Sovereign Debt as a Commodity: A Contract Law Perspective

The ad hoc institutional configurations that facilitated the resolution of sovereign insolvency for over thirty years are fragmenting. Recent court decisions interpreting the pari passu clause in sovereign debt contracts reveal the dangers of pressuring common law courts to enforce contracts and mediate structural flaws in the market. The courts have dismantled sovereign protections in international law and common law checks and balances. They have gone beyond precedent to innovate remedies justified by interpreting a clause whose meaning and function were not clearly understood by the contracting parties themselves. They have also opened up a possible inter-creditor obligation that circumvents sovereign immunity legislation. This obligation imperils third party property protections and exposes the US clearing system to creditor remedies. The article argues that the current challenges require the courts to play an inadvertent, expansive regulatory role. To fulfil this role they must ensure that creditors enjoy their property (debt) without constraints and assume away the resulting externalities. In effect, enforcement sustains the legal fiction that debt is a commodity. Legal recognition of this fiction obviates negotiated debt workouts, which are premised on suspending this commodity form. The article dispels the idea that the possibility of enforcement in sovereign debt markets brings us closer to achieving the legal regime theorized as the neutral backdrop of competitive markets