Welcome to DU!
The truly grassroots left-of-center political community where regular people, not algorithms, drive the discussions and set the standards.
Join the community:
Create a free account
Support DU (and get rid of ads!):
Become a Star Member
Latest Breaking News
General Discussion
The DU Lounge
All Forums
Issue Forums
Culture Forums
Alliance Forums
Region Forums
Support Forums
Help & Search
Economy
In reply to the discussion: Weekend Economists Revere Two Kings January 16-19, 2015 [View all]Demeter
(85,373 posts)2. It’s time we reconsidered the principle that states must always repay their sovereign debt
http://blogs.lse.ac.uk/politicsandpolicy/its-time-we-reconsidered-the-principle-that-states-must-always-repay-their-sovereign-debt/?utm_content=buffer6616c&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
Is it true that states must always repay their sovereign debt even after a major regime change to maintain their future creditworthiness? Odette Lienau writes that this conventional wisdom on sovereign debt is overly simplistic and in some cases entirely wrong. She argues that the assumptions of political neutrality, creditor uniformity, and historical constancy, upon which this common narrative rests, do not stand up to closer inspection. This suggests that more flexibility exists in terms of our understanding of government debt and how the market determines creditworthiness.
Conventional wisdom holds that all nations must repay debt. Regardless of the legitimacy of the regime that signs the contract, the actual use of loan proceeds, or the exigencies of any potential default, a country that fails to honour its loan obligations damages its reputation, inviting still greater problems down the road.
Yet difficult questions have arisen from this assumption: Should a black-African-led South Africa really be expected to repay apartheid era debt? Or, given that Saddam Hussein was a dictator who used funds for the oppression of a majority of Iraqs population, would it be appropriate to require future Iraqi generations to pay for his iniquity? Although the strict repayment norm comes into starkest relief in situations of regime change and transitional justice, its expectations filter into debt negotiations more generally. If repayment is expected even in such extreme circumstances, then it is reasonable to expect debtors to bear most of the burden in all other situations as well.
Rethinking sovereign debt
My book, Rethinking Sovereign Debt: Politics, Reputation, and Legitimacy in Modern Finance, argues that the market narrative supporting the repayment norm is overly simplistic and in some respects entirely wrong. I suggest that the framing of repayment and reputation as a market principle immobilises our sovereign debt regime in part by propagating the following three assumptions.
First, the dominant approach implies that although creditors may assess a specific borrowers political characteristics through the lens of sovereign risk, judgements about a borrowers repayment decisions are not shaped by politics per se. Rather, they are simply the best objective assessment of a given set of material facts, and are therefore unchallengeable on the basis of political or moral principle.
Second, the mechanism of sovereign reputation itself is assumed to be similarly free from subjective and historically variable political judgments, and therefore similarly immune from challenge.
And third, all rational creditors are expected to respond in basically the same way to particular debt events, suggesting that efforts to understand or reshape their identities and interests would be futile.
But in fact none of these assumptions seem to hold up to closer scrutiny, which means that the strict debt repayment norm is more politically and historically variable than it first appears. To begin with, any discussion of sovereign debt is rendered intelligible only by quietly incorporating one of the most highly politicised (and thus deeply contested) terms in international law and international relations: sovereignty. Depending on the theory of sovereignty implicitly or explicitly adopted, the practices of sovereign debt and reputation could be expected to diverge significantly. Furthermore, creditor uniformity cannot simply be assumed, and in fact different creditors may interpret and historically have interpreted the same politicised debt repudiation in opposing ways. The post-World War I cases of the Soviet Union and Costa Rica have been held out to suggest the futility of challenging the timeless rules of capital markets. But in fact these cases demonstrate quite the opposite, showing how creditors can reasonably make reputational judgements in favour of post-repudiation lending, at least under conditions of market competition and ideological flexibility. The Soviet case in particular has been misinterpreted in the economics literature; a look at the historical correspondence between banks and governments, rather than only at bond float data, demonstrates that private interest did exist in lending to the new Soviet regime, at least among new American banks eager to compete with established European financiers...MORE
About the Author
Odette Lienau is Associate Professor of Law at Cornell University Law School. She is the author of Rethinking Sovereign Debt: Politics, Reputation, and Legitimacy in Modern Finance(Harvard University Press, 2014).
