Financial Crises and International Investment Agreements: The Case of Sovereign Debt Restructuring

The global community still lacks a regime for sovereign debt restructuring. There is increasing concern that international investment agreements may become a ‘court’ for sovereign workouts. Are international investment agreements the appropriate place for the global community to resolve sovereign debt restructuring in the event of a financial crisis? It has been often overlooked that the definition of a covered investment within international trade and investment agreements often includes sovereign debt. In lieu of this, this article analyses the extent to which investment provisions in various treaties may hinder the ability of nations and private creditors to comprehensively negotiate sovereign debt restructurings when a debtor nation has defaulted or is close to default on its government debt. It is found that the treatment of sovereign debt varies considerably in terms of strength and applicability across the spectrum of now thousands of trade and investment treaties in the world economy. It is also found that most treaties may restrict the ability to restructure debt in the wake of a financial crisis. These findings could undermine the ability of nations to recover from financial crises and could thus broaden the impact of such crises.

Exclude sovereign debt from IIAs. The exclusion of sovereign debt from ‘covered’ investments under future treaties would relegate sovereign debt arbitration to national courts and to international financial bodies. Many IIAs already exclude sovereign debt, such as NAFTA and others.
Clarify that the essential security exceptions cover financial crises and that sovereign debt restructuring taken by host nations is ‘self-judging’ and of ‘necessity’. Tribunals have recently acknowledged that nations acts to prevent and mitigate crises are acts of ‘essential security’, but need to make such decisions on their own (hence, ‘self-judging’).
Create safeguards for Sovereign Debt Restructuring (SDR). A handful of recent IIAs have included explicit provisions regarding SDR. While this is a positive development, such provisions may not prove to be fully adequate.
State-to-state dispute resolution for SDR and crisis related instances may be more prudent given that governments need to weigh a host of issues in such circumstances. States attempt to examine the economy wide or public welfare effects of crises whereas individual firms rationally look out for their own bottom line. Investor-state tips the cost-benefit upside down, giving power to the ‘losers’ even when the gains to the winners of an orderly restructuring may far outweigh the costs to the losers.