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The sovereign, its creditors and the law When the sovereign struggles to pay its debts, the world remains a lawless place now as before, observes Roberto Bissio. TO make ends meet, sovereigns borrow. In the not-so-distant past, sovereign debt financed military adventures or profligate lifestyles of monarchs and their courts. In the contemporary world, the first obligation of states is to respect, promote and protect human rights, and therefore it is the need for welfare-maximising development that justifies sovereign debt. There is a huge ethical and political progression from the absolutist state to one based on the democratically organised sovereignty of the people. However, when the sovereign struggles to pay its debts, the world remains a lawless territory now as before. In 1307, Philip IV of France avoided bankruptcy by accusing his creditors, the Knights Templar, of heresy and sodomy and sending them to the stake. If, however, force was on the side of the creditors, they did not hesitate to use it against the sovereign debtor at fault (default). In 1902 the navies of Britain, Germany and Italy blocked the ports of Venezuela to collect their debt in arrears. Dozens died as a result of this exercise in 'gunboat diplomacy' and the European powers took control of Venezuelan customs until 1930. Popular reaction in Latin America against this abuse was widespread but only one government showed solidarity with the victims. Argentine Foreign Minister Luis Maria Drago issued on 29 December 1902 a document outlining what is now known as the Drago Doctrine: violent recovery of a debt is illegal. This is obviously most helpful for small debtor states, defending them against the arbitrary powers that frequently act as judge, jury and executioner. Apart from banning acts of war against debtors, however, nothing has been done since then to resolve with legitimacy and impartiality disputes between creditors and sovereign debtors. In 1956, the Argentine government could not repay short-term debts contracted by the government of General Pedro Aramburu after overthrowing Juan Peron the year before. Argentina accepted the invitation of France to negotiate a settlement with the creditor countries, and thus was born the Paris Club, in which sovereign creditors negotiate with sovereign debtors the rescheduling of official debts. It is an informal and partial mechanism where each small debtor country must sit down and negotiate in very difficult conditions with the governments of 19 powerful countries (the United States, most of Western Europe, Canada, Japan, Israel and Russia). After almost 60 years, the Paris Club has reached 430 agreements to renegotiate the official debt of 90 debtor countries totalling $583 billion. But in the last two decades the nature of sovereign debt has changed, as governments no longer borrow from other governments but sell bonds to domestic and foreign private investors. A state lending to another has the assurance that it will recover its money, if not by gunboats, then by the collective pressure of the Paris Club. But who will defend the individual investor? Market logic is implacable. If the debtor is perceived as risky, the bond buyer will demand high interest rates. The countries that most need the money pay more dearly for it. To lower risk rates, countries issue bonds in 'hard' currencies (dollar, euro or yen), they use large international banks as intermediaries and eventually resign legal sovereignty, allowing the laws and courts of New York, London or Tokyo to address any dispute with creditors. Thus, the banks and the financial systems of these cities thrive at the expense of the needs of developing countries. Sovereign bonds were first issued in the 16th century by Philip II, who made history as the greatest king of Spain, despite three defaults (and subsequent restructuring) of his debt. The issuing of bonds to finance development skyrocketed in the last two decades. A total of $55 trillion in sovereign bonds is now in circulation, a hundred times more than the entire government-to-government debt renegotiated by the Paris Club in its history. But the financial architecture underpinning all this depends ultimately on a bunch of judges such as Thomas Griesa from New York, of whom the New York Times said that he 'seems not to have understood' the functioning of the bond market under his jurisdiction and whose decision in favour of so-called 'vulture funds' and against good-faith investors 'hardly inspired confidence in the American legal system'. The International Capital Market Association (ICMA), which groups the intermediaries of sovereign bonds, started to demand new rules and the Group of 77 and China drafted at the United Nations a resolution to start negotiating 'a multilateral legal framework for sovereign debt restructuring processes . to [increase] the efficiency, stability and predictability of the international financial system'. On 9 September the General Assembly of the UN voted 124 to 11 (and 41 countries abstained) in favour of this crucial resolution. The United States, the United Kingdom, Japan and Germany voted against, but a majority of the European countries abstained, as well as New Zealand. Russia was the only Paris Club member voting in favour. The decision opens the door to negotiations to establish for the first time in history a fair way out of external debt crises. This can change the history of sovereign debt, which is the financial expression of the history of global inequities. Roberto Bissio is coordinator of Social Watch, an international network of civil society organisations. The above is a revised version of an article that was first published in Spanish in Uno (Peru). |
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