Decolonization and Sovereign Debt

The complex state succession cases arising from decolonization generated intense debates within legal circles. This chapter examines the tension between two stylized schools on state succession into debt: the universal succession and clean slate theories. Universal succession refers to the automatic and complete assumption of the colonial power’s rights and obligations by the newly independent state as they relate to its territory. According to the competing clean slate theory, the former colonial power’s obligations (including debts) as they relate to the territory of the newly independent state are extinguished on independence. Because these obligations are personal to a state, they lapsed on independence. The successor state thus starts life with a clean slate. This chapter provides historical insights into this legal controversy by focusing on the two scholars and practitioners of international law who embodied these two schools of thought, Judge Mohamed Bedjaoui and Professor Daniel Patrick O’Connell. We show how the fundamental disagreements between the two schools (and their radically different implications for the conditions under which colonial entities can achieve independence) have left the law on state succession in flux. Ultimately, the solutions adopted in the decolonization context and in later succession disputes remained highly case-specific and typically involved an agreement between the states concerned.

The Fortune of Geopolitical Conditions in Debt Diplomacy

This chapter revisits the relevance of geopolitical factors during sovereign debt negotiations. We explain how the Mexican government reached an agreement with international creditors for the repayment of its foreign debt in 1942, after more than twenty-five years of unsuccessful negotiations. The agreement, that included a haircut of 90 per cent, was the result of a change in the geopolitical situation of Mexico, when the United States entered the Second World War and considered that country a strategic ally. The agreement, we argue, also derived from Mexico’s proactive stance in debt negotiations and bond repurchasing. This chapter studies the process of negotiations since 1922 and the conditions that allowed Mexico to reach an unusually advantageous settlement.

Contract Provisions, Default Risk, and Bond Prices

This chapter presents a case study that investigates the pricing of key contract provisions in Puerto Rican debt. It contributes to a body of research that asks whether investors price contract provisions and, if so, whether the pricing varies with credit risk. Contract provisions across different types of Puerto Rican bonds contain multiple sources of variation. Specifically, the chapter examines investor pricing of three key legal provisions of Puerto Rican debt; general obligation debt versus the secured bonds issued by the Puerto Rico Sales Tax Financing Corporation; debt issued under New York law versus Puerto Rican law; and finally impact of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) which retroactively enacted collective action clauses for Puerto Rican debt. In each instance, we find evidence consistent with the hypothesis that investors value specific contract provisions and legal protections and more so when credit risk is high, and restructuring becomes likely.

Introduction

Every seventh year you shall practice remission of debts [Shmita]. This shall be the nature of the remission: every creditor shall remit the due that he claims from his fellow; he shall not dun [request debt payment from] his fellow or kinsman, for the remission proclaimed is of the Lord....

Independence and the Effect of Empire

‘Sovereign’ bonds issued by colonies are often supposed to benefit from an implicit imperial guarantee. This guarantee is usually presented as the main reason why yields on colonial bonds are exceptionally low. This paper investigates investors’ perception of this guarantee during the interwar period, a period during which the guarantor faced financial turmoil and some colonies began their journey towards independence. On the basis of an original database tracking the yields of six colonial bonds we show that, in general, market participants believed the guarantee would be honoured. This general observation needs, however, to be nuanced. In 1931 when Britain left the gold standard, investors felt the British guarantee was less valuable. Furthermore, when colonies were facing extreme financial distress, markets reassessed the likelihood the guarantee would be honoured. This was also the case when it became clear that India would become independent.

The Revenge of Defaulters

This chapter examines important changes in the way debtors and creditors settled sovereign debt disputes in the turmoil of the post–Second World War context. Post-war debt settlements represented an enormous task not only because of the sheer amount of debt in default but also because old methods of settlement no longer applied. Faced with the declining significance of bondholder committees, creditors increasingly sought the mediation of their governments. After 1945, the enforcement of sovereign debt claims was effectively transferred from creditor committees to creditor states. Drawing on archival data collected on several high-profile cases of debt restructuring, this chapter revisits the meaning of sovereign debt disputes in the age of interstate negotiations. First, we show that debt acquired a broader public and diplomatic meaning as states became the contractual enforcers of private debt claims. Second, we show that private creditors benefited from the active role of their states, but problems arose, notably in relation to equality of treatment between creditors. Third, we emphasize several cases of creditors attempting to elevate debt disputes to international legal forums. Although such attempts failed, they are nonetheless significant because they foreshadow many aspects and problems in the current debate on legal tools of debt dispute settlement. Section 4 assesses the efficiency of pre-1914, interwar, and post-war methods of debt settlements against several metrics of performance. Section 5 concludes.

