What other countries can learn from Costa Rica’s debt repudiation

1 November by Eric Toussaint

In January 1917, the government of Costa Rica, under President Alfredo González, was overthrown by his Secretary of the Army and Navy, Federico Tinoco, who called new elections and established a new constitution in June 1917. The Tinoco putsch was supported by the oligarchy, who rejected the policies of the previous government. For good reason – it had decided to levy a tax on property and a progressive income tax. |1| Tinoco also had the support of the director of the infamous North American transnational United Fruit Company (Chiquita Brands International since 1989), known to have contributed to the overthrow of several governments in Latin America in order to maximise its profits. |2|

The Tinoco government was then recognized by several South American States, as well as by Germany, Austria, Spain and Denmark. The United States, Britain, France and Italy refused to recognize it.

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Federico Tinoco

In August 1919, Tinoco left the country, taking with him a large sum of money which he had just borrowed in his country’s name from a British bank, the Royal Bank of Canada. |3| His government fell in September 1919. A provisional government then restored the former constitution and called new elections. Law No. 41 of 22 August 1922 declared null and void all contracts entered into between the executive power and private individuals, with or without the approval of the legislature, between 27 January 1917 and 2 September 1919; it also annulled Law No. 12 of 28 June 1919, which had authorized the government to issue sixteen million colones (the Costa Rican currency) in paper money. It is worth pointing out that the new president, Julio Acosta, at first vetoed the debt repudiation law, arguing that it went against tradition, which was to honour international obligations contracted towards creditors. But the Constitutional Congress, under popular pressure, maintained its position and the President finally rescinded his veto. The law repudiating debts and all contracts entered into by the previous regime constitutes a clear break with the tradition of continuity of obligations of States despite a change of regime. The unilateral sovereign decision by Costa Rica clearly resembles the decision made in 1867 par by President Benito Juárez, supported by the Congress and the people of Mexico, to repudiate the debts claimed by France. |4| It is also in line with the Bolshevik decree repudiating Tsarist debts adopted in 1918.

Great Britain threatened Costa Rica with military intervention if it did not compensate the British companies affected by the repudiation of the debts and contracts. These companies were the Royal Bank of Canada and an oil company. London sent a warship into Costa Rica’s territorial waters. |5|

Costa Rica held to its position of refusing compensation by loudly and clearly proclaiming that:
“The nullity of all the acts of the Tinoco regime was definitively settled by a decree of the Constitutional Congress of Costa Rica, which was the highest and ultimate authority having jurisdiction upon that subject, and its decision on that question, made in the exercise of the sovereign rights of the people of Costa Rica, is not open for review by any outside authority.” |6|

In order to find a solution, Costa Rica agreed to call in an international arbitrator in the person of William Howard Taft, Chief Justice of the US Supreme Court, to express his opinion on the two main disputes with Great Britain – the Royal Bank of Canada question and that of an oil concession that had been granted by the dictator Tinoco to British Controlled Oilfields Ltd.

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William H. Taft, president of United States of America (1909-1913).

By involving Taft, who had been president of the United States from 1909 to 1913, Costa Rica hoped to win its case by taking advantage of Washington’s interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. in marginalising Britain in the region. And that is indeed what happened.

Taft’s decision was to reject London’s demands for compensation.

It is important to look closely at Taft’s arguments. Firstly, he clearly establishes the principle that the despotic nature of the Tinoco regime was of no importance.

In his opinion, William H. Taft says: “To hold that a government which establishes itself and maintains a peaceful administration, with the acquiescence of the people for a substantial period of time, does not become a de facto government unless it conforms to a previous constitution would be to hold that within the rules of international law a revolution contrary to the fundamental law of the existing government cannot establish a new government.” Which means that Taft rejects Costa Rica’s argument involving the nature of the Tinoco regime. According to Taft, Tinoco, who de facto exercised control over the State even if he did not respect the constitution, had the right to contract debts in the name of that State.

Taft’s argument, cited above, opens the way to the recognition of revolutionary governments who come to power without respecting the constitution. Taft declares that if we exclude the possibility of an unconstitutional government becoming a regular government, it implies that international law would prevent a people who have carried out a revolution from setting up a new legitimate government – which according to Taft is inconceivable. Of course, in practice, what has happened most often over the last two centuries is recognition (and support by the government in Washington, in particular) of dictatorial regimes who have overthrown democratic regimes, support for these dictatorial regimes in getting financing abroad, and pressure being put on democratic regimes which succeed them to shoulder the debts contracted by the dictatorship. This underscores the difference between the theory, based on the history of the birth of the United States out of rebellion against a constitutional British regime in 1776, and the actual practice and policies of the United States.

