Current Legal Issues Affecting Central Banks, Volume V

Chapter 14 Legal Remedies in the Event of a Sovereign Debt Default

Robert Effros
Published Date:
May 1998
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The growth in sovereign debt that began during the Second World War has continued through peace, war, recession, and prosperity. Fondness for state borrowing has spread from developed to developing countries, and from market-based economies to socialist ones, which then became highly indebted “economies in transition.” The difficulties of servicing this debt, particularly by developing and transition borrowers, have triggered crises in financial institutions, bond markets, and currency exchanges. The continued development of highly liquid portfolio capital markets, particularly in developing and transition countries, has had a multiplier effect. This effect stems from the possibility that a sovereign default could trigger a stampede of disinvestment, or what economists call an investor “rush for the exits.” Fears of possible “contagion effects,” where a single sovereign default leads to a “rush for quality” domino effect as investors move capital to more secure venues, have made economists even more concerned with the potential multinational effects of the default of a single sovereign.

The Mexican peso crisis in late 1994 forced the world’s financial community, and in particular the governments of the Group of Ten countries2 and international financial institutions, to give the problem of sovereign illiquidity heightened attention.3 Although meetings have been held and reports written, so far no consensus has emerged as to what the response of the international community should be. However, some observers fear that sovereign defaults among a number of developing and transition countries may loom menacingly on the horizon. Ministers of finance, central bankers, and financial experts in both the public and private sectors continue to warn of the consequences to the world economy of a major sovereign liquidity crisis.

A primary issue is what constitutes “sovereign debt obligations.” The answer to this question depends on what constitutes “sovereign debt.” This term has at least two different definitions, depending on the point of view of the speaker. First, if one is an economist, one is as likely to use the term “public” or “government” debt and to think in terms of total borrowing by the entire governmental sector. Public debt would include those obligations that are, or would as a practical matter become, a burden on the state revenues of the particular polity.4 These obligations would include not only those of the national state (including contingent liabilities through loan guarantees), but also of political subdivisions, such as provinces or municipalities; related governmental institutions, such as central banks; and state-owned enterprises, whose financial well-being is ultimately supported by the public treasury. This latter category would include not only those entities whose debts are formally or legally guaranteed by the state, but also other entities that the state could not, as a matter of practical politics or economics, allow to fail.5

Second, if one is a lawyer, what defines sovereign debt is less an issue of the effects of the obligation on state revenues and more a question of who has incurred a legal obligation to pay and what special protections are afforded to that borrower if it is a sovereign. A lawyer advising either a borrower or a lender will be concerned with the specific rights and responsibilities that the law attaches to sovereigns, as opposed to nonsovereign borrowers or lenders. In particular, a lawyer will be concerned with the ability of a creditor to use legal process against the sovereign borrower to secure financial redress in the event of a default. Among the most important issues of concern will be the special legal immunities of sovereigns, known as sovereign immunity. These immunities may restrict the ability of a creditor to find a court that can exercise the necessary personal and subject matter jurisdiction so that the creditor may sue the sovereign for a judgment, or to have his or her judgment executed on the sovereign’s assets. These issues are largely the subject of this chapter. However, there is another reason why sovereign debt differs from private, and that is because sovereign states cannot take advantage of bankruptcy laws. This means that, in the event of a default, the sovereign cannot turn to a bankruptcy court for a temporary stay of suits by creditors. Private issuers, on the other hand, are afforded the protections found in bankruptcy laws.6

Public finance economists are also most likely to be concerned with “external debt” as opposed to “domestic debt.” From the economist’s perspective, external debt is debt held by foreigners, and therefore, such debt has a primary effect on a country’s balance of payments and the pricing of its currency. In the case of developing and transition countries, it is typical for this debt to be denominated in foreign currencies. This means that such debt cannot be monetized by the debtor through the printing of more money. Moreover, when the country (and its central bank) run out of foreign currency to pay state debts, private economic actors may run out of foreign currency as well. The country may then impose exchange controls that may give rise to defaults on the repayment of private sector foreign-currency-denominated debt as well.

