Rethinking Sovereign Debt

RETHINKING
SOVEREIGN DEBT
Politics, Reputation and Legitimacy
in Modern Finance
PhD Forum, December 17, 2014
House of Finance, Frankfurt
Luca Amorello presents Odette Lienau’s new book

In a nutshell:
 Introduction:
1. Odette Lienau: a short bio;
2. Relevant Literature;
 Contents of the book:
1. Open Questions in Sovereign Debt;
2. Theoretical Underpinnings of Modern Finance;
3. Costly Talk? Reinterpreting the Soviet Repudiation;
4. Costa Rica, Public Benefit, and the Rule of Law;
5. Public and Private Capital in Mid-Century Repayment Norms;
6. Continuity and Consolidation in the Return of Private Finance;
7. Legitimacy and Debt at the Turn of the Century;
8. Politics and Prospects;
 Conclusions

Odette Lienau: a Short Bio
 Associate Professor of Law at Cornell Law School;
 Prior to joining the Cornell faculty, she practiced with the
Financial Restructuring and Insolvency group at
Shearman & Sterling in New York City;
 A.B. from Harvard College and a J.D. from NYU
School of Law, where she was awarded the Jerome
Lipper Prize for Excellence in International Law and
the John Bruce Moore Award for Outstanding Work in
Law and Philosophy;
 She has published articles and chapter contributions
with Oxford University Press and the Yale Journal of
International Law, among others, and is a consultant
to the United Nations Conference on Trade and
Development on the development of a sovereign debt
workout mechanism;
 Her search and teaching interests include international
economic law, international law and international
relations, bankruptcy and debtor-creditor relations, and
political and legal theory.

In “Rethinking Sovereign Debt” (Harvard University Press, 2014) she:
 challenges the conventional wisdom that all states, including those
emerging from a major regime change, must repay debt or suffer
reputational consequences;
 contends that this practice is not essential for functioning capital
markets; and
 locates the twentieth century consolidation of the repayment rule in
contingent actions taken by government officials, international
financial institutions, and private market actors.

Relevant Literature:
 Main authors:
 Anne Gelpern, Mitu Gulati, Robert Howse, Chris Desan, Jonathan Kirshner,
Katerina Linos; Peter Katzenstein, David Super.
 Interesting books:
 Sovereign Debt Management, R. Lastra, L. Buchneit, Oxford University Press,
2014;
 Sovereign Debt: From Safety to Default, R. W. Kolb, Wiley, 2011;
 Main practitioner:
 Lee Buchneit (to see: https://www.youtube.com/watch?v=6PccxwQfsI4)

Open questions in Sovereign Debt

Open Questions in Sovereign Debt
 There is one background rule in Sovereign Debt framework: 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;
 The common market narrative behind suggests that without this background rule of
consistent repayment, reinforced by the disciplining mechanism of reputation, lending
to many countries would disappear;
 The main idea of the book is that the market narrative supporting the repayment norm
is simplistic and in some respect entirely wrong.
 How have we come to think about that the norm of sovereign debt continuity is more
or less unavoidable for a working international financial system?
 Are there possible alternatives approaches in which odious debt ideas and selective
debt cancellation might be incorporated into a functioning debt market for
Sovereigns?

Conventional narrative
of consistent debt repayment
 Three main ideas:
1) Judgments about a borrower’s repayment decisions are not shaped by politics per se;
(Political Neutrality)
2) The mechanism of Sovereign reputation itself is free from subjective and historically
variable political judgments; (Reputational Stability)
3) All rational creditors are expected to respond in basically the same way to particular
market events; (Creditor Uniformity)

Challenging the mainstream continuity rule
 Instead, according to Odette Lienau:
 The debt continuity norm is intrinsically political and historically variable;
 Depending on the theory of sovereignty implicitly or explicitly adopted, the practice of
Sovereign debt and reputation may diverge significantly;
 Creditor uniformity cannot simply be assumed and different creditors may interpret –
and historically have interpreted – the same politicized debt repudiation in opposing
ways;
 Alternative approach, as the incorporation of illegitimate debt and partial cancellation,
emerged historically and could function more fully in future.

