Valoración de la transferencia de acuerdo con el tiempo

Understanding how legal norms impact the behaviour of sovereigns and their creditors requires three elements: the set of preferences they seek to maximise, their mode of behaviour, and a model of the influence legal norms on this behaviour.

1.3.1.1 The preferences of sovereigns and their creditors

The traditional understanding of market actor’s behaviour has been fairly narrow. Market actors, according to the classic economic model of human behaviour espoused by Posner and its followers, are rational self-maximisers. They act on the basis of a cost-benefit analysis in order to increase their own utility, expressed in dollars or dollar equivalents110. Applied to the sovereign debt market this would mean that States, seek to borrow at the best possible rate, and repay as little as they can while maintaining said rate. Creditors, on the

107 _{ibid 11.}

108 _{It should also be noted that the central policy tenets underpinning the two models are akin to what Lienau}

refers to as the ‘laws of the market’, or ‘law in hiding’ within the market. They are economic ideas which shape the legal norms on sovereign debt. See Odette Lienau, ‘Law in Hiding: Market Principles in the Global Legal Order’ (Social Science Research Network 2018) SSRN Scholarly Paper ID 3096060 <https://papers.ssrn.com/abstract=3096060> accessed 29 April 2020.

109_{French Company of Venezuelan Railroads Case (France v Venezuela) (1905) X Rep Int Arbitr Awards 285}

(Arbitral Tribunal).

110 _{See e.g. Richard A Posner, ‘Utilitarianism, Economics, and Legal Theory’ (1979) 8 The Journal of Legal}

Studies 103, 119.For an overview of rational choice theory as a behavioural heuristic in the legal scholarship see in general Richard A Posner, Economic Analysis of Law (2d ed, Little, Brown 1977); Andrew T Guzman,

How international law Works: A Rational Choice Theory (Oxford University Press 2008); Joel P Trachtman,

The Economic Structure of international law (Harvard University Press 2009). Posner, ‘Utilitarianism, Economics, and Legal Theory’.

Introduction 40 other hand, seek to maximise their revenues, usually by obtaining the best possible interest payment111.

There are several issues with applying this narrow definition of human behaviour to the sovereign debt market. First, its reading of utility as applied to States appears too limited. While it is true that, in general, sovereigns seek to borrow at the best possible price112, their preferences are not purely monetarily motivated. Rather, it appears that, in practice, sovereigns within the sovereign debt market pursue two sets of sometimes contradictory interests: the pursuit of financial gain, and the maximisation of their ‘jurisdiction’ or ‘sovereignty’113_{. Sovereigns, thus, seek to strike a balance between the maximisation of}

revenues that good borrowing conditions allow, and the loss of jurisdiction over their debts that better borrowing conditions generally entails114.

A potential difficulty with assessing States’ preferences arises from the fact that sovereigns, lack agency, and therefore need to act through the intermediary of individuals115. Public choice theory116 and liberal theories readings of sovereign’s preferences assume that the individuals acting on behalf of governments seek to further their own preferences rather than those of the public they theoretically represent117. Thus, following those theories one cannot

111 _{For such an exercise see notably Vinod K Aggarwal, Debt Games: Strategic Interaction in International}

Debt Rescheduling (Cambridge University Press 1996); Kenneth M Kletzer and Brian D Wright, ‘Sovereign

Debt as Intertemporal Barter’ (2000) 90 American Economic Review 621.

112 _{See e.g. Michael Tomz, Reputation and International Cooperation: Sovereign Debt Across Three Centuries}

(Princeton University Press 2007) 5–8.

113 _{For an analysis of States preferences see Trachtman (n 68) 10–11. To put it simply, States within the}

sovereign debt market are not purely motivated by the maximisation of their wealth, but seem to also seek to minimise their own loss of jurisdiction. International norms thus arise within the sovereign debt market when the monetary gains States can obtain outweigh the potential loss of jurisdiction over their own debt.

