Chapter of Book
The contingent liabilities of a sovereign, such as guarantees of the debts of third parties, can normally be kept off the balance sheet of the sovereign guarantor. That is their charm. As the debt to GDP ratios of many developed countries approach red-zone levels, contingent liabilities are increasingly being favored over direct, on-the-balance-sheet, borrowings.
But what happens if a country carrying large contingent liabilities needs to restructure its debt? The borrower dare not leave its contingent claims out of the restructuring. To do so would risk undermining the financial predicates of the sovereign’s economic recovery program should the beneficiaries of the guarantees demand payment in full after the restructuring closes.
Attempting to shoehorn sovereign contingent liabilities into a debt restructuring, however, is a particularly challenging task. There are few precedents for how to do so, and no good precedents. The explosion in the size of contingent sovereign obligations since the financial crisis began in 2008 inevitably means that these issues will need to be confronted sooner or later, probably sooner.
Lee C. Buchheit & G. Mitu Gulati, Sovereign Contingent Liabilities, in Sovereign Debt Management (Rosa Lastra & Lee Bucheit, eds., 2014)
Library of Congress Subject Headings
Public debts, Debt relief, Debtor and creditor, Contingent liabilities (Accounting)
Available at: https://scholarship.law.duke.edu/faculty_scholarship/3112
This is an author pre-print of the chapter under a different article title.