Problems with the conventional wisdom
 Political Neutrality derives from a statist conception of sovereignty (i.e.: idea that
content of and changes in a state’s internal structure, interests, and popular support
are irrelevant to its status as legitimate Sovereign);
 The determination of which Sovereign a reputational assessment attaches to is
necessarily infused with a background, historically informed political judgment: statist
and non-statist approach to the idea of Sovereign may lead to very different
outcomes.
 The assumption of Creditor Uniformity and shared interests is not fully supported by
the historical record. There are historical evidences in which creditors respond in
entirely different ways to the same debt repudiation.

Odious debt as Sovereignty in Practice
 The issue of Odious Debt is pivotal. Odious debt arises when an illegitimate regime
contracts debt that is not authorized by and does not benefit a nation’s people
(Alexander Sack);
 The key point of all odious debt version is that they challenge the dominant statist
vision of Sovereign continuity in international economic relations;
 When a regime changes, the incoming regime frequently seeks to distinguish itself
from its predecessor, and may consequently seek to free itself of the predecessor’s
debt obligations on the basis of the right. This idea then questions the norm of
Sovereign debt continuity.

Creditors competition in the Last Century
 The ways in which creditors are consolidated or competitive in their interactions and
risk interpretations affect the degree to which non-statist approaches are accepted in
Sovereign debt:
1) In times when creditors are more competitive and they consider each other to be
significant risks, sovereign debt norms are subject to greater contestation;
2) Shifts in broader norm of Sovereignty in the international arena affect the degree
to which we consider odious debt ideas plausible in international economic
relations.
 These two assumptions play a central role in conditioning the debt continuity rule and
the ultimate responses of market actors in any Sovereign debt interaction.
 Although debt repudiations are not numerous, they do suggest that the continuity
norm is not predetermined and also highlight how creditor interaction and broader
conception of Sovereignty make flexibility more or less likely at certain historical
contexts.

Theoretical Underpinning
of Modern Finance

Addressing the Conventional Approach
 The strict rule of repayment depends upon a distinctly statist concept of Sovereignty, which
assumes Sovereign continuity within the same territory and insists on the irrelevance of
changes in internal rule of Sovereign Identity; however this idea leaves open vey basic
questions: who actually constitutes the ultimate principal in a Sovereign contract? If it is
people, what type of governmental authorization is needed to make such a contract
binding?
 Different theories of Sovereignty in reality are alternative theories of agency in international
context. Any valid domestic contract then is at least implicitly grounded in a theory of
agency. The problem is the lack of a clear theory of agency in the international arena.
 The distinction between legitimate and illegitimate domestic contracts falls apart when we
move to the realm of transnational sovereign debt. Different conceptions of Sovereignty
should result in differential treatment of Sovereign Contract obligations.
 A theory of Sovereignty should then specify the nature of the relationship between the
Sovereign government and the principal, the people against whom the contract is
ultimately enforced.

The Indeterminacy
of Sovereign Reputation
 The reputational mechanism is flexible enough to incorporate a range of statist and non-
statist approaches of Sovereignty. However, different approaches to legitimate
Sovereignty and debt continuity lead to conflicting reputational assessments; indeed, any
claim about Sovereign reputation implicitly rests on an underlying political and legal
theory.
 For example, any acceptance of an odious debt idea, which might highlight the
importance of authorization and/or public benefit, suggests the presence or plausibility of
non-statist approaches in Sovereign reputational analysis. If such an argument is made
and accepted by a creditor after a regime change, the incoming regime may be treated as
a new or unseasoned borrower.
 Conversely, a statist concept of Sovereignty, supportive of the continuity norm, would not
distinguish between legitimate and illegitimate debt in assessing a new regime’s
repayment record as part of reputational analysis.
 The idea of Sovereign Reputation thus is important but it must be located within a
broader theoretical and historical contexts;

