The New Vulture Culture: Sovereign debt restructuring and trade and investment treaties Kevin P. Gallagher

[Working Paper No. 02/2011]

The global community still lacks a regime for sovereign debt restructuring. But it has often been overlooked that the definition of a covered investment within international trade and investment agreements often includes sovereign debt. There is thus increasing concern that international investment agreements may become a ”court” for sovereign workouts by default. In this context, this paper analyzes the extent to which investment provisions in various treaties may hinder the ability of nations and private creditors to comprehensively negotiate sovereign debt restructurings when a debtor nation has defaulted or is close to default on its government debt. It is found that the treatment of sovereign debt varies considerably in terms of strength and applicability across the spectrum of the thousands of trade and investment treaties in the world economy. Most treaties may restrict the ability to restructure debt in the wake of a financial crisis. It is therefore concluded that these treaties could undermine the ability of nations to recover from financial crises and thus broaden the impact of such crises.

02_2011  (Download the full text in PDF format)