentina and Greece across a dozen different jurisdictions, it distils the organizing principles for ongoing and future cases of sovereign debt restructuring and litigation. It highlights the different approaches judges and arbitrators have adopted when dealing with holdout creditors, ranging from the denial of their contractual right to repayment on human rights grounds to leveraging the international financial infrastructure to coerce governments into meeting holdouts’ demands. To this end, it zooms in on the role the governing law plays in sovereign debt restructurings, revisits the contemporary view on sovereign immunity from suit and enforcement in the international debt context, and examines how creditor rights are balanced with the sovereign’s interest in achieving debt sustainability. Finally, it advances a new genealogy of holdouts, distinguishing between official and private sector holdouts and discussing how the proliferation of new types of uncooperative creditors may affect the sovereign debt architecture going forward.
While the book is aimed at practitioners and scholars dealing with sovereign debt and its restructuring, it should also provide the general reader with the understanding of the key legal issues facing countries in debt distress. Moreover, by weaving economic, financial, and political considerations into its analysis of holdout creditor litigation and arbitration, the book also speaks to policymakers without a legal background engaged in the field of international finance and economics.
Reviews:
No issue in sovereign finance has preoccupied the attention of scholars, politicians and lawyers in this century more than the problem of holdout creditors in sovereign debt workouts. Sebastian Grund has given us a magisterial survey of how courts and arbitrators have dealt with the claims of holdout creditors in two of the largest sovereign debt restructurings in history — Argentina and Greece.
Lee Buchheit, Honorary Professor, University of Edinburgh School of Law and former Senior Partner at Cleary Gottlieb Steen & Hamilton
This book is a delightful treatment of two of the most important restructurings in the modern history of sovereign debt, Argentina and Greece. While the restructurings and the central problem of holdout creditors manifested themselves in very different ways in the different cases, Grund shows us the lessons we can learn from the commonalities. The treatment of what happened in the particular cases (and there were many) is sure to be invaluable to be both scholars and practitioners.
Mitu Gulati, Perre Bowen Professor of Law, University of Virginia School of Law
Holdout creditors are a massive impediment to the orderly restructuring of sovereign debt. They are typically investors who’ve bought the debt to profit from the sovereign debtor, not the original lenders to it. This book explores the approaches of an unusually wide range of national courts to this problem, and distils the lessons from the Argentine and Greek restructurings. It sheds light on issues that need it – as those who ultimately pay the price today of these cynical investments are the poorer citizens of poor nations.
Ross P Buckley, Scientia Professor & ARC Laureate Fellow, University of New South Wales Sydney
Business & Finance Law Review, Vol. 4, Issue 2, May 2021
This Article argues that the current frameworks for the orderly resolution of large financial institutions suffer from a liquidity problem. The main reason for this predicament is that post-crisis reforms on both shores of the Atlantic enjoined central banks from providing liquidity to financial firms during and immediately after resolution. By creating a bright line rule prohibiting lender-of-last resort (LOLR) operations once a firm enters resolution proceedings, there is a risk that firms will no longer be able to roll over short term debt, thereby increasing risks to financial stability. As this Article shows, however, there are important differences between the United States (U.S.) and Europe. While the U.S. Congress at least sought to minimize liquidity gaps in resolution by throwing the fiscal firepower of the United States in the ring, European lawmakers failed to agree on a genuine, common backstop for the resolution of significant credit institutions, leaving only a small window for national solutions. To meet the core objectives of resolution, which include allocating losses to equity and long-term debt holders rather than to taxpayers, the central bank should be given a limited LOLR role to shore up the resolved firm’s funding. This LOLR function ought to be guaranteed by the fiscal authority, subjected to ex-ante volume limits, and limited to short-term credit. Moreover, to further mitigate latent moral hazard and to create a counterweight to the extended LOLR function, the Article advocates for higher capital requirements.