 Interest depends upon particular circumstances and identities that may shift over time.
 There is little reason to believe that creditor interests in the arena of Sovereign debt will
be entirely uniform, given that they respond to tow principal source of risk:
1) Risk of default or debt repudiation;
2) Competition between suppliers of credit for the same borrowing client.
 It would be a mistake to ignore that creditors are embedded in a collective world and are
therefore social and strategic. At certain historical moments, creditors may well identify
other lenders as primary threats, and look more favorably upon potential borrowers;
 As long as major creditors identify nonpayment of loans as central threat in the Sovereign
debt market, then a hegemonic insistence on full debt repayment make sense. This
creditor approach would emerge when the market is consolidated (i.e. the underlying
material and social structures of creditors interactions encourage more unified interests
and risk interpretations).
Unpacking Creditor interest

 However, in a market with more competitive creditor interactions, in which creditors views
also fellows creditors as risks the preferred approach should not be so uniform.
 The desire to keep the client may lead to a weaker insistence on the norm of Sovereign
Continuity and a more flexible perspective on who counts as the “sovereign” in Sovereign
debt.
 If the potential borrower looks like a good credit risk overall, a new creditor – considering
the new regime an unseasoned borrower – may be willing to extend credit even after
repudiation;
 The degree to which creditors are competitive or consolidated thus may affect the degree
to which the rule of continuous debt payment is stable.
 Then, two alternative logics exist for creditor preferences, depending on the nature of their
interactions and interpretations of risk. The dominance of one or another logic remains a
matter of historical investigation.

The multiple role for Public Creditors
 Public creditors are generally less focused on competition and profits;
 Public lending results in a differential relationship with debtors and with the Sovereign
Credit market as a whole;
 The classic public actor is established to instantiate some broader goal or idea of the
public good with a deeper commitment to particular political values;
 In short, given the competitive pressures on private creditors and the unique
characteristics of public creditors, to speak of creditors as a single group in Sovereign
lending is theoretically untenable.
Neither creditor uniformity, nor the mechanism of creditworthiness, nor a claim
of political neutrality is sufficient for the market principle expectation of
continuous debt repayment.

Statist views of Sovereignty
 A the center of the debt continuity norm is neither market discipline, nor the idea of
governmental rule per se, but rather the idea of Sovereignty itself.
 The first problem then is the theorization of what constitutes Sovereignty. Under a statist
approach Sovereignty is based on effective control and recognition by the community of
states (see e.g J. Bodin, J. Austin, T. Hobbes). Thus, whoever exercises control may sign
the Sovereign contract and because the State’s population is not considered the
“principal” of the State, no real agency problem exists.
 The second key question is whether a successor regime must be bound by that prior
regime’s actions under statist approach. There are two opposing answers even within the
statist approach:
1) Eternal nature of the State apart from any changes in actual rulership, and thus
considers Sovereignty to live forever (J. Bodin); thus sovereign obligations are
inalienable and remain even in case of major regime changes;
2) Sovereigns have absolute right to do as they please, including contract repudiation
(T. Hobbes);

Alternative Sovereignties
and their Ramifications
 Main alternative competitor to a statist approach of Sovereignty is the idea of popular
or democratic Sovereignty: Sovereign State is valid only if it reflects the consent of
the underlying population (J. Rousseau).
 Under this approach, not all States are properly or equally “Sovereign” simply by
virtue of their territorial command. The evaluation and recognition of true sovereignty
requires the consideration of a regime’s internal practices.
 Under this approach, Sovereign obligations, properly understood, do not exist unless
they have actually been properly authorized by the population. Regimes that rule by
force would not be able to enter into international agreements that bind the population
after their fall and creditors who lend to such regimes cannot expect to be repaid after
a regime change.

