Date of Award

8-2014

Document Type

Thesis

Degree Name

Master of Arts (MA)

Legacy Department

Economics

Advisor

Bodenhorn, Howard

Committee Member

McCormick , Robert

Committee Member

Sauer , Raymond

Abstract

Sovereign bond contracts create unique legal problems for bondholders, issuers, and courts. Specifically, when a sovereign becomes insolvent, there is no international workout mechanism through which the sovereign's debt can be efficiently restructured. Absent a mechanism similar to bankruptcy for sovereigns, some bondholders may attempt to resist restructuring in an effort to obtain a legal judgment for the full value of their initial investment. Until recently, the legal status and rights of these holdout creditors has been uncertain. However, a recent Second Circuit decision upheld creditors' rights to hold out or resist a sovereign's attempt to restructure its debt. Of course, this decision creates a host of other problems related to collective action and efficiency. International legal scholars remain uncertain whether such judgments are enforceable against a sovereign. The Supreme Court of the United States has accepted a petition for certiorari regarding enforceability issues and is considering a petition for the underlying question of holdout creditors' rights. This paper highlights the complexities and complications that have brought sovereign debt to the forefront of international legal scholarship. Although scholars and politicians have proposed solutions to the sovereign debt dilemma, the paper argues that none of the proposed solutions provides an adequate remedy to the problem. Using an original economic model, the paper argues that an Argentinian default (repudiation) is the socially optimal response to the NML Capital decision and will lend the most stability to the sovereign debt market. However, as a repeat player in the international bond market, Argentina has an individual incentive to comply with the Second Circuit's order and pay the holdout creditors. Finally, the paper considers how the Supreme Court may provide a more realistic avenue to alter the adverse incentives that the Second Circuit's decision created.

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