Journal of Financial Regulation (2020, forthcoming in Issue 2)
The European sovereign debt crisis and, more recently, the COVID-19 pandemic have revealed the European Economic and Monetary Union’s fragility, which essentially emanates from the inherent tension between a single monetary policy and decentralized fiscal policies. To cushion economic and financial shocks and sever the sovereign-bank doom loop, different proposals to create a common public debt security have been put forward, although none of them has so far seen the light of day. Building on pertinent economic and finance scholarship, this article reviews four promising safe asset proposals from a legal perspective: Sovereign bond-backed securities (SBBS), E-bonds, Purple bonds, and Coronabonds. Rather than focusing on their feasibility under EU law or national constitutional law, this article compares the proposals from an investor perspective against the backdrop of the following formal and functional legal characteristics that render assets ‘safe’: governing law, dispute settlement forum, investor protection, and investor representation in sovereign debt restructurings. Against this backdrop, targeted recommendations on critical design elements of safe assets, with the aim of reconciling the economic policy objectives with the pertinent legal constraints, are advanced.
Capital Markets Law Journal (Vol. 14, Issue 2, April 2019, pp. 134-154)
In this paper, we review the first five years of the European experience with Collective Action Clauses (CACs), focusing on both the legal and the economic dimension. First, we present a chronology of the most important legal developments, from the legislative acts to incorporate CACs in contracts to landmark lawsuits that have challenged their viability in the context of the Greek government debt restructuring of 2012. Given the legal uncertainties surrounding retroactive legislative amendments of sovereign bond contracts, the ex-ante clarification of sovereign debt restructuring processes in the euro area was both sensible and warranted. Second, we complement the legal developments with an empirical analysis of the effects of CACs on financial market prices. Our results suggest that their introduction as well as the key legal developments have had limited effects on sovereign bond markets, both around the time of their announcement as well as in the time since. We show that the pricing differential with respect to bonds that do not include a CAC provision are very limited and mostly driven over the medium-term by developments in market liquidity. Overall, we conclude that the European experience with CACs is a positive one. While scope for improvement remains, sensible and timely communication as well as careful legal drafting have ensured the smooth transition towards a regime to deal more orderly with solvency crises in the euro area.
Coverage:
Fordham International Law Journal (Vol. 42, Issue 3, 2019, pp. 795-846)
This paper discusses the legal framework for sovereign debt restructuring in the euro area – both de lege lata and de lege ferenda. Sovereign debt restructurings remain exceptional events that come with profound implications for financial stability and monetary policy transmission. However, they may be necessary as part of a financial assistance program to a euro area Member State, as was the case for Greece in 2012. This paper seeks to contribute to the ongoing discussion on how to enhance the functioning of the Economic and Monetary Union (EMU) by exploring the legal aspects of sovereign debt restructuring in the euro area. This includes an analysis on whether and how the procedures for sovereign debt restructuring in the euro area can be made more orderly, fair, and predictable by establishing a European Sovereign Debt Restructuring Framework (ESDRF). Drawing upon international standards for sovereign bond documentation, one may consider the inclusion of enhanced Collective Action Clauses (CACs) as well as certain technical amendment clauses. In addition, two options for a sovereign debt dispute resolution mechanism are discussed: (i) a separate chamber at the Court of Justice of the European Union (CJEU) and (ii) a sovereign debt arbitration mechanism. The paper makes no judgement on the economic or political feasibility and necessity for such changes, but seeks to shed some light on the legal aspects to be taken into account in the context of reforming the euro area's framework for sovereign debt restructuring.
Coverage:
Journal of International Economic Law (Vol. 21, Issue 3, August 2018, pp. 489-507)
The IMF’s regulatory power to exercise authority over the capital account policies of its members is based on a patchwork of restrictions and obligations. It has therefore used its soft powers in the context of bilateral and multilateral surveillance to influence its members’ policies. Indeed, the importance of capital flows and policies to manage them has long been reflected in the Fund’s surveillance mandate, from the perspective of maintaining a stable international monetary system. As this note argues, the Fund has yet to show that its soft powers will result in greater consistency of its members’ capital account policies over the longer term, or whether there is a need to increase the regulatory powers of the IMF. The Fund could also play an active role in promoting international cooperation. The G20 Eminent Persons Group on Global Financial Governance could possibly give guidance on the future role of the IMF in overseeing capital account policies.
