Commentary

Enforceable promises discourage lying, cheating, and stealing. Contracts that embody such promises shape institutions, distribute power, and organize markets. The Smith-King critique of elite empirical contracts scholarship reveals a field preoccupied with the first set of functions and barely interested in the second. I am loath to second-guess this view without empirical evidence of my own. Instead, I draw from it two sets of implications-one for the substantive study of contracts, the other for the relationship between contract theory and contract empiricism

Banks and Governments: An Arial View

Financial systems and public treasuries are communicating vessels: strength or weakness in one flows to the other, and back. This chapter considers the implications of this insight using case studies from Europe, Asia, and Latin America. The connection is not unique to Europe, although it does not always result in feedback effects, or the ‘doom loop’ that has made headlines since 2010. Events now known as banking or government debt crises often have had elements of both, and could have gone either way. Policy and political choices determined their path. In all cases, governments were as indispensable for resolving banking crises as banks were for resolving sovereign debt crises. As capital movements have become more rapid and global, the bank-government link has turned more destructive, prompting proposals to break it for good. Some of these proposals may adjust, elaborate, or displace the link. None would break it. Instead of chasing the fantasy of total separation, the policy goal should be to reduce destruction and harness the link in the name of financial stability

Financial Stability is a Volume Business: A Comment on the Legal Infrastructure of Ex Post Consumer Debtor Protections

Professor Melissa B. Jacoby\u27s essay pays homage to Stewart Macaulay\u27s classic study of the Magnuson-Moss Warranty Act, a U.S. federal consumer protection law that, according to Macaulay, was virtually unknown to the lawyers whose clients needed it the most. The moral of Macaulay\u27s study is that even good consumer protection laws on the books often fail to deliver in action for complex cultural, institutional, and economic reasons. Yet reducing Professor Jacoby\u27s essay to this very important moral undersells its contribution. A fragmented infrastructure for legal service delivery of the sort she describes does not merely fail consumers more often than it should, but can frustrate economic policy, delay crisis response, and undermine financial stability. By implication, rationalizing legal service provision is key to the success of both crisis management and financial reform. In this Comment, I first situate household debt in the context of financial stability. Second, I highlight elements of Professor Jacoby\u27s argument most relevant to financial stability concerns. Third, I sketch out several potential implications of her contribution for crisis response and financial regulation

The Importance of Being Standard

Contract standardisation in the sovereign debt market saves time and money in preparing documents and endows widely-used terms with a shared public meaning, which in turn saves investors the costs of acquiring information, facilitates secondary market trading and reduces the scope for mistakes in the judicial interpretation of contract terms. Sovereign debt issuers and investors claim to value standardisation and list it as an important contractual objective. Issuers generally insist that their bond contracts are standard and reflect market practice. Variations from past practice and market norm must be explained in disclosure documents and through market outreach. Standardisation is not just part of the fabric of market expectations: international policy initiatives to prevent and manage financial crises rest on the assumption that sovereign debt contracts follow a generally accepted standard. Such initiatives would make no sense in the absence of standardisation. On closer examination, however, it turns out that sovereign bond contracts are not nearly as standardised as market participants and policy makers seem to suggest. It is common to see a handful of negotiated terms embedded in a mish-mash of different generation industry models, sprinkled with bits of creative expression that no one can explain, usually attributed to some long-forgotten lawyers. At least some of the variation appears to be deliberate. But to the extent that it is inadvertent, variation can be costly. For example, it can make contracts internally inconsistent, vulnerable to opportunistic lawsuits and errors of judicial interpretation. Variation could also make debt instruments less liquid, especially during periods of market stress. In this essay, I argue that the problem of inadvertent variation would diminish substantially if sovereign debt markets were to adopt a more centralised, modular approach to contracting, whereby a subset of widely-used non-financial terms would be produced by an authoritative third party (a public, private, or public-private body) and incorporated by reference in individual transactions

The Strained Marriage of Public Debts and Private Contracts

“[S]overeign debt is a complex political institution, which cannot be reduced to creditor coordination or any other contract problem.

