A Historical Outline of Sovereign Indebtedness

Megliani, Mauro

doi:10.1007/978-3-319-08464-0_2

Mauro Megliani²

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Abstract

From a historical perspective, States have systematically contracted loans to finance their policies. Since the modern age began, State indebtedness has progressively lost the character of an occasional necessity of the sovereign to become an instrument of development for the national community as a whole. In other words, sovereign indebtedness has been increasingly incurred to meet political contingencies and to the advantage, and in the interests of, the public.

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Notes

1.
From eighteenth century onwards, some limitations on the power of the sovereign to contract loans began to emerge: Emmerich de Vattel, after drawing a distinction between personal debts and national debts, specified that a sovereign can validly contract debts as long as they are for the benefit of the country; in contrast, if it without necessity incurs debts so great as to bring his country to ruin, “le souverain agirait manifestement sans droit; et ceux qui lui auraient prêté, auraient mal confié”, de Vattel (1835), Liv. II, Chap. XIV, § 216.
2.
See Sack (1927), pp. 25–30. In this connection, the creation of a “National Debt” was the work of the Dutch, who brought the idea to England: “National Debts secured upon Parliamentary Funds of Interests, were things unknown in England before the last Revolution under the Prince of Orange”, Swift (1951), p. 68. See Dickson (1967), pp. 17–18.
3.
One of the first instances of default can be traced back to the loan made by the Greek sanctuary of Delos in the fourth century bc to certain States of the Attic League: of the sums lent, only a small portion was subsequently reimbursed; see Andreades (1933), pp. 171–172. In the period from 1800 to 2009, the practice records at least 250 episodes of external defaults, Reinhart and Rogoff (2009), p. 34.
4.
The breach of an agreement concerning a loan between sovereigns provided cause for a justum bellum for the recovery of the debt: “[p]lerique bellorum tres statuunt causas justas, defensionem, recuperationem rerum, et punitionem”, Grotii Hugonis (MDCCLVIII–MDCCLIX), Lib. II, Cap. I, § II(2), and the property of the subjects of the defaulting sovereign might be the object of confiscatory measures as a means of reprisal: “aut corpora, aut res mobiles subditorum ejus, qui jus non reddit, capi posse”, ibid, Lib. III, Cap. II, § V(2). In 1446, Florence underwent reprisals for having failed to pay interest on Pope Eugenius IV’s monte credits; these reprisals involved the seizure of the properties of Florentine merchants in Rome and the imprisonment of the Florentine ambassador to the papal court, Pezzolo (2008), p. 23.
5.
“Non tamen semper, quamvis justa causa subditi alicujus obligat rectores ad bella sumenda: sed ita demum, si id fine omnium, aut plurium subditorum incommodo fieri potest”, on the assumption that “[n]ec utilitas par jus facit cum necessitate”, Grotii Hugonis (MDCCLVIII–MDCCLIX) Lib. II, Cap. XXV, § II and Lib. II, Cap. XXII, § VI.
6.
Fischer Williams (1923), p. 301.
7.
Contract between France and the United States (signed 16 July 1782) (1781–1783) 48 CTS 111 and Contract between France and the United States (signed 25 February 1783), ibid 259. The loans were made in implementation of the Treaty of Amity and Commerce (signed 6 February 1778) (1775–1778) 46 CTS 417.
8.
Dawson (1990), p. 15. From 1793 to 1814, Great Britain distributed among the allies sub specie of loans and subsidies an amount corresponding to 47,860,000 UK sterling, Nys (1913), pp. 184–185. For a complete historical account, see Sherwig (1969).
9.
Convention and Secret Convention between Austria and Great Britain (signed 20 June 1800) (1799–1801) 55 CTS 235.
10.
Loan Convention between Great Britain and Portugal (signed 21 April 1809) (1808–1809) 60 CTS 375.
11.
Treaty of Subsidy between Great Britain and the Netherlands, and Prussia, and Separate Convention between Great Britain and the Netherlands (signed 19 April 1794) (1793–1795) 52 CTS 199.
