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Rethinking Sovereign Debt

Rethinking Sovereign Debt

Odette Lienau
Copyright Date: 2014
Published by: Harvard University Press
Pages: 344
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  • Book Info
    Rethinking Sovereign Debt
    Book Description:

    Conventional wisdom holds that all nations must repay debt. Regardless of the legitimacy of the regime that signs the contract, a country that fails to honor its obligations damages its reputation. Yet should today's South Africa be responsible for apartheid-era debt? Is it reasonable to tether postwar Iraq with Saddam Hussein's excesses?Rethinking Sovereign Debtis a probing analysis of how sovereign debt continuity--the rule that nations should repay loans even after a major regime change, or else expect consequences--became dominant. Odette Lienau contends that the practice is not essential for functioning capital markets, and demonstrates its reliance on absolutist ideas that have come under fire over the last century. Lienau traces debt continuity from World War I to the present, emphasizing the role of government officials, the World Bank, and private markets in shaping our existing framework. Challenging previous accounts, she argues that Soviet Russia's repudiation of Tsarist debt and Great Britain's 1923 arbitration with Costa Rica hint at the feasibility of selective debt cancellation.Rethinking Sovereign Debtcalls on scholars and policymakers to recognize political choice and historical precedent in sovereign debt and reputation, in order to move beyond an impasse when a government is overthrown.

    eISBN: 978-0-674-72640-6
    Subjects: Economics, Political Science, Law, Business, Sociology

Table of Contents

  1. Front Matter
    (pp. [i]-[vi])
  2. Table of Contents
    (pp. [vii]-[x])
  3. 1 Open Questions in Sovereign Debt
    (pp. 1-19)

    Sovereign debt markets have demonstrated incredible resilience despite a century of dramatic political and economic upheaval. Among the most remarkable aspects of the contemporary debt regime is the degree to which expectations of borrowers remain relatively uniform even in the face of such major shifts. These basic expectations resolve into one background rule: sovereign borrowers must repay, regardless of the circumstances of the initial debt contract, the actual use of loan proceeds, or the exigencies of any potential default. This is not to say that countries always pay; certainly, they do not. But the background rule remains, and it sets...

  4. 2 Theoretical Underpinnings of Modern Finance
    (pp. 20-56)

    The norm of sovereign debt continuity is so regularized in international economic relations today as to become largely unremarkable and taken for granted. We tend to dismiss—or even fail to see—the possibility of alternative approaches to sovereign debt and reputation. This dismissal, it seems, derives at least in part from intellectual path dependence. Without a closer look at the theory or the history, it is easy to suppose that current debt practices are the only ones available and truly workable in a functioning international capital market. And without fully acknowledging the degree to which theories of sovereignty are...

  5. 3 Costly Talk? Reinterpreting the Soviet Repudiation
    (pp. 57-99)

    The soviet repudiation of tsarist debt in 1918 has been presented as a cautionary tale—perhaps the most important cautionary tale—in support of the force and reputational basis of the debt continuity norm. In this chapter, however, I contend that any such account relies on an incomplete reading of the historical record. A closer look at the repudiation and its aftermath underscores the indeterminacy of sovereign debt and reputation, and highlights the possibility of making a reputational judgment in favor of lending even after a politically motivated debt cancellation. It also emphasizes the degree to which competitive creditor interactions...

  6. 4 Costa Rica, Public Benefit, and the Rule of Law
    (pp. 100-123)

    While the Soviet debt repudiation displayed all the political drama, financial consequence, and diplomatic tension a post-World War I newsroom could possibly wish for, on the other side of the globe Costa Rica undertook a similar action on a much smaller scale. The Costa Rican debt repudiation of 1920 has been largely forgotten in political science and economics, but features fairly prominently in international legal literature. Unlike the Soviet case, the Costa Rican repudiation was not a revolutionary rejection of multiple centuries of previous rule. Rather, it involved the denial of a brief authoritarian aberration in otherwise constitutional rule. The...

  7. 5 Public and Private Capital in Mid-Century Repayment Norms
    (pp. 124-153)

    Although sovereign states desperately needed long-term capital to rebuild their economies in the years following World War II, private finance was initially not forthcoming. The London-centered financial system that had globalized the world economy through much of the nineteenth and early twentieth century suffered crippling blows during the First World War. It definitively lost its preeminent financial role in the decline of international trade and capital flows during the interwar period and World War II. While private lending in the United States increased dramatically during the 1920s and to some degree competed with older London and European houses, this source...

  8. 6 Continuity and Consolidation in the Return of Private Finance
    (pp. 154-192)

    While public actors such as the World Bank laid the foundations for the contemporary debt regime after World War II, key private players returned in force during the 1970s. Although they were initially wary of international sovereign lending, developments over two decades had made the sovereign credit markets more attractive. The advanced industrialized countries had fallen into economic difficulties, and the easing of capital controls associated with the Bretton Woods system meant that private capital could flow more freely across borders. Beginning in the late 1960s, private creditors began to look overseas for productive investments. This engagement deepened in the...

  9. 7 Legitimacy and Debt at the Turn of the Century
    (pp. 193-225)

    Despite the shock of the 1980s’ debt crisis, private actors returned to sovereign lending enthusiastically in the last decade of the millennium. This was not without significant adjustment in the international economic system, of course. In particular, sovereign borrowers struggled through serial reschedulings, which extended the time frames for repayment without providing more significant relief. As the 1990s approached, major international players began to acknowledge that debtor countries faced something more intractable than a temporary liquidity problem. The successive measures put in place to encourage growth had fallen short, and countries remained mired in deep economic problems and an incapacity...

  10. 8 Politics and Prospects
    (pp. 226-240)

    We have reached a strange place in world history. On the one hand, global law and politics have increasingly emphasized the accountability of leaders, expecting them to represent the interests and respect the rights of state populations. Discussions of corruption and good governance insist on distancing legitimate sovereign rule from self-serving prerogative, and separating the public purse from that of private citizens. Institutions such as the International Criminal Court hold leaders accountable for crimes committed against their own populations, drawing the brightest line possible between rule by brute force and emerging ideas of public benefit and rule of law. Yet...

  11. Notes
    (pp. 241-318)
  12. Acknowledgments
    (pp. 319-320)
  13. Index
    (pp. 321-331)