Taft’s opinion contains a passage which affirms that the rule of continuity of obligations of States must be respected despite a change in regime: “Changes in the government or the internal policy of a state do not as a rule affect its position in international law. (…) though the government changes, the nation remains, with rights and obligations unimpaired (…). The principle of the continuity of the states has important results. The state is bound by engagements entered into by governments that have ceased to exist; the restored government is generally liable for the acts of the usurper (…)” |7| This clearly shows the conservative nature of Taft’s position.

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The owner of the United Fruit Company (now Chiquita in 1989) had provided support to the dictator Federico Tinoco

On the other hand, Taft supports Costa Rica against Britain on the basis of other important arguments. Taft says that the transactions between the British bank and Tinoco are full of irregularities and that the bank is liable for them. He adds that “The case of the Royal Bank depends not on the mere form of the transaction but upon the good faith of the bank in the payment of money for the real use of the Costa Rican Government under the Tinoco régime. It must make out of its case of actual furnishing of money to the government for its legitimate use. It has not done so.” |8| Let’s follow Taft’s reasoning: Tinoco could contract loans even though he took power in violation of the country’s constitution, but he needed to do so in the interest of the State. Taft says that Tinoco contracted the loans from the Royal Bank of Canada for his personal benefit. |9| Taft adds that the bank was fully cognisant of the fact and was therefore a direct accomplice. According to Taft’s reasoning, had Tinoco borrowed money to develop the railway network, the regime that succeeded him would have been under obligation to repay the debt.


The USA’s motivations regarding the two repudiations (Cuba and Costa Rica)

The United States’ motivation in the two repudiations that have just been analysed (Cuba in 1898 and Costa Rica in the 1920s) is clear: to increase their influence and power in the region. Cuba was in a strategic location for Washington; the rich island was just a stone’s throw from the coast of the United States. With Puerto Rico, which the United States had also taken from Spain in 1898, Cuba was the last Spanish colony in the Americas. As for Costa Rica, it is part of Central America, which the United States considers its own “back yard”. Until then, Britain had been the dominant financial power in the entire region. The United States was very pleased to oust a large British bank from the country and send a warning to everyone else: other repudiations could take place, since the British banks, like the French banks, had dirtied their hands in highly irregular affairs that kept Latin American countries in debt. And the US banks were chomping at the bit to take over that action themselves.

In 1912, Taft, then president of the United States, had said in a speech: “The day is not far distant when three Stars and Stripes at three equidistant points will mark our territory: one at the North Pole, another at the Panama Canal, and the third at the South Pole. The whole hemisphere will be ours in fact as, by virtue of our superiority of race, it already is ours morally.” |10| President Taft actively backed the extension of North American banks into Latin America in general and Central America in particular. |11| In December 1912, he declared before Congress: “[…] the Monroe doctrine is more vital in the neighborhood of the Panama Canal and the zone of the Caribbean than anywhere else. There, too, the maintenance of that doctrine falls most heavily upon the United States. It is therefore essential that the countries within that sphere shall be removed from the jeopardy involved by heavy foreign debt and chaotic national finances and from the ever-present danger of international complications due to disorder at home. Hence the United States has been glad to encourage and support American bankers who were willing to lend a helping hand to the financial rehabilitation of such countries[…]” |12|

Thus Taft’s ruling in favour of Costa Rica was highly calculated. He refused to support Costa Rica’s argument concerning the despotic and unconstitutional nature of the Tinoco regime |13|, whereas it would have been easy to put that argument forward, since Washington and London had both refused to recognize that regime. He chose other arguments. He wanted to avoid establishing a precedent based on the democratic or non-democratic nature of a regime. He knew perfectly well that Washington and US corporations were supporting dictators, and would continue to support dictators in the future – not to mention actively contributing to putting them in power.


Arguments in favour of Greece, Argentina, Tunisia, etc.

Certain arguments used by Taft are useful to the cause of the Greeks and other peoples groaning under the weight of debt.

Taft asserts that the debts and other obligations contracted by Tinoco are null and void because he did not adhere to the constitution he himself had had adopted after his coup. That constitution stipulated that the type of obligations Tinoco had contracted required a joint vote of the Senate and the Chamber of Deputies. However, only the Chamber of Deputies had voted in favour of granting the oil concession and the tax exemptions to the British company. Consequently, according to Taft, the contract was not valid. |14|

As many Greek jurists and the Greek Debt Truth Commission have pointed out, Articles 28 and 36 of the Greek constitution were violated at the time of the adoption of the Memorandum of Understanding of 2010, which resulted in the accumulation of a new debt of 120 billion euros. |15| Regardless of the democratic or non-democratic nature of the regime in place in Greece, the fact that it contracted obligations toward creditors in violation of the Greek constitution, is in itself an argument for nullity. Obviously numerous other arguments can be added to that one in establishing the legality of repudiating the debts whose repayment is being demanded by Greece’s current creditors.