114 _{Notably borrowing under foreign law, or in a foreign currency, a clear loss of jurisdiction by a sovereign}

usually correlates with better borrowing conditions, as seen in chapter 3. See Stephen J Choi, Mitu Gulati and Eric A Posner, ‘The Evolution of Contractual Terms in Sovereign Bonds’ (2012) 4 Journal of Legal Analysis 131; Marc Flandreau and Nathan Sussman, ‘Old Sins: Exchange Rate Clauses and European Foreign Lending in the 19th Century’ (Social Science Research Network 2004) SSRN Scholarly Paper ID 511303 <https://papers.ssrn.com/abstract=511303> accessed 3 August 2018; Barry Eichengreen, Ricardo Haussman and Ugo Panizza, ‘Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences’, Capital Controls and Capital Flows in Emerging Economies: Policies, Practices and Consequences (National Bureau of Economic Research 2007) <http://www.nber.org/chapters/c0150.pdf>.

115 _{David Copp, ‘On the Agency of Certain Collective Entities: An Argument from “Normative Autonomy”’}

(2006) 30 Midwest Studies In Philosophy 194, 195; Alexander Thompson, ‘Applying Rational Choice Theory to international law: The Promise and Pitfalls’ (2002) 31 The Journal of Legal Studies S285, 291.

116 _{For an overview on public choice theory see Dennis C Mueller, ‘Public Choice: A Survey’ (1976) 14 Journal}

of Economic Literature 395.

117 _{Trachtman (n 68) 19. See notably Andrew Moravcsik, ‘Taking Preferences Seriously: A Liberal Theory of}

International Politics’ (1997) 51 International Organization 513, 540–544; Anne-Marie Slaughter and Jose E Alvarez, ‘A Liberal Theory of international law’ (2000) 94 Proceedings of the Annual Meeting (American Society of international law) 240, 516–518. See also Richard E Wagner, ‘Debt Default and the Limits of the Contractual Imagination: Pareto and Mosca Meet Buchanan’ [2018] Debt Default and Democracy <http://www.elgaronline.com/view/edcoll/9781788117920/9781788117920.00012.xml> accessed 11 May 2020; Jon Elster, ‘Introduction’, Rational Choice (New-York University Press 1986); Robert Powell, ‘Absolute

Introduction 41 model sovereigns as having preferences of their own. However, following Trachtmann118, quoting March and Olsen119, this thesis opts for a generally institutionalist vision of the sovereign. It considers that, as States are institutionally designed to achieve certain set goals, they benefit from a sufficient internal coherence to allow construing them, as having determinable preferences120.

That is not to say that this thesis considers the liberal critique121 _{of institutionalism to be}

unfounded. An actual empirical determination of how sovereigns behave would probably require the granularity that public choice theories or liberal theories of sovereign behaviour provide122_{. However, the paradigm-mapping exercise pursued here does not require a perfect}

empirical representation of sovereign behaviour, but rather benefits from a clearer heuristic of how sovereigns behave123. Such an understanding is better achieved by opting for an institutional lens rather than a liberal or public-choice theory approach.

Nevertheless, there are instances where the preferences of certain government organs or their agents are easily identifiable and can thus fit with the broader model of State behaviour used here. In such cases, this thesis takes them into account so as to produce as reliable a model of sovereign behaviour as possible124.

and Relative Gains in International Relations Theory’ (1991) 85 The American Political Science Review 1303, 1305.

118 _{Trachtman (n 98) 18.}

119 _{See James G March and Johan P Olsen, ‘The New Institutionalism: Organizational Factors in Political Life’}

(1984) 78 The American Political Science Review 734.

120 _{Trachtman (n 68) 18.}

121 _{It also appears that a realist approach would not particularly benefit this thesis. The worldview pushed by}

the realist methodology, heavily focused on security concerns and difficult cooperation seems at odds with the subject matter of this thesis. On this see: See e.g. Duncan Snidal, ‘Relative Gains and the Pattern of International Cooperation’ (1991) 85 The American Political Science Review 701, 702. Citing notably Kenneth Neal Waltz, Theory of International Politics (McGraw Hill 1979) 105. See also Hans J Morgenthau, Politics

Among Nations: The Struggle for Power and Peace (Alfred A Knopf 1973); John J Mearsheimer, ‘The False

Promise of International Institutions’ (1994) 19 International Security 5.