12.
Provisional Convention between Great Britain and Russia (signed 18/29 December 1798) (1797–1799) 54 CTS 379.
13.
Treaty of Subsidy between Great Britain and Wurtemberg (signed 20 April 1800) (799–1801) 55 CTS 189.
14.
Treaty of Alliance and Subsidy between Great Britain and Sweden (signed 3 October 1805) (1804–1806) 58 CTS 225.
15.
Treaty of Concert between Great Britain and Russia (signed 30 March/11 April 1805) (1804–1806) 58 CTS 225.
16.
Treaty of Concert and Subsidy between Great Britain and Sweden (signed 3 March 1813) (1812–1813) 62 CTS 147.
17.
Convention between Great Britain and Prussia (signed 14 June 1913) (1812–1813) 62 CTS 273.
18.
Subsidiary Agreement between Great Britain and Hanover (signed 3 December 1813) (1812–1813) 62 CTS 499.
19.
Subsidiary Agreement between Great Britain and Sardinia (signed 3 February 1814) (1813–1815) 63 CTS 71.
20.
Loan Convention between Austria and Great Britain (signed 4 May 1795) (1793–1795) 52 CTS 369 and Loan Convention between Austria and Great Britain (signed 16 May 1797) (1797–1799) 54 CTS 73. The controversy between Austria and Britain was eventually settled through the Convention for the Definitive Settlement of the Austrian Loan (signed 17 November 1823) (1822–1824) 73 CTS 459. For a full account, see Helleiner (1965).
21.
Great Britain and the Netherlands committed themselves to assume part of the bonded loan that Russia had placed in the Netherlands through the Dutch bankers Hope & Co. at the end of the eighteenth century (Treaty between Great Britain, the Netherlands, and Russia (signed 19 May 1815) (1815) 64 CTS 293); this financial arrangement was essential to secure the support of Russia for the creation of the new kingdom of the Netherlands and Belgium at the Congress of Vienna. Following the independence of Belgium (1830), a new convention was signed to confirm the British undertaking in the light of the new political situation (Convention between Great Britain and Russia relative to the Russian–Dutch Loan (signed 16 November 1831) (1831–1832) 82 CTS 265). See Clapham (1917), pp. 498–499. The obligations stemming from the Convention were duly honoured, even during the Crimean War (1854), Twiss (1889), pp. 167–168.
22.
During the first 3 years of the war, Britain lent nearly US$4 billion to her allies, Fisk (1924), pp. 120–149.
23.
Britain was unable to continue to finance her allies and to meet her own war expenses (cf. the correspondence of the US Ambassador in Great Britain to the Secretary of State, in (1917) Foreign Rel, suppl 2(I) 516–518); she was therefore relieved to be replaced by the United States in this role: “[m]other England ceased to be the foreign banker for the Allies and her lusty descendant, the United States of America, took her place”, Fisk (1924), p. 154. The credits were granted for uses approved by the US Treasury, and the borrowers were obliged to provide representations indicating the purposes for which the credits were used (Act of 24 April 1917, Statutes at Large, Vol XL, 35; Act of 24 September 1917, ibid 288; Act of 4 April 1918, ibid 502; Act of 9 July 1918, ibid, 844; Act of 3 March 1919, ibid 1309). Still, in the post-war period, in consideration of the difficulty of reimbursement, the war loans were restructured and converted into securities to be delivered to the United States in force of the settlement agreements with the former co-belligerent countries; see the texts in Moulton and Pasvolsky (1929), pp. 225–385.
24.