From a lawyer’s perspective, these distinctions are imprecise. For example, a given sovereign bond issue may be subscribed by both foreign and local residents, while the same governmental issuer may issue bonds denominated in both local and foreign currencies. For the lawyer, the importance of the type of debt lies in the legal nature of the obligation. This chapter concerns international debt—that is, debt where payments of interest and principal are legally required to be made, at the option of the lender, in a foreign country. This distinction is important, because debt that is payable in foreign jurisdictions is almost always subject to foreign laws; in fact, international debt typically provides that it is governed by the laws of a particular foreign jurisdiction and that this jurisdiction is also a forum for dispute settlement. Two important consequences flow from this. First, in the event of a default the government typically cannot, through its own laws, protect itself from being sued in a foreign court. Second, while the government might, by changing its own laws, be able protect its domestic assets from being attached in execution of judgment, it cannot similarly protect its foreign assets from being attached.

Finally, international debt typically includes clauses waiving any immunities it might have to execution of judgment against foreign assets. In most cases, the laws of foreign sovereign immunity, meaning those laws that restrict the jurisdiction of a court when the defendant is a foreign sovereign, will respect such waivers and will not allow the sovereign unilaterally to cancel them. This means that there is a potential for creditors to use legal process in a foreign jurisdiction either to collect from defaulting debtors or as a tool to apply pressure so as to improve the terms of any negotiated refinancing. Also of great importance, international debt is often payable (either directly or at the option of the holder) in a foreign currency.

Debt is domestic, on the other hand, where payments are made within the country of the issuer. It is usually governed by domestic law, which the government can use to protect itself from both suit and from attachment. At the same time, because domestic debt includes no waivers of immunity, foreign sovereign immunity laws typically will protect the sovereign’s foreign assets from attachment. Therefore, creditors would generally not be able to use litigation to collect from defaulting debtors, or to use litigation to improve the terms of any refinancing.7 Each of these issues is discussed at greater length later in this chapter.

The economist looks to the general consequences of a default on the economy, while the lawyer looks to the specific consequences of a default for his or her client. However, the general effects will depend on the sum of the particular effects. The nature of the legal consequences of a default by a sovereign debtor will determine, in large part, how sovereign borrowing will be priced in the future. Therefore, the legal nature of sovereign borrowing will determine the extent of remedies. How the law of sovereign immunities affects the ability of the borrower to collect on a default will determine, again at least in part, the market’s response to a default. In addition, by changing the legal consequences of a default, the market’s reactions can also be changed. For these reasons, the economist, whether in a ministry of finance or a central bank, should be concerned with the protections afforded by sovereign immunity.

Some commentators have suggested that in certain cases of sovereign default creditors should not be permitted to take legal action to enforce their claims. Instead, sovereign debtors should be permitted a “breathing period,” similar to that provided in national bankruptcy laws, to allow them time to negotiate a debt rescheduling or adjustment with their creditors. During this time, the sovereign would also engage in an economic restructuring to provide for additional resources to pay creditors. In addition, as provided in national bankruptcy laws, a reasonable settlement should result in a legally binding contract between the debtor and all creditors, even if all creditors do not consent.8 Such a new world might be implemented through changes in the rules of sovereign immunity. These issues are addressed in the final part of this chapter.

The fear of legal redress against defaulting sovereign debtors is probably not the most important aspect of a sovereign default. The most important aspect is the reaction of the sovereigns’ creditors and of markets to a sovereign default. If a borrower defaults, lenders either will not lend additional funds or will demand higher interest rates to compensate for the additional risk of lending to a defaulting borrower. Nevertheless, it may be possible for certain creditors to reduce their losses in the case of a default through recourse to legal process or to apply pressure on a sovereign with which a refinancing is being negotiated.

