November 30, 2009
Is the Dubai Crisis a Sovereign Debt Crisis or a Bankruptcy?
Posted by David Zaring

It is hard to know, given that the country has acknowledged that it is $59 billion in debt, and its wholly owned firm, Dubai Portsworld, has extended the maturities on its debt for six months.  Here's a nice look at the panic.  If it is the company, that's a matter of international contractual and commercial law.  What happens if countries default on their debt?

There's nothing forbidding such a thing in customary public international law, and debt defaults in the past century, have, of course, been legion.  One buys sovereign bonds at one's own risk, though it could be that Dubai is a party to some exotic investment treaties of which I am not aware.

But what if Dubai is discriminating against foreign investors in the way it treats its creditors?  In the Barcelona Traction case, the ICJ made it difficult for countries to espouse the interests of their investors if they believed their investments were being expropriated by their host country.  The result was a flowering of BITs, or bilateral investment treaties, which provided national treatment obligations and usually the option to take a dispute to a neutral arbitrator.  It meant that foreign investors could claim that they were being discriminated against, and they could do it to a panel of arbitrators in Washington, DC, Paris, or Stockholm.  Dubai itself is not a party to any BITs, according to the World Bank, but the UAE, of which Dubai is a part, is a party to 21 (that's not many - fewer than Venezuela and Vietnam).  There may not be much here for foreign investors to grab onto.  The WTO, which the UAE joined in 1995, is also pretty sparse on investment protections (which have been left to the BITs).

The key to these sorts of claims is to establish that domestic investors are being treated better than are foreign ones.  There's no indication yet that this is the case.  And while some have argued that international law forbids the expropriation of property without paying compensation, I'm not sure that many observers would find that rule to be one carefully observed.  And it could, at any rate, be circumvented by the contractual outs contained in the sovereign debt. 

Finally, sovereigns are generally immune from suit in foreign courts - whether that immunity should extend to purely commercial activities is a matter of debate, but it is worth noting that sovereign debt does not clearly qualify as commercial activity - at least, not in the same way that operating an airline would.

So these are the sort of questions that might form the basis for a beginning of research - but it would be a beginning; I'm not holding myself out as an expert on sovereign defaults, who have their own well versed followers in the halls of academe.

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