Rethinking Sovereign Debt from Colonial Empires to Hegemony

This descriptive chapter identifies the available narratives on the evolution of sovereign debt across the four historical clusters we have chosen to examine and show how this volume updates and complements existing research. Consistent with the diplomatic framework outlined in the introduction, we survey patterns of similarities and differences between clusters in terms of risk analysis, legal clauses, bargaining power, and conceptions of state responsibility. Our periodization will not surprise the reader inasmuch it broadly conforms to the conventional reading that the Great Depression and the collapse of the Bretton Woods system in 1971 were two critical junctures that deeply altered the form of creditor–debtor interactions in the sovereign sector. Yet, as we show below, this volume also makes substantial amendments to this conventional story. First, our focus on colonial history from the nineteenth-century building of empires to postcolonial transitions allows to diversify and identify discrepancies in the available narratives on each periods. Second, our attention to colonialism leads us to pay sustained attention to debt disputes arising during the postcolonial transitions of the 1960s–70s, a cluster of defaults which has not received sufficient scholarly attention. As explained below, our proposal to jointly analyse the historical threads of sovereign debt and colonialism allows for revisiting certain well-known cases of debt disputes and to examine previously unknown or little known events. The last section of this chapter presents the general organization of the volume as well as the list of selected case studies.

Sovereignty and Debt in Nineteenth-Century Latin America

After their independence from Spain and Portugal, Latin American governments became frequent borrowers in international capital markets. However, the region’s political and economic instability also led to recurrent episodes of sovereign defaults. During the particular historical context of the nineteenth century, remedies to debt defaults were not limited to bilateral negotiations between creditors and governments. They also encompassed military interventions or control commissions formed by foreign governments, bondholders, or merchant bankers. In North Africa and the Middle East, debt defaults could even trigger military interventions from creditor states ending in the establishment of colonial regimes. This paper shows that such interventions were rare in Latin America, as creditors only enlisted their governments’ military intervention in the most extreme cases. In most cases, external control was exerted privately by bondholders and merchant banks through the imposition of economic policies promoting trade openness and fiscal management. Additionally, bondholders turned to legal methods of contractual enforcement to obtain debt settlements that limited the sovereignty of debtor states over their land, infrastructure, and resources. By the end of the century, Latin American jurists began to respond to the increasing use of legal techniques to settle sovereign debts by developing counter-legal discourses aimed at limiting foreign intrusion in sovereign affairs.

We Owe You Nothing

This chapter analyses how the context of decolonization gave rise to a new discourse in international public law on the legitimacy and legality of sovereign debts contracted during the colonial times. It focuses on the international doctrine of state succession created by ‘third-world’ legal scholars within the context of the United Nations (UN), at the UN General Assembly (UNGA), and the International Law Commission (ILC). This chapter focuses in particular on the twenty-year-long effort started in the 1960s by the ILC to codify the doctrine on the law of State Succession in respect to State Property, Archives and Debts, which led to the adoption of the so-named Convention by a majority of newly independent states in 1983. In doing so, it highlights the tools that international public law gave to the global movement in favour of the cancellation of sovereign debts contracted during colonial times. The chapter is based on archival research as well as extensive interviews with the concerned lawyers, in particular, with foremost foreign policy architect and prominent international law scholar Mohamed Bedjaoui (1929–) who opposed the continuity in sovereign debt obligations that former empires wanted to impose on newly independent states.

The Multilateral Principle-Based Approach to the Restructuring of German Debts in 1953

This chapter revisits the 1953 London Debt Agreement on German Debts (LDA). The LDA stands out from the rest of dispute settlements of that time because the restructuring of Germany’s debt overhang in a unified and orderly operation orchestrated by creditors’ governments. To understand how negotiators managed to reconcile different interests, this chapter concentrates on the innovative procedures of debt dispute adjudication designed by Allied Powers. I show that creditor states enforced a multilateral ‘principle-based’ approach in their restructuration of German debt. The principles that guided and facilitated the outcome of the LDA were: 1) capacity to pay and 2) equality of treatment between creditors. I argue that those principles were not only the result of Allied governments’ political considerations prevailing after the Second World War but that private creditors were, in fact, an important contributing force in shaping the procedure and outcome of the LDA. To be sure, the negotiations between Germany and foreign creditors took place under Allied control and according to the principles settled by foreign powers. However, in the post–Second World War context, creditors’ expectations of repayment were rather low. Anxious not to lose everything, bondholders were ready to accept losses on their investments that other creditors in different historical contexts would have deemed unacceptable. As such, this chapter documents an important fact about the norm of repayment: far from being stable and inevitable, the debt continuity norm is inherently political and historically variable.