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Durham University

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Publication details for Dr Federico Lupo-Pasini

Lupo-Pasini, F (2021). Hidden sovereign finance. Capital Markets Law Journal kmab002.

Author(s) from Durham


Recent scandals in the sovereign debt market have highlighted the risks associated with hidden
debt transactions. These are sovereign debt transactions in favour of a central government, substate entity or state-owned enterprise, whose entire existence or whose terms have not been fully
disclosed in violation of local administrative or constitutional requirements. The phenomenon was
first reported with regard to the Mozambique hidden loans case, but it likely extends to many other
The multifaceted nature of this phenomenon makes it difficult to provide a coherent picture.
Lenders involved in hidden debt include private banks, state-owned banks, governments, and
commodity traders. Products include loans, government guarantees, derivatives, and trade
financing schemes linked to commodities exports. The goal of the paper is to provide a framework
to analyse the legal and regulatory landscape applicable to these transactions with specific focus
on the legal obligations of lenders.
At present, there are a number of voluntary standards and guidelines for lenders. These include
the UNCTAD’s Principles on Promoting Responsible Sovereign Lending and Borrowing, the recently
approved IIF/G20 Voluntary Principles for Debt Transparency. This essay argues that hidden sovereign
finance is a multifaceted legal problem, which presents three distinct components: the violation of
the borrower’s laws governing public financing, the possible presence of corruption, and the active
hiding of the transaction. This means that any effective policy to tame this phenomenon must rely
on these three pillars: civil litigation in commercial courts, criminal prosecution of corruption, and
loans disclosure to put sovereign finance under closer public scrutiny. In order to make the analysis simpler, I focus on English law and on the practice of English courts.