Sovereign Bonds

6 Key excerpts on "Sovereign Bonds"

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  Sovereign Defaults before International Courts and Tribunals

  • Michael Waibel(Author)
  • 2011(Publication Date)
  • Cambridge University Press

    (Publisher)

  57 Sovereign Bonds are debt instruments issued by a state and acknow- ledging indebtedness and promising repayment of principal and inter- est on an earlier advance of money. 58 In this sense, they are highly asymmetric. Historically, a bond is a ‘document written and sealed containing a confession of debt’. 59 Black’s Law Dictionary defines a bond as a ‘long-term, interest-bearing debt instrument issued by a corporation or governmental entity, usually to provide for some particular financial need’. Philip Wood defines ‘bonds’ as ‘negotiable debt securities’ where the underlying ‘transaction is loan, but the terms of loan are set out in securities’. 60 Borchard defines a sovereign bond as the ‘principal document con- taining the terms of the contractual relationship between the debtor government and the individual lender . . . issued by the bank in accord- ance with the loan agreement or directly by the government pursuant to the loan prospectus. It evidences the promise by the borrower to pay the agreed interest on the loan, the principal at maturity, and to amortize the issue in a specified manner.’ 61 Debentures, promissory notes and certificates of indebtedness display similar features. The word debenture derives from the word ‘debentur’, 56 Cf. ‘ILC Report on the Draft Articles on succession of states in respect of state property, archives and debts’, A/Conf.117/4, 79, reprinted in YBILC, vol. 2, part 2 (1981). 57 ILA Study Group on Sovereign Insolvency, ‘The state of sovereign insolvency’ (2010), 4–5. 58 Cf. L. Jones and R. Bowers, The Law of Bonds and Bond Securities (Indianapolis: Bobbs-Merrill, 1935), 4. 59 F. Pollock and F. W. Maitland, The History of English Law before the Time of Edward I (Cambridge University Press, 1898), 207. 60 P. Wood, International Loans, Bonds, and Securities Regulation (London: Sweet and Maxwell, 1995), 9. 61 Borchard, State Insolvency and Foreign Bondholders, 23. s o v e r e i g n d e b t c r i s e s a n d d e f a u l t s 13

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  10% Less Democracy

  Why You Should Trust Elites a Little More and the Masses a Little Less

  • Garett Jones(Author)
  • 2020(Publication Date)
  • Stanford University Press

    (Publisher)

  Business lending comes with even more strings. Banks reserve the right to see a business’s books, as well as to check the business’s inven-tory to make sure that the business owner hasn’t squirreled the bank’s money away in an overseas account. Accountants do much of this checking on the bank’s behalf. An accountant I know had to person-ally climb to the top of a grain silo in the American Midwest as part of a regular audit; she climbed up a silo half a dozen stories high just to peer into the top of the silo and make sure that it really was filled with grain. Insisting on specific actions, following up, verifying the claims of borrowers: this is a natural part of the business of lending. But when it comes to sovereign lending, there’s an unusual split. While crisis lenders like the IMF or the World Bank insist on reform as a condition for loans, the everyday lenders—those who buy gov-ernment bonds during good times—play a much more passive role. In pleasant times, international investors—mutual funds, investment banks, insurance companies—calmly take a look at a government’s credit rating, read some newspapers and perhaps check out some statistical analyses, and decide whether the return on the govern -ment’s Sovereign Bonds is worth the risk of default. Defining a New Relationship These arm’s-length relationships are absurdly inefficient. Instead, the role of sovereign bondholders should be redefined to become BONDHOLDERS AS A SEPARATE BRANCH OF GOVERNMENT 135 more like that of a corporate shareholder. By thinking of sovereign bondholders as sovereign shareholders, the types of reforms I’ve suggested will appear natural and evolutionary rather than radical— not 50 % less democracy but closer to 10 % . Recall that in the private sector, there are two classic ways for a business to raise funds: 1. Borrowing, through banks or by issuing bonds: Someone gives me money now and I promise to repay that amount plus interest later 2.

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  The Logic of Financial Nationalism

  The Challenges of Cooperation and the Role of International Law

  • Federico Lupo-Pasini(Author)
  • 2017(Publication Date)
  • Cambridge University Press

    (Publisher)

  The process of sovereign borrowing is, from a business viewpoint, not very different from that of a domestic transaction. In both instances, a lender (a financial institution) offers credit to a borrower (a state) upon the promise of the former to repay the principal and the interest. However, sovereign debt is different from any other credit transaction due to the legal, institutional, and 1 On the various remedies available and relative damages, see Robert Cooter and Melvin Aron Eisenberg, “Damages for Breach of Contract” (1985) 73 California Law Review 1432; Victor Goldberg, Framing Contract Law: An Economic Perspective (Cambridge, MA: Harvard University Press, 2006). 2 On the role of the law as a deterrence mechanism, see Robert E. Scott and George G. Triantis, “Anticipating Litigation in Contract Design” (2006) 115 Yale Law Journal 814. 120 The Logic of Financial Nationalism economic underpinnings behind the entire debt process. These differences make international coordination in sovereign debt policy extremely challeng- ing and often subject to the logic of financial nationalism. More than any other topic, sovereign debt exemplifies the difficulties for financial sovereignty and financial integration to coexist peacefully. Bankers and sovereigns have had a long history of cooperation dating back centuries. 3 The emergence of banking business in Florence in the fourteenth century was spurred by the constant financing needs of sovereigns to wage wars. Until modern times, bankers have thrived on the political or economic ambitions of states, thereby making sovereign lending a very profitable business. 4 Yet, sover- eign lending has often proved to be a highly risky endeavor. At the foundation of the sovereign debt process lies an asymmetry of power between debtors and their creditors, which puts the two legs of the sovereign debt transaction on an uneven playing field.