122 _{Trachtman (n 98) 18.}

123 _{For such an approach see e.g. Aggarwal (n 111).}

124 _{Similarly, this thesis has no problem espousing credible commitment theories which originally required}

deconstructing the State into its key components, since again, this enables a clear understanding of sovereigns’ preferences. On this see: Douglass C North, ‘Institutions and Credible Commitment’ (1993) 149 Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift für die gesamte Staatswissenschaft 11; Douglass North and Barry Weingast, ‘Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seveteenth Century England’ (1989) 49 Journal of Economic History 803.

Introduction 42 It has also been argued that using set and endogenous preferences, as done here, is unrealistic, as actors’ preferences change through time125. This argument, while founded in other areas of foreign relations, does not seem particularly relevant to the present study.

For sovereigns it seems that maximising jurisdiction and minimising costs remains a relatively constant set of interests. While the relationship between both sets of preferences may change over time, the nature of the preference sought should remain fairly stable126_.

For creditors one can expect that maximising profits remain a stable goal through time. One can reasonably assume that when they acquire debt titles or during a restructuring, private entities are mostly interested in the obtention of an interest rate payment proportional to the risk they take127. As noted by Lienau, this does not mean creditor’s preferences are systematically homogeneous128. Creditor’s specific choices may vary while the nature of their preferences remains the same. For example, during restructurings, some creditors might prefer cooperation with sovereigns, while other may desire full payments. As will be shown in chapter 2 and 3, however in those cases all sets of creditors still seek to further their profits, but given their structural differences obtain profits in different fashion.

1.3.1.2 The behaviour of sovereigns and their creditors

Having established, for the purpose of this thesis the set of preferences sovereigns and their creditors seek to further when accessing capital markets, this thesis now needs to turn to the

way via which sovereigns and their creditors seek to further said set of interests.

Traditional law and economics reads market actors behaviour as furthering their interest through rational means, as argued in classical economics129. A more modern framing of this

125 _{See notably George Stigler and Gary Becker, ‘De Gustibus Non Est Disputandum’ (1977) 67 American}

Economic Review 76. Cited in Duncan Snidal, ‘Rational Choice and International Relations.’, Handbook of International Relations, Walter Carlnaes, Thomas Risse, Beth Simons (eds) (2nd edn, Sage Publication 2012) 100.

126 _{Tomz (n 112) 11–13.}

127 _{In rare cases, profit is not the main driver behind the extension of credit to sovereigns. For example, it could}

be argued that the purchase of war bonds, as those emitted by heavily indebted sovereigns during the World Wars is more the result of patriotism and a desire to participate in the war effort than an economic decision. However, such cases are rare. Thus, on average, one can argue that lending to sovereign is done for profit purposes. On war bonds see e.g. James J Kimble, Mobilizing the Home Front: War Bonds and Domestic

Propaganda (Texas A&M University Press 2006); James T Sparrow, ‘“Buying Our Boys Back”: The Mass

Foundations of Fiscal Citizenship in World War II’ (2008) 20 Journal of Policy History 263.

128 _{Lienau, Rethinking Sovereign Debt (n 48) 28–29.}

129 _{For an overview of rational choice theory as a behavioural heuristic in the legal scholarship see in general}

Richard A Posner, Economic Analysis of Law (2d ed, Little, Brown 1977); Andrew T Guzman, How

international law Works: A Rational Choice Theory (Oxford University Press 2008); Joel P Trachtman, The

Introduction 43 theory concedes that individual action may vary, but argues that the aggregate of market actors’ behaviour matches the result produced by rational choices and that, therefore, one can construe individual behaviour as if it were rational130.