Cf. infra, § 3.5.2. However, a few exceptions can be recorded. One former instance regards the treaty that sanctioned the independence between Brazil and Portugal (Treaty between Brazil and Portugal (signed 29 August 1825) (1824–1825) 75 CTS 357), where in a separate and direct convention Brazil agreed to take on the bonded loan raised by Portugal in London in 1823 (Art II); cf. Dawson (1990), pp. 170, 180. Another instance concerns the Loan Convention between Belgium and the Congo Free State (signed 3 July 1890) (1890) 173 CTS 325 and the further Convention between Belgium and the Congo Free State (11 June 1895) (1895) 181 CTS 342; these financial intercourses were justified by the bequest of the Congo by King Leopold to Belgium of 2 August 1889 (see the testament of the King and the attached letter to the minister of finances reproduced in Stenmans 1949, pp. 114–117), which paved the way for the annexation of the African State by Belgium, formalised in a first treaty in 1895 (Treaty of Cession between Belgium and the Congo Free State (signed 9 January 1895) 181 CTS 17), see Fauchille (1895), and for a further and definitive treaty in 1907 (Treaty for the Cession to Belgium of the Independent State of Congo (signed 28 November 1907) (1907–1908) 206 CTS 17). Loans to the British colonies were provided through the Colonial Development Act 1929, 20 Geo 5, in Public General Acts 1929 c 5, and the Colonial Development and Welfare Acts 1940, 3 & 4 Geo 6, in Public General Acts 1940 Ch 40; see Riddell (2007), p. 24.
25.
Sapori (1926).
26.
Ehremberg (1963).
27.
The reason is that the terms of the loans were estimated by borrowers preferable to the reorganisation or the reform of the domestic fiscal system and could be coupled with the exploitation of domestic credits: by the end of the eighteenth century Great Britain, Austria, Denmark, Sweden, Russia, Poland, Spain, France, and the United States raised loans on the Dutch markets. For a vivid account of that scenario, see Riley (1980). In this period, the Dutch were the major foreign subscribers of English government securities, Dickson (1967), pp. 304–337. A major step towards the emergence of a modern capital market may be identified with the decision adopted by the Dutch States General to refrain from guaranteeing the foreign loans to be placed in the Netherlands (1713): in this way, international finance disenfranchised itself from diplomacy; by the same token, the English decision to fund public debt on taxation was a watershed between the ancient conception of public debt as the personal obligation of the country and the modern conception of it as responsibility of Parliament; see de Vries and van der Woude (1997), pp. 141–143.
28.
France was to pay Britain, Prussia, Austria, and Russia 700 million francs in war reparations and 250 million francs in occupation costs for 5 years. The economic situation of France was not desperate, but the public credit of her government was disrupted by the bankruptcy of the previous regime: the only way to raise sufficient financial resources was to float a foreign loan. In 1817, the London house Baring Brothers & Co., in association with the Dutch house Hope & Co., arranged a series of loans that helped to secure the financial reputation of France, Jenks (1963), pp. 31–36 and Austin (2007), p. 12.
29.
In 1818, the house of Rothschild arranged a loan in favour of Prussia, the first foreign loan denominated in sterling. The Prussian loan was shortly followed by Austrian and Russian loans, which led to the Rothschilds becoming known as the “bankers of the Holy Alliance”, Jenks (1963), p. 38 and Ferguson (1998), pp. 131–136.
30.
Lewis (1938), p. 10; the loans placed in London, Amsterdam, and Paris were arranged by Baring Brothers, Austin (2007), pp. 17–18.
31.
Latin American indebtedness was a product of the Napoleonic wars: the conflict disrupted the links between the Spanish and Portuguese monarchies and their colonies, encouraging the independence of these latter. To meet the expenses incurred in the liberation struggle, the Latin American States borrowed heavily on the European markets: the first countries to raise loans were Colombia (1819), Chile (1822), and Peru (1822); others followed. By the end of the 1820s, the only non-defaulting borrower was Brazil, possibly because the old Portuguese colony gained its independence from the colonial power without a military struggle. See Dawson (1990), passim. Baring Brothers, in its financial rivalry with the house of Rothschild, became heavily involved in the financing of the newly independent Latin American republics, and in 1890 its solidity was significantly affected by the Argentine default, Sampson (1983), pp. 38–39.
32.
The most striking example is France, which in order to cement her alliance with Russia encouraged the issuance and listing of Czarist bonds on her domestic market but did not lend directly; Feis (1930), pp. 212–224.
