Two centuries of sovereign debt conflicts

Book review “Sovereign Debt Diplomacies” (part 1)

13 January 2022 by Eric Toussaint

Sovereign Debt Diplomacies: Rethinking Sovereign Debt from Colonial Empires to Hegemony, published by Oxford University Press in 2021, honorably takes its place among the numerous publications on the question that have come out over the last two decades. [1]

As it happens, I am the author of two books on the issue of sovereign debt Sovereign debt Government debts or debts guaranteed by the government. , The Debt System, A History of Sovereign Debts and their Repudiation, [2] which covers the period from the beginning of the 19th century to the Second World War, and Banque mondiale : une histoire critique, from the Second World War to the present day, [3] which meant I was particularly interested in their endeavour. The result of a considerable amount of work by editors Pierre Pénet and Juan Flores Zendejas, a score of authors have contributed from a diversity of points of view about foreign debt disputes that have arisen over two centuries, beginning early in the 19th century and up to the present. The review starts with a brief summary of Pierre Pénet’s and Juan Flores Zendejas’ arguments before passing on to a critical judgement of some points in the contributions.

The editors distinguish four periods in the methods of management of sovereign debt by States and private creditors. We largely agree with their division into four periods, of which I offer here a short summary.

First period: from 1820 to 1933, imperialistic responses were successfully used to coerce debtor states.

Second period: from 1933 to 1970, in a number of cases, debtor states managed to profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. from creditors’ weaknesses in a context of crisis, suspension of debt payments among countries of the North, world war and finally decolonizations.

Third period: from 1960 to the 1980s, third world countries tried, without success, to create a ‘New International Economic Order’.

Fourth period: from the 1990s to the present day the creditors have won back the advantage, States’ immunity in the face of creditors have been seriously cut down.

In more detail:

 1.1 Imperialist responses to sovereign debt crises (1820–1933)

Concerning the first period, Pierre Pénet and Juan Flores Zendejas write, “On the one hand, creditors from the North benefited awesomely from the colonial wars waged by their home states on their behalf. On the other, private capital was an essential cog in the exploitative and extractive system that supported the building and maintaining of colonial empires.” (p. 18) They continue, “we identify sovereign debt as a powerful tool of colonial empire-building. In the nineteenth century, capital market expansion encouraged the creditors of industrialized countries to invest heavily abroad. This influx of foreign capital dangerously inflated the debt of peripheral countries, bringing them closer to insolvency.”

Sovereign debt as an instrument for empire building

They tell how, when repayment default became a real menace, private creditors, with the help of powerful states such as Britain or France took control of the indebted State’s resources in order to assure repayment. They add that, “more punitive methods were available, such as the use of gunboats or the threatened use of them by imperial powers” (p. 37), for instance in “Egypt and Tunisia, where the suspension of debt repayments provided justification for European powers to assert colonial control. Military invasion then led to full-fledged colonization.” (p.18)

 1.2 Concerning the second period “When Repayment Takes a Backseat (1933-70s)” (p. 19).

Pierre Pénet and Juan Flores Zendejas write, “Beginning in 1931, the majority of states had no alternative but to suspend 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. payments on their foreign obligations. The economic consequences of the Great Depression combined with the rising political uncertainties in the years leading up to the Second World War would effectively postpone the negotiations between borrowers and bondholders to after 1945.” Then “When the question of debt repayment resurfaced in 1945, capital markets were virtually shut down.” (p. 20)

Beginning in 1931, the majority of states had no alternative but to suspend interest payments on their foreign obligation

“In the 1940s and 1950s, the US, the UK, and France took steps to significantly reduce the foreign debts of Egypt, Mexico, Germany, and Japan — to name a few — sometimes resorting to unilateral actions that hurt the interests of private creditors.”(p. 21)

While States had defended debt contracts in the 19th century, during the Cold War (after 1945), they accepted to call sovereign debts into question, which resulted in some debt relief. Creditors then appealed to international courts. However, these courts have often refused to rule against sovereign states. For example, “twentieth-century development of international law was grafted onto the changing realities of state power, which were themselves linked to colonial history”(p. 22).

 1.3 Postcolonial transitions and hopes of a ‘New International Economic Order’ (1960-1980)

After the wave of independences in former colonies, we see “an effort to make international law a resource not for creditors but for countries facing problems of over-indebtedness” (p. 23). So, International law has not always been at the heed of creditors. “During postcolonial transitions, legal recourses were also construed as a resource to emancipate debtor countries from the chains of colonial debt.”

An effort to make international law a resource not for creditors but for countries facing problems of over-indebtedness

It was in this context that the work of the Russian jurist Alexander Nahum Sack was turned to again. Also to be noted is Mohamed Bedjaoui’s [4] “attempt to establish a ‘New International Economic Order’, was a source of inspiration for UNCTAD UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

policies and it can be credited with having substantially influenced development economists and debt campaign movements in the 1960s–70s” (p. 23).

