CLS Blue Sky Blog

Sovereign debt markets have been on a rough ride recently. On the heels of Argentina’s 2014 default, a turbulent debt situation in Greece has threatened the integrity of the Eurozone. An ongoing debt crisis in Ukraine has stoked economic anxiety and raised geopolitical blood pressures. Meanwhile, Puerto Rico’s debt crisis poses unique challenges as a quasi-sovereign territory without access to bankruptcy.

These episodes highlight the broad and far-reaching effects of sovereign debt on the global financial system. While sovereignty limits the enforceability of their debt contracts, sovereigns lack a formal bankruptcy system. Nor is there a global sovereign debt regulator. As a result, sovereign debt exists in an awkward legal void, simultaneously unenforceable yet undischargeable.[1] Despite their freedom from international financial regulation, sovereign issuers are also uniquely constrained. Governments—unlike corporations, which can issue equity stock—rely on fixed income debt to externally finance their investments and operations. While investors can…

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