Legal frameworks for sovereign debt restructuring
Despite contributing towards a series of crises (from the third world debt crisis of the 80s to the Euro-crisis of 2010), sovereign debt is rising across low-, middle-, and high-income economies, leading to renewed discussions around the macroeconomic consequences of sovereign debt restructuring and default.
In addition to debates about the economic consequences of default, a large academic and policy literature explores the varying legal architectures of debt contracts. In a 2002 paper, LEE BUCHHEIT and G. MITU GULATI present a history of contractual provisions for sovereign bonds in the United States, focusing specifically on the absence of collective action clauses, which are mandated in the UK.
From the article:
“In most contracts, the parties know each other’s identity beforehand, and they make a conscious decision to enter into a legal relationship. In a multi-creditor debt instrument, the borrower’s identity is of course known by each investor, but what the investors don’t know is the identity of each other. When the bond issuer runs into financial difficulties, the actions of any one bondholder can dramatically affect the interests of all the other lenders.
Bonds issued by both corporate and sovereign borrowers in the early nineteenth century rarely contained provisions that contemplated collective decisionmaking by the bondholders. Each bond was a freestanding debt instrument; its terms could not be changed without the consent of its holder, and, if not paid when due, each holder was free to pursue her individual remedies against the issuer. The instruments did not require a holder to consult with, much less to act in concert with, fellow bondholders before, during or after a default. Although this approach ensured that each bondholder’s claim against the borrower could not be deranged without that bondholder’s consent, it also had the consequence of forcing financially-distressed corporate borrowers into bankruptcy (which in those days meant liquidation). This was, is, and ever shall be the “holdout creditor problem” in a debt workout.
One hundred years on, the financial community is again confronted with a remarkably similar problem. A sovereign bond issuer of the early twenty-first century is in much the same spot as the distressed corporate or railroad bond issuer of the early twentieth century. The merits of including majority action clauses in sovereign bonds as a method of neutralizing the holdout creditor are being proposed in some circles today, just as they were in the 1920s and 1930s in the context of corporate bonds. It may be feasible to engage the equity powers of U.S. federal courts in the oversight of some sovereign bond workouts with the result that the bondholders can be homogenized into a single voting class, and any court-approved compromise of the action will bind all members of that class.”
Link to the paper.
- “By noticeably intensifying distributional conflict over scarce public resources, sovereign debt crises tend to lay bare underlying power dynamics that, during normal times, are quietly at work beneath the surface.” Jerome Roos’s recently published book uncovers the global distributional politics underlying the financialization of sovereign debt. Link. See also Barry Eichengreen’s 2003 comparative overview of debt restructuring proposals. Link.
- Two pieces by José Ángel Gurría on the recent history of Mexico’s debt crises: from Coping with Capital Surges, a chapter on the historical trade-offs of foreign direct investment; and a 1995 paper on “The Mexican Debt Strategy” draws policy lessons from the crises of the ’80s. Link, link.
- “The Greek debt restructuring of 2012 stands out in the history of sovereign defaults. It achieved very large debt relief—over 50 per cent of 2012 GDP—with minimal financial disruption, but it did so at a cost.” From 2013, “An Autopsy” of Greek debt restructuring, by Jeromin Zettelmeyer, Christoph Trebesch, and Mitu Gulati. Link. And a 2014 paper by Miranda Xafa assesses the drawbacks to delaying the restructuring after mid-2011. Link.
h/t reader Dominik L for several of these links
Fort construction and population distribution in the US
Economics PhD candidate at Boston University CHELSEA E. CARTER studies the long term effects of historical policy decisions. Her job market paper examines how US military history has shaped the spatial distribution of the American population.
From the abstract:
“I build a new dataset of the 19th century Army’s frontier forts to document their place-based effects. Forts predict initial increases in population and population density, indicative of their role as man-made factors in explaining the origins of local population patterns. Increased population and density persist, on average, over a century after fort abandonment, indicative of path dependence at frontier fort locations. Results using new causal random forest estimation provide consistent evidence of frontier forts’ treatment effects both initially and in the long run.demographics of forts locations reflect those of the US Army itself, but only in the short run, with increased shares of men and foreign-born. Using the spread of the transcontinental railroad, I show that early rail access was critical for continued growth at fort locations and that forts are necessary, but not sufficient, in determining spatial patterns.”
