{"id":10400,"date":"2022-07-14T20:24:40","date_gmt":"2022-07-14T20:24:40","guid":{"rendered":"http:\/\/legalblog.ie\/sovereign-debt\/"},"modified":"2022-12-03T20:29:57","modified_gmt":"2022-12-03T20:29:57","slug":"sovereign-debt","status":"publish","type":"post","link":"https:\/\/legalblog.ie\/sovereign-debt\/","title":{"rendered":"Sovereign Debt"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_63 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Terms_of_Borrowing\" title=\"Terms of Borrowing\">Terms of Borrowing<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#State_Covenants\" title=\"State Covenants\">State Covenants<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Governing_Law\" title=\"Governing Law\">Governing Law<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Restriction_of_Immunity\" title=\"Restriction of Immunity\">Restriction of Immunity<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Coventnats_Disclosure\" title=\"Coventnats &amp; Disclosure\">Coventnats &amp; Disclosure<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Default\" title=\"Default\">Default<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Enforcement\" title=\"Enforcement\">Enforcement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Rescheduling\" title=\"Rescheduling\">Rescheduling<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Paris_Club\" title=\"Paris Club\">Paris Club<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Commercial_Debt\" title=\"Commercial Debt\">Commercial Debt<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Succession\" title=\"Succession\">Succession<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/legalblog.ie\/sovereign-debt\/#Partition_and_Decolonisation\" title=\"Partition and Decolonisation\">Partition and Decolonisation<\/a><\/li><\/ul><\/nav><\/div>\n<h3><span class=\"ez-toc-section\" id=\"Terms_of_Borrowing\"><\/span>Terms of Borrowing<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Sovereigns are generally immune from enforcement in foreign courts. There are no effective solvency mechanisms against states.\u00a0 There is no process by which their assets may be realized and distributed to creditors.<\/p>\n<p>Solvent states have an inherent power to borrow subject to the terms of their own constitution.\u00a0 Some Constitutions may impose debt breaks and limitations.<\/p>\n<p>States may pass legislation to enable particular borrowings for particular purposes either directly or by state entities.\u00a0 In the case of bodies established under law, specific statutory power and authority will be given to allow the borrowing for purposes which may be specified..<\/p>\n<p>The broad terms of state borrowing are similar to those for corporate borrowing.\u00a0 There are a number of significant differences.\u00a0 States control their own taxation.\u00a0 States undertake to pay gross, unaffected by changes in their own taxation system.\u00a0 The state&#8217;s right to redeem would be restricted if it changes its domestic tax regime to require withholding.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"State_Covenants\"><\/span>State Covenants<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>States do not provide financial statements in accordance with standard financial conditions.\u00a0 State financial reporting tends to have its own format.<\/p>\n<p>No warranties are given in relation to litigation or formal insolvency.\u00a0 Warranties may be given in relation to the accuracy of the underlying information, memorandum or prospectus.\u00a0 The warranty will confirm the disclaimer of the state&#8217;s immunity.<\/p>\n<p>Undertakings and restrictions will not apply to solvent borrowers in view of their prerogatives and powers.\u00a0 They will not accept fetters on their freedom of action.\u00a0 Accordingly, state debt transactions will not generally include financial covenants.\u00a0 There may be a requirement to maintain good standing with the IMF.<\/p>\n<p>There may be a negative pledge giving preference to particular creditors to the prejudice of all creditors.\u00a0 Generally, it may be limited to foreign currency borrowing. It is standard for sovereigns to undertake that the debt ranks pari passu and equally with other unsecured creditors.<\/p>\n<p>Events of default will normally include failure to pay, breach of terms, misrepresentation for cross-default, perhaps limited to foreign borrowing, debt rescheduling, and other creditor enforcement. Maintenance of good standing membership of IMF may be included.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Governing_Law\"><\/span>Governing Law<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>A governing law will be a foreign law, and enforcement will be in a foreign jurisdiction.\u00a0 This will almost invariably be required for obvious reasons.\u00a0 The state could otherwise propose a moratorium on payments by its own law or require payments to be made in some other form.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Restriction_of_Immunity\"><\/span>Restriction of Immunity<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The modern concept of sovereignty has tended to remove immunity in respect of certain state activities.\u00a0 Trade and commerce are not core sovereign activities.<\/p>\n<p>Most states removed complete immunity by legislation in the 20th century.