Creditors to foreign sovereigns may be official (governments and international financial organizations) or private. Private creditors, excluding short-term trade credits, can be divided into two groups—those that make syndicated loans and those that extend credit on a party-to-party basis, often, although not always, through bonds.9 Although there have been exceptions, political considerations often prevent official creditors from seeking legal redress in the event of default by a sovereign borrower.10 Again, despite exceptions, most syndicated creditors do not seek legal redress for reasons discussed immediately below.11 In the past, most sovereign defaults have been handled outside the courts, either bilaterally or in the Paris and London Clubs, which deal with official and private debt, respectively.

Before the debt crisis of the 1980s, most sovereign debt was in the form of syndicated loans. Those loans typically included sharing clauses, which meant that any separate creditor in the syndicate would have to share the benefits of asset attachment with all other members of the syndicate in proportion to outstanding exposure. However, since the resolution of the debt crisis, the majority of debt contracted by sovereigns has been securitized—that is, through notes or bonds. In the case of securitized debt, there are no sharing clauses.12 This means that, in the event a bondholder recovers assets through legal process, he need not share them with any other creditor.

For party-to-party creditors or for bondholders, however, legal process may remain a practical option. When a sovereign debtor fails to make a payment due on an obligation, these creditors may do many things besides sue to recover damages, including trying to negotiate a rescheduling or seeking redress at the political level. However, even good faith negotiations and influential political pressure will be affected by the legal remedies available. Those legal remedies will depend on the sovereign immunities recognized in the particular court in which a suit may be conducted against the sovereign defaulter.


In order to secure an effective legal remedy against a defaulting borrower, the creditor needs two things: a judgment providing that damages of a specific amount are due, and sufficient assets of the borrower to attach or seize to secure the judgment.13 Of course, a court cannot serve as a forum for a dispute unless it can exercise jurisdiction over the defendant; nor can a court execute judgment by attaching or seizing assets unless it can exercise jurisdiction over those assets. As noted previously, the laws of sovereign immunity may restrict one or both of these jurisdictions. If so, it may be difficult to find a court that either can hear the original case for default and damages or can order attachment or seizure of sufficient assets to make the judgment effective.


The residence of the debtor is recognized in most legal systems as the most basic ground for exercising jurisdiction. It may, in fact, be possible to secure a judgment against a sovereign debtor in one of its own courts. However, it may also be that the government has enacted laws that either grant complete immunity from suit to the government or that may even alter the terms and conditions of the debt contract in such a way as to render the underlying debt effectively void.14 For this, as well as for other reasons to be explained below, few creditors are likely to sue a sovereign for judgment in the courts of that sovereign.

Many countries also recognize a number of other bases of jurisdiction to sue.15 These bases will usually be sufficient to allow the creditor to sue the sovereign somewhere other than in its own courts. Perhaps the most important of these bases for jurisdiction is that stemming from a contract provision according to which the parties consent to submit their dispute to a particular court. Most sovereign loan agreements and bond terms and conditions include specific provisions whereby the parties consent to jurisdiction and choose the governing law. Parties to international loan contracts typically specify that the contract will be governed by the law of a particular jurisdiction and that the courts of that jurisdiction will serve as a forum for dispute settlement. Among the most common jurisdictions for choice of law and venue are New York, London, Frankfurt, and Tokyo. Courts in these jurisdictions have generally recognized and applied these choices.

The doctrine of foreign sovereign immunity comes into play in cases reaching the courts of such jurisdictions.16 The immunity of foreign countries from the jurisdiction of national courts has a long history in the law. Traditionally, courts would not exercise any jurisdiction over a foreign government or its assets unless it expressly consented. Over time, this adherence to an absolute theory of immunity has given way to the more restrictive view, which allows foreign countries to retain immunity only with respect to their public acts (jure imperii). When acting in a commercial or private manner (jure gestionis), countries are denied immunity. The rules regarding immunity against attachment of assets in execution of judgment, which are discussed in greater length below, have changed less.

