Research page

Research team:
Ugo Panizza, Coordinator, Geneva Graduate Institute
Juan Flores, Co-coordinator, University of Geneva
Steve Ka Lok Wong, Principal Member, Geneva Graduate Institute
Mark Manger, Principal Member, University of Toronto
Mitu Gulati, Associated Member, University of Virginia

Funding organisation: Swiss Network for International Studies (SNIS).
Status: ongoing.
Disciplines: Economics, Law, Political Economy, Statistics.
SDGs: #1 No poverty, #10 Reduced inequalities, #17 Partnership for the goals.

Project Summary

Sovereign debt is issued by a country’s government to borrow money.

Our understanding of the economics, politics, and law of sovereign debt is based on extremely simplified assumptions, tested with poor quality and limited data, and is insufficient to develop the policies necessary to prevent crises or to limit their damage.

Most theoretical models of sovereign debt assume that governments are always tempted to cease payment of their debt and that the only reason why they repay is that they worry about their reputation. There are two problems with this assumption. First, while it is intuitive, it has been proven to be wrong.  Second, it pays little attention to the wide variation in how countries borrow, and barely acknowledges that contract law matters in international affairs.

Following the Global Financial Crisis and the Covid-19 Pandemic, the sovereign borrowing of developing and emerging economies has reached unprecedented levels. Inevitably, debt crises and defaults loom. The IMF and the World Bank classify 60% of low-income countries as being in debt distress or at high risk of debt distress. These crises threaten to devastate economies and to throw millions into poverty.

In this context, this project combines the expertise of scholars from economics, economic history, political science, and legal studies to develop a new understanding of sovereign debt. Using machine learning and a large sample of contracts, it seeks to assemble a new, comprehensive data set on the financial and legal clauses in bonds spanning over 60 years and tens of thousands of sovereign bonds. This data will help in testing different models of sovereign debt. The project will investigate why governments borrow the way they do, resulting in a variety of different debt structures, and how legal clauses can help or hinder a resolution and restructuring of debt.

The results will be used as building block for reassessing the theory of sovereign debt and help develop new policy approaches to prevent future debt crisis or to mitigate their adverse effects.

Professor Panizza explains what we need to know – and what the project will uncover – to design safe debt structures for countries on the development path.