Background and Overview

Breakdowns in debt contracts are an important feature of financial markets, in both the domestic and the international context. But the international case, especially if it involves a sovereign state, is more complicated than the domestic one. Part of the reason is that there is no established legal procedure providing for an orderly liquidation of any portion of the Borrower's assets to meet the Creditors' claims. While in the domestic context bankruptcy procedures provide for control of the Borrower to pass into the hands of an official liquidator who ensures an equitable distribution of whatever assets remain, there is no corresponding procedure in the case of an international sovereign loan. ¹ An implicit assumption is often made that because, unlike companies, countries do not cease to exist ("countries never go bankrupt" ² ) it is therefore unlikely that loans extended to them will never be repaid.