Lawsuits and Empire: On the enforcement of sovereign debt in Latin America

Law and Contemporary Problems

Volumn 73, Issue 4, 2010, Pages 39-46

  Ahmed, Faisal Z ^a   Alfaro, Laura ^b   Maure, Noel ^b  

^a PRINCETON UNIVERSITY   (United States)

^b HARVARD BUSINESS SCHOOL   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 79952018187     PISSN: 00239186     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (41)

1. Theodore Roosevelt, Corollary to the Monroe Doctrine, http://www.pinzler.com/ushistory/corollarysupp.html (last visited June 15, 2010).
2. Zambia Loses "Vulture Fund" Case, BBC NEWS (Feb. 15, 2007, 6:38 PM), http://news.bbc.co. uk/2/hi/business/6365433.stm.
3. World Bank, Global Development Finance: The Development Potential of Surging Capital Flows: Review, Analysis, and Outlook, 3 (World Bank Publications: Washington, D.C., 2006).
4. Laura Alfaro & Fabio Kanczuk, Sovereign Debt as a Contingent Claim: A Quantitative Approach, 65 J. INT'L ECON. 297, 300 (2005).
5. Kris Mitchener & Marc Weidenmier, Supersanctions and Sovereign Debt Repayment 2 (Nat'l Bureau of Econ. Research, Working Paper No. 11472, 2005).
6. Letter from Irwin Laughlin, U.S. Chargé d'Affairs at London, to Philander Knox, U.S. Sec'y of State (Jan. 28, 1913), in FOREIGN RELATIONS OF THE UNITED STATES, 814.51/225, 565 (1920).
7. Emily Rosenberg & Norman Rosenberg, From Colonialism to Professionalism: The Public-Private Dynamic in United States Foreign Financial Advising, 1898-1929, 74 J. AM. HIST. 59, 75-76 (1987).
8. See WHITNEY PERKINS, CONSTRAINT OF EMPIRE: THE UNITED STATES AND CARIBBEAN INTERVENTIONS 1-74 (1981).
9. EDWIN BORCHARD, STATE INSOLVENCY AND FOREIGN BONDHOLDERS: GENERAL PRINCIPLES 277-78 (1951).
10. In addition, the contract stipulated that any disputes would be submitted to the Chief Justice of the Supreme Court of the United States for binding arbitration. La República de Costa Rica and Central Union Trust Company of New York as Trustee, Trust Agreement (Nov. 1, 1926) (on file with Law and Contemporary Problems).
11. JOHN MAJOR, PRIZE POSSESSION: THE UNITED STATES GOVERNMENT AND THE PANAMA CANAL 1903-1979, at 139-40 (1993).
12. See ROBERT DUNN, AMERICAN BUSINESS ABROAD 219-47 (1926) (reprinting the complete text of the controlled loan contract).
13. CHESTER JONES, THE CARIBBEAN SINCE 1900, at 432-33 (1936).
14. U.S. troops ostensibly landed to prevent disorder. In Cuba, the U.S. intervened in 1906 when the Liberal Party launched an armed rebellion against the incumbent Moderates after a contested election. Similarly, U.S. troops intervened in Panama on multiple occasions (most notably in 1925) after contested elections prompted violence. Both countries had formal clauses in their constitutions permitting U.S. intervention to preserve order. The U.S. intervened in Nicaragua in 1912 when rebels opposed to a loan contract with the U.S. neared Managua. In Haiti and the Dominican Republic, American troops intervened in 1915 and 1916 when rebels threatened to take control of the customhouses, imperiling government revenues. In Honduras, U.S. Marines briefly landed in 1911 and 1912 to protect U.S. investments during a civil war.
15. The seminal works on the U.S. occupation of the Dominican Republic and Haiti are BRUCE CALDER, THE IMPACT OF INTERVENTION: THE DOMINICAN REPUBLIC DURING THE U.S. OCCUPATION OF 1916-1924 (2006) and HANS SCHMIDT, THE UNITED STATES OCCUPATION OF HAITI, 1915-1934 (1995).
16. For an account of the U.S. intervention in Nicaragua
17. LESTER LANGLEY, THE BANANA WARS: UNITED STATES INTERVENTION IN THE CARIBBEAN, 1898-1934, at 59-71, 175-212 (2002)
18. On U.S. fears of a Bolivian default, see State Department Records (Record Group 59), National Archives, Memorandum from the Economic Adviser of 9 May 1928, NA 824.5 11449. For a discussion of the Bolivian situation at the time.
19. see generally Manuel Contreras, Debt, Taxes, and War: The Political Economy of Bolivia, c. 1920-1935, 22 J. LAT. AM. STUD. 265 (1990).
20. DOMINICAN CUSTOMS RECEIVERSHIP, REPORT OF THE TWENTY-FOURTH FISCAL PERIOD 9, 28 (1932).
21. See Republic of Arg. v. Weltover, Inc., 504 U.S. 607, 618-20 (1992).
22. See generally FEDERICO STURZENEGGER & JEROMIN ZETTELMEYER, DEBT DEFAULTS AND LESSONS FROM A DECADE OF CRISES (2007).
23. Kenneth Rogoff & Jeromin Zettelmeyer, Bankruptcy Procedures for Sovereigns: A History of Ideas, 1976-2001, at 470-507 (Int'l Monetary Fund, Working Paper No. WP/02/133, 2002).
24. For instance, the decisions in Dart v. Brazil, 886 F. Supp. 1105 (S.D.N.Y. 1995), and Elliott Associates, L.P. v. Republic of Panama, 975 F. Supp. 332 (S.D.N.Y. 1997), permitted attachments.
