Research Project D4 - Summary

 

The project deals with the question of governments’ ability to provide efficient governance in times of financial distress. Specifically, it looks at cases when private creditors constrain the public financial leeway by suing a sovereign debtor in the context of debt crises, thus rendering a cooperative solution impossible. The project, in other words, investigates a government’s possibilities of providing public goods during legal conflicts between public and private actors. These legal conflicts typically take place in a non-hierarchic legal framework and accordingly the distribution of power between the actors comes to the fore.

The project centres on the modus operandi of coordinating action between private creditors and sovereign debtors. Generally, there are three modes to solve a debt crisis: (1) bargaining, which typically leads to a restructuring of debt; (2) legal conflicts, where a cooperative solution is waived in favour of a conflict-laden lawsuit, solved in front of a court; (3) debt relief. The first project phase focussed on bargaining, particularly on the role of the sovereign debtor, and concentrated on emerging economies. The second phase will now emphasise adversarial  behaviour of private creditors, with a special reference to litigation by banks and specialised “vulture” funds. The sample of countries will be broadened to include highly indebted poor countries (HIPCs). This group of countries typically is typically featured by high degrees of debt, an impoverished population, and limited statehood. Many of the countries are African states.

Changes to legal frameworks have led to a situation in which especially these deprived countries have become a prime target for litigation by private creditors. In a typical litigation scenario, a “vulture creditor” buys sovereign debt claims prior to a debt relief or debt restructuring agreement at a deep discount (e.g. for 10% of the nominal value) with the explicit intention to sue debtor governments for full debt repayment, i.e. for 100% of the nominal value plus accumulated interest. The subject matter of legal action has risen for years and today amounts to billions of euro for HIPCs. We hypothesize that the provision of public goods and public services is particularly influenced by litigation in weak states. Many efforts to relieve HIPCs debt burden are virtually and to an increasing extent undermined by non-cooperative private creditors.

In spite of the apparent academic, political and economic relevance of litigation in the context of debt crises, the literature is scarce. This may well be attributed to a poor data situation. The project thus aims at, firstly, compiling the first comprehensive, standardised data set on creditor litigation against emerging economies and developing countries. Furthermore, Stage 1 will investigate the most important determinants of litigation. As stated before, the central hypothesis to test is whether weak states with limited financial and legal resources are more prone to being sued than developed states. Stage 2 will then look at the effects of litigation on public resources, with a special reference to the subsequent provision of public goods and governance.