The courts of most countries or their political subdivisions, including courts in the United States, the United Kingdom, and Germany, currently adhere to the restrictive view of sovereign immunity from jurisdiction. While the courts in Japan do not, such provisions often exist in relevant bilateral treaties.17 After relying primarily on common law, in the 1970s the United States and the United Kingdom enacted specific statutes limiting the sovereign immunities of foreign states to their governmental acts.18 The U.K. Act states that “any loan or other transaction for the provision of finance” is a “commercial transaction” not entitled to immunity.19 The U.S. Act leaves the term “commercial activity” to be defined by the courts,20 although it has been understood to embrace loan contracts with the proper nexus to the country. This means that when the country acts as a borrower, sovereign immunities do not apply in these jurisdictions, and the country is subject to the jurisdiction of a court.

In most instances of international sovereign borrowing, the general application of a court of the restrictive interpretation of sovereign immunity is not relevant because, as noted above, the terms and conditions of the borrowing typically include an express consent by the debtor to the jurisdiction of a specific court. This consent constitutes a waiver of immunity from jurisdiction, even in Japan.21 Once jurisdiction has been extended by a court, the securing of a money judgment for damages may follow.

A judgment by itself is of little use unless there are assets available to satisfy the judgment. Therefore, if a sovereign debtor has insufficient attachable assets in the forum where a judgment was rendered, a creditor may begin proceedings in other jurisdictions where attachable assets exist. The creditor will then have to begin the suit anew, unless it is able to obtain recognition and enforcement in the new forum of the prior judgment. This usually means that the creditor will be forced to seek recognition of the prior judgment in the court in whose jurisdiction the sovereign’s attachable assets lie.

Rules concerning the recognition of foreign judgments have a high degree of uniformity among most jurisdictions. For example, under the Uniform Foreign Money Judgments Recognition Act—currently in force in New York22—a foreign judgment may be recognized and enforced if it is final, conclusive, and enforceable where rendered, unless it satisfies one of the grounds for nonrecognition, which should rarely be applicable.23 The Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters,24 which governs recognition and enforcement of judgments among the member states of the European Union, has rules similar to the New York statute. The rules of other important financial centers are similar.25

Inasmuch as the conditions for recognition and enforcement are quite uniform and reflect generally accepted principles, there should be little difficulty in making an initial judgment legally enforceable in other forums located in major financial centers. However, the problems of executing that judgment are the same as they would be for the initial judgment.

Satisfaction of Claims

Assets of a country that are held within its own jurisdiction are likely to be protected against execution of judgment by domestic sovereign immunities.26 Therefore, the only way to execute a judgment would be to find and attach assets held abroad. There are three types of assets that may be located in foreign jurisdictions that could be used to satisfy a judgment against a sovereign creditor. These are property owned directly by the sovereign, property of legal persons that are owned by the sovereign, and property of the sovereign’s central bank.27 Once such assets are located, the creditor would move the court in whose jurisdiction they are located to order attachment.

While attachment of assets can serve as a judicial remedy to execute a final judgment, in most jurisdictions a court will order attachment before a final judgment is ordered. The purpose of such “prejudgment” attachment is to prevent a defendant from moving the assets outside of the jurisdiction of the court so as to evade any final order of execution. The standards for prejudgment attachment vary among jurisdictions, but often require some showing that there is a well-founded fear that the defendant will remove otherwise attachable assets from the court’s jurisdiction.28 The ability to receive an order of prejudgment attachment, therefore, can be helpful both with regard to enforcing a final judgment later and with regard to applying pressure on a debtor in the context of any refinancing negotiations.

The ability to secure either postjudgment attachment or prejudgment attachment will be limited both by the availability of any assets within the jurisdiction of the court and by the protections afforded by sovereign immunities to those assets. First, the assets in question must be the property of the debtor. For example, if the debtor is the state, but the property (such as official foreign exchange reserves) is held by the central bank, the reserves may not be amenable to attachment even if they are held within the court’s jurisdiction. Second, the waivers of immunities exercised in most sovereign borrowing usually include immunities against execution, including both pre- and postjudgment attachment. However, a number of jurisdictions severely limit the ability of a sovereign to waive such immunities. Where the central bank is party to the debt, the waiver is more likely to be limited. In both situations, sovereign immunities may affect the ability of the creditor to attach assets of the debtor. The rest of this section examines what assets are likely to be amenable to attachment.