 An intermediate alternative is the “rule of law” or “constitutional Sovereignty”; it pays
attention to internal modes of legitimation in recognizing valid Sovereign action.
 The Sovereign State exists and is both empowered and limited by its internal constitution
or rule of law, whether or not its is democratic (M. Weber and H. Kelsen).
 Under this approach, Sovereign obligations exist and are continuous if they have been
validly authorized under the internal legal framework, even if this internal framework is
distasteful according to some moral standards.
 These three school of thought about sovereignty are basically process-oriented. However it
is possible that political concepts of Sovereignty focus on the outcomes of such contracts.
 This outcome orientation is, potentially, entirely complementary with either of the statist,
popular or rule-of-law approaches. This orientation could result in a separate requirement
that government action should be responsive to the public needs of a State, whatever the
approach taken. In this case valid Sovereign debt must serve public interests of the State.

 In short, the recognition and enforcement practice of any Sovereign debt regime both
depends upon and reinforces a given Sovereignty paradigm.
 The debt continuity rule rests on and gives force only to a statist conception of
legitimate Sovereignty. However, different concepts of Sovereignty may suggest
alternative plausible approaches to debt obligations.
 Plausible alternatives in modern debt management thus do exist and contingent
historical factors enable or disenable certain possibilities at key historical moments.
 Let’s explore then some of these different historical and political contexts.

Costly Talk?
Reinterpreting the Soviet Repudiation

A New Language of Sovereign Legitimacy
 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.
 The political order maintained by the 19th
Century European powers rested upon a statist
approach to Sovereignty. State’s internal form of political organization and the degree of
legitimation were considered irrelevant to external obligations.
 However in early 20th
Century new political theories and flexible notions of sovereign statehood
emerged:
1) One key conceptual development following WWI was the idea of “National Self-
Determination” (both internal and external). This idea soon drastically altered the discursive
framework of international relations and the expectation of local populations.;
2) Second key development was the understanding of a valid Sovereign authority as based on
beneficial outcomes for the relevant population, helping to undermine the static
understanding of Sovereignty.

Repudiation as Political Emancipation
 Russia has been a major borrower since the middle of 19th
Century, in particular for
infrastructures. By the end of the WWI, Russia’s public debt reached £3385 million.
 The new Soviet Regime manifested and catalyzed the new thinking emerging after
WWI. In February 1918 the Bolshevik Government cancelled the debt of its
predecessors, causing uproar among both private and public creditors.
 Far from rejecting the central mechanism of international capitalism wholesale, new
Russian elites openly accepted the importance of creditworthiness for continued
cross-border relations. They suggest only that reputation of a new regime should be
de-linked from the repudiation of illegitimate debt but rather to develop on its own.
 Its debt repudiation relied on principle of political emancipation: the discontinuity of
states should lead to a discontinuity in state obligations: “Government and systems of
government which have emerged from a revolution are not bound to respect the
obligation of Government which have lapsed”.

Degree of Legitimacy and Repayment
 However, the Soviet government express readiness to make partial payment in the
context of a larger agreement on government credit. It expresses willingness in effect
to turn back to the financial clock to 1914, rejecting the civil war and the war debt
claims but assuming the Tsar’s prewar debt obligations in return for additional funding
and a recognition of the principle of the debt discontinuity;
 The Soviet government explicitly rejected the idea the that repudiation of the Tsar’s
debt would have any bearing on how it might treat its own obligations
 Leon Trotsky for example in a 1923 interview, underscored that treatment of a
predecessor’s debts did not foreshadow the regime’s likely future actions and
acknowledge the importance of maintaining the regime’s own reputation in facilitating
continued economic relations.
 The new Russian regime then did not take an absolutist position on actual debt
payment. It expressed willingness to negotiate for partial debt recognition but rejected
the requirement to pay as a point of principle and out of compulsion.

