Law Commons^™

The Coroner’S Inquest: Ecuador’S Default And Sovereign Bond Documentation, Mitu Gulati, Lee C. Buchheit

Faculty Scholarship

Conventional wisdom is that sovereigns will rarely, if ever, default on their external debts in circumstances where it is clear that they have the capacity to pay. The first line of defense against the errant sovereign is its concern about reputation. It may have to tap the external debt markets again in the future; and there is the fear that the markets will extract revenge. But reputational constraints do not always work because some governments heavily discount future costs in favor of current benefits. When reputational constraints fail, however, a second line of defense is supposed to come into play. …