 1.4 Sovereign debt disputes after the cold war: hegemony or fragmentation?

The authors point out (p. 24) that “Syndicated banking grew during the 1970s and soon government loans returned to pre-1914 levels.” and “financial liberalization accelerated with the widespread policy shift towards deregulation,” (p. 24) a change particularly visible in the Thatcher and Reagan governments’ policies. “The Foreign Sovereign Immunities Act of 1976 gave a more restrictive interpretation of the principles protecting sovereign debtors and allowed debtors to sue a foreign government in US courts.” (p. 25). As sovereign debt immunity was abolished, numerous legal actions were undertaken, so “the increasing legalization of sovereign debt markets has been credited with generating additional financial uncertainties” (p. 25).

It is curious to note that Pénet and Zendejas do not mention the 1982 third world debt crisis.

Creditors use international institutions to recover debts. “When a country is unable to service its debt, it can turn to the Fund for loans, provided that its debt is deemed sustainable.” (p. 25) But, the loans are conditional on social and economic policies. Further on the authors highlight that “the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

, the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, regional development banks, and bilateral organizations also use conditionality frameworks in their country financing operations.” These multilateral institutions serve the interests of the powerful States such as the USA and the EU who often use them “to help private creditors recover their loans”(p. 26). The Argentine crisis at the beginning of the 2000s tarnished their image, showing up the part they play “in sovereign debt disputes”.

These multilateral institutions serve the interests of the powerful States

Thus, since the 1980s, the States again protect creditors who maintain their control over the indebted States. Nevertheless, nowadays, “Debt repayment mobilizes multilateral organizations like the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
, the World Bank, and the Paris Club, whose practices of conditionality are hard to resist, even by Western countries, such as Greece recently”(p. 27). An important difference with these conditionalities is that they have “a universal reach which no colonial empire (for instance the British Empire before 1914) ever had before” and are imposed as axioms.

In the 1980s and 1990s, the Washington consensus drowned the New International Economic Order initiative (NIEO) led by Third World countries that had entertained the promise that a counter-model for the organization of global financial affairs was possible.

The Washington consensus drowned the New International Economic Order initiative (NIEO) led by Third World countries

Imperative debt reimbursement was back, whatever the cost and in a context that was “unprecedented in terms of its uniformity” (p. 27) because “borrowing nations are beholden to market forces.”

However, International Law is again interested in the odious debt Odious Debt According to the doctrine, for a debt to be odious it must meet two conditions:
1) It must have been contracted against the interests of the Nation, or against the interests of the People, or against the interests of the State.
2) Creditors cannot prove they they were unaware of how the borrowed money would be used.

We must underline that according to the doctrine of odious debt, the nature of the borrowing regime or government does not signify, since what matters is what the debt is used for. If a democratic government gets into debt against the interests of its population, the contracted debt can be called odious if it also meets the second condition. Consequently, contrary to a misleading version of the doctrine, odious debt is not only about dictatorial regimes.

(See Éric Toussaint, The Doctrine of Odious Debt : from Alexander Sack to the CADTM).

The father of the odious debt doctrine, Alexander Nahum Sack, clearly says that odious debts can be contracted by any regular government. Sack considers that a debt that is regularly incurred by a regular government can be branded as odious if the two above-mentioned conditions are met.
He adds, “once these two points are established, the burden of proof that the funds were used for the general or special needs of the State and were not of an odious character, would be upon the creditors.”

Sack defines a regular government as follows: “By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.”

So clearly for Sack, all regular governments, whether despotic or democratic, in one guise or another, can incur odious debts.
doctrine developed by Sack in 1927, which states, “Debts are odious and should not be repaid when they were incurred by irregular regimes and for improper uses” (p. 28).

International rights is again interested in the odious debt doctrine

We see that “international law is a development that may also benefit debtors, since it limits creditors’ claims” (p. 29).

 Some general considerations on the book

It is pertinent to consider four periods. However, several remarks are to be made.

The authors do not question the conditions made for granting loans, what the loans are for, or why payments are suspended.

Pierre Pénet and Juan Flores Zendejas do not analyze the context and conditions imposed on loan borrowing countries, an essential exercise if one wishes to understand why so many countries have had to suspend payments. In most cases it was simply impossible to meet the conditions imposed: the amounts in fact delivered to the borrowing countries were less than half of the amounts to be repaid. In 1824, Mexico received £1.1 million for an engagement to repay £3.2 million. [5] The two loans to Greece in 1824-1825 amounted to £2.8 million, 120% of the country’s GNP Gross National Product
The GNP represents the wealth produced by a nation, as opposed to a given territory. It includes the revenue of citizens of the nation living abroad.
at the time but Greece received no more than £1.3 million. [6]

The amounts in fact delivered to the borrowing countries were less than half of the amounts to be repaid

In these cases and many others the bankers charged high commissions and brought the sovereign bonds onto the markets drastically below rating (50% reductions were not unknown). The interest rate paid by Mexico for the above mentioned loan eventually worked out to 8.60%. [7] Greece was hardly better treated paying 8.33%. [8] Pierre Pénet and Juan Flores Zendejas do not mention the consequences of the financial crises in the Northern markets that caused cash-flows to the indebted countries to dry up causing repayment defaults. In other studies Carlos Marichal [9] and myself have separately shown that these crises were caused in the markets in the North and not in the peripheral borrowing countries.