\u00a0 It was removed in Ireland by constitutional interpretation.<\/p>\n<p>The Crown Proceedings Act, 1947 in the UK, permitted a range of claims against a state.\u00a0 Sovereign Immunity Act 1978 provides for the general principle of immunity from jurisdiction for foreign states subject to certain exceptions.\u00a0 Similar exemptions exist in Australia and the US based on the nature of the activity.<\/p>\n<p>A sovereign state may submit to jurisdiction by prior written agreement.\u00a0 In commercial transactions, states are not immune. \u00a0This may include the supply of goods or services, transactions for finance or guarantee, and other transactions entered by states other than in the exercise of sovereign authority.<\/p>\n<p>State entities have immunity only if the proceedings relate to matters that are an exercise of sovereign authority and if a state would, in the same circumstances, have been entitled to immunity.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Coventnats_Disclosure\"><\/span>Coventnats &amp; Disclosure<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The state will be obliged to give extensive information.\u00a0 A negative pledge may be required from the central bank and state entities.\u00a0 The negative pledge may be limited to external debt.\u00a0 External debt may be that other than in the state&#8217;s currency.<\/p>\n<p>A negative pledge may prevent the grant of security and collateral with limited exceptions, including liens by operation of law, a collateral grant which committee approval, purchase money mortgages in the ordinary course of trade, collateral over title documents, insurance policy, sales contracts in relation to consumer goods in the ordinary course of business.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Default\"><\/span>Default<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Events of default are likely to include<\/p>\n<ul>\n<li>non-payment,<\/li>\n<li>breach of obligations,<\/li>\n<li>cross-default,<\/li>\n<li>\u00a0enforcement,<\/li>\n<li>repudiation,<\/li>\n<li>windup of state entities.<\/li>\n<li>breach of pari passu,<\/li>\n<li>breach of IMF obligations,<\/li>\n<li>suspension from IMF.<\/li>\n<\/ul>\n<p>Loan management will take place on a syndicated basis with a committee of the banks.\u00a0 Majority approval will suffice or a specified percentage may be prescribed.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Enforcement\"><\/span>Enforcement<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Generally, states are immune from enforcement.\u00a0 Enforcement is permissible if they consent and the asset is commercial in nature and not used in the administration of the state. Generally, remedies of injunction, specific performance, delivery of assets, arrest, and detention on sale are not available against states.<\/p>\n<p>If a state fails to meet its obligations, it may, in effect, be insolvent.\u00a0 This may arise through poor financial management, external circumstances, fraud, war, change in interest rate, collapse in prices etc.<\/p>\n<p>There is no mechanism for taking over of the management of a state&#8217;s affairs.\u00a0 The IMF may put in place a stabilization program.<\/p>\n<p>There are no mechanisms whereby creditors of states may be necessarily treated equally.\u00a0 Some creditors may take proceedings in foreign courts.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Rescheduling\"><\/span>Rescheduling<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>In default, states may reach scheduled debts in order to resolve financial crises in an orderly manner.\u00a0 Different creditors may be treated differently.\u00a0 Reorganization may only occur by consent.\u00a0 It cannot generally be imposed, and there is no mechanism for imposition on a dissenting minority.\u00a0 There is no mechanism to write down the debt other than by agreement.<\/p>\n<p>Restructuring of state debt commonly takes place on a so-called short-leash basis.\u00a0 It seeks to incentivize the state to undertake economic austerity to maintain creditors&#8217; bargaining power to enable monitoring.<\/p>\n<p>Certain liabilities, including interest, trade debt and short term debt, may be restructured in certain circumstances if possible. Certain categories of debt, such as public bonds, which are widely held, may not be rescheduled in some cases. Generally, the amount rescheduled will be up to four-fifths or nine-tenths of the total with the balance repaid as a condition of restructuring.<\/p>\n<p>Supranational creditors, including IMF, World Bank, regional development banks and the EIB, do not generally accept rescheduling.\u00a0 Intergovernmental debt is rescheduled in accordance with Paris Club principles set out below.<\/p>\n<p>Commercial banks are generally organized to join in rescheduling.\u00a0 Public bond debt is only restructured in highly exceptional circumstances where the position of the state is badly impaired.\u00a0 Trade debt is not generally restructured.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Paris_Club\"><\/span>Paris Club<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The Paris club is an informal intergovernmental association coordinating the actions of major creditor countries.\u00a0 It is not binding.\u00a0 There is no formal association rules or offices.