A Skeptic’s Case for Sovereign Bankruptcy

This essay describes fundamental flaws in the sovereign debt restructuring regime, but questions the prevailing arguments for sovereign bankruptcy. The author concludes that efficient debt outcomes may well come about without bankruptcy, but that a statutory regime is necessary to achieve sovereign autonomy and political legitimacy

Building a Better Seating Chart for Sovereign Restructurings

Every sovereign debt restructuring in recent memory has wrestled with the problem of inter-creditor equity. Governments have discriminated among creditors in ways that were hard to predict and often were not revealed until after a debt default. In contrast, debts of firms, individuals and even localities are ranked in order of priority established by contract and statute. This ranking is known at borrowing, generally corresponds to the order of repayment in bankruptcy liquidation, and helps define the creditors\u27 relative bargaining power in reorganization. Without a bankruptcy backstop, most debts of national governments are legally equal. Yet in practice, sovereign immunity empowers a government to choose the order of repayment among its creditors based on political imperatives, financing needs, reputational concerns or any other considerations. A transparent, enforceable priority system for sovereign debt could reduce the risk of involuntary subordination, the attraction of lending to overindebted governments and the need for collateral. When all else fails, such a system could make restructuring less messy. But an effort to imagine sovereign priorities shows both the utility and the limits of domestic bankruptcy as a source for solutions to sovereign debt crises. This article suggests that while incremental improvement is possible and desirable, in the sovereign context, the most robust priority structures are doomed to fail

Cinderella Sovereignty

The Blocher-Gulati critique of the barriers to secession under public international law is insightful and thought provoking, an important contribution in its own right. I wish it had not been eclipsed by the authors\u27 clever and provocative fix: turning sovereignty into a tradable commodity. I suspect that this fix would bring about more suffering than the status quo for two reasons. First, a market for sovereign control is unlikely to be a market in any meaningful sense. Therefore, trading sovereignty would not discipline oppressors. Second, should something like a real market materialize, it could diminish the incentives for states to treat their populations better just as plausibly as it could improve them. Distant empires could find it easier to traffic in oppressed people and territories, which would pass from state to state as their masters lose interest. A class of marginal client statelets would grow, endowed with a poor stepchild of sovereignty, which would leave their people defenseless and voiceless

Sovereign Debt: Now What?

The sovereign debt restructuring regime looks like it is coming apart. Changing patterns of capital flows, old creditors’ weakening commitment to past practices, and other stakeholders’ inability to take over, or coalesce behind a viable alternative, have challenged the regime from the moment it took shape in the mid-1990s. By 2016, its survival cannot be taken for granted. Crises in Argentina, Greece, and Ukraine since 2010 exposed the regime’s perennial failures and new shortcomings. Until an alternative emerges, there may be messier, more protracted restructurings, more demands on public resources, and more pressure on national courts to intervene in disputes that they are ill-suited to resolve. Initiatives emanating from wildly different actors — the United Nations General Assembly, the International Monetary Fund, the International Capital Market Association and the Jubilee coalition, among others — reflect broad-based demand for reform. Now is the time to reconsider the institutional architecture of sovereign debt restructuring, along with the norms and alliances that underpin it. In this symposium essay, I suggest broad criteria for evaluating a successor regime, and offer a package of incremental measures to advance sustainability, fairness, and accountability

Beyond Balancing the Interests of Creditors and Developing States

The traditional view of sovereign debt as a relationship between a developing country government and and its foreign private creditors is increasingly out of date. Financial institutions and individuals inside the borrowing countries are are becoming more and more important as creditors to their governments. At the same time, as countries remove restrictions on cross-border capital flows, foreign creditors are participating more actively in domestic law, local-currency debt markets. These developments imply fundamental changes in lending decisions and, where the loan goes bad, in the sovereign debt workout process