33.
The limited capacity of the lenders to make an appraisal of the soundness of their investment, mostly driven by speculative motivations, is vividly reflected in the vicissitudes of fraudulent loans raised by the phantomatic Republic of Poyais, Tomz (2007), pp. 51–53.
34.
See de Martens (1831), p. 250. In this regard, Strupp (1925), p. 76, emphasised that citizens were not legally entitled to the exercise of diplomatic protection by their national State, whose concrete exercise was subject to a balance of considerations in the field of international relations.
35.
This approach was formalised in 1848 in a circular by Minister of Foreign Affairs Lord Palmerston to HM Representatives in foreign States: this specified that the exercise of diplomatic protection was subject to considerations of opportunity based “entirely upon British and domestic considerations”. This position was further intended to discourage British subjects from investing “their capital in loans to foreign governments instead of employing it in profitable undertakings at home”; the loss of the sums invested “would prove a salutary warning to others, and would prevent any other foreign loans from being raised in Great Britain”. This did not mean that the British government was not prepared to resort to diplomatic intervention whenever “the loss occasioned to British subjects by the non-payment of interest upon loans made by them to foreign governments become so great”. The circular by Lord Palmerston is reproduced in Platt (1968), pp. 398–399. Consistently with this, in 1849 Lord Palmerston disclaimed the prise of the Tigre Island in the Gulf of Fonseca as a security for the British nationals injured by the default of some Central American States, Dawson (1990), pp. 204–205. In this regard, Westlake drew a distinction between bonds and contracts, emphasising that only the latter deserved general protection, Oppenheim (1914), pp. 107–110; in this connection, Borchard (1915), p. 316, drew a further distinction between bonds purchased for investment purposes and bonds received in exchange for works or services rendered to the foreign State. However, the position of the British government must be correctly appreciated: while formal steps in favour of the bondholders were somewhat infrequent, from time to time British diplomatists acted as channels of communication between the representatives of the bondholders and the governments of the debtor countries; again, see Platt (1968), pp. 41–42. However, the Palmerston doctrine did not impede armed intervention by Great Britain in the case of the Venezuelan loans; cf. infra, § 2.2.3.
36.
See Westlake (1904), p. 319.
37.
The Umpire Sir Frederick Bruce, in the framework of the Columbia–United States claims commission, distinguished the case of a citizen suffering as a result of a mere default on payments, from the case of a citizen suffering from “a direct act of injustice or violence” ascribable to a foreign State, Moore (1898), p. 3615. The so-called English Convention debt originated in a series of conventions between Great Britain and Mexico around the 1850s to settle claims concerning forced loans, confiscations, and damages suffered by British subjects resulting from the turmoil that had marked the independence of the new State: Convention for a Settlement of British Claims between Great Britain and Mexico (Pakenham Convention) (signed 15 October 1842) (1842–1843) 94 CTS 11 and Convention for a Settlement of British Claims between Great Britain and Mexico (Doyle Convention) (signed 4 December 1851) (1851–1852) 107 CTS 101. See Costeloe (2003), pp. 99–100.
38.
The main feature of the Monroe doctrine, named after US President James Monroe, who first formalised it in 1823, was the invitation addressed to countries outside America (in particular, the European countries) not to interfere in the internal affairs of the continent. See Alvarez (1924).
39.
The Calvo doctrine banned, inter alia, recourse to diplomatic protection as a means of supporting the claims of foreign citizens, Hershey (1907). The assumption on which the Calvo doctrine rested was the parity of treatment between nationals and foreign residents in one State, Calvo (1896), p. 231. Although it failed to gain recognition in international law, Shea (1955), p. 20, the Calvo doctrine is not completely dead but simply dormant, Shan (2007). Cf. infra, Chap. 6, note 192.
40.