Neither do the authors consider what the loans were used for, what they financed. Some passages convey a favourable disposition towards creditors, for example, “creditors were left with little alternative but to seize control over a defaulter’s customs or tax collection system” (p. 17), which contradicts other arguments.

Creditors’ cartels were not as strong as the authors claim.

Pierre Pénet and Juan Flores Zendejas argue that in the first period from 1820 to 1933, and in particular in the 19th century, the action of the cartels of bondholders was really effective in preventing a defaulting country from borrowing again. One exception should have been mentioned and explained, which has been well identified by key authors such as William Wynne (1951). [10] After an armed struggle for succession that lasted from 1831 to 1834, Queen Maria of Portugal repudiated a loan issued in 1833 by the self-proclaimed king, Dom Miguel. She justified the repudiation by saying that bankers should not have lent money to a usurper. The loan had been issued in Paris in 1833 through the bankers Outrequin and Jauche for a sum of 40 million francs to be repaid over 32 years at 5% interest.

Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. -holders set up a repayment committee that over 54 years initiated numerous actions to try to obtain repayment. In 1891, one of Maria’s successors finally agreed to pay a paltry amount equivalent to 2.5 million francs, i.e. the amount Queen Maria had managed to recover from the treasury of Dom Miguel. (Remember that the initial loan was for 40 million.)

It is worthy of note that despite the suspension and repudiation of the debt and the ensuing protests, Portugal was able to raise fresh loans in Paris and London as of 1836-37. Although Portugal rapidly defaulted on these loans, between 1856 and 1884, fourteen further loans were issued to the tune of 58.4 million pounds sterling. [11]

This example shows that titleholders’ committees are not as successful as Pénet and Zendejas claim.

A radical analysis of the issues around sovereign debt is missing.

While the introduction presents a serious and solid critical vision, the same cannot be said for some of the contributions. In their choice of chapters, Pierre Pénet and Juan Flores Zendejas have favoured an approach that is very clearly situated in mainstream thinking, i.e. on the right of the spectrum. This is typically the case with Ugo Panizza, Mitu Gulati and Ali Coşkun Tunçer.

This would be fine if at least different points of view were present in the book, especially on the meaning of the odious debt doctrine, and if some chapters did not contain outright untruths.

Concerning the analysis of imperial debt policies, it is regrettable that key authors such as Rudolf Hilferding, Rosa Luxemburg, Georges Corm and others are simply omitted or barely mentioned, such as Carlos Marichal.

Translated by Mike Krolikowski.


[1Sarah Ludington, G. Mitu Gulati, Alfred L. Brophy, “Applied Legal History : Demystifying the Doctrine of Odious Debts”, 2009; Carmen Reinhardt and Kenneth Rogoff, This Time is Different: a Panoramic view of Eight Centuries of Financial Crises, National Bureau of Economic Research, Cambridge MA, 2008; Odette Lienau, Rethinking Sovereign Debt: Politics, Reputation, and Legitimacy in Modern Finance, Harvard, 2014; Jeff King, The Doctrine of Odious Debt in International Law. A Restatement, Cambridge University Press, 2016. See also, an important collective work to which CADTM contributed: How to Challenge Illegitimate Debt Theory and Legal Case Studies Edited by Max Mader and André Rothenbühler for Aktion Finanzplatz Schweiz (AFP):

[2London, Haymarket, 2019.

[3Paris, Syllepse, 2021, to come out in English.

[4Mohammed Bedjaoui (1929-...) was for twenty years (1982-2001) a judge at the International Court of Justice at the Hague. Member of the International Law Commission of the United Nations (1965-1982) and Special Rapporteur of the International Law Commission with respect to Succession of States with respect of matters other than treaties (13 reaorts fromd1967 ào 1981), h. was Legal-Adviser to the F.L.N, and the provisional Government of the Algerian Republic (G.P.R.A.) (1956-1962), 1956-1962, Expert of the Algerian Delegation in Evian and Lugrin Negotiations for Algeria independence (1961 – 1962); Secretary General of the Government (Algiers 1962); Minister of Justice, Keeper of the Seals (Algiers 1964 – 1970); Ambassador to France (1970 – 1979); Ambassador, Permanent Representative of Algeria to the United Nations in New York(1979 – 1982). (source: Eminent Scolars -

[5Jan Bazant, Historia de la deuda exterior de Mexico, 1823-1946, El Colegio de México, Centro de Estudios Históricos, Mexico, 1995, p. 38 (in Spanish)

[6Carmen Reinhardt and Christoph Trebesch, The pitfalls of external dependance: Greece, 1829-2015, 2015.

[9Carlos Marichal, A Century of Debt crises in Latin America, Prince­ton, University Press, Princeton, 1989, 283p.

[10See William Wynne, State Insolvency and Foreign Bondholders. Selected Case Histories of Governmental Foreign Bond Defaults and Debt Readjustments, vol. 2, New Haven, Yale University Press, 1951, pp. 361-386.

[11Eric Toussaint, Portugal’s Debt Repudiation in 1837, September 2017.

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 Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), 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, etc.
See his bibliography:
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. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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