There are several issues with this conception of behaviour, as applied to the sovereign debt market. First, as opposed to classical conceptions of rational choice theory, market actors’ opportunities are, in real life, limited by external circumstances131_{. Transaction costs,}

information asymmetry, and the opportunity cost of time prevent sovereigns and their creditors from behaving optimally. They bound their rationality132_.

Moreover, as behavioural economists have shown, individual action is marred by unconscious biases which prevent them from reaching optimal outcomes, even in the absence of the aforementioned external constraints133. Those same inefficiencies apply, to actions within the sovereign debt market. Risk aversion might prevent law firms from altering the drafting of bond clauses, even when they lead to sub-optimal results134. Endowment effects or sunk-cost fallacies may prevent bondholders from liquidating their positions when restructurings seem unavoidable135. Similarly, some research has found that economic actors are biased towards solutions which appear fair or equitable136 but diverge from the maximisation of their preferences.

130 _{See Milton Friedman and Marilyn Friedman, Essays in Positive Economics (University of Chicago Press}

1953) 21; Klaus Mathis and Deborah Shannon, ‘Homo Economicus’ in Klaus Mathis and Deborah Shannon (eds), Efficiency Instead of Justice? Searching for the Philosophical Foundations of the Economic Analysis of Law (Springer Netherlands 2009) <https://doi.org/10.1007/978-1-4020-9798-0_2> accessed 13 February 2020; Klaus Mathis and Deborah Shannon, ‘Economic Analysis of Law’ in Klaus Mathis and Deborah Shannon (eds),

Efficiency Instead of Justice? Searching for the Philosophical Foundations of the Economic Analysis of Law

(Springer Netherlands 2009) <https://doi.org/10.1007/978-1-4020-9798-0_4> accessed 13 February 2020.

131 _{Trachtman (n 68) 26–71; The Limits of international law (n 70) 11.}

132 _{The term bounded rationality was originally coined in Herbert A Simon, Models of Man; Social and}

Rational (Wiley 1957). See also Christine Jolls, Cass R Sunstein and Richard Thaler, ‘A Behavioral Approach to Law and Economics’ (1998) 50 Stanford Law Review 1471.

133 _{See e.g. Richard H Thaler and Cass R Sunstein, Nudge: Improving Decisions About Health, Wealth and}

Happiness (01 edition, Penguin 2009); Misbehaving

<https://books.google.com/books/about/Misbehaving.html?hl=fr&id=9EJzAwAAQBAJ> accessed 9 December 2019; Jolls, Sunstein and Thaler (n 132); Richard A Posner, ‘Rational Choice, Behavioral Economics, and the Law’ (1998) 50 Stanford Law Review 1551.

134 _{On this see e.g. Gulati and Scott (n 75); Weidemaier, Scott and Gulati (n 75).}

135 _{See infra, and Alexandre Belle, ‘Mamatas and Others v. Greece: How the European Court of Human Rights}

Could Change Sovereign Debt Restructuration’, New Voices and New Perspectives in International Economic Law. J. Haskell, A. Rasulov (eds) (Springer International Publishing 2020).

136 _{Cass R Sunstein, ‘Human Behavior and the Law of Work’ (Social Science Research Network 2001) SSRN}

Scholarly Paper ID 267447 217 <https://papers.ssrn.com/abstract=267447> accessed 13 May 2020; Jolls, Sunstein and Thaler (n 132) 1492; Ernst Fehr, Georg Kirchsteiger and Arno Riedl, ‘Does Fairness Prevent Market Clearing? An Experimental Investigation’ (1993) 108 The Quarterly Journal of Economics 437. The idea that human behaviour is directed by ideals beyond self-interest is, of course, not the invention of behavioural economists. Smith himself explored similar concepts in: Adam Smith, The Theory of Moral

Introduction 44 If one particularly considers the application of rational choice theory to sovereigns, a rich literature has argued that the collective nature of States prevents the application of rational choice theory to model their behaviour, as said theory is better suited to individuals137.Here again it is argued that, because sovereigns lack agency, one should deconstruct the black box that is the modern State and focus on the behaviour of individuals acting as its agents. Understood as such, the actions of sovereigns are less rational, more bounded, than those of the individuals who compose them138.This thesis, to a certain extent, takes into account these preferences of government organs. Notably, in its chapter 4, it argues that short-term electoral interests may prevent sovereigns from behaving optimally by delaying necessary restructurings.