Winner of the John H. Jackson Prize of the Journal of International Economic Law 2018
Capital Markets Law Journal (Vol. 12, Issue 2, Apr. 2017, pp. 253-273)
Five years after Greece implemented the biggest sovereign debt restructuring in history, its legal design has been vindicated by European courts and international tribunals. Bondholders have exhausted all potential legal avenues to challenge the debt workout but Greece ultimately held the upper hand. This article sheds a light on the most seminal decisions, discussing their implications for possible future restructurings of local law bonds, which continue to be prevalent in Eurozone Member States. While the retroactive insertion of Collective Action Clauses facilitated a relatively smooth Greek debt swap, governments ought to carefully study the recent jurisprudence of European courts, which set important limits to governmental interference with bondholder’s property rights. By mapping three potential future debt restructuring scenarios with post-Greece case law, this article strives to provide further clarity to both governments and creditors as regards the legal design of Private Sector Involvement in Europe.
Coverage:
Maastricht Journal of European and Comparative Law (Vol. 24, Issue 3, 2017)
This article analyses three seminal instances of bondholder litigation before German municipal courts following the Greek sovereign debt restructuring of 2012. While the haircut imposed on private bondholders led to a significant reduction of the country’s debt level in 2012, thousands of German investors subsequently challenged the Greek government’s decision before German courts. In this context, as this article highlights, even within a single jurisdiction, courts may hold very different views as to which debt management measures by a sovereign borrower ought to be considered ‘public’ legal acts – thus barring foreign bondholder suits – and which are ‘commercial’ legal acts, where litigation is a feasible legal avenue for disgruntled creditors to recover losses. In sum, however, German courts were reluctant to grant broad enforcement remedies to private bondholders, essentially vindicating the Greek government’s strategy of rewriting local law and retrofitting so-called ‘collective action clauses’ to increase bondholder participation in the restructuring. Against this background, this article discusses some of the decisions’ potential implications, such as the increased prospects for other crisis-stricken governments to successfully repeat a Greek-style debt restructuring as well as the future treatment of foreign and domestic-law public debt both by courts and market participants.
Coverage:
European Law Review (Vol. 41, Issue 6, Dec. 2016, pp. 781-803)
While many central banks around the world have pursued quantitative easing programmes in recent years responding to the weak inflation outlook, the European Central Bank (ECB) faces unique legal constraints with respect to its Public Sector Purchase Programme (PSPP) launched in 2015. Most importantly, owing to the prohibition of monetary financing enshrined in art.123 of the Treaty of the Functioning of the European Union (TFEU), the ECB may find itself in the — for the ECB — unprecedented position of a creditor participating in a sovereign debt restructuring while, at the same time, being confronted with severe legal constraints in accepting any debt cut on its sovereign bond holdings. Against this backdrop, this article sheds some light on the potential legal options available to the ECB, should another debt crisis in the euro area materialise. For this purpose, we will also take a closer look at two seminal judgments by European Courts, delineating the legal boundaries within which the ECB may conduct its non-standard monetary policy.
Working Papers
Apr., 2020
On Feb. 19, 2020, the IMF declared that Argentina’s debts were no longer sustainable and called upon bondholders to help resolve the crisis. A schedule for the restructuring of Argentina’s external debt has been announced by the Argentina Ministry of Finance on Jan. 29, 2020. According to the Ministry, Argentina plans to launch a debt restructuring offer in the second week of March and execute the offer by the end of March.
