After each of the spectacular financial distresses of major sovereign states, serious concerns raised about the economic inefficiency of the current international legal frames of sovereign debts. The sources of concern are: 1. The absence of institutionalized renegotiation setup that promotes orderly workouts alike the Chapter 11 in the USA; 2. The limited ability of creditors to seize assets of the sovereign borrower in default (absence of collateral). In practice, each loan contract includes a governing law that provides the legal framework for any dispute. The governing law of the contract is a state law, e.g., England law and New York law. The limitation in creditors’ ability to seize foreign states’ assets, the so-called foreign state immunity, is determined by the governing law of the loan contract. Unlike corporate debts, the governing laws of sovereign debts have major implications on the restructuring and the enforcement of the terms of the contract. In fact, the governing law constitutes the unique legal environment that governs any dispute that may arise. Instead, the jurisdiction where corporations are registered has major importance (e.g., Ayotte and Skeele, 2002; Wood, 1995). By looking at the characteristics and the impact of governing laws on international bond amounts, this chapter investigates the second source of concern, i.e., the credibility of the legal threat of asset seizure (collateral) of sovereign defaulters. International bonds are non-local currency bonds, e.g., a dollar-denominated bond issued by Argentina and listed in New York or Luxembourg. I first analyze the foreign state immunity in England law and New York law, the most frequent governing laws of Eurobonds. I then examine whether governing laws are selected according to the features of the governing law in general as well as in connection to the bond characteristics (listing market and currency). I also examine the impact of the governing law on international bond amounts.
Governing law of sovereign bonds and legal enforcement.
HALLAK, ISSAM
2011
Abstract
After each of the spectacular financial distresses of major sovereign states, serious concerns raised about the economic inefficiency of the current international legal frames of sovereign debts. The sources of concern are: 1. The absence of institutionalized renegotiation setup that promotes orderly workouts alike the Chapter 11 in the USA; 2. The limited ability of creditors to seize assets of the sovereign borrower in default (absence of collateral). In practice, each loan contract includes a governing law that provides the legal framework for any dispute. The governing law of the contract is a state law, e.g., England law and New York law. The limitation in creditors’ ability to seize foreign states’ assets, the so-called foreign state immunity, is determined by the governing law of the loan contract. Unlike corporate debts, the governing laws of sovereign debts have major implications on the restructuring and the enforcement of the terms of the contract. In fact, the governing law constitutes the unique legal environment that governs any dispute that may arise. Instead, the jurisdiction where corporations are registered has major importance (e.g., Ayotte and Skeele, 2002; Wood, 1995). By looking at the characteristics and the impact of governing laws on international bond amounts, this chapter investigates the second source of concern, i.e., the credibility of the legal threat of asset seizure (collateral) of sovereign defaulters. International bonds are non-local currency bonds, e.g., a dollar-denominated bond issued by Argentina and listed in New York or Luxembourg. I first analyze the foreign state immunity in England law and New York law, the most frequent governing laws of Eurobonds. I then examine whether governing laws are selected according to the features of the governing law in general as well as in connection to the bond characteristics (listing market and currency). I also examine the impact of the governing law on international bond amounts.
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