Why is sovereign debt rarely defaulted unilaterally in recent years? (III)

Law and sanctions hypothesis. The opinion of law hypothesis is: Because the debtors' international debt is usually valued in foreign currency and is governed by other laws. Therefore the debtor is subject to the law of the country where the debt is issued, and the debtor may not be able to protect himself from the aggressive litigation conducted by the creditor in the issuing country. However, the facts do not support this hypothesis as well. Within three years of Argentina's default in 2001, about 140 lawsuits were filed against Argentina in several jurisdictions. Although creditors won most of the lawsuits, it was futile to claim for compensation of Argentina's foreign assets in the next decade. Some studies have found that litigation has no significant impact on bond yields, relying on legal sanctions alone seems not feasible to establish a credible enforcement mechanism.

Some other literature regard direct punishment as the enforcement mechanism of the debtors' performance. The punishment can take two forms: Detaining the debtors' assets abroad; Impose a trade embargo. Other studies have emphasized the importance of so-called super sanctions, in which external financial control, military coercion and the threat of direct occupation are the main forms. The common points of these sanctions are that they attempt to raise the cost of default to a level through some certain form of direct action by creditor,which is sufficient for debtors to consider it fits their own interests to repay foreign debts. It is same as reputation hypothesis, sanctions hypothesis is still confined to the category of cost-benefit analysis of neoclassicism. However, the practical evidence does not support the sanctions hypothesis. In the 1980s, when Argentina and Peru unilaterally defaulted on foreign creditors for a short time, the U.S. government never imposed or threatened to impose sanctions on these two countries. In the case of Argentina's default in 2001, the United States never imposed any sanctions on it also.