Link to the full paper, link to Carter’s website.
+ + +
- At the Phenomenal World, the first of two new posts features Stephen Nuñez—JFI’s Project Lead on Guaranteed Income—explaining and contextualizing the results from a brand new working paper on UBI and New York City. The paper, by Khalil Esmkhani, Jack Favilukis and Stijn Van Nieuwerburgh, models the effects of a guaranteed income in the city, and finds that, “when financed through a progressive income tax, a UBI increases general welfare and—perhaps most notably—does not lead to housing market inflation.” Link.
- Also at the Phenomenal World this week, JFI Fellow and Harvard PhD candidate Kathryn Holston gives an overview of recent advancements in macroeconomic modeling and how inequality can feature in future macro research. Link.
- A study from last year by Gabor Simonovits et al looks at the political effects of USDA payments to agricultural producers: “Receiving agricultural payments is associated with a 20% increase in the probability of voting in county elections, a 34% increase in the probability of running for office, and a 25% increase in the probability of winning office.” Link. (See last week’s newsletter for more policy feedback literature.)
- “Eight centuries of global interest rates, R-G, and the ‘suprasecular’ decline, 1311-2018.” A Bank of England paper by Paul Schmelzing. Link.
- Raúl Sánchez de la Sierra examines the welfare effects of positive demand shocks for coltan and gold in villages near mineral mines in the Congo: “Positive demand shocks lead armed actors to settle as ‘stationary bandits’ introducing illicit mining visas, taxes, and administrations. My findings suggest that armed actors may create ‘essential functions of a state’ to better expropriate, which, depending on their goals, can increase welfare.” Link.
- A new report from Kristin Blagg, Laurie Goodman, and Kelia Washington at the Urban Institute on the interaction between student loan debt and mortgage borrowing. Link.
- Dylan Scott at Vox with an excellent piece on Taiwan’s single-payer healthcare system. Link. The post is part of an in-progress series looking at different health care systems around the world. Link to the series page. See also a recent systematic review paper on the political economy of universal health coverage, from the journal of Health Policy and Planning. Link.
- From the ASSA annual conference, a webcast of Dani Rodrik and Suresh Naidu’s presentation on Economists for Inclusive Prosperity (followed by a presentation by Samuel Bowles and Wendy Carlin on new economic paradigms). Link.
- “Using official voter turnout records and rich micro data, we document considerable demographic differences between voters who participate in school board elections and the students attending the schools that boards oversee. For example, we show that most majority nonwhite districts in our sample have a majority-white electorate and that these electoral disparities are associated with racial achievement gaps.” By Vladimir Kogan, Stéphane Lavertu, and Zachary Peskowitz. Link.
- From the Internet Policy Review, a paper on the GDPR’s frameworks for regulating political micro-targeting. Link.
- “Prevailing formulations of economic theory make an indiscriminate assumption of ergodicity, which underlies the assumption that the time average and the expectation value of an observable are the same. I argue that by carefully addressing the question of ergodicity, many puzzles besetting the current economic formalism are resolved in a natural and empirically testable way.” Ole Peters in Nature. Link.
- At Vox Dev, a post on China’s 2009 VAT reform and its effects on firm behavior, by Zhao Chen, Xian Jian, Zhikuo Liu, Juan Serrato, and Daniel Xu. Link.
- “The jury trial is a critical point where the state and its citizens come together to define the limits of acceptable behavior. Here we present a large-scale quantitative analysis of trial transcripts from the Old Bailey that reveal a major transition in the nature of this defining moment. By coarse-graining the spoken word testimony into synonym sets and dividing the trials based on indictment, we demonstrate the emergence of semantically distinct violent and nonviolent trial genres. We show that although in the late 18th century the semantic content of trials for violent offenses is functionally indistinguishable from that for nonviolent ones, a long-term, secular trend drives the system toward increasingly clear distinctions between violent and nonviolent acts. This work provides a new window onto the cultural and institutional changes that accompany the monopolization of violence by the state, described in qualitative historical analysis as the civilizing process.” By Sara Klingenstein, Tim Hitchcock, and Simon DeDeo. Link.
Each week we highlight research from a graduate student, postdoc, or early-career professor. Send us recommendations: firstname.lastname@example.org.