Revisiting Sovereign Bankruptcy

The Growing Sovereign Debt Dilemma

Over the last few decades, a growing number of countries have gone through sovereign debt crises. To highlight just a few such debacles, remember the Latin American debt crisis of the 1980s, Russia’s nonpayment of its bonds in 1998, and Argentina’s 2001 default on more than $80 billion worth of foreign bonds. More recently, the European Central Bank has taken action to avoid default by recession-ridden, fiscally unsound countries in the European Union. The common theme that underscores all these events is the unique nature of sovereign debt.

Under corporate debt agreements and in other private dealings, creditors have a number of contractual means at their disposal to gain full or partial recovery of their funds, and all bondholders typically must abide by these agreements. Sovereign debt creditors, by contrast, have much weaker and less-clearly defined protections when a country goes into default or is on the brink of doing so. Even when these creditors win courtroom battles, the fact that creditors cannot seize most sovereign assets hampers material recovery. Many sovereign assets enjoy special protections, or courts shield them...