When Bad Things Happen to Good Sovereign Debt Contracts: The Case of Ecuador

Porzecanski, Arturo C. (2010): When Bad Things Happen to Good Sovereign Debt Contracts: The Case of Ecuador. Forthcoming in: Law & Contemporary Problems No. Fall 2010

Abstract

The lesson from abundant history is that, despite decades of constructive innovations in international loan and bond contracts involving sovereign financial obligations, lawyers, bankers, analysts and investors are best advised to operate under no illusions: Sovereigns are indeed sovereign. To those who harbored the hope that Argentina’s bad behavior as a sovereign debtor was a major exception that would not soon be repeated, the case of Ecuador’s latest default on shaky claims of the “illegitimacy” of some of its obligations demonstrates that while the absence of sovereign willingness to pay remains rare, it is not rare enough. These rogue sovereign debtors can be effectively restrained only by the forceful actions of other sovereigns, bilaterally or multilaterally, but in this case, in a repetition of attitudes shown toward Argentina since 2002, the international official community not only failed to condemn Ecuador’s actions, but actually expressed verbal and provided financial support. The government in Quito gathered no plaudits from the many national and international NGOs that have been campaigning for the massive forgiveness of developing-country debt, but at least this attitude is understandable: the case of Ecuador did not lend itself to arguments in favor of repudiation on “odious debt” or any related grounds. Above all, the country provides a useful, cautionary tale of the bad things that can happen to good sovereign debt contracts.

• Item Type: MPRA Paper
• Language: English
• Keywords: International finance; sovereign debt; default; Latin America; Argentina; Ecuador
• Subjects: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; F - International Economics > F5 - International Relations, National Security, and International Political Economy; F - International Economics > F3 - International Finance; F - International Economics > F5 - International Relations, National Security, and International Political Economy > F51 - International Conflicts ; Negotiations ; Sanctions

References

Arturo C. Porzecanski, "From Rogue Creditors to Rogue Debtors: Implications of Argentina’s Default," Chicago Journal of International Law, Summer 2005.

Lee C. Buchheit, "The Evolution of Debt Restructuring Techniques," International Financial Law Review, August 1992.

Lee C. Buchheit, "How Ecuador Escaped the Brady Bond Trap," International Financial Law Review, December 2000.

Arturo C. Porzecanski, "Debt Relief by Private and Official Creditors: The Record Speaks," International Finance, Summer 2007.

Lee C. Buchheit and G. Mitu Gulati, "The Coroner’s Inquest," International Financial Law Review, September 2009.