However, following Sunstein139, this thesis does not embrace a complete rejection of rational choice theory in favour of fully empirical and detailed models of human behaviour, neither does it treat actors as fully ‘rational’ in the traditional sense of the term. Rather, it understands that behaviour, while generally rational, is limited by external constraints and takes into account market actor biases when they are directly relevant.

1.3.1.3 The impact of legal norms on the behaviour of sovereigns and their creditors

If one assumes that sovereigns and their creditors have set preferences, and that they behave in a predictable way, there are several ways via which norms can impact their behaviour. Here again, the specificity of sovereign debt, as a legal relationship, must be kept in mind. Theories of international law’s impact on sovereigns’ behaviour abound140_{. However, most} ‘morals’ sensu lato, with the essentially self-interested set of preferences that economists tend to adopt is a complex question, impossible to fully explore within these pages. To put it simply, one can frame the desire for morality as part of market actors’ utility function, as Smith does or as a bias in market actor’s action, as a behaviourist would. This thesis opts for the latter, as it makes for a simpler modelling of market actor’s relationships.

137 _{Copp (n 115) 195; Thompson (n 115) 291.}

138 _{On collective entities as more prone to biases see notably David G Myers and Helmut Lamm, ‘The Group}

Polarization Phenomenon’ (1976) 83 Psychological Bulletin 602; Paul Hart, ‘Irving L. Janis’ Victims of Groupthink’ (1991) 12 Political Psychology 247; Prof Paul t’Hart, Groupthink in Government: A Study of

Small Groups and Policy Failure (Johns Hopkins Paperbacks Ed edition, The Johns Hopkins University Press

1994).

139 _{As such, this thesis understands that the contribution of behavioural economics has not been to undermine}

the idea that people act in a somewhat rational manner, but rather to note that when behaviour predictably deviates from what is expected, it should be modelled. See Cass Sunstein, ‘Behavioral Analysis of Law’ [1997] Law & Economics Working Papers 1–2 <https://chicagounbound.uchicago.edu/law_and_economics/79> noting, “it it does not follow that people’s behavior is unpredictable, systematically irrational, random, rule- free, or elusive to social scientists. On the contrary, the qualifications can be described, used, and sometimes even modelled.”

140 _{A classic argument would be that breaching international norms leads to reputations costs. See e.g. Abram}

Chayes and Antonia Handler Chayes, The New Sovereignty: Compliance with International Regulatory Agreements (Harvard University Press 1995). For an application to sovereign debt see, infra, and Tomz (n 112). Another well-known theory states that international law works by enabling State to cooperate, via institutions,

Introduction 45 of these theories focus on the behaviour of sovereigns towards other sovereigns and have very little to say about how the law can impact the actions of sovereigns in at arms’ length transactions with private entities.

This thesis operates from the postulate that legal norms can affect the behaviour of market actors in three main ways. First, norms shape the market itself. Second, norms tax certain behaviours in order to alter the preferences of market actors. Finally, norms provide legitimacy to certain behaviours.

On the first point, laws provide the structure of the legal relationship between sovereigns and their creditors. Financial markets, like any other market, are essentially created by legal norms enabling market actors to interact with each other141. For example, the transferability of bonds has enabled both retail investors and vulture funds to participate within the sovereign debt market by providing them with a legal title over the bonds emitted by sovereigns.

Beyond their roles as gatekeepers, legal norms also structure the behaviour of market players by creating strategic opportunities142. They determine the range of possible behaviours within the sovereign debt market. For example, the insertion of collective action clauses in