CDS Zombies

This paper examines the contract interpretation strategies adopted by the International Swaps and Derivatives Association (ISDA) for its credit derivatives contracts in the Greek sovereign debt crisis. The authors argue that the economic function of sovereign credit default swaps (CDS) after Greece is limited and uncertain, partly thanks to ISDA’s insistence on textualist interpretation. Contract theory explanations for textualist preferences emphasise either transactional efficiency or relational factors, which do not fit ISDA or the derivatives market. The authors pose an alternative explanation: the embrace of textualism in this case may be a means for ISDA to reconcile the competing political demands from state regulators and its market constituents. They describe categories of contracts susceptible to such political demands, and consider when and why textualism might be the preferred response

Markets and Sovereignty

The past few decades have witnessed the growth of an exciting debate in the legal academy about the tensions between economic pressures to commodify and philosophical commitments to the market inalienability of certain items. Sex, organs, babies, and college athletics are among the many topics that have received attention. The debates often have proceeded, however, as if they involve markets on one side and the state on the other, with the relevant question being the ways in which the latter can or should try to facilitate, restrict, or rely on the former. In this article, we approach the relationship between markets and sovereign control from a different perspective, and contemplate more radical versions of their relationship. What would it mean for governing authority itself to be market alienable? And what would it mean if the people—rather than the state—were the ones who set the prices and controlled the transfers? Could a ‘market for sovereign control’ contribute to welfare-enhancing changes in governance

Making a Voluntary Greek Debt Exchange Work

Within the next couple of months, the Greek government, is supposed to persuade private creditors holding about EUR 200bn in its bonds to voluntarily exchange their existing bonds for new bonds that pay roughly 50 percent less. This may work with large creditors whose failure to participate in a debt exchange could trigger a Greek default, but may not persuade smaller creditors, who will be told that their claims will continue to be fully serviced if they do not participate in the exchange. This paper proposes an approach to dealing with this free rider problem that exploits the fact that with some probability, the proposed exchange might be followed by an involuntary restructuring some time in the future. The idea is to design the new bonds that creditors are offered in the exchange in a way that make them much harder to restructure than the current Greek government bonds. This is easy to do because the vast majority of outstanding Greek government bonds lack standard creditor protections. Hence, creditors would be offered a bond that performs much worse than their current bond if things go according to plan, but much better if things do not. They will accept this instrument if (1) the risk of a new Greek debt restructuring in the medium term is sufficiently high; and (2) there is an expectation that the next restructuring probably will not be voluntary

The Hausmann-Gorky Effect

For over a century, legal scholars have debated the question of what to do about the debts incurred by despotic governments; asking whether successor non-despotic governments should have to pay them. That debate has gone nowhere. This paper examines whether an Op Ed written by Harvard economist, Ricardo Hausmann, in May 2017, may have shown an alternative path to the goal of increasing the cost of borrowing for despotic governments. Hausmann, in his Op Ed, had sought to produce a pricing penalty on the entire Venezuelan debt stock by trying to shame JPMorgan into removing Venezuelan bonds from its emerging market index. JPMorgan did not comply, but there was a pricing penalty. Intriguingly, the penalty hit only one bond; an issue by Venezuela’s state-owned oil company that went on the market two days prior to Hausmann’s piece. That bond then began to carry the name in the market of “Hunger Bond.” Using quantitative data and interviews with investors, we try to understand the causes of the Hunger Bond penalty and ask whether there are lessons for policy maker

Competing for Refugees: A Market-Based Solution to a Humanitarian Crisis

The current refugee crisis demands novel legal solutions, and new ways of summoning the political will to implement them. As a matter of national incentives, the goal must be to design mechanisms that discourage countries of origin from creating refugees, and encourage host countries to welcome them. One way to achieve this would be to recognize that persecuted refugee groups have a financial claim against their countries of origin, and that this claim can be traded to host nations in exchange for acceptance. Modifications to the international apparatus would be necessary, but the basic legal elements of this proposal already exist. In short, international law can and should give refugees a legal asset, give host nations incentives to accept them, and give oppressive countries of origin the bill

Engineering an Orderly Greek Debt Restructuring

For some months now, discussions over how Greece will restructure its debt have been constrained by the requirement that the deal be “voluntary” – implying that Greece would continue debt service to any creditors that choose retain their old bonds rather than tender them in an exchange offer. In light of Greece’s deep solvency problems and lack of agreement with its creditors so far, the notion of a voluntary debt exchange is increasingly looking like a mirage. In this essay, we describe and compare three alternative approaches that would achieve an orderly restructuring but avoid an outright default: (1) “retrofitting” and using a collective action clause (CAC) that would allow the vast majority of outstanding Greek government bonds to be restructured with the consent of a supermajority of creditors; (2) combining the use of a CAC with an exit exchange, in which consenting bondholders would receive a new English-law bond with standard creditor protections and lower face value; (3) an exit exchange in which a CAC would only be used if participation falls below a specified threshold. All three exchanges are involuntary in the sense that creditors that dissent or hold out are not repaid in full