Debt Recognition
 While the Western Powers considered the principle of debt recognition central, they
showed considerable flexibility on actual payment: “the legality of obligations is a very
different matter from paying such obligations”.
 Indeed, an acknowledgement of the debt claims by any new regime would not have
translated into substantial payment obligations for some time. A decision to
acknowledge debt – in principle – would have been cheap talk in the early 20th
Century Soviet case.
 The Soviet insistence on the language of repudiation as point of principle and legal
right was very costly: it undermined the access to foreign credit and to crucial
reconstruction resources.
 However, despite the lack of any ultimate agreement, it would be inaccurate to
present the 1918 repudiation as evidence of a uniformity statist insistence on debt
continuity, based on a clear interpretation of major debt cancellation.

Creditor Disunity and the Possibility of
New Lending
 In reality, the response across both public and private creditors actually varied to some
degree according to previous Russian exposure, with several new American players
expressing interest in facilitating additional lending.
 Far from demonstrating how uniform reputational assessments support the norm of debt
continuity, a closer look at the creditor response to the Soviet repudiation exposes the
centrality of ideology and historically contingent creditor interactions.
1) France, Russian primary pre-Revolution creditor, was obviously extremely hostile to
repudiation. But the hostility of the public was mainly towards the new Soviet Regime.
2) British response was instead was less hostile and was partially driven by competing
commercial interests and broader political and anticommunist ideology. In 15 year partial
recognition of discontinuous, non statist approach to understanding Sovereign
reputation.
3) Germany became a major trading partner of the Soviet Union in the short order to
revitalize German industrial capacity.

4) Among US creditor institutions instead there was significant disagreement on the
interpretation of Soviet creditworthiness after its repudiation:
a) Many US financial institutions continued to insist that the new regime should
accept the obligations of its predecessor. These institutions had several links to
European institutions and businesses and were hostile to Soviets.
b) Yet, some other US banks, not involved in previous Russian business, pushed
to extend financing to the Soviet regime. Ultimately, US government opposed
such loans.
 However, the key-point is that this challenge the view of uniform response to
Soviet repudiation. The response to the Soviet repudiation was far from uniform:
some actors were hostile, but other were far more interested to extend and
facilitate credit.
 This also proves the competing interpretation of Russian creditworthiness.
 Any effort to extend credit to Soviets was stopped at the end by non financial
obstacles

The potential of Soviet Repudiation
 Far from playing a secondary role, anticommunist ideology and political-legal
sentiment crucially shaped the response to the Soviet debt repudiation, making the
creditor outcome appear to fall much more in line with a uniformly statist reputational
assessment than in fact was the case.
 Creditors exhibited divergent interpretations of the Russian repudiation and
eventually news loans were blocked not by any reputational assessment, but rather
by the hostility of external governmental actors and the broader anti-Soviet social
environment.
 However, the Soviet case articulated an alternative conception of Sovereignty for
Sovereign debt, which emphasized the idea of Sovereign discontinuity in
creditworthiness and suggest that public benefit should factor into assessing a debt’s
validity. It’s a turning point for potential new practices and norms in Sovereign debt.

Costa Rica, Public Benefit
and the Rule of Law

Sovereign Legitimacy
 The Costa Rica repudiation and the subsequent creditor response suggest that there
is more flexibility than is usually acknowledged in the norm of debt continuity and in
the concept off Sovereignty that could underpin a functioning debt regime.
 After the restitution of constitutional government and the December 1919 election of
Julian Acosta, the restored regime sought to repudiate the Tinoco’s (former dictator)
contracts from Costa Rica’s debt.
 When the Congress passed the “Law of Nullities” to repudiate such contracts, Costa
Rica distanced itself from the aberration of military rule and repudiated the dictatorial
regime. Costa Rica then laid down its claim on the basis of right.
 Costa Rica distinguished between legitimate rule and that of a usurper, highlighted
the importance of genuine governmental purpose, insisted on adherence to internal
laws, and maintained the ultimate authority of a rightful sovereign government to
decide on the validity of its contracts.

