The Transformation of Public Interests in Sovereign Debt Disputes – An Empirical Analysis

Project Start:01/2018
Researchers:Matthias Goldmann, Grygoriy Pustovit, Seo Young Shin
Area: Financial Intermediation
Funded by:LOEWE

Topic and Objectives

Our research investigates the handling of the public interest by courts in sovereign debt holdout litigation. A few recent cases have created the impression that courts do not care much about the public interest of the debtor states when holdout creditors sue debtor states. Court cases from the 1990s seem, however, to be more appreciative of debtor states’ public interest. We check this assumption with a large-n case sample and aim at mapping the development over time.

We collected and coded more than 400 decisions of U.S. courts since 1970 using databases on the U.S. court system. As debtor states usually invoke specific defenses to introduce the public interest in a sovereign debt restructuring into the case, we coded the defenses invoked in each case by using multiple variables. We also collected about 100 decisions from UK courts.

We found that the usage of defenses and their success rate varies considerably over time. While foreign sovereign immunities were the most successful public interest defense in the 1980s, the decline of sovereign immunity led to the emergence of a host of new, innovative public interest defenses in the 1990s. The 2000s saw a rapid decline in the use and the success rate of public interest defenses and a rise in the success rate of private law-based defenses. Since 2010, there has been a revival of public interest defenses.

These changes in treating public interests are not due to changes in jurisprudence. What seems much more relevant is the policy preferences of the U.S. government, which changed around the turn of the century. A qualitative analysis of the case law reveals that certain amicus curiae briefs of the U.S.government played a decisive role. Thus, courts have restrained their discretionary decision-making and taken a more literal approach, , which coheres with constitutional law and theory that gives the executive a stronger role in foreign policy-related issues.

The upshot of this reasoning is that sovereign debt litigation is a lot more political than commonly assumed. For better or worse, the U.S. government and possibly other governments in capital-exporting states where sovereign debt litigation takes place may influence the practice of courts by clearly stating their policy preferences and introducing them into court proceedings where possible. This can be used to address future debt crises, given the impact of COVID-19 and climate change.

We presented the first results at an interdisciplinary conference on sovereign debt research in Geneva in October 2017 (slides: The overwhelming feedback encouraged us to continue and expand the research. A draft manuscript on U.S. cases has been submitted to a first-rate journal on international economic law. Due to expiry of funding, the comparative analysis with the UK could not be continued.

Key Findings

  • The declining respect for the public interest of debtor states in sovereign debt litigation since around the year 2000 is a political, not a legal phenomenon.
  • Governments hold considerable sway over sovereign debt cases due to their foreign policy prevalence.
  • Given guidance by governments, courts restrict their discretion.

Policy Implications

  • The key findings can be used to address litigation in future sovereign debt crises.
  • Governments may guide courts by clearly stating their policy preferences.