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1. Pari Passu Lost and Found: The Origins of Sovereign Bankruptcy 1798-1873

Author:
Marc Flandreau
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Verdicts returned by modern courts of justice in the context of sovereign debt lawsuits have upheld a ratable (proportional) interpretation of so-called “pari passu” clauses in debt contracts which, literally, promise creditors they will be dealt with equitably. Such verdicts have given individual creditors the right to interfere with payments to others, in situation where the sovereign had failed to make proportional payments. Contract originalists argue that this interpretation of pari passu clauses has no historical foundation. Historically, they claim, pari passu clauses never granted individual creditors a unilateral right to block payments to other bondholders assenting to a government debt restructuring proposal. This article shows this claim is incorrect. Drawing on novel archival research, it argues that pari passu clauses find one potent historical origin in the operation of a now forgotten sovereign bankruptcy tribunal, the London stock exchange. Under the law of the stock exchange, departure from ratable payments did create a unilateral right for individual creditors to interfere with sovereign debt discharges. In fact, ratable distributions provided the touchstone for the stock exchange sanctioned sovereign debt discharge system. What is more, sophisticated contract drafters availed themselves of the logic. The result was a weaponization of pari passu clauses, and their inscription into sovereign debt covenants in the 19th century. The article concludes that the modern debate on the role of clauses in sovereign debt contracts cannot be held without thorough reconsideration of the history of sovereign bankruptcy.
Topic:
Finance, Banking, Stock Markets, and Sovereign Debt
Political Geography:
United Kingdom, Europe, and England

2. "Fool Me Once . . . " Did U.S. Investors Play it Safer in the European Debt Crisis?

Author:
Carol C. Bertaut, Fang Cai, and Nyssa Kim
Publication Date:
08-2013
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper examines U.S. investors' portfolio investment patterns since the global financial crisis, particularly since the European debt crisis that began in late 2009. The global financial crisis during 2007-2009 was accompanied by an increase in U.S. investors' home bias. U.S. investors experienced significant valuation losses and pulled back notably from their foreign investment, especially from foreign debt. In contrast, while they have also incurred sizable losses on cross-border investment during the European debt crisis, U.S. investors so far have not shown any increase in home bias, and they have not even pulled back from their long-term investments in Europe. Holdings data show that U.S. investors have continued to invest in European securities, particularly in government debt, but have made little new investment in the financial sector. This continued interest in European securities could owe to the fact that most of U.S. holdings of European debt have been concentrated in dollar-denominated debt issued by core euro area countries and the United Kingdom, which are deemed relatively safe. Changes in the composition of holdings over the past couple years suggest that U.S. investors have behaved in a way that reflects their diversity and differing objectives: while investors reached for higher yields in government debt, there also appears to be some shift toward safer investment in the financial sector.
Topic:
Debt, Financial Crisis, Investment, Securities, and Stock Markets
Political Geography:
Europe, North America, and United States of America