Is it true that states must always repay their sovereign debt even after a major regime change to maintain their future creditworthiness? Odette Lienau writes that this conventional wisdom on sovereign debt is overly simplistic and in some cases entirely wrong. She argues that the assumptions of political neutrality, creditor uniformity, and historical constancy, upon which this common narrative rests, do not stand up to closer inspection. This suggests that more flexibility exists in terms of our understanding of government debt and how the market determines creditworthiness.
Conventional wisdom holds that all nations must repay debt. Regardless of the legitimacy of the regime that signs the contract, the actual use of loan proceeds, or the exigencies of any potential default, a country that fails to honour its loan obligations damages its reputation, inviting still greater problems down the road.
Yet difficult questions have arisen from this assumption: Should a black-African-led South Africa really be expected to repay apartheid era debt? Or, given that Saddam Hussein was a dictator who used funds for the oppression of a majority of Iraqs population, would it be appropriate to require future Iraqi generations to pay for his iniquity? Although the strict repayment norm comes into starkest relief in situations of regime change and transitional justice, its expectations filter into debt negotiations more generally. If repayment is expected even in such extreme circumstances, then it is reasonable to expect debtors to bear most of the burden in all other situations as well.
Rethinking sovereign debt
My book, Rethinking Sovereign Debt: Politics, Reputation, and Legitimacy in Modern Finance, argues that the market narrative supporting the repayment norm is overly simplistic and in some respects entirely wrong. I suggest that the framing of repayment and reputation as a market principle immobilises our sovereign debt regime in part by propagating the following three assumptions.
But in fact none of these assumptions seem to hold up to closer scrutiny, which means that the strict debt repayment norm is more politically and historically variable than it first appears. To begin with, any discussion of sovereign debt is rendered intelligible only by quietly incorporating one of the most highly politicised (and thus deeply contested) terms in international law and international relations: sovereignty. Depending on the theory of sovereignty implicitly or explicitly adopted, the practices of sovereign debt and reputation could be expected to diverge significantly. Furthermore, creditor uniformity cannot simply be assumed, and in fact different creditors may interpret and historically have interpreted the same politicised debt repudiation in opposing ways. The post-World War I cases of the Soviet Union and Costa Rica have been held out to suggest the futility of challenging the timeless rules of capital markets. But in fact these cases demonstrate quite the opposite, showing how creditors can reasonably make reputational judgements in favour of post-repudiation lending, at least under conditions of market competition and ideological flexibility. The Soviet case in particular has been misinterpreted in the economics literature; a look at the historical correspondence between banks and governments, rather than only at bond float data, demonstrates that private interest did exist in lending to the new Soviet regime, at least among new American banks eager to compete with established European financiers...MORE
About the Author
Odette Lienau is Associate Professor of Law at Cornell University Law School. She is the author of Rethinking Sovereign Debt: Politics, Reputation, and Legitimacy in Modern Finance(Harvard University Press, 2014).
Edit history
Please sign in to view edit histories.
77 replies
= new reply since forum marked as read
Highlight:
NoneDon't highlight anything
5 newestHighlight 5 most recent replies
RecommendedHighlight replies with 5 or more recommendations
It’s time we reconsidered the principle that states must always repay their sovereign debt
Demeter
Jan 2015
#2
WAPO: Holder limits seized-asset sharing process that split billions with local, state police
Demeter
Jan 2015
#19
The Elvis Presley coverup: What America didn’t hear about the death of the king
DemReadingDU
Jan 2015
#48
As young minds leave, industrialized eastern Ukraine faces brain drain | Al Jazeera America
MattSh
Jan 2015
#31
Ukrainian men are jumping the ship for the Russian shores ahead of mobilization deadline - Fort Russ
MattSh
Jan 2015
#32
Russia may lift food import ban from Greece if it quits EU - Russian agriculture minister
Demeter
Jan 2015
#70