This short essay provides an overview of the intricate challenges that Argentina would be facing in a potential restructuring of its sovereign debt obligations, with a focus on the legal aspects. After mapping the respective debt instruments, which include domestic debt, international sovereign bonds, as well as loans from international financial institutions, I turn to the key legal obstacles when it comes to the (unilateral) restructuring.
The paper posits that the most significant legal risks are likely to occur with respect to international bonds and disruptive legal actions taken by their holders. Uncooperative creditors may engage in holdout tactics with the goal of obtaining a better settlement than their peers by refusing to settle and ultimately launching litigation proceedings in foreign courts. The latest type of Argentine bonds ("Macri bonds") include modern, fully-aggregated, single-limb Collective Action Clauses (CACs), which are powerful in ameliorating such holdout inefficiencies. However, several older bonds ("Kirchner bonds") feature an outdated model of CACs, and generally afford stronger enforcement rights to bondholders. Unsurprisingly, creditor holding Kirchner bonds have already formed committees to leverage their negotiation position. Another related difficulty that this paper reviews arises from the requirement in Argentina's newer ("Macri") bonds that a restructuring offer must be "uniformly applicable" for all affected series of bonds. Given the two different sets of bond contracts involved, this requirement may lead to complex transactional and design questions. Finally, with respect to the interpretation of the pari passu clause included in Argentina's bond prospectuses, the essay argues that a recent decision by the Southern District Court of New York significantly reduced the risks of specialized holdouts attacking a majority-approved debt workout.
To be sure, modern sovereign bond restructurings rest on the basic premise of bondholder democracy. In other words, as long as a sufficient majority of creditors accepts a restructuring offer, most legal obstacles can be overcome. However, the entrance of specialized distressed-debt managers the market suggests that some investors will gamble for a better deal, or try to leverage their contractual rights against the country in a classic holdout manner. While Argentina certainly finds itself in a legally superior position compared to its last debt crisis, the country will soon have to sail into choppy legal seas where all sorts of hazards lurk - some of which the country is all too familiar with.
Coverage:
Press Coverage:
Clarin
Global Americans
Aug., 2019
The European sovereign debt crisis of 2011-2012 revealed the currency union's fragility, which essentially emanates from the tension between a single monetary policy and decentralized fiscal policies. Financial distress in certain national debt markets hampered the transmission and the singleness of monetary policy, pushing the euro area to the brink of a break-up. Moreover, given that euro area banks are heavily exposed to sovereigns, shocks in the banking sector propagate to the sovereign and vice versa.
Against this backdrop, several policy proposals to create a common public debt security for the currency union have been put forward since the heydays of the crisis. This paper examines the the following three safe asset proposals from a legal perspective: (a) sovereign bond-backed securities (SBBS), (b) E-bonds, and (c) Purple bonds.
The paper argues that creation of a new public debt instrument warrants a comprehensive and multidisciplinary analysis that moves beyond the important and insightful debate economists and financial experts have engaged in for several years. Indeed, the legal aspects have often been overlooked or simply pushed aside as “technicalities”. To that end, the paper compares the respective safe asset proposals against the backdrop of the following legal features: (i) governing law and dispute settlement, (ii) investor protection, and (iii) investor representation in sovereign debt restructurings. As is the case with any other public debt instruments, these elements are vital for the assessment of legal risks associated with the investment. They thus bear direct relevance for the feasibility of the safe asset proposals, the pricing of these instruments by private markets, as well as their suitability to achieve the objectives envisaged by economic policymakers.
I conclude that while much progress has been made in identifying and calibrating financially and economically sounds safe assets, critical legal questions have not yet been answered to a satisfying degree. For one, policymakers are well-advised to provide more clarity on the legal basis as well as crucial legal design features of the respective safe asset. For another, in order to create a truly common asset and mitigate the risk of regulatory arbitrage, further harmonization of euro area sovereign debt markets seems warranted. Whether the current political gridlock can be unlocked remains, however, an open question.