The principle of European non-intervention in the internal affairs of the American continent was not easily reconciled with the necessity to recover defaulted loans. To meet this impasse, US President Theodore Roosevelt, in the so-called “Roosevelt corollary”, formulated the rule that, as long as it did not permit direct European intervention in the American Continent, the USA should assume the responsibility of inducing defaulting States to maintain their obligations towards their creditors. See Dammers (1984), p. 80.
41.
Geck (1992). Cf. infra, § 8.2.1.
42.
In 1876, Lord Derby, minister of foreign affairs, gave instruction to the British minister in Peru to assist unofficially any agent or representative of the bondholders in bringing their claims before the Peruvian government, Feis (1930), pp. 106–107. In 1940, the US Department of State organised a meeting with the representatives of the Colombian government to resolve the Colombian debt default: on that occasion, the Department of State announced that its officials had played the role of “friendly intermediaries to assist the parties in reaching an agreement”, Borchard (1951), p. 246.
43.
See Borchard (1951), pp. 250–251.
44.
In 1854, France and Haiti concluded a Convention for the Repayment of the Loan of 1825 (signed 1 October 1954) (1854–1855) 112 CTS 211, i.e. a bonded loan launched on the French market in 1825; in 1902, the restructuring settlement between the French and German bondholders and the Portuguese government was followed by an exchange of diplomatic notes by the Portuguese government from one side and the French and German governments from the other, incorporating the terms of the settlement, Wynne (1951), pp. 382 and 386–389.
45.
Originally, only States were enabled to file claims with the commissions, even in relation to individual claims, Dolzer (1997), p. 438.
46.
Claims Convention between Colombia and the United States (signed 10 February 1864) (1864) 129 CTS 61. The mixed commission was competent even for the claims against Nueva Grenada, Moore (1898), pp. 3612–3616, and Ralston (1929), p. 210.
47.
Claims Convention between the United States and Venezuela (signed 5 December 1885) (1885–1886) 167 CTS 63. See Moore (1898), pp. 3616–3664, and Ralston (1929), p. 221.
48.
The establishment of an arbitral body was originally envisaged in a decree of the Chilean government of 1882 as a means to liquidate the claims of the Peruvian bondholders on the guano deposits situated in the provinces conquered by Chile (1879). Failing the appointment of the arbitrators, in 1892 France and Chile, through a specific protocol, referred the matter to the president of the Swiss Federal Tribunal. See the texts in La Fontaine (1902), pp. 594–601.
49.
In this case, the national State of the creditors played the simple role of a curateur, as “ne représente pas le particulier, il l’assiste en le faisant jouir de son crédit, en mettant à son service sa puissance”, Watrin (1929), pp. 98.
50.
The arbitration was merely intended to identify who was entitled to receive these sums, Wynne (1951), p. 162.
51.
The three Courts of first instance were composed of seven judges (four foreign nationals and three Egyptian nationals); the Court of Appeal was composed of 11 judges (seven foreign nationals and four Egyptian nationals); see Watrin (1929), p. 251.
52.
(1875) 2 JDI 475: Although formally this was a statute enacted by the Khedive (Règlement d’organisation judiciaire pour les procès mixtes en Égypte), from a substantive standpoint the charter of this judicial machinery was a binding international obligation with the 14 capitulatory Powers that gave legal backing to the regime of the Mixed Courts. See Brinton (1968), pp. 22–23 and 25.
53.
According to Kaufmann (1890), p. 579, the guarantees of independence and impartiality were so protected by international law that “ces cours de justice forment des organes judiciaires internationaux”; in contrast, Heyligers (1927), p. 46, inclined towards the domestic interpretation of these judicial bodies, although conceding that it was “une organisation judiciaire égyptienne, mais sui generis”. In the view of Brinton (1926), p. 671, these Mixed Courts were a form of distorted capitulation that “threatened to throttle the whole commercial life of the country”.
54.
Article 4 of the Decree of 2 May 1876, in Gouvernement égyptien/Ministère de la justice (1899), p. 49; see Hoyle (1991), p. 39.
55.