A Convenient Untruth: Fact and Fantasy in the Doctrine of Odious Debts

The few years since the U.S. incursion into Iraq in 2003 have witnessed an explosion in the literature on odious debts - that is, debts incurred (a) without the consent of the people (e.g., by a despotic regime); (b) from which no benefits accrued to the people; and (c) when the creditors had knowledge of the foregoing. The key question in the literature is whether successors to the despotic regime are obligated to pay the debts of the despot. That is, whether the newly democratic nation of Iraq is obligated to pay the debts of Saddam Hussein. The starting point for almost every discussion - scholarly or popular - of this doctrine is an obscure legal scholar named Alexander Nahum Sack, variously described as the pre-eminent scholar on public debts of his time, a former minister to Tsar Nicholas II, and a Russian professor of law who penned the doctrine of odious debts while teaching in Paris. This Article excavates the background of Alexander Sack, separating the reality of his life from the myth perpetuated in the odious debts literature. Instead of the heroic and eminent Tsarist exile, the evidence reveals a peripatetic legal scholar who taught in five different universities on two continents, and after being fired from a tenured position, ended his life penniless. We are left then with these questions: What does the reality of Sack mean for the legal status of the odious debts doctrine? And how is it that he achieved this iconic status when even minimal inquiry would have revealed a far more murky reality

Transferable Sovereignty: Lessons from the History of the Congo Free State

In November 1908, the international community tried to buy its way out of the century’s first recognized humanitarian crisis: King Leopold II’s exploitation and abuse of the Congo Free State. And although the oppression of Leopold’s reign is by now well recognized, little attention has been paid to the mechanism that ended it—a purchased transfer of sovereign control. Scholars have explored Leopold’s exploitative acquisition and ownership of the Congo and their implications for international law and practice. But it was also an economic transaction that brought the abuse to an end. The forced sale of the Congo Free State is our starting point for asking whether there is, or should be, an exception to the absolutist conception of territorial integrity that dominates traditional international law. In particular, we ask whether oppressed regions should have a right to exit—albeit perhaps at a price—before the relationship between the sovereign and the region deteriorates to the level of genocide

A Tournament of Judges?

We suggest a Tournament of Judges where the reward to the winner is elevation to the Supreme Court. Politics (and ideology) surely has a role to play in the selection of justices. However, the present level of partisan bickering has resulted in delays in judicial appointments as well as undermined the public\u27s confidence in the objectivity of justices selected through such a process. More significantly, much of the politicking is not transparent, often obscured with statements on a particular candidate\u27s merit - casting a taint on all those who make their way through the judicial nomination process. We argue that the benefits from introducing more (and objective) competition among judges are potentially significant and the likely damage to judicial independence negligible. Among the criteria that could be used are opinion publication rates, citations of opinions by other courts, citations by the Supreme Court, citations by academics, dissent rates, and speed of disposition of cases. Where political motivations drive the selection of an alternative candidate, our proposed system of objective criteria will make it more likely that such motivations are made transparent to the public. Just as important, a judicial tournament for selection to the Supreme Court will serve not only to select effective justices, but also to provide incentives to existing judges to exert effort

The International Monetary Fund\u27s Imperiled Priority

The role of the Official Sector institutions as lenders in crisis situations has evolved over time, and, particularly in the context of the current euro area debt crisis, into something akin to a lender of last resort. Institutions like the International Monetary Fund regularly provide distressed sovereigns with lending at affordable rates when private funding has dried up. To be able to provide this kind of emergency relief in a manner that does not result in large losses for their stakeholders, these Official Sector institutions often assert that their lending will have de facto priority over private lending. As a practical matter, since other creditors could not sue to interfere with the sovereign’s choices regarding whom to pay and in what order, de facto priority was all that was needed in the past for the system to function. All of this may have changed since October 2012 as a result of one case: NML Capital v. Republic of Argentina. This case has given private creditors, for the first time in history, a weapon with which they can go after payments made to any other creditor that has equal legal priority to them, potentially including any Official Sector institution without de jure priority. This leads to the question of whether Official Sector institutions’ half-century-old claim of de facto priority for their lending status can be said to have evolved, as a matter of customary international law, to a level of de jure priority