1) Indeed, Tinoco had military usurped a constitutional republic that reflected the
popular will. Furthermore Costa Rica contented that the government was not even
sufficiently established as to justify de facto recognition by other powers or by
business interests. In addition, Costa Rica asserted that the Tinoco regime’s
contracts had violated particular laws of the republic and even had violated its own
“costitutional” laws.
2) Costa Rica Congress distinguished between more and less legitimate debt
expenditures on the basis of their ultimate purpose. (e.g. oil concession contract).
 In line with the argument distinguishing Tinoco-era contracts from those of the earlier
constitutional regime, Costa Rica continued to make payment on pre-Tinoco debt
throughout this controversy.

Creditor Disunity
in the Immediate Response
 As in the Soviet Case, creditors did not offer a unified response:
1) The US administration had actively refused to recognize the Tinoco regime and
chose to remain neutral on the Costa Rican repudiation;
2) UK decided to pursue claims on behalf of two British companies, insisting on the
continuity of obligations even while acknowledging the usurpation of
Constitutional rule.
 Eventually President Acosta and UK signed an arbitration treaty in March 1923 and
appointed US chief justice William H. Taft as sole arbitrator.
 Emerging ideas of non-statist Sovereignty appeared not only in Costa Rica’s own
argument but also surfaced in foreign policy approaches such as the US non-
recognition policy.

Establishment validation and a Muted
Creditor Response
 Justice Taft mad his award in October 1923 deciding in favor of Costa Rica but in
roundabout way. He took an intermediate approach that incorporated attentiveness to
internal law and appropriate governmental purpose:
1) Taft agreed with UK saying the Tinoco regime was in de facto control of the
State: for two years Tinoco and the legislative assembly ruled Costa Rica without
serious revolutionary activity and with the apparent acquiescence of the people.
Thus, it was a valid Sovereign government.
2) However, the contracts made were not enforceable because thy were not
internationally valid.
 Taft paid attention to the mechanism or procedure of control: a sovereign
governmental international action is valid and binding on successor governments
only if it has followed its own internal legal requirements for competence or
ratification. If a contracts is signed in contravention of a government’s own
internal laws, then the contract may risk repudiation by a subsequent regime.

Governmental purpose and Valid
Sovereign Action
 Taft declined to enforce the Tinoco’s regime contracts also by suggesting outcome
orientation as an element of valid Sovereign action: the contracts are not
internationally enforceable if they do not serve a legitimate governmental purposes.
 According to Taft, the loans were unlikely to serve valid state interests.
 He then suggested the idea that the rule of law should be incorporated into all levels
of legitimate Sovereign State interaction, and translated these ideas into the
international economic arena.
The Soviet and the Costa Rican cases are important in highlighting the possibility
of alternatives to the norm of Sovereign debt continuity and deepening the
question of why such alternatives failed to take hold.

Public and Private Capital
in Mid-Century Repayment Norms

Public Credit, Private Credit and
Political neutrality
 What can explain the closure of these earlier alternative approaches to the statist
practices?
 While private lending in US increased dramatically during the 1920s, this source of
capital also dried up during the Great Depression. After the WWII, the new International
Bank for Reconstruction and Development actively intervene and fill this gap.
 The decisions taken by the early IBRD, in conjunction with the choices of other public
actors like the US government, moved the understanding of responsible lending and
acceptable Sovereign action in a statist direction.
 The Bank’s understanding of how ideas of Sovereign legitimacy might apply to debt
continuity and creditworthiness became the dominant vision.
 In insisting that all debts be repaid regardless of their provenance as a precondition for
funding, the new IBRD effectively instantiated a statist framework of debt and reputation
and a norm of Sovereign continuity for the post-WWII.