Treaty of Peace with Germany concluded at Versailles on 28 June 1919 (1919) 13 AJIL suppl 151 and (1919) 225 CTS 189. As the United States did not ratify the Treaty of Versailles, the claims of US nationals could not be brought before the Tribunaux Arbitraux Mixtes; following the Treaty of Berlin concerning the Re-Establishment of the Peace between Germany and the United States of America (signed 25 August 1921) XII LNTS 191, a Mixed Claims Commission was created: see Witenberg (1926).
56.
Wühler (1997), p. 434.
57.
Art 296 of the Treaty of Versailles (n. 55). See Blühdorn (1932), p. 142. Nevertheless, the Ottoman Debt Council (infra, § 2.2.2) attempted unsuccessfully to bring a claim before the French–German Mixed Arbitral Tribunal for compensation under Art 297 of the Treaty of Versailles (n. 55), De Neullize c Deutsche Bank, Diskonto Gesellshaft, S Bleichroeder, Etat Allemand (1924) tome IV Tribunaux Arbitraux Mixtes 794.
58.
Article 16 of the Annex to Article 296 of the Treaty of Versailles (n. 55).
59.
Infra, § 2.2.3.
60.
A Court of Arbitration consisted of three members, one appointed by the debtor, one appointed by the creditors’ representatives, and a chairman to be chosen from third country nationals. Failing agreement on the chairman, he could be appointed by the International Chamber of Commerce [Art 29(2)]. The decisions of the Court of Arbitration were binding for the parties to the proceeding as to the terms of the offer of settlement, and the creditors’ representatives were to recommend the acceptance of the offer to the bondholders [Art 29(7)].
61.
International financial controls fall squarely into the wider purview of international controls, which constituted a limitation on State sovereignty in relation to territory (rivers, canals, straits, and demilitarised zones) or specific matters (minorities, military, and finance). See Kaasik (1933), pp. 102–114, and amount to a limitation of the sovereignty of States, DeWitt Dickinson (1920), p. 256. The phenomenon is certainly significant but should not be overestimated: in the period 1821–1975, there were only 20 cases of political–economic controls, of which 15 were concentrated in the period 1871–1925, Suter (1992), p. 93.
62.
On this distinction, see Strupp (1925).
63.
See Wells (1955), pp. 441–442. Nonetheless, the origin the San Domingo financial control had been ushered in by the award of 14 July 1904, rendered by the arbitral commission under the provisions of the Protocol of 31 January 1903 between the United States of America and the Dominican Republic, for the settlement of the claims of the San Domingo Improvement Company of New York and its Allied Companies, which provided for the appointment of a Financial Agent by the United States for the collection of the revenues assigned as a security for the payments under the award, (1904) Foreign Rel 274–279. Borchard (1951), pp. 277–279, emphasised that, without an agreement between the parties, an international control could be imposed only for just cause, i.e. not simply in consequence of a default but only as result of discrimination among creditors. In fact, “dans les relations d’Etat à Etat, la souveraineté ne saurait être invoquée pour couvrir les abus de la souveraineté”, Dupuis (1921), p. 304. Obviously, the establishment of a financial control was not welcomed by the States to be controlled: “rien n’est évidennment plus contraire à la raison et au le droit public international que d’asservir un État parce qu’il ne fait pas honneur à ses dettes extérieures quand, depuis des siècles, la servitude pour dettes a disparu des législations de tous les peuples barbares et civilisés”, Simaika (1892), p. 134.
64.
See Borchard (1951), pp. 279–282.
65.
Such a measure could be regarded as incompatible with national dignity of a sovereign debtor, Borchard (1951), pp. 282–284.
66.