If we move to another spot on the planet, that argument could also be used in Argentina to justify repudiation of the obligations contracted with foreign creditors by the various democratic regimes that have succeeded one another since the fall of the dictatorship in 1983. Argentina’s constitution does not allow the courts of another State to be given jurisdiction when the nation contracts debts or other types of obligations.

Another argument in the opinion handed down by Taft is useful. Recall that Taft declared that the Bank “[…] must make out its case of actual furnishing of money to the government for its legitimate use.” It is clear that the creditors who have granted loans to Greece, Portugal, Cyprus, Ireland and Spain since 2010 are incapable of demonstrating “furnishing of money to the government for its legitimate use”, since that money has served mainly to repay foreign banks in the major lender countries and the loans were granted on condition that policies contrary to the interests of the country be conducted.

This argument also applies to the debts contracted by Tunisia and Egypt after the fall of those dictatorships in 2011. The debts were not contracted in the interests of the people and of the nation. They were not contracted for legitimate purposes.

In conclusion, the interest of Taft’s ruling is that it does not base the nullity of the debts claimed against Costa Rica on the despotic nature of the regime that contracted them. Taft’s ruling is founded on the use that was made of the loans and on adherence to the country’s internal legal standards. Taft’s ruling affirms that while in principle there is a continuity of obligations of States even in the case of a change of regime, those obligations may be repudiated if the funds borrowed were not used for legitimate purposes. He adds that if the contracts resulted in violation of the internal rules in force in the country (for example its constitution) or contain irregularities, that country has the legal right to repudiate those contracts.

We have no sympathy for Taft and it is obvious that his motives were anything but disinterested. But whether we like it or not, Taft’s arbitration constitutes an international reference for application of the law with respect to debts and other obligations. It is fundamental for States to avail themselves of their right to repudiate illegitimate debts.


Translated by Snake Arbusto


Footnotes

|1| See Odette Lienau, Rethinking Sovereign Debt: Politics, Reputation, and Legitimacy in Modern Finance, Harvard, 2014, p. 101

|2| For information on United Fruit Company: https://en.wikipedia.org/wiki/Unite...

|3| See Sarah Ludington, G. Mitu Gulati, Alfred L. Brophy, “Applied Legal History: Demystifying the Doctrine of Odious Debts”, 2009

|4| This unilateral sovereign decision is also not unrelated to the decision made by the Congress of the United States to repudiate the debts contracted by the Confederate States (see above) with both foreign and domestic creditors, despite the fact that in that case there was no change of regime.

|5| Odette Lienau, op. cit. p. 108.

|6| Cited by Odette Lienau, op. cit. p. 105

|7| Odette Lienau, op. cit. p. 110

|8| Justice Taft, cited in Patricia Adams, Odious Debt, 1991, p. 168.

|9| Tinoco arbitration, 1. R.I.A.A. P. 394. See Sarah Ludington, G. Mitu Gulati, Alfred L. Brophy, op. cit, p. 267.

|10| Quotation taken from Gregorio Selser, Diplomacia, garrote y dolares en América Latina, Buenos Aires, 1962 and used by Eduardo Galeano, Open Veins of Latin America: Five Centuries of the Pillage of a Continent, Monthly Review Press, 1973, online edition, p. 106.

|11| See Sarah Ludington, G. Mitu Gulati, Alfred L. Brophy, op. cit., p. 266.

|12| William H. Taft, Message of the President of the United States on our foreign relations, communicated to the two Houses of Congress, December 3, 1912 (http://www.presidency.ucsb.edu/ws/?...). Cited by Yves L. Auguste, “La doctrine de Monroe, couverture de l’impérialisme”, in Revue de la Société haïtienne d’histoire et de géographie. Sept.-Dec. 1996 (in French).

|13| As we have seen, he even defended the Tinoco regime on the grounds that a people needs to be able to overthrow an existing regime via revolution in order to establish a new one, without being held to the previous constitution.

|14| Odette Lienau, op. cit. p. 113.

|15| See the preliminary report (June 2015) op. cit. at http://www.cadtm.org/Preliminary-Report-of-the-Truth and the second report (September 2015) at http://www.cadtm.org/Greece-Assessment-of-the-debt-as

Author

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.


Translation(s)

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