Ramification
of the Wall Street Connection
 Furthermore, the IBRD scarce resources caused the need of interaction with New York
financiers. The minimal capital available encourage the Bank to turn to borrowing, and the
only institutions with sufficient capital to lend to the Bank resides on Wall Street.
 This implied two consequences:
1) the Bank’s strong link to financiers shaped its view on the proper role of a development
institution, and on what constituted productive and wise Sovereign lending.
1) the Bank became increasingly concerned with its own creditworthiness, and thus with
the creditworthiness of the borrowers that would make up its loan portfolio. The bank
awareness that it was being monitored by external funders shaped its own decisions in
fundamental ways. Thus the early IBRD developed a fairly conservative framework for
understanding Sovereignty and debt continuity.
 The Bank not only limited its own flexibility in lending approaches but actually helped to
consolidate private creditors into an oligopolistic market structure with regard to post WWII
sovereign debt market.

The Statist Meaning
of Political Neutrality
 Banks turned towards tow interests with regard to Sovereign lending:
1) They sought to encourage the repayment of their own prewar loans;
2) They monitored the practices of public actors, actually involved in direct Sovereign
lending, particularly the IBRD, which had become a private borrower and a sort of
intermediary.
 Private investors were effectively consolidated into an indirect cartel position with
regard to Bank borrowers. The IBRD’s particular position as a public creditor only
enhanced the noncompetitive character of this Sovereign lending.
 Furthermore, the early Bank interpreted its mandate to remain politically neutral in
ways that reinforced a statist approach to Sovereign lending.
 As a consequence, the process and principles of decolonization as it progressed
reinforced a statist vision of Sovereignty that only could guaranteed internal freedom of
action; noninterference in internal affairs became a cardinal rule;

American Lending
as Countervailing Force?
 However, the main sources of post-WWII development aid was not the IBRD, but
rather the US government, whose capital outflow overtook those of the IBRD for two
decades.
 Given the professed American commitment to democracy, it would have been
reasonable to expect that the US might oppose statist international economic
practices that disregarded internal governmental characteristics.
 However, US financial assistance during this period was driven mainly by Cold War
concerns, and despite the democratic ideology of the Cold War, this rhetoric did not
counter the ideas of Sovereign creditworthiness espoused by the Bank.
 As such, the underlying economic structure and broader ideological context of mid-
20th
century international relations (see the cases of China and Cuba) proved to be
inhospitable ground for further development of non-statist approaches incorporating
ideas of illegitimate debt.

Continuity and Consolidation
in the Return of Private Finance

Integration and Competitive
Consolidation in Sovereign Lending
 Key private players returned in force during the 1970s. To what degree did this
infusion of new players shift the expectations surrounding debt continuity and
sovereign legitimacy in the 1970s and into 1980s?
 Although banks started competing with each other, they did so with a common
outlook that undermined the space for heterodox approaches in Sovereign debt.
 Private creditors easily adopted the statist approach to politically neutral lending
taken by the World Bank.
 The interaction of private banks with public institutions such as the IMF resulted in a
joint approach to Sovereign debtors that limited the receptivity to non-statist claims.
 Although challenges to the international economic system were made, they failed to
undermine the statist ideas and presumptions of debt continuity surrounding the
Sovereign debt regime.

Sovereign Borrowing
and a Rejection of Limitations
 The elites of most regimes borrowing at the time were eager to maintain a
noninterventionist conceptual framework in both the economic and political arena;
 A statist framework in Sovereign debt and its implicit denial of odious debt ideas
allowed borrowing elites to access international bank capital through multiple state
organs, for vague purposes, and in some cases in contravention of clear domestic
guidelines;
 Thus, the integrative pressure on both the creditor and the borrower side of debt
adjustment negotiations further normalized fundamentally statist ideas in the
Sovereign debt regime though the 1980s, making it more difficult to make or accept
opposing arguments about debt discontinuity in the international economic arena.
 Even the IMF, a key actor in the debt crisis during the 1980s, adopted an explicitly
neutral approach to questions of internal regime politics and, like the IBRD, interpted
this decision through a statist lens in both its initial lending decisions and its
expectations for country repayment.

