Reportedly, concerns about litigation in the UK have been a main reason why Greece decided not to impose a haircut on its English-law holdouts, thus foregoing EUR 4.1 bn in additional debt relief (more than 2% of Greek GDP, see Zettelmeyer et al., 2013).44 On a broader level, Buchheit et al. (2013b) argue that the fear of litigation and holdouts is one important explanation why we have seen so few sovereign debt restructurings in Europe

If the trends we describe continue, and if our findings are confirmed in future research,
they could thus have important implications for sovereign lending. Already in recent years,
the “legal threat” of sovereign default has likely influenced government willingness to pay
and the way debt crises have been resolved, in particular the design of debt exchange offers
and the treatment of holdout creditors. One example is the Greek debt restructuring of
2012. At the time of writing, Greece continues to pay holdout creditors of ‘old’ English-law
bonds in full and on time, i.e. 100% of face value. Reportedly, concerns about litigation
in the UK have been a main reason why Greece decided not to impose a haircut on its
English-law holdouts, thus foregoing EUR 4.1 bn in additional debt relief (more than 2%
of Greek GDP, see Zettelmeyer et al., 2013).44 On a broader level, Buchheit et al. (2013b)
argue that the fear of litigation and holdouts is one important explanation why we have
seen so few sovereign debt restructurings in Europe. To avoid a “messy” default `a la
Argentina, policymakers may have become more prone to arrange official sector bailouts.
Looking forward, there are few reasons to assume that the ex-post cost of legal disputes
will decrease anytime soon. Collective action clauses, in particular, are unlikely to prevent
litigation and holdouts in future debt crises. For example, the newly introduced Euro-CACs
are no “wonder-clause”, but likely to disappoint the high hopes that some place on them,
as explained by Gelpern and Gulati (2013), IMF (2013), and Zettelmeyer et al. (2013).45
We therefore see the need for more research on sovereign debt disputes. Amongst other,
future work could study the determinants of litigation and shed light on the large variation
across crisis cases.

S 27

Sovereign Defaults in Court 

Julian Schumacher
Christoph Trebesch¶
Henrik Enderlein

This version:
May 6, 2014
Abstract
Sovereign debt is widely regarded as non-enforceable and immune from legal action.
This paper takes a different perspective and builds a comprehensive new dataset on
creditor lawsuits filed against defaulting sovereigns since 1976. The data show a drastic
rise of sovereign debt litigation. In recent years, almost 50% of sovereign defaults
involved legal disputes abroad, compared to just 5% in the 1980s. Our case studies
and econometric results also indicate significant externalities outside the courtroom:
litigation is associated with (i) a loss of access to international capital markets, (ii) a
decline in international trade, and (iii) delays in crisis resolution. We conclude that
the legal consequences of sovereign defaults are much greater than commonly thought.
This is consistent with theoretical models with sanctions and creditor retaliation.