See Wuarin (1907), pp. 177–186. The Ottoman Debt Council was created by the Decree of Mouharrem of 20 December 1881 (the text in the French version is given in Young 1906, pp. 69–95), an act vested with a triple character: it was a legislative act of the Sublime Porte, a formalisation of the agreement between Turkey and the committees of the creditors, and an international instrument as it was communicated to the national States of the creditors, Wynne (1951), p. 451, note 110. The interesting point is that the national States of the creditors were not party to this agreement: the sole international underpinnings of the Decree were the reference to the diplomatic intercourses with the foreign powers contained in the preamble and in the obligation to communicate the act to the foreign powers encapsulated in Art 21 of the Decree; see Blaisdell (1966), pp. 103–104. The executive body was the Ottoman Debt Council, composed of the representatives of the bondholders on the basis of their nationality: one member for the Britons and the Dutch, one for the French, one for the Austrians, one for the Germans, one for the Italians, one for the Ottoman subjects, and one for the holders of priority bonds (Art 15 of the Decree of Mouharrem); it enjoyed a legal personality separate from the bondholders, De Neullize c. Deutsche Bank (n. 57) 798. In 1903, the Decree of Mouharrem was supplemented by a Décret-Annexe with two objectives, the unification of the unredeemed bonds and the participation of the Ottoman Government in the profits (Young 1906, pp. 98–103). The Debt Council performed its functions until 1928, when the Turkish government reacquired its full sovereignty over the administration of the revenues formerly ceded and the Council was degraded to the status of a trustee for the payment of the outstanding debts; see Borchard (1951), pp. 284–285. The Decree of Mouharrem was seen as a success by the Ottoman ministers as the settlement with the foreign bondholders was achieved without the intervention of the foreign powers; still, this first evaluation underwent a reappraisal as the Debt Council was progressively bestowed with an increasing number of additional functions and its members acted not only as the representatives of the bondholders but also as champions of the interests of their respective national powers; see Clay (2000), pp. 552–554.
67.
On the position maintained by the French government on this point, see the diplomatic correspondence between the Minister of Foreign Affairs and the Consul General at Tunis, Kiss (1962), pp. 285–287.
68.
The Comité executif was composed of three members, of whom two were appointed by the Tunisian government and one by the French government; the Commission de contrôle was composed of two Italians and two Anglo-Maltese nationals, chosen by bearers of the internal debt, and two French nationals, also chosen by bearers of the external debt. As a result, the French were represented at both the public level and the private level, the Tunisian government solely at public level, and the Italians and the Britons solely at private level. However, the legal architecture was the product of a political compromis, as France was obliged to accept the presence of nationals of other powers in a region that she considered part of her sphere of influence. The financial control came to end in 1889, following the establishment of the French protectorate in 1881. See Andreades (1924), pp. 13–18.
69.
An intervention by a foreign State assumed a clear political connotation to the extent that it aimed at extending influence on the country affected, Borchard (1951), pp. 286–287.
70.
The Caisse was created by the decree of 2 May 1876 (in Gouvernement égyptien/Ministère de la justice 1899, p. 45) as a domestic organ of the Egyptian State to face the problem of the recurring defaults, Wuarin (1907), pp. 193–201; subsequently, under the law of 17 July 1880 (Gouvernement égyptien/Ministère de la justice 1899, p. 49), it was converted to an organ of international character, Kaufmann (1891), pp. 283–285.
71.
The pervasiveness of the international control in the Egyptian administration was so extensive that it caused popular revolts; see Martens (1882).
72.
This manifest infringement of Egyptian sovereignty, which had no parallel in other financial controls, made Egypt a country under the suzerainty of foreigners (powers, creditors, members of the Caisse), Andreades (1924), pp. 28–29. The budgetary control exerted by the Caisse ceased following the decree of 28 November 1904, implementing the Declaration between France and Great Britain respecting Egypt and Morocco (8 April 1904) (1903–1904) XCVII State Papers 39 and (1904) 195 CTS 197; see Ibrahim (1911), pp. 132–133.
73.
The members of the Caisse could be removed from their functions solely with the joint consent of the State by which they had been indicated and of the Khedive by whom they had been appointed. The members of the Caisse were technically representatives of neither the foreign States nor the Egyptian State, with the result that the Caisse could be regarded as an international law entity: “[l]a Caisse de la Dette, créée en 1876, devenait en 1880, une institution internationale obligatoire, permanente et indépendante”, Politis (1904), p. 678; see also Kaufmann (1891), pp. 285–286, and Strupp (1925), pp. 14.
