Reforming Sovereign Lending Practices: Modern Initiatives in Historical Context

The sovereign debt crisis in the Eurozone has prompted a number of policy responses. Among the most significant is an initiative by the United Nations Conference on Trade and Development to identify what it has termed “Principles of Responsible Sovereign Lending and Borrowing.” The Principles aim to transform sovereign debt contracts – to set “a global standard...against which to assess” their terms. Principle 15, for example, seeks to ensure that debt restructurings, such as that presently underway in Greece, occur “promptly, efficiently, and fairly,” and it envisions the use of collective action clauses (CACs) to achieve this end. Public officials agree with this goal; Eurozone leaders have stated their intent to mandate the use of standardized CACs in all euro area sovereign bonds. This article explores, and questions, whether the Principles are likely to have a significant impact on bond contracts. Over the past century, a number of other initiatives have pursued the same goal, with varying degrees of success. Using a dataset of bonds issued in New York and London, the article demonstrates how contracts responded (or failed to respond) to these initiatives, often in ways reformers did not anticipate. Several lessons emerge. First, initiatives designed to encourage changes to entrenched contracting practices may require significant and coordinated leadership by states and other international actors. Without such leadership, these initiatives may fail. One reasons for this is that reformers often misread market sentiment or fail to appreciate the diverse preferences of market actors. Second, even successful initiatives can have unexpected results. In particular, efforts to encourage the use of uniform contract terms may have the paradoxical effect of provoking greater contract variation. The third lesson, then, is that standardization – assuming that is a desirable and feasible goal – may have to be mandated. The paper concludes by exploring other ways in which initiatives like the Principles can influence sovereign lending markets.