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Sovereign debt defaults: Insights from history
Abstract
History provides many insights to address the issue of sovereign debt defaults. This article first presents a detailed account
of defaults in historical perspective. It then discusses the solutions devised in the past to address sovereign debt crises
and puts these into perspective with today’s answers when crises occur. Finally, the paper stresses the role of history when
the events studied do not occur frequently and when archival data may shed new light on the process of the resolution of crises.
The impact of odious debts declarations, of state succession, and of international relations on sovereign defaults and on
their settlement is thus also addressed.
... Second, we place the ongoing lending boom from China in historical perspective, in the tradition of many previous papers on sovereign debt and default that draw lessons from the past (see Eichengreen, 1991;Reinhart and Rogoff, 2009;Oosterlinck, 2013;Mitchener and Trebesch, 2020). In particular, we draw parallels to the syndicated bank lending boom of the 1970s, which ended in dozens of sovereign defaults in developing countries in the 1980s. ...
Compared with China's pre-eminent status in world trade, its role in global finance is poorly understood. This paper studies the size, terms and destination of Chinese official international lending on the basis of a new “consensus” database of 4900 loans and grants to 146 countries, 1949–2017. Using the loan-level lending data we estimate outstanding debt stocks owed to China for more than 100 developing and emerging economies since 2000. As of 2017, China had become the world's largest official creditor, surpassing the World Bank and the IMF. The terms of China's state-driven international loans typically resemble commercial rather than official lending. We also find that 50% of China's official lending to developing countries is not reported in the most widely used official debt statistics. These “hidden” debts have important implications for debt sustainability.
This article examines the reputation recovery of Portugal's public debt during the war of liberation against the former Habsburg ruler. Using novel datasets on long‐ and short‐term debt and nominal interest rates, this study provides evidence that the sovereign borrower used debt credibility to build a pact of regime in a revolutionary context with implications for financing the war. The Portuguese kings followed an implicit budget balance rule as a reputational scheme, which made Portugal an exceptional case of military success with a low debt‐to‐GDP ratio and low interest rates. These conclusions contribute to the literature in various attributes of war finance, debt management, and state‐making by showing that default avoidance could be as important to military success as fiscal capacity.
This article reviews recent economic and legal literature on sovereign debt in light of the COVID-19 shock. Most of the core theoretical contributions across the two disciplines hinge on immunity, and the sovereign borrower's consequent inability to commit to repay foreign creditors, as the distinguishing attribute of sovereignty. We highlight a persistent gap between sovereign debt theories grounded in immunity and empirical evidence that the governments of low- and middle-income countries borrow far more than theory would predict. On the other hand, the governments of advanced economies, generally viewed as outside the scope of this literature before the euro area debt crisis, have shown themselves to be far more commitment challenged than previously supposed. We conclude that the traditional split between a literature concerned with developing economy sovereigns that repudiate debt and one concerned with advanced economies that do not is no longer appropriate (if ever it was). We argue that shifting some attention away from immunity to a different attribute of sovereignty—authority—could help bridge the gap between the two literatures.
Expected final online publication date for the Annual Review of Economics, Volume 14 is August 2022. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
This chapter engages with the limitations of jurisdictional immunity of states in cases of commercial transactions (acta jure gestionis) by looking at state bonds and immunity against claims for their repayment. There is no international consensus as to whether immunity can subsequently be restored by the issuing state through a public act of state (actus jure imperii) that unilaterally modifies or lifts the obligation of repayment. The chapter analyses the two opposing views that have been taken by highest courts of different countries and international courts. The reasoning behind the judicial views is elucidated in order to establish why, or why not, foreign states might subsequently assert their jurisdictional immunity when sued by private investors. Placing this controversy in the wider legal context, the chapter suggests that differing perceptions of the underlying public-private law divide can be seen as an explanation of the divergent views. The respective consequences of jurisdictional immunity against claims for repayment of state bonds are addressed subsequently.KeywordsSovereign debtImmunity from jurisdictionCommercial exceptionActa jure imperii
Acta jure gestionis
In contrast to other economic calamities such as financial crises or war, the topic of nationalisation has received only little attention by economic and business historians. Drawing on Russian and Swedish archival sources, this paper takes stock of the economic losses incurred on foreign investors in the 1917 Russian revolution, with particular emphasis on the Swedish case. Constructing lower and upper bounds for the losses, the paper argues that depending on the chosen measure these were in the range from 380 to 1,140 million SEK in 1917. For a country that remained neutral throughout two world wars, the Russian revolution represents one of the largest (if not the largest) externally incurred losses on Swedish firms and households in modern history. These results suggest that the role of revolutions in international business history needs to be better understood.
Scholars continue to debate why states repay their debts to foreign creditors. The existing literature stresses the short-term economic and political costs that deter default, focusing on reputational damage, creditor reprisals, spillover costs and loss of office. International Relations scholars and economists have largely tested these explanations using quantitative methods, framing their analyses as a choice between default and non-default driven by the rational interests of states or actors within them. The three books considered here draw on qualitative methods to refine and sometimes challenge the prevailing wisdom, offering valuable insights concerning the many types and wider-ranging causes of sovereign default. These books reveal that default is not a binary outcome but instead a spectrum ranging from unilateral repudiation through to cooperative restructuring. Furthermore, governments sometimes default for economically irrational reasons, reflecting shifts in domestic-political interests or changes in state identity. This new literature also raises important questions for future researchers, especially about when default can be beneficial and how it can affect long-term relations between states.
Economists occupy leading positions in many different sectors including central and private banks, multinational corporations, the state and the media, as well as serving as policy consultants on everything from health to the environment and security. Power and Influence of Economists explores the interconnected relationship between power, knowledge and influence which has led economics to be both a source and beneficiary of widespread power and influence.
