Sovereign Defaults in Court The Rise of Creditor Litigation 1976 - 2010

Sovereign Defaults in Court
The Rise of Creditor Litigation 1976 - 2010 x
Julian Schumacher
Christoph Trebesch{
Henrik Enderlein

This version:

April 15, 2013

Abstract

Sovereign debt is widely seen as non-enforceable and immune from legal action.
This paper comes to a di erent conclusion, by documenting the changing environment
for sovereign debt enforcement via courts. We construct a comprehensive dataset of
lawsuits led against defaulting governments in the US and the UK between 1976
and 2010. The data show a drastic rise of creditor litigation against sovereigns: Case
numbers, case volumes, and attachment attempts have all more than doubled over the
past decade. In recent years, 50% of sovereign defaults have triggered creditor lawsuits.
What explains this rise in legal disputes? And why is there such a large variation across
crises? To answer these questions we assess the determinants of litigation based on a
standard theoretical framework. We nd that creditors are more likely to le suit in
large debt restructurings, when governments impose high losses (\haircuts"), and when
the defaulting country is more vulnerable to litigation (open economies and those with
a low legal capacity). We conclude that the rise in litigation can be attributed to both
legal and economic developments. Legal disputes are likely to remain an important
challenge in future debt crises.

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