Has the Legal Threat to Sovereign Debt Restructuring Become Real?

The existence of sovereign debt relies on the ability of creditors to impose costs on defaulting debtors. In their seminal contribution Eaton and Gersovitz (1981) began the modern literature on sovereign debt by assuming that creditors could not impose sanctions but could exclude debtor countries from international capital markets. This piece was followed by a large literature that attempted to weaken its assumptions. However, as a result of changes in the law as well as from the development of new legal strategies, during the last thirty years the possibilities for creditor actions against sovereigns have improved significantly. This survey reviews the evidence from recent litigation practice and discusses whether this requires a change in our understanding of sovereign debt markets. Our conclusion is that the original assumptions of Eaton and Gersovitz (1981) hold surprisingly well.