25. See Elliott Assocs., 975 F. Supp. at 334-35.
26. For the details of the final settlement, see Emerging Markets Trade Association, Preliminary Analysis of Creditor Litigation in the Non-HIPC Sovereign Debt Restructuring Context, June 16, 2009, 8-9, available at http://www.clubdeparis.org/sections/communication/evenements/rencontre-avec-secteur/secteurprive2009/document-emta/downloadFile/file/EMTA_Analysis.pdf?nocache=1256649422 (last visited May 22, 2010).
27. Brady bonds are dollar-denominated bonds, issued mostly by Latin American countries in the 1980s, in the aftermath of the 1982 debt crisis. In 1989, U.S. Treasury Secretary Nicholas Brady arranged for the commercial banks that had lent to Latin American countries to write down the value of their outstanding loans in arrears, exchanging them for newly issued long-term dollar-denominated bonds. The U.S. Treasury secured the principal and one year's worth of interest payments. In total, Brady deals restructured $202.8 billion of debt for eighteen countries. The result was $63.7 billion of debt relief-and the creation of an active secondary market in bonds issued by developing-country governments. Laura Alfaro & Ingred Vogel, Creditor Activism in Sovereign Debt: "Vulture" Tactics or Market Backbone? at 3-4 (Harvard Business School, Case No. 706-057, 2007).
28. Noel Maurer & Aldo Musacchio, The Barber of Buenos Aires: Argentina's Debt Renegotiation at 8 (Harvard Business School, Case No. 706-034, 2006).
29. For the details of the Peruvian case
30. see Ugo Panizza, Federico Sturzenegger & Jeromin Zettelmeyer, The Economics and Law of Sovereign Debt and Default, 47 J. ECON. LIT. 1, 7 (2009). For a discussion of the behavior of mutual funds in economic crises.
31. see Graciela Kaminsky, Richard Lyons & Sergio Schmukler, Economic Fragility, Liquidity, and Risk: The Behavior of Mutual Funds during Crises, Jan. 29, 2000, Mimeo, available at http://citeseerx.ist.psu.edu/viewdoc/summary?doi= 10.1.1.12.8916 (last visited June 15, 2010), and INT'L MONETARY FUND, GLOBAL FINANCIAL STABILITY REPORT: MARKET DEVELOPMENTS AND ISSUES (2004), particularly chapter four.
32. Africa Political and Economic Strategic Center, What is a Vulture Fund and Why Africa, http://www.afripol.org/VultureFunds.htm (last visited June 15, 2010).
33. Anne Krueger, First Deputy Managing Director, International Monetary Fund, New Approaches to Sovereign Debt Restructuring: An Update on Our Thinking, Address Before the Int'l Monetary Fund Conference on Sovereign Debt Workouts: Hopes and Hazards, Institute for International Economics (Apr. 1, 2002), available at http://imf.org/external/np/speeches/2002/040102.htm (last visited June 15, 2010).
34. Hal S. Scott, Sovereign Debt Defaults: Cry for the United States, Not Argentina 42-43 (Wash. Legal Found., Critical Legal Issues Working Paper Series No. 140, 2006).
35. H.R. 2493, 111th Cong. §§ 4, 6 (2009).
36. See generally Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J.L. & ECON. 1 (1969).
37. We coded up the yields on sovereign debt issues for all Latin American nations with traded debt from the Investor's Monthly Manual and the Economist from 1904 through 1929. We then calculated the spreads over U.S. Treasury bonds, adjusting (when possible) for the term structure. We also coded up data on the emerging-market bond spreads (EMBI) for Latin American borrowers from 1994 through 2007. For comparability to Dollar Diplomacy, we limited our sample to Latin American countries. Not all Latin American countries have EMBI data before 1994. Hence, we benchmarked against the Peruvian case of 1995, although the vulture regime arguably started with the 1992 Weltover decision.
38. See Faisal Ahmed, Laura Alfaro & Noel Maurer, Gunboats and Vultures: On the "Market Reaction" to the Enforcement of Sovereign Debt, Mimeo, 2009. We collected data from "Jury Verdicts, Settlements & Judgment" directory in Lexis-Nexis, the Westlaw database, newspapers, and law journals, and identified the filing and settlement or attachment dates for all successful lawsuits over defaulted sovereign debt. We thank Lee Buchheit and Jay Newman for generous help in identifying successful lawsuits and attachments.
39. The empirical analysis in Ahmed, Alfaro & Maurer does not comment directly on the welfare implications associated with the enforcement of sovereign debt.
40. Press Release, World Bank, World Bank to Increase Support to Curb Vulture Fund Actions, Press Release No:2007/415/PREM (May 31, 2007), available at http://go.worldbank.org/J2FE06IQI0.
41. The State of the International Financial System: Hearing Before the H. Comm. on Financial Services, 110th Cong. 39-40 (2007).