Volume 6, Issue 3 - Sovereign Debt Restructuring: Politics, Reputation, and Legitimacy in International Finance

This short article is an introduction to the Book Review Symposium on Rethinking Sovereign Debt: Politics, Reputation, and Legitimacy in Modern Finance (Harvard University Press, 2014, 331 pp.). Given that several of the symposium comments detail the basic contours of the book, I do not extensively summarize the arguments of each chapter. However, the essay briefly presents the central motivations, questions, and assertions of the project.

Lienau’s book on ‘Rethinking Sovereign Debt’ delves into international finance to shed light on its background rules, overarching ideologies and interacting actors, disentangling the social norm of sovereign debt continuity and its institutional foundations. What a formalistic legal reasoning would interpret as a self-contained bilateral contract is then situated in historical time and social space populated by a variety of actors (debtors and creditors), co-existing legal regimes and evolving principles of reference. Her focus on odious debt highlights situations where debt continuity is challenged by major events in the sovereign borrower status (such as major political regime change, corruption and human rights abuse) which challenge debt legitimacy. This comment expands on her thoughtful analysis by linking debt continuity to the borrowing sovereign entity as a going concern. Sovereign borrowing makes lenders involved with this ongoing entity through time and circumstances. Ongoing sovereign debt management is featured by both debt securities market trading and the refinancing mechanism. In turn, refinancing involves public finances with their public benefit missions, central banking and the monetary base management. In this context, socially responsible lending and borrowing may be facilitated by acknowledging the bonding relationship between the borrowing sovereign entity and its creditors, including when default occurs.

“Rethinking Sovereign Debt: Politics, Reputation, and Legitimacy in Modern Finance” by Odette Lienau convincingly challenges the notion that the norm of debt continuity is a “stable and inevitable market principle” by providing a thorough analysis of the historical and political contexts surrounding this norm. The author’s approach which goes beyond the “market narrative” on the norm of debt continuity provides significant insights into the difficult issues of debt repudiation. This approach reveals the politically and historically variable nature of the norm of debt continuity. As such, the author demonstrates the openness and the possible development of sovereign debt practices towards accepting a more flexible and non-statist approach to sovereign debt management.

The book under review seems especially relevant to the intergovernmental policy dialogues that have recently focused on how creditors and a borrowing government should vet sovereign borrowing, and how to hold the lender and borrower accountable for their decisions. The book seeks to specify under what circumstances, if any, there are limits to the legal obligation to repay a sovereign loan. While repayment is always required except in cases of sovereign insolvency when it is just not possible, there have been exceptions to absolute repayment obligation in practice and in legal theory. This review builds on the author’s analysis of determinants of illegitimacy (which would remove the obligation to repay) in order to examine why governments in fact repay their loans, why the loss of access to credit makes repudiation of odious loans rare, and how if enforcing the obligation to repay were restricted to “responsible” lending and borrowing under internationally agreed terms, it could advance socially and environmentally sustainable development, while maintaining normal financial market activity of sovereigns. Finally, complementing a loan-by-loan approach, this paper calls for an internationally concerted process for more effectively and fairly resolving sovereign insolvencies.

Reviewing and commenting on Lienau’s book Rethinking Sovereign Debt, Politics, Reputation, and Legitimacy, this paper agrees with most of her points, aiming at supporting and complementing rather than contradicting her line of argument. It wants to corroborate her points as well as to bring up aspects that the book does not discuss. It presents two main comments on the more civilized treatment of sovereign debtors before WWII, and on the role of the Bretton Woods Institutions after 1945 that – as Lienau correctly notes – changed the positon of debtors fundamentally. The paper shows that going further back into history than the book did, namely sovereign debts in the nineteenth century, strongly corroborates Lienau’s line of argument regarding the period before WWII. The paper complements the role of the Bretton Woods Institutions with further facts, arguing that their strongly statist view is also self-serving and helpful to support multilateral lending practices violating these institutions’ statutes. Finally, the new tendency back to a non-statist regime she rightly observes is commented on, pointing out that present debt management in the eurozone constitutes a considerable backlash.

What is the relationship of a government to its population as it pertains to sovereign debt? And how does this fit into the larger web of relationships and obligations that make up the international financial arena? These questions are incredibly difficult to think through – beyond the capacity of one author alone. I am therefore grateful to have the company of Yuri Biondi, Barry Herman, Tomoko Ishikawa, and Kunibert Raffer in beginning to consider them. In addressing their thoughtful and thought-provoking comments, I see this response less as an opportunity to answer every potential challenge or differential emphasis. Indeed, the comments by and large extend the analysis of the book in incredibly insightful ways. Instead, I take this brief essay as a chance to identify several themes uniting the responses, and to highlight how these themes raise additional questions for the sovereign debt regime going forward. In particular, the comments suggest the ways in which the issues and actions associated with questions of sovereign legitimacy in the debt market exist not as dichotomies but rather on a continuum. I fully agree with this implicit characterization, and contend that – given that this is the case – challenging the market narrative that supports the repayment of odious debt should help to undermine resistance to reforming the regime for restructuring sovereign debt more generally. In addition, the comments emphasize how sovereign debt can be thought of as embedded in two types of social contract, both of which should shape how we think of appropriate policy responses to the challenges of the contemporary moment.