Political Economy Foundations of International Sovereign Bankruptcy Law

Abstract

Law has historically failed to address sovereign insolvency in a systematic way despite its harmful socioeconomic effects. A longstanding controversy exists on whether international law should tackle sovereign insolvency through a statutory regime or whether contractual mechanisms are sufficient to deal with this problem. Yet in this debate, legal scholarship commonly conceives the various legal infrastructures that respond to sovereign insolvency as disconnected from each other. This prevents a systematic understanding of their systemic interaction, as well as the distributive dynamics produced by it.
This thesis joins the broader discussion on the role of law in sovereign insolvency by constructing the political economy foundations of an international law on sovereign bankruptcy. It does so on three main original grounds. First, the solvency of sovereign States is critically determined by their monetary power, which makes sovereign bankruptcy rules a critical matter of global justice. Second, the main legal infrastructures that respond to sovereign insolvency – built upon core domestic jurisdictions on sovereign debt and the International Monetary Fund (IMF) – function as part of a unified system of governance that imposes rigidity in the law to the global periphery while being unable to solve background insolvency problems. Third, the distributive effect of this legal governance system should be conceived as a common pool problem where no collective procedure exists to allocate risk among key stakeholders. In the absence of bankruptcy rules, the most powerful stakeholders are able to shift losses to other stakeholders in the pool.
As this thesis contends, this governance system rewards short-termism in the global periphery while reallocating risk to the population of the debtor State and long-term investments. Reversing this logic is crucial to address the main challenges of the present: tackling inequality, achieving the UN’s Sustainable Development Goals (SDGs), and mitigating climate change. To achieve these objectives, an international collective procedure is needed that redistributes sovereign insolvency costs, risk, and losses based on justifiable legal hierarchies.