Enough Potential Repudiation: Economic and Legal Aspects of Sovereign Debt in the Pandemic Era

This article reviews recent economic and legal literature on sovereign debt in light of the COVID-19 shock. Most of the core theoretical contributions across the two disciplines hinge on immunity, and the sovereign borrower's consequent inability to commit to repay foreign creditors, as the distinguishing attribute of sovereignty. We highlight a persistent gap between sovereign debt theories grounded in immunity and empirical evidence that the governments of low- and middle-income countries borrow far more than theory would predict. On the other hand, the governments of advanced economies, generally viewed as outside the scope of this literature before the euro area debt crisis, have shown themselves to be far more commitment challenged than previously supposed. We conclude that the traditional split between a literature concerned with developing economy sovereigns that repudiate debt and one concerned with advanced economies that do not is no longer appropriate (if ever it was). We argue that shifting some attention away from immunity to a different attribute of sovereignty—authority—could help bridge the gap between the two literatures.