Property Owned Directly by the Debtor

A sovereign may own property located in various foreign jurisdictions. This includes commercial bank accounts, buildings and property, and other assets. Under a typical waiver, such property might appear to be attachable. Nevertheless, the U.S. statute extends immunity that cannot be waived to any property used in connection with a military activity and of either a military character or under the control of a defense agency.29

The U.S. statute also provides immunity to immovable property used for a diplomatic or consular mission or as the residence of the chief of such a mission.30 This immunity extends to bank accounts used to maintain these assets. Such immune property may constitute the majority of a defaulting sovereign’s foreign assets in the jurisdiction in question.

One major issue involves a country’s official foreign reserves. Typically, the official reserves may be the property of the central bank, and not of the state itself. If, in these circumstances, the state is the defendant, it is unlikely that the official reserves would be attachable. The majority of sovereign debt contracted in the past ten years is that of the state, which would mean that official reserves would be safe. Nevertheless, in some instances, it is the central bank that acts as the borrower. In these cases, the central bank may limit its waiver of immunities so that official reserves are not attachable.

As with the U.S. statute, the U.K. statute protects some property from attachment, regardless of waivers, including the premises and physical property of diplomatic and consular missions and the means of transport of such missions.31 It also appears that military property of a foreign country may be immune from attachment.32 The French and German laws appear to protect certain assets of a foreign government from attachment either on the ground of their inviolability (diplomatic missions) or as part of the foreign government’s “public domain” (for example, military installations).33

There would generally appear to be little attachable property of worth held directly by some sovereigns in foreign jurisdictions. Possible exceptions might include cases where title to an airplane, ship, or other physical property was held directly by the sovereign—that is, not through another legal person. Governments may also hold assets in foreign bank accounts, but, with the exception of official reserves held by central banks, these amounts may be limited.

However, in the context of rescheduling negotiations, even the attachment of limited amounts of foreign exchange assets could exert considerable pressure on a country to agree to a relatively more favorable settlement for creditors. One example of this is National Union Fire Insurance Company of Pittsburgh, PA, v. People’s Republic of the Congo.34 That case involved a suit by a London Club creditor against the Congo for $22.5 million in damages stemming from the Congo’s default on a credit facility. The suit was filed during restructuring negotiations. District Judge Kimba Wood, in agreeing to execute judgment in New York, commented that the strategy of seeking to attach assets “will certainly serve to disrupt attempts to complete the rescheduling effort and will definitely have an adverse effect on Congo’s international trade and banking business. Although we would prefer to avoid this situation, it is clearly a viable, and rational strategy.”35

It is also possible that a judgment creditor may attempt to attach a loan disbursement to be made by another creditor to the debtor government. Once all the requirements of the loan agreement are fulfilled, such that the debtor government has the right to receive the loan disbursement, the government is said to have a “claim” against the lender for the amount of the disbursement. As with any other claim, this could be subject to judicial attachment. The result of such an attachment would be that the court would transfer the right to receive the loan disbursement from the debtor government to the creditor. The lender would continue to have a contractual claim against the country to repay the loan, notwithstanding the fact that the proceeds of the disbursement were never received by the debtor government. However, because the debtor government would presumably be less willing to repay an amount that it never actually received, a commercial lender could be expected, as a matter of practice, to exercise its right to cancel the loan agreement and make no further disbursements.36 Thus, while such an attachment order would be unlikely to enable the creditor actually to seize a government’s assets, it could be an effective means of cutting off any resumption of access to private financing, thereby exerting pressure on the government to negotiate a settlement. Such a strategy could be pursued even if the size of a creditor’s claim is small in relation to disbursement.

