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Important proposal by some of the leading sovereign debt experts. The idea is for the @WorldBank & other DBs to set up "credit facilities" that would cover Corona-related expenses. Funding would come from private contributions to the credit facilities. A short review 1/x
The Corona Credit Facility (CCF) would have preferred creditor status through the @WorldBank - i.e. it would be repaid ahead of private investors. On that basis, the CCF could make concessional loans to recipient countries without a huge credit risk for the @WorldBank. 2/x
The million dollar question is why would private investors agree to re-invest interest payments in the CCF? The authors argue that recipient countries should try to modify outstanding bonds so that payments are re-directed to the CCF (avoiding a payment default). 3/x
For this to fly, we need sticks (and maybe carrots). The proposal recommends for G-20 to confirm that the pandemic has created a state of "necessity" under int. law, which would arguably help countries to shield themselves from litigation.… 4/x
The problem I see with the "necessity" argument is that many courts have not accepted it in the past. It may play a role in @icsid arbitration cases, but when states tried to justify defaults with economic necessity, they usually failed --> see, e.g.,… 5/x
To dig a bit deeper, in the U.S., the necessity defense was never really considered in sovereign debt litigation. The reason was that bond issuance activities are considered private (contractual) activities for which international law does not apply.… 6/x
This is not to say that necessity could not be revived as part of the #Covid_19 response - the crisis is so deep, affects almost all countries, and no one's to blame. Indeed, with G-20 support, courts may be more comfortable with entertaining the necessity defense. 7/x
Another important aspect that the authors mention is that private investors are acutely aware of sovereign funding problems. So leaving aside the outlined legal uncertainty, there may indeed be good commercial reasons to fund the CCF with the hope of averting chaotic default. 8/x
This is the time for bold and unconventional solutions and to that end the proposal by @pogourinchas, @upanizza et al. goes a long way in addressing what is likely to become the biggest economic/financial threat in the next few months: a wave of sovereign defaults in EMs. 9/x
Would be very interested in your takes @MattHGoldmann, @AGelpern, @mweidemaier, @astridiversen, @TimRSamples
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