aus einer empirischen Untersuchung von Bondkontrakten seit 1960 bis 2011

Pari Passu

. This provision bars the sovereign from passing legislation to lower the legal

rank of a creditor vis-à-vis some future creditor it is seeking to borrow from. There is

disagreement over the meaning of the

Pari Passu clause and litigation over the topic is ongoing

as of this writing.

4 One view holds that the clause applies only to a narrow set of situations where

creditors have been historically subordinated—such as when pre-existing local laws permitted an

unsecured creditor to obtain priority over other unsecured creditors unilaterally (particularly

when domestic creditors were favored over foreign creditors).

5 A competing view holds that the

Pari Passu

clause more broadly prohibits any legislative grant of earmarks to future creditors

(Olivares-Caminal 2011; Cohen 2011; and Gulati and Scott 2011, discuss competing views).

There are three versions of the

Pari Passu clause in the bonds in our database. First, the

Ranking Equally

version provides that the bonds will “rank equally” with all other unsecured

debt of the sovereign. This version protects creditors from involuntary subordination by laws that

the sovereign might pass. Second, the

Priority of Payment version provides that the bonds rank

equally “in priority of payment.” As noted, there is litigation ongoing over whether the addition

of these words is the equivalent of a contractual promise that the sovereign, in the event that it is

not able to fully comply with its debt obligations, will pay all of its creditors with

Pari Passu

clauses on a pro rata basis. Third, the

Pro Rata Payment version of the clause explicitly provides

that the bonds will both rank equally and will be payable on a pro rata basis (Financial Markets

Law Committee Report 2005, provides background).

http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3102&context=faculty_scholarship

Political Risk and Sovereign Debt Contracts

Stephen J. Choi, Mitu Gulati, and Eric A. Posner

1

November 21, 2011

Abstract

. Default on sovereign debt is a form of political risk. Issuers and creditors

have responded to this risk both by strengthening the terms in sovereign debt contracts

that enable creditors to enforce their debts judicially and by creating terms that enable

sovereigns to restructure their debts. These apparently contradictory approaches reflect

attempts to solve an incomplete contracting problem in which debtors need to be forced

to repay debts in good states of the world; debtors need to be granted partial relief from

debt payments in bad states; debtors may attempt to exploit divisions among creditors in

order to opportunistically reduce their debt burden; and debtors and creditors may attempt

to externalize costs on the taxpayers of other countries. We support this argument with an

empirical overview of the development of sovereign bond terms from 1960 to the present.