Property of Separate Legal Persons That Are Owned by the Sovereign

Generally, jurisdictions respect the separateness of different legal persons. Under this principle, the property of private or even public entities is not attachable for the satisfaction of claims on the sovereign debtor. However, such a separation may be ignored in special circumstances. In the United States, a creditor may not generally execute judgment on the assets of a separate legal person who is not a party to a sovereign default, even if the legal person is wholly owned by the sovereign.37 The “corporate veil” can be pierced, however, where “(i) the ‘corporate entity is so extensively controlled by its [foreign sovereign] owner that a relationship of principal and agent is created’ or (ii) the separate corporate entity of a foreign instrumentality is abused to work fraud or injustice or to defeat overriding public policy.”38 This has happened on rare occasions and only under special circumstances.39 The United Kingdom has similar rules.40

In France, although the law is not yet clearly settled, the cases show an unwillingness to authorize the seizure of other entities’ assets when such entities are not fully owned by the sovereign debtor or when the sovereign debtor could have claimed immunity from jurisdiction for the relevant debt.41 In a case where the creditors of one state-owned entity were seeking to attach assets of another entity owned by the same state, it was held that the attachment would only be possible if the creditors demonstrated that there was no separation of assets and liabilities between the two entities.42

Property of the Central Bank

A sovereign’s central bank often maintains foreign exchange accounts in several major financial centers, such as New York, London, Frankfurt, or Tokyo. However, a number of important obstacles prevent the attachment of such assets. First, at least for debt contracted in the past ten years, the central bank is unlikely to be the debtor. Before the debt crisis of the 1980s, sovereign borrowing was frequently implemented through the sovereign’s central bank or with its guarantee or participation. In these instances, a waiver of the central bank’s immunities was often a condition for the loan. However, since that debt crisis central banks of highly indebted countries have tended to become more independent. Moreover, bond offerings in recent years have generally not involved central banks. If the central bank is not the debtor, it would not be a party to the suit by creditors to recover damages due to a default, and its assets would not be amenable to attachment. This is because, in most cases, the central bank is a separate legal entity and, as any other entity, it may invoke its separateness from the state against actions brought by the state’s creditors. Specific legislation in the key jurisdictions of New York and London has made clear that a claim by a defaulting country against its central bank for foreign exchange assets does not make those assets the property of the state and therefore subject to attachment.43

In some cases, sovereign debt is still contracted by the central bank. However, again at least since the debt crisis of the 1980s, in a number of these cases the terms of the indebtedness have expressly stated that the waiver of immunity contemplated in their terms does not apply to foreign exchange assets or official reserves.44 Therefore, the lack of participation of central banks or the exclusion of central bank assets from the coverage of sovereign immunity waivers is likely to exclude central bank foreign exchange assets from the list of assets available to execute a judgment. Finally, there are a limited number of recent cases where central banks have contracted debt in the form of bonds and have waived immunities even with regard to official reserves.45

As noted earlier, the property of a foreign country or its instrumentality is not immune to prejudgment attachment if the country or entity has explicitly waived its immunity from prejudgment attachment and the purpose of attachment is to secure satisfaction of judgment.46 However, the U.S. Foreign Sovereign Immunities Act (FSIA) is unclear with regard to prejudgment attachment of central bank assets. Section 1611(b)(1), which provides that property of a foreign central bank is immune from attachment in aid of execution and from execution, makes no mention of prejudgment attachment. There appears, however, to be a consensus among commentators that such an omission combined with the special status of central banks and their assets47 means that immunity from prejudgment attachment of central bank assets cannot be waived. The court in Weston Compagnie de Finance et d’Investissement, S.A. v. La Republica del Ecuador also concluded that “section 1611(b)(1) purposely did not provide for prejudgment attachment of property of foreign central banks held for their own account.”48 While prejudgment attachment is mentioned elsewhere in the Act and is omitted in the provisions regarding central bank assets, reading such an omission as conclusive may be precarious. Some contend that a foreign central bank, if it so desires, should be permitted to waive immunity from prejudgment attachment just as any other juridical entity is able to do. Temporary restraining orders also may not be issued against the assets of foreign central banks under the FSIA.49 They are viewed as having the same features as prejudgment attachments and are therefore deemed invalid.50

In England, Mareva injunctions, which prevent the removal of assets from the jurisdiction or their disposal so as to frustrate execution of judgment, may be granted. However, with regard to central bank assets such an injunction may only be issued if the central bank gives its written consent to such relief.51

In France and Germany, there are no specific statutory exemptions for central bank assets. In Germany, prejudgment attachment is permitted if there is an express waiver.52 Prejudgment attachment is permissible in France and can be ordered if attachment of the assets involved would be permissible at postjudgment.53 It remains unclear if in Japan prejudgment attachment would be permitted in the event of a waiver.

