The above figure, from a fascinating new IMF Working Paper* on sovereign debt restructuring, shows the breakdown of recent EU country public bond issuance by the governing law of the bond contract. Economics has various concepts of the usefulness of tying one’s hands to gain credibility, such as for example by committing to a single currency following a history of high inflation and devaluations. So perhaps the most interesting thing about this chart is that it shows despite the presumed sanctity of sovereign bonds above all other forms of debt, European countries have generally not chained themselves to the (external) mast in terms of governing law. Most countries issue government debt under their own law, meaning that changing the terms of the debt could be accomplished legislatively at any time. This is in contrast to commercial bonds: note that one of Ireland’s rationale’s for servicing unsecured debt in insolvent banks was that the bonds were issued under English law.
Now, as the chart shows, it’s not always true that European Union countries issue public bonds governed by domestic law. If there’s a rough trend in the data, it’s for small and mostly non-Eurozone countries to issue under English law, perhaps in search of the credibility or good signal of such a framework. But for the rest of them, its sovereign debt and we’re not even supposed to discuss default and they’ve pinky-promised that they’ll pay it back. But legally, they could rewrite the terms in the morning.
*Sovereign Debt Restructurings 1950 – 2010: Literature Survey, Data, and Stylized Facts. Das, Papaioannou, & Trebesch, IMF WP 12/203, 2012.