Article | Law and Contemporary Problems | fall 2010

Lawsuits and Empire: On the Enforcement of Sovereign Debt in Latin America

by Faisal Z. Ahmed, Laura Alfaro and Noel Maurer


The re-occurring phenomenon of sovereign default has prompted an enormous theoretical and empirical literature. Most of this research has focused on why countries ever chose to pay their debts (or why private creditors ever expected repayment). The problem originates from the fact that repayment incentives for sovereign debts are minimal since little can be used as collateral and the ability of a court to force a sovereign entity to comply has been extremely limited, especially given the lack of a supranational legal authority capable of enforcing contracts across borders. In this paper we contrast the market reaction to attempts to enforce sovereign debt contracts via U.S. "dollar diplomacy" in Latin America in the pre-World War II period and by legal action in the 1990s and early 2000s. We argue that dollar diplomacy created an effective and credible enforcement regime while legal actions by creditors, conversely, do not appear to have done so.

Keywords: Lawsuits and Litigation; Insolvency and Bankruptcy; Sovereign Finance; Borrowing and Debt; Debt Securities; Motivation and Incentives; Markets; Equity; Banking Industry; Latin America;


Ahmed, Faisal Z., Laura Alfaro, and Noel Maurer. "Lawsuits and Empire: On the Enforcement of Sovereign Debt in Latin America." Law and Contemporary Problems 73, no. 4 (fall 2010).