A few days ago, Mitu Gulati (Duke) gave us a guest
post on Ecuador’s recent debt restructuring. Today, I bring you Adam Feibelman
(Tulane) with a follow-up to that post.
I’m grateful to Kim and the other folks at the Faculty Lounge for the chance to participate in this small explosion of posts on sovereign debt by Kim, Anna, and Mitu. As Mitu notes, Ecuador’s dramatic default is something of a distant memory, though the ultimate consequences of that episode may influence the action of other sovereigns now or soon facing debt crises. It’s not surprising, therefore, that most of the commentary about Ecuador’s action has focused on the costs or benefits to that country of its strategic default. What’s been more surprising, however, is that there has been very little discussion of what Ecuador’s default and invocation of equitable grounds (odiousness or illegitimacy) might mean for the development of the law of sovereign debt – in particular, the movement to advance a doctrine or create an institution to address odious or illegitimate debt. Arturo Porzecanski is one of the few who has addressed this, as he does in his forthcoming article on Ecuador that Mitu discusses.
Odious debt was a legal topic du jour a few short years ago (thanks to Mitu, of course). Like many others at that time, I wrestled with some possible avenues for enabling sovereigns to repudiate or discharge debts deemed odious or illegitimate, proposing a contractual approach and considering the applicability of doctrines of equitable subordination and fraudulent transfer. These and all other approaches face a fundamental definitional problem – what makes an obligation odious such that it should be subject to avoidance? After all, one of the important intended effects of a doctrine or institution in this context would be to dramatically reduce incentives for people to lend within the definition. It follows from this that odiousness or illegitimacy would need to be defined very narrowly (even to the point of being quite under-inclusive). Otherwise, legal actors and policymakers would be reasonably reluctant to unleash a mechanism that might severely hamper the ability of many sovereigns to borrow even for beneficial purposes.
Given these concerns, it seems quite likely that the Ecuador episode will prove to be a very salient cautionary tale for legal actors or policymakers who might be inclined to consider employing a doctrine or creating an institution to address odious or illegitimate debt. Porzecanski makes this point quite elegantly toward the end of his article. In the essay of mine that Mitu mentions, Ecuador's Sovereign Default: A Pyrrhic Victory for Odious Debt? (forthcoming, J. Int’l Banking Law and Regulation), I argue that Ecuador’s justifications for its default may only increase skepticism that the operational definition of odiousness or illegitimacy can or will be carefully circumscribed.
[T]he factors that Ecuador relied upon to support its actions boil down to these: the funds borrowed from external sources disproportionately benefited privileged interests in the country; the government took over private obligations, shifting burdens to the broader population; the country spent more on debt service than it received from external creditors; the government acted illegally in accepting contractual provisions that waived sovereign rights and assented to foreign courts and foreign jurisdiction; the government failed to purchase discounted obligations on secondary markets and restructured obligations based on nominal values; and current debt service is greater than public expenditure on other essential public goods … .
[T]hese factors are hardly unambiguous markers odiousness or illegitimacy. Most of the funds initially received from creditors were employed by the private sector or for public projects (however ill-conceived or tainted with corruption). Waiving sovereign immunity and submitting to foreign jurisdiction is, in most contexts, consistent with legitimate external borrowing. Government take-over of private sector debt is, in at last some circumstances, often a beneficial and justifiable strategy for debt-crisis prevention/resolution. Debtors in distress or default often end up paying significant, seemingly disproportionate, amounts to service their obligations; restructurings can reduce these servicing costs, but usually do not eliminate them altogether. … [These factors] may arguably reflect significant inequities in prior governmental policy and mismanagement of fiscal, monetary, and social policy. Yet, they do not indicate that the Ecuadorean state knowingly incurred obligations that were not for the benefit of the country’s citizens or that creditors extended resources knowing that to be the case.
If it is true that Ecuador’s action will heighten concerns over the scope of an odious debt doctrine or institution, this may have a silver lining for those, like myself, who are generally sympathetic to efforts to relieve sovereigns from odious or illegitimate obligations. It may be that this episode will encourage some interests that have opposed such efforts in the past to acknowledge that some obligations might be odious or illegitimate and subject to avoidance, if only to clarify that Ecuador’s obligations should fall outside the scope of this category. This would be at least a small victory for debt-relief advocates, though I am not holding my breath.
This post is already much longer than I intended to write, but I want to take the opportunity to note a potential – if somewhat attenuated – relevance of the Ecuador episode to the unfolding crisis in Europe. In both cases, foreign financial actors and institutions are blamed for supporting bad state actions, and they face the prospect of liability for their support (or collusion, depending on one’s assessment). Again, I think there should be room for imposing liability on private actors who enable sovereigns to engage in egregious, illegitimate, or odious behavior. But this is an extremely difficult thing to achieve without discouraging a broader range of legitimate transactions and services that many sovereigns and their citizens sorely need. For that reason, liability should probably be reserved for actions that are unambiguously egregious, odious, or illegitimate, or nearly so.
-- Adam Feibelman
**************************************
For Related Posts in what has become a veritable virtual mini-symposium, see:
The Greek Crisis: Economic Meltdown or Mental One?
The Modern Greek Drama: Comedy, Tragedy, or Both?
The Modern Greek Drama, Part 2
Verge of the Unböring (The Modern Greek Drama, Part 3)
Is 2010 The Year of Odious Sovereign Defaults?
Comments