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Individual enforcement rights in international sovereign bonds

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  • Häseler, Sönke

Abstract

Sovereign bond contracts are notoriously hard to enforce. The few rights that bondholders have can be vested either collectively or individually. It seems that investors traditionally had a preference for the latter, which hindered financial market reform projects, such as the universal adoption of collective action clauses or trust structures. This paper discusses theoretically and empirically whether it is indeed in the bondholders’ collective interest to be allowed to individually sue and attach the debtor country’s assets following a default. Market reaction to the landmark case of Elliott Associates v. Peru is tested to assess just how much bondholders actually value individual enforcement rights. It is found that even the single most important event to reinforce creditor rights in recent years provoked no systematic movement in bond prices. We thus conclude that perhaps the importance of individual enforcement rights to the markets has been exaggerated and we therefore recommend ignoring any opposition from market participants that may arise during the necessary transition to more collective enforcement rights.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35331.

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Date of creation: 01 May 2011
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Handle: RePEc:pra:mprapa:35331

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Keywords: sovereign bonds; enforcement rights; Elliott Associates; Peru; collective action clauses; fiscal agent; trustee;

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  1. Andrew K. Rose, 2002. "One Reason Countries Pay their Debts: Renegotiation and International Trade," NBER Working Papers 8853, National Bureau of Economic Research, Inc.
  2. Amar Gande & David Parsley, 2003. "News Spillovers in the Sovereign Debt Market," Working Papers 062003, Hong Kong Institute for Monetary Research.
  3. Bulow, J. & Rogoff, K., 1988. "Sovereign Debt: Is To Forgive To Forget?," Working papers 8813, Wisconsin Madison - Social Systems.
  4. Michael Bradley & James D. Cox & Mitu Gulati, 2010. "The Market Reaction to Legal Shocks and Their Antidotes: Lessons from the Sovereign Debt Market," The Journal of Legal Studies, University of Chicago Press, vol. 39(1), pages 289-324, 01.
  5. Miller, Marcus & Thomas, Dania, 2006. "Sovereign debt restructuring : the Judge, the vultures and creditor rights," The Warwick Economics Research Paper Series (TWERPS) 757, University of Warwick, Department of Economics.
  6. Kris James Mitchener & Marc D. Weidenmier, 2005. "Supersanctions and Sovereign Debt Repayment," NBER Working Papers 11472, National Bureau of Economic Research, Inc.
  7. Eduardo Borensztein & Ugo Panizza, 2009. "The Costs of Sovereign Default," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 683-741, November.
  8. Jeremy A.Rogoff Bulow & Kenneth, 1986. "A Constant Recontracting Model of Sovereign Debt," University of Chicago - George G. Stigler Center for Study of Economy and State 43, Chicago - Center for Study of Economy and State.
  9. Michael P. Dooley, 2000. "Can Output Losses Following International Financial Crises be Avoided?," NBER Working Papers 7531, National Bureau of Economic Research, Inc.
  10. Sturzenegger, Federico & Zettelmeyer, Jeromin, 2008. "Haircuts: Estimating investor losses in sovereign debt restructurings, 1998-2005," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 780-805, September.
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