In the case of recently contracted sovereign debt where the central bank is not a party, there is little likelihood that, in the event of default, all creditors as a class would be able to attach sufficient assets to satisfy fully their judgments against a defaulting sovereign debtor. Before the debt crisis of the 1980s, most sovereign debt was in the form of syndicated loans. Those loans typically included sharing clauses, which meant that any separate creditor in the syndicate would have to share the benefits of asset attachment with all other members of the syndicate in proportion to outstanding exposure. However, since the resolution of the debt crisis, the vast majority of debt contracted by sovereigns has been securitized, i.e., notes or bonds. In the case of securitized debt, there are no sharing clauses.54 In the event of default, a single bondholder, who may have a relatively small investment, may be able to execute at least a part of its individual judgment against a sovereign by attaching assets. In addition, and perhaps of even greater importance, attachment of available assets can be used as a device to apply pressure on a sovereign that is negotiating a refinancing with its creditors.

Should Immunities Be Restricted?

Some commentators have argued that ad hoc immunity from suit and attachment should be made complete for those sovereign debtors that cooperate in good faith with their creditors to reschedule their debts, typically along with structural adjustments of their economies. A few have viewed this as similar to the “automatic stay” provisions often found in bankruptcy laws. However, the protections afforded sovereign borrowers through sovereign immunities are already substantial. It is not clear how much further these protections should be extended.

On the other hand, instead of broadening the concept, sovereign immunities might be narrowed, at least with respect to certain debtors. The main feature of current provisions on sovereign immunities is that protection for debtors extends to all, not just to those who have agreed to make a good faith effort to reach an agreement with their creditors or otherwise resolve their liquidity problem. The question, therefore, is whether, under a hypothetical international scheme that would apply to the obligations of illiquid sovereign debtors, such protection should be limited to those sovereign debtors who are seeking to resolve the crisis appropriately. If it is decided to limit such protection, two immediate problems arise: (i) that of determining which debtors are not taking appropriate action and, therefore, from whom protection should be with-drawn; and (ii) that of designing effective methods of withdrawing such protection. Once these issues are resolved, the problem arises as to how the solutions can be implemented in a legally binding fashion.

The first problem of distinguishing cooperating from noncooperating debtors raises difficult questions of substance (for example, the setting of standards for appropriate behavior, determining time limits during which protection would apply, etc.) and process (for example, who would make such decisions, under what auspices they would be made, what would be the procedure for their adoption, etc.). In order to avoid conflicting assessments by national authorities, it might be appropriate to rely on the judgment of an international organization.

With respect to the second problem of withdrawing the benefits of a regime from noncooperating debtors, consideration could be given to amending domestic sovereign immunities laws to exclude sovereign debtors’ assets and those of their public entities (including central banks) in cases where debtors do not act appropriately. This would require changes in existing law in those jurisdictions where central banks deposit foreign exchange—most importantly, the United States, the United Kingdom, Germany, France, and Japan. (There would presumably be a great incentive for a jurisdiction not to make such changes, in that this would adversely affect the jurisdiction’s ability to retain central banking assets; this would reduce the jurisdiction’s attraction as a financial center.) Because legal changes would, in most cases, require legislative approval, such changes would appear particularly unlikely. Instead, consideration could be given to a contractual approach. For example, loan agreements could provide that in case of default the immunities of the sovereign debtor and its central bank would not be invoked unless a specified international organization has endorsed the default. Such a clause might reduce risk premiums paid by sovereign debtors.

Major changes in the protection offered to defaulting sovereign debtors by legal doctrines regarding their immunities are at this time, and for the foreseeable future, unlikely.

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