How the Contractual Terms of Sovereign Bonds Can Be EnhancedAntigone Mavragani, Legal Counsel, Eastern Mediterranean Maritime Ltd, Athens, Greece
Sovereigns as debtors bear special characteristics compared to corporates or individuals because of the fact that there is no bankruptcy code, either domestic or foreign, applying in case of non-payment of their obligations, which leaves them vulnerable to costly litigation procedures, perpetuating debts and high political risk. On the other hand, holders of sovereign bonds face the reality of the limited enforceability of judgments against states, either because of sovereign immunity or because in general sovereign property is awarded a certain degree of special treatment.
The lack of a legal framework dealing with sovereigns in distress led eventually to the creation of a series of contractual mechanisms which aim to facilitate both bondholders and sovereigns to assess cases of inability of the second and to fulfil obligations arising from sovereign debt.
The need for effective restructuring methods became even more essential as emerging economies started like a domino effect, from Pakistan (1999) to Ukraine (2015), to face problems of liquidity and failing to fulfil initial agreements with their creditors. This is why the terms of the most secure bonds, such as US bonds, tend to be more incomplete focusing on the basic terms of interest rate, amount, maturity and currency, whereas developing countries include in their bonds different kinds of clauses to strengthen their commitments to creditors, increase the probability of payment, secure an orderly restructuring in case of default and prevent any kind of opportunistic behaviour from the sovereign. As although instability in the global market is rising, the bonds of all sovereigns start gradually implementing additional clauses to help them deal in an orderly way in case of restructuring or default and to persuade bondholders to invest.
B. Enforcement clauses
Before we enter into an analysis of the contractual clauses aiming to facilitate the sovereign bonds restructuring, we shall begin by mentioning that since the 1990s clauses enabling legal enforceability have been added to sovereign bonds, called the enforcement clauses. These clauses take usually the form of a waiver of the sovereign immunity that countries enjoy under public international law, for creditors to be able to bring a lawsuit against the sovereign if it breaches their agreement and may be accompanied by a foreign jurisdiction law clause and/or a foreign governing law clause. The foreign jurisdiction law clause is added to secure the hearing of the case against the sovereign, as national courts may refuse to do so, and the latter to avoid the application of domestic law, which can be amended to help the debtor not repaying its debts.
Additionally, because of the fact that when a government defaults in one obligation it subsequently defaults in all current and future obligations, cross default clauses and acceleration clauses appear in sovereign bonds. The first clause states that a default in any government obligation constitutes a default in the contract containing that clause. The acceleration clause allows creditors to call the debt they hold in case the government defaults on a payment.