<\/p>\n<p>The club&#8217;s principles require the debtor to disclose its economic position.\u00a0 The principles require that default on external payments will arise in the absence of rescheduling.\u00a0 This will generally be apparent from arrears.<\/p>\n<p>The state must accept an economic adjustment program with the IMF to reschedule and contributes to the stabilization of economic conditions. Creditors should agree to accept the burden arising from debt rescheduling equitably and fairly.\u00a0 Grace periods on the scheduled payments may be equalized. The state enters bilateral agreements with each creditor country that accepts the rescheduling program.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Commercial_Debt\"><\/span>Commercial Debt<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Commercial bank debt may be restructured through negotiation with a committee of its principal bank creditors. The committee may make proposals.\u00a0 A rescheduling agreement may be entered equivalent to a syndicated loan agreement. Appropriate state entities may join in the obligations under the agreement.<\/p>\n<p>Participation by a high percentage of participants may be a practical requirement.\u00a0 Non-rescheduled debt may require to be repaid.\u00a0 Third-party governing law and forum will be required.<\/p>\n<p>Where there are multiple currency exposures, credits may be required under the agreement to convert it into one or a small number of major currencies. There may be a common basis for interest rates for ease of administration and transparency.<\/p>\n<p>The Pari Passu principle requires proportionate payments of all debt obligations.\u00a0The most favoured principle provides that arrangements with other debtors outside the agreement should not be on more favourable terms.\u00a0 If so, they are to be applied under the rescheduling agreement if they later arise.<\/p>\n<p>There may be an incentivisation which provides that debt maturing beyond a cut-off date may not be rescheduled if economic progress is not satisfactory.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Succession\"><\/span>Succession<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The issue of recognition and succession arises in the context of state debt.<\/p>\n<p>International recognition of the state will be important.\u00a0 Recognition is a matter of fact.\u00a0 It may be formal through treaties or by implication.<\/p>\n<p>Recognition may arise when a new state comes into being, or a new government takes control by some unconstitutional mechanism such as a coup.\u00a0 This raises questions about the entitlement of the state to borrow, and its recognition in its own and other courts.<\/p>\n<p>There is an international convention on the succession of states in respect of state property, the 1983 Vienna Convention.\u00a0 It is not universally accepted.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"Partition_and_Decolonisation\"><\/span>Partition and Decolonisation<span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Third-party creditors will not be bound by partition or devolution.\u00a0 A successor state of the devolved entity may agree to take responsibility for the predecessor&#8217;s obligations.<\/p>\n<p>The Vienna Convention provides that where there is a partial transfer of territory, the debt should be apportioned in the absence of a specific agreement.\u00a0 Localized debt, which is debt incurred in connection with the development of expenditure in a particular area, will go with the area which is partitioned.<\/p>\n<p>In the case of the colonization of a new state, the new state does not succeed to the colonizer&#8217;s debt. Where states unify, the obligation passes to the successor.\u00a0 The successor may apportion the debt over its territory.<\/p>\n<p>An equitable proportion of the debts of the apportioned and passed to the successor. Where states cease to exist, successors should take on an equitable proportion.<\/p>\n<!--themify_builder_content-->\n<div id=\"themify_builder_content-10400\" data-postid=\"10400\" class=\"themify_builder_content themify_builder_content-10400 themify_builder tf_clear\">\n    <\/div>\n<!--\/themify_builder_content-->\n","protected":false},"excerpt":{"rendered":"<p>Terms of Borrowing Sovereigns are generally immune from enforcement in foreign courts. There are no effective solvency mechanisms against states.\u00a0 There is no process by which their assets may be realized and distributed to creditors. Solvent states have an inherent power to borrow subject to the terms of their own constitution.\u00a0 Some Constitutions may impose [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[144],"tags":[],"_links":{"self":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/10400"}],"collection":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/comments?post=10400"}],"version-history":[{"count":3,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/10400\/revisions"}],"predecessor-version":[{"id":21022,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/posts\/10400\/revisions\/21022"}],"wp:attachment":[{"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/media?parent=10400"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/categories?post=10400"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/legalblog.ie\/wp-json\/wp\/v2\/tags?post=10400"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}