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Sovereign Defaults in Court: The Rise of Creditor Litigation 1976-2010
Creditor coordination problems have motivated a large body of theoretical work in the sovereign debt literature. This paper is the fi rst empirical analysis on the causes of creditor litigation, a prominent type of free-riding behavior in the context of sovereign defaults and restructurings. How frequent are legal disputes between creditors and sovereigns? What determines whether creditors decide to sue a government in court? And why do some debt crises see a run to the courthouse while many others do not? To answer these questions we compile a comprehensive new dataset of creditor lawsuits led against debtor governments in US and UK courts between 1976 and 2010. The data show a drastic rise of creditor litigation numbers since the 1970s, with more and more lawsuits led by 'vulture funds'. We also find a large variation of cases across countries and crisis events. Lawsuits mostly occur following tough defaults, meaning those cases with payment moratoria and high haircuts. Sovereigns that impose large losses on their creditors are much more likely to be sued in foreign courts. These findings are in line with theoretical predictions and shed new light on the ongoing debate on reforming the international financial architecture.