The contributors to this book explore the complex and diverse methods and channels that economists have used to exert and expand their influence from different disciplinary and national perspectives. Four different analytical views on the role of power and economics are taken: first, the role of economic expert discourses as power devices for the formation of influential expertise; second, the logics and modalities of governmentality that produce power/knowledge apparatuses between science and society; third, economists as involved in networks between academia, politics and the media; and forth, economics considered as a social field, including questions of legitimacy and unequal relations between economists based on the detention of various capitals. The volume includes case studies on a variety of national configurations of economics, such as the US, Germany, Italy, Switzerland, Greece, Mexico and Brazil, as well as international spaces and organisations such as the IMF.
This book provides innovative research perspectives for students and scholars of heterodox economics, cultural political economy, sociology of professions, network studies, and the social studies of power, discourse and knowledge.
A key feature of the full sovereign default record from 1294-2008 is that serial default is far rarer than the much-ballyhooed 1980s experience suggests. The only mass default in Europe’s long record, dating back to 1294, occurs during the Napoleonic Wars (1800-1815). The majority of the serial defaults occurred only after 1975, primarily in Africa, Asia, and Latin America, and were heavily concentrated in the 1980s. These countries’ multiple defaults, in common with some earlier default waves in Latin America, reflect the experiences of newer nation states. These defaults also occurred in conjunction with the inherent vulnerability of countries on the periphery to events in the much longer-established major financial centers. This was quite distinct from the earlier defaults seen in Europe and largely represent an aberration when taken in context of the overall historical record both before and after.
We provide a comparison of salient organizational features of primary markets for foreign government debt over the very long run. We focus on output, quality control, information provision, competition, pricing, charging, and signaling. We find that the market setup experienced a radical transformation in the recent period, and we interpret this as resulting from the rise of liability insurance provided by rating agencies. Underwriters have given up their former role as gatekeepers of liquidity and certification agencies to become aggressive competitors in a new Speculative Grade market.
This paper unpacks the role of foreign bondholders committees in influencing market access following a default during the
era before the creation of the British Corporation of Foreign Bondholders (CFB) in 1868. I argue that many ideas about this
period need to be revisited. In particular, my evidence (which uses archival work to describe market microstructures) shows
the importance of the London Stock Exchange (LSE) as a Court of Arbitration. I show how the LSE General Purpose Committee
set up a system of Collective Action Clauses, requiring majority agreement among bondholders to permit market access. I argue
that (unlike what research has argued thus far) this created powerful incentives for bondholders to get organized as they
did. Previous models and historical ‘lessons’ need to be recast.
"Odious debts" have been the subject of debate in academic, activist, and policymaking circles in recent years. The term refers to the debts of a nation that a despotic leader incurs against the interests of the populace. When the despot is overthrown, the new government — understandably — does not wish to repay creditors who helped prop up the despot. One argument has focused on whether customary international law supports a "doctrine" of odious debts that justifies the nonpayment of sovereign debts when three conditions are met: (1) the debts were incurred by a despotic ruler (without the consent of the populace); (2) the funds were used in ways that did not benefit the populace; and (3) the creditors were aware of the likely illegality of the loans. Advocates of this doctrine, which was synthesized by Alexander Sack in 1927, typically cite two examples of U.S. state practice for support: the negotiations between the United States and Spain following the Spanish-American War, in which the United States repudiated Cuba’s colonial debt, and the Tinoco arbitration, which repudiated certain debts of the deposed Costa Rican dictator, Frederico Tinoco. Those historical precedents do not support the first condition of Sack’s doctrine of odious debts, but do support the second two requirements. In addition to these two instances, United States history is rich with examples of debt repudiation by states. Those examples suggest a doctrine of odious debts that is broader and more flexible than the one written by Sack. Indeed, it may be appropriate to speak of the doctrines (not just doctrine) of odious debts.
“Unfair” sovereign debts, used, for instance, to suppress a rebellion, may be declared “odious” and not be repaid once the
former regime is overthrown. Bondholders may therefore require a premium to compensate for the higher default risk due to
the potentially odious character of these debts. On the basis of an original database of Cuban bonds, the paper shows the
existence of a risk premium of at least 200 basis points which penalized bonds issued by the Spanish occupation regime. Bond
market reactions to events changing the perception that the debts were “unfair” or that they would be repudiated are analysed
on the basis of a structural VAR.
Douglass North and Barry Weingast's seminal account of the Glorious Revolution argued that specific constitutional reforms enhanced the credibility of the English Crown, leading to much stronger public finances. Critics have argued that the most important reforms occurred incrementally before the Revolution; and that neither interest rates on sovereign debt nor enforcement of property rights improved sharply after the Revolution. In this article, I identify a different set of constitutional reforms, explain why precedents for these reforms did not lessen their revolutionary impact, and show that the evidence, properly evaluated, supports a view of the Revolution as a watershed.
The Foreign and Colonial Investment Trust (FCIT) is the oldest surviving closed end fund in the world today and was established fully half a century before similar funds appeared in the US of the 1920s. Its early success was related to its identification of a missing market, namely, the provision of a wholesale diversified investment vehicle for the investing public. Whilst much research has been conducted on aggregate international capital flows in this First Era of Globalisation, little work has been undertaken on the prime investment institutions. This micro-study seeks to fill this gap by undertaking detailed quantitative analysis of the leading investment trust investing widely in emerging markets during the First Era of financial globalisation before WWI. The history of this flagship fund over more than three decades provides an insight into the relative success of this institutional innovation as well as into the risk and returns of investing in global emerging markets over a century ago.