Limiting Alternatives
 It is perhaps surprising that, given the number of countries implicated in debt crisis,
the period witnessed no real effort at principled repudiation. This was so despite a
series of major regime changes.
 These new regimes’ decisions emphasized the degree to which a statist expectation
of debt continuity had already become dominant and normalized, even in a
postcolonial era of massive political upheavals.
 The 1970s consolidation of private creditors, and their interaction with public
international financial institutions, helped to regulate this practice.
 This background shaped and stiffed the approach taken to key cases in the 1980s,
including post regime-change Nicaragua and Philippines, and the geo-strategically
complicated case of the Iranian debt negotiations.
 This integrated approach gave rise to a fairly standard and formalized mechanism for
dealing with debt problems.

Legitimacy and Debt
at the Turn of the Century

Trends going into the New Millenium
 Despite the shock of the 1980s’ debt crisis, private actors returned to Sovereign lending
enthusiastically in the last decade of the millennium;
 The end of the material and ideational competition between the US and the Soviet Union
created more flexibility in international relations than had existed for nearly half a century;
 The principles adopted by regional and international development banks through the 1990s
indicate a shift from the strictly statist approach of decades prior;
 This flexibility opened space for a range of global arguments and movements associated
with the ideas of popular Sovereignty, including expanded claims to self-determination and
human rights and insistence on more governmental accountability;
 There is evidence that a new opening has emerged for thinking through political legitimacy in
Sovereign lending;
 Recent cases implicating questions about legitimate debt, including Iraq and Ecuador, raise
the possibility of more flexibility in future Sovereign debt markets.

Trends in Creditors Interaction
 Action by individual creditor government can also reveal a shift in approach: for example
Norway, motivated by ethical commitment, cancelled a range of debts owed by Ecuador,
Egypt, Peru and Jamaica, explicitly taking the view that creditors and borrowers were
jointly accountable for certain debt obligations;
 In 2003, 9 major banks from 7 countries authored guidelines on socially responsible project
finance lending, which have been adopted by 79 financial institutions as of 2013: these
guidelines provide assessment of banks’ activities according to a public benefit and human
right standards;
 The adoption of principles related to an supportive of non-statist concepts of Sovereignty
has emerged in international tribunals as well, in particular though more frequent
discussions of corruption (e.g. World Duty Free v. The Republic of Kenya where the
concessions contracts of the former government were the result of bribery);
 The larger numbers of small and new creditors that now participate in Sovereign lending
has increased the potential for non-statist reputational assessment and has disaggregated
creditors’ interests.

 All this raises the question of whether a new opening has emerged for thinking about
issues of Sovereign legitimacy in debt and repudiation.
 A strict insistence on debt continuity counters key elements of the contemporary
international political discussion, and more flexible approaches also appear to be
enabled by new developments and entrants in contemporary capital markets.
 However, the background norm seems to remain relevant across the majority of debt
interactions.
 What is important to understand is that in “Sovereign debt”, the practices and the
discussions in this area depend upon an implicit but politically controversial theory of
Sovereign legitimacy.

Conclusions
 Debt continuity is inherently political and, especially given the conceptual trends in
international politics over the last century, its seeming inevitability only deepens the
question of why it continues to hold away.
 Part of the explanation lies in the 20th
Century interaction among political actors,
broader ideological shifts, and dynamics of creditor competition and consolidation.
 Today the shift in the international political and legal discourse toward a non-statist
language of governance, democracy, and human rights has intensified.
 The likely success of particular proposals and the possible development of legal
custom depend on broader structural features of international politics and finance. As
such, lawyers and activists concerned with strictly statist approaches in Sovereign debt
should ideally expand their efforts to expand this new framework even further.

That’s all Folks.
Thanks.
“Rather go to bed without dinner
than to rise in debt.”
…………………………..
(Benjamin Franklin)

Rethinking Sovereign Debt

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