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  The Three and a Half Minute Transaction

  Boilerplate and the Limits of Contract Design

  • Mitu Gulati, Robert E. Scott(Authors)
  • 2012(Publication Date)
  • University of Chicago Press

    (Publisher)

  CHAPTER TWO

  The Sovereign Bond Contract

  The sovereign debt market is among the oldest securities markets in existence. For reasons ranging from a monarch’s desire to go to war to the routine funding of daily expenditures in modern industrialized economies, sovereign states have been borrowing from time immemorial. Frequently, that borrowing has been from foreign creditors. The fact that a sovereign is the debtor and the creditors are often in a distant jurisdiction creates a unique set of contracting problems. The obvious one is that it is difficult to enforce the obligation if a sovereign state decides it does not wish to repay its debts.

  In this chapter, we describe those contracting problems and outline the contract provisions that debtors and creditors have devised to solve them. The basic issues with sovereign debt have remained largely the same over many centuries, and this allows scholars to examine data over a longer period than for almost any other contracting problem. In turn, this broader temporal perspective not only permits one to determine how the basic contracting problems are solved, but also how those solutions are modified in response to changes in the global economy from exogenous events such as the formation of the Bretton Woods institutions (the International Monetary Fund (IMF) and the World Bank), the world wars, or, as in our case, an unexpected court decision in a commercial court in Brussels.

  The Sovereign Debt Contracting Problem

  Many are familiar with corporate borrowing and the contracting problems it raises (e.g., limited liability issues and agency problems arising from managers’ incentives to misbehave). We use corporate borrowing as the backdrop against which to contrast the sovereign debt contracting problem. Sovereign lending is different from corporate borrowing in at least five ways, each of which is likely to cause the contractual terms in Sovereign Bonds to be different from those in corporate bonds.1

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  OECD Sovereign Borrowing Outlook 2018

  • OECD(Author)
  • 2018(Publication Date)
  • OECD

    (Publisher)

  Assessment of these factors shapes the lender’s perception of the borrower’s ability and willingness to repay. If and when this link is weak, borrowing conditions may become vulnerable to sudden shifts in investor sentiment and perceptions of sovereign risk. From an investor’s perspective, the main determinants of bond valuation are: the credibility of a government’s macroeconomic framework; the integrity of state institutions; the political environment and the country’s economic growth prospects. To assess a government’s ability to pay, these elements are allegedly captured in sovereign credit ratings. 9 It could be assumed that a government’s borrowing costs should largely reflect its credit quality. Nevertheless, besides country specific risks, there are other factors affecting borrowing costs associated with aggregate and contagion risk ( e.g. changes in monetary policy, global uncertainty and risk aversion) (De Santis Roberto A., 2012). The perceived credit quality of Sovereign Bonds is influenced by credit ratings to such an extent that sovereign borrowing pricing largely depends on credit ratings. In general, lower credit ratings are usually associated with higher borrowing costs, in particular during times of market stress. For example, in 2011 during the European sovereign debt crisis, 10-year bond yield spreads between ‘AAA’ and ‘AA’ issuers increased about 200 basis points. In today’s relatively calm market conditions, the difference is closer to 20 basis points. Considering that governments borrow in large amounts, even small changes in funding rates can result in significant costs or savings to taxpayers. Figure 1.12 presents the credit rating profile of OECD governments in 2006, 2013 and 2017. A number of countries have been downgraded by the three big credit agencies during the past decade – in effect shrinking the pool of government bonds in the prime category to 11, down from 19 a decade ago.

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  Sovereign Debt and Socio-Economic Rights Beyond Crisis

  The Neoliberalisation of International Law

  • Emma Luce Scali(Author)
  • 2022(Publication Date)
  • Cambridge University Press

    (Publisher)

  The latter can include other states and public institutions (e.g. central banks), international financial institutions (e.g. the International Monetary Fund (IMF), the World Bank or the European Stability Mechanism), as well as private financial institutions and bondholders (e.g. commercial or investment banks, insurance companies, pension or hedge funds and retail investors). Sovereign debt includes, inter alia, trade debt (i.e. obligations arising from the purchase of supplies and services by the state or owed to banks through arrangements such as documentary letters of credit) and other (non-contractual) liabilities (e.g. deriving from arbitral awards). 22 2.3 recent global debt trends and the nature of contemporary debt financing The historical (not necessarily linear) development of different modes of sovereign financing, including states’ fiscal regimes, has progressed parallel 19 Hans-Ernst Folz, ‘State Debts’ in Rudolf Bernhardt and Peter Macalister-Smith (eds.), Encyclopaedia of Public International Law, vol. 4 (Amsterdam: North-Holland, 2000), p. 608. 20 Waibel, Sovereign Defaults before International Courts and Tribunals, p. 13. 21 Ibid. 22 International Law Association, The Hague Conference (2010), Sovereign Insolvency Study Group, ‘State Insolvency: Options for the Way Forward’ (August 2010), ila.vettoreweb.com/S torage/Download.aspx?DbStorageId=1451&StorageFileGuid=58bc4db7-4213-440c-93fe-978a0 a2896cb, 9. 2.3 Contemporary Debt Financing 33 to transformations of the sovereign as a political organisation, its aims and consequent financial necessities and the nature and (later, also legal) ordering of international (economic and political) relations.

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