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Era of the Holdout Is Raising the Cost of Sovereign Default

28.02.2018

Christoph Trebesch et. al. say that in recent decades, the legal standards of sovereign immunity have gradually eroded in global financial centers

Excerpt from the Article

(...) Going broke just ain’t what it used to be.

In defaults of yesteryear, countries could bank on immunity as they reneged their obligations in peace. These days they’re ending up in costly legal quagmire like never before, according to a working paper published by the European Central Bank on Wednesday.

The trend is strengthening the power of creditors, especially hedge funds, and significantly raising the cost of default for debtors, the paper found. Argentina’s decade-long debacle with hedge-fund holdouts is a case in point, showing how court disputes can bind the hand of an issuer for years.

“In recent decades, the legal standards of sovereign immunity have gradually eroded in global financial centers,” wrote Julian Schumacher, Christoph Trebesch, and Henrik Enderlein, who authored the paper. “Sovereign debt lawsuits have become larger, less likely to be settled early on, and more likely to involve attempts to attach sovereign assets abroad.”

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