Finally, on litigation strategy, we posit that sovereign issuers need to be aware of how foreign courts assess actual and apparent authority to ensure legal certainty and avoid (ex-post) disputes as to the validity of sovereign debt. 14/end
With respect to contractual reform, clearer carve-outs regarding the applicability of domestic law to authorization issues seem sensible, as others have argued: scholarship.law.unc.edu/cgi/viewcont... 13/x
Domestic reform is key, as IMF staff has argued. Many countries lack clear rules on what happens when debt is issued unlawfully. Without this clarity, foreign courts will find it difficult to assess whether an agent had actual authority or not.
www.imf.org/en/Publicati... 12/x
Yet the case law paints a complicated picture, emphasizing the need for a multi-pronged approach to enhancing transparency: (i) Clear domestic laws on authorization & disclosure
(ii) Contractual carve-outs for local law
(iii) Litigation strategies that target actual authority 11/x
To this end, as others have argued, ultra vires principles can play some role in promoting debt transparency. If disclosure is a condition for authorization, then the validity of undisclosed debt may be challenged by the parties involved. www.clearygottlieb.com/-/media/file... 10/x
This dual-track framework when it comes to ultra vires sovereign debt—actual vs. apparent authority—creates both risk and flexibility. It protects the good-faithed creditor but, under certain circumstances, also gives sovereigns tools to challenge ultra vires debt. 9/x
In both jurisdictions, courts are reluctant to let sovereigns escape liability unless the creditor clearly knew—or should have known—that the debt was issued ultra vires. And even then, the sovereign may be confronted with non-contractual claims for repayment. 8/x
English courts, notably in Law Debenture v. Ukraine decided by the UK Supreme Court in 2023, distinguish between capacity (typically presumed for sovereigns) and authority (again differentiating between actual and ostensible authority). supremecourt.uk/uploads/uksc... 7/x
In this vein, the 2024 PDVSA decision by the NY Court of Appeals clarified that the validity of sovereign securities is governed by the issuer’s domestic law, while the consequences of invalidity are governed by New York law. www.nycourts.gov/ctapps/Decis... 6/x
Apparent authority means the agent appeared to have authority, and creditors reasonably relied on that appearance. This is judged under the governing law—typically NY or English law. If an agent had (no actual but) apparent authority, the debt may still be valid/enforceable. 5/x
Actual authority focuses on whether the agent (e.g. finance minister) was legally empowered under domestic law to issue the debt. For this assessment, foreign courts tend to look to the issuer's domestic (constitutional) laws. 4/x
Ultra vires sovereign debt broadly means that the instrument was issued beyond a government’s legal powers. Courts in New York and England typically assess such debt and how it was issued through the prism of agency law: did the official have actual or apparent authority? 3/x
Many emerging and developing countries issue their debts under foreign law, which means that the instruments' validity and enforceability is decided by foreign courts. This raises the question as to how these courts look at flaws in the domestic debt authorization process (ultra vires). 2/x
🚨New paper alert: "Contested Authority: The Legal Framework for Ultra Vires Sovereign Debt and its Implications for Public Debt Transparency" (forthcoming in the Emory International Law Review).
papers.ssrn.com/sol3/papers.... 1/x
This link to our paper “The International Financial Architecture and Sovereign Debt Crisis Solution” now out on @ssrn should work papers.ssrn.com/sol3/papers....
13/ 🏁 Bottom line: The global debt architecture isn’t static. It shifts with politics, law, and market forces, like furniture that can be arranged and re-arranged. Constant evolution thus remains key to reduce the negative effects of sovereign debt crises. #SovereignDebt #Finance
🌱 12/ Climate-focused mechanisms—like debt-for-nature swaps & resilience bonds—could align financial relief with sustainability goals. The challenge? Balancing creditor interests with long-term climate action.
11/ 💰 State-contingent debt instruments (SCDIs)—linking contractual debt to a pre-defined variable—were revived and featured in recent restructurings (Zambia, Suriname, Sri Lanka). Whether and how they reshape the architecture is not clear yet: www.lazard.com/research-ins...
10/ 🤝 The G20 Common Framework was recently introduced to improve restructuring for low-income countries. While restructurings under the Framework initially faced delays, it has started to deliver by ensuring faster agreements: www.imf.org/en/Blogs/Art...
9/ 🏦 The IMF is central to the system. Most sovereign debt restructurings happen within IMF programs. If the member’s debt is assessed as unsustainable, the IMF is
precluded from providing financing unless steps are taken to restore debt sustainability, including through a debt restructuring
8/ ⚖️ Legal frameworks, too, shape debt outcomes. Most sovereign debt is governed by New York or English law, giving these jurisdictions an outsized role in global restructurings. Equally, sovereign debt litigation and enforcement is concentrated in these two jurisdictions.
7/ 🛑 Holdout creditors remain a challenge in the restructuring of privately-held debt. CACs have helped by binding minority creditors to majority-approved deals, but they apply only to bonded debt, not loans or other credit instruments—leaving gaps in the system.
6/ 🏦 Over the past decades, the creditor landscape has changed significantly. The Paris Club and the London club coordinated official and commercial lenders, respectively. Today, China and other non-Paris Club lenders play a major role—reshaping the "furniture" of debt negotiations.
5/ 📉 Defaults hit the poorest hardest. Research shows they lead to higher poverty, falling GDP, declining life expectancy, and a 1.5% increase in infant mortality. A slow-moving system makes these crises worse.
4/ ⏳ Restructurings are often protracted. On average, it takes 7.9 years to reach a decisive deal that prevents re-default. The longer it takes, the higher the economic and social costs.
3/ 🔄 Over centuries, debt resolution has shifted from gunboat diplomacy to IMF-led restructuring, from unilateral defaults to collective action clauses (CACs). The system adapts, but problems remain.
2/🌍The global sovereign debt architecture isn’t a rigid structure—it’s more like furniture. Pieces are moved, reassembled, and replaced over time to fit the political and financial landscape. Unlike corporate debt, sovereign debt has no bankruptcy court.
1/ 📢New paper alert:
"The International Financial Architecture and Sovereign Debt Crisis Resolution" by @clemensgvl.bsky.social, Juan Farah Yacoub and myself: papers.ssrn.com/sol3/papers..... Short 🧵👇
Thanks, @tealemery.bsky.social, appreciate it. Impressive to see what the WB has done in the data space!
Great paper by @sandertordoir.bsky.social and @lscazzieri.bsky.social on the options for common EU defence spending. Grateful for the shout-out to A. Steinbach's and my paper on "EU debt financing" which looks at the legal leeway to issue joint EU debt: www.bruegel.org/working-pape...