74.
Kebedgy (1894) and Wynne (1951), pp. 296–306.
75.
See Strupp (1925), pp. 17–19. The origins of the control were peculiar: it was required by Turkey from the Six Powers of the Concert of Europe as a guarantee for the war indemnities due by Greece under the Treaty of Constantinople (signed 18 September 1897) (1897–1898) (186 CTS 10); see Politis (1902), pp. 5–8. The control was established by the Six Powers without consulting Greece: Germany, in particular, acting in protection of her nationals who were holders of Greek bonds, had asserted that the fact that Greece had given a mandate to the Six Powers to negotiate peace conditions with Turkey had implied to entrust them with the defence of her interests and, therefore, was superfluous to ask her consent, Borchard (1951), pp. 288–289.
76.
Under the Egyptian control the members of the Caisse were at least formally appointed by the Khedive, Andreades (1924), p. 62.
77.
Law of 28 February 1898 (1897–1898) XC State Papers 403, Wuarin (1907), pp. 208–216. Although from a formal standpoint Greece could have modified these legislative measures, substantively any such attempt would have amounted to an infringement of the obligations of the Treaty of Constantinople (n. 75), under which the International Commission was established (Art II). See Levandis (1944), pp. 111–112.
78.
Borchard (1951), p. 287.
79.
Cf. supra, note 38.
80.
“The justification for the United States taking this burden and incurring this responsibility is to be found in the fact that it is incompatible with international equity for the United States to refuse to allow other powers to take the only means at their disposal of satisfying the claims of their creditors and, yet, to refuse itself to take any such steps”, US President Theodore Roosevelt in his message of February 1905 to the Senate, which transmitted the Protocol with S Domingo for approval (1905) Foreign Rel 334–342. In these respects, this control constituted a transposition of the Monroe doctrine to the financial field, Andreades (1924), p. 94.
81.
See Borchard (1951), p. 294.
82.
The agreement between S Domingo and the United States was so intrusive that it would have implied the establishment of a protectorate over the Caribbean country (1905) Foreign Rel 342–343: it was for this reason that President Roosevelt did not succeed in overcoming the opposition of the Senate to the ratification of the bilateral agreement. Therefore, from 1905 to 1907, the relationships between the USA and S Domingo were regulated by a modus vivendi (ibid 366–367), which gave a positive result in the administrative sphere; in 1907, it was replaced by a proper international convention that obtained the approval of the Senate since it involved the United States to only a minor degree (signed 8 February 1907) (1907) 1 AJIL suppl 2, 231. The purpose of the Convention was not to adjust or to control the Dominican debt but simply to administer customs for 50 years to service a new loan whose proceeds were used to repay former loans, which had been reduced by half. See de La Rosa (1911, 1912, 1914) and Wynne (1951), pp. 240–250.
83.
While in the system laid down for S Domingo the appointee became a US official, in this case the appointees became respectively Honduran or Nicaraguan officials, Finch (1911), pp. 1044, 1048. See the text of the Treaty with Nicaragua in (1911) 5 AJIL, suppl 291, and the text of the Treaty with Honduras, ibid 274.
84.
As compared with the case of S Domingo, this provision apparently demonstrated more consideration for the sovereignty of the country in question, Finch (1916), p. 861; nevertheless, the appointment by the Haitian President remained a compulsory act, Strupp (1925), p. 29. See the text of the Treaty in (1916) 10 AJIL 234.
85.
Cosoiu (1934), pp. 190–191.
86.
The legal and diplomatic mechanism consisted of three protocols on the restoration of Austria passed on 4 October 1922 (XII LNTS 385, 391, 405): the first Protocol was a political engagement between Austria and the guarantor Powers, the second an undertaking by the guarantor Powers to submit to the respective parliaments the authorisation to provide the guarantee, and the third a declaration by Austria to the Council of the League and the guarantor Powers concerning the acceptance of a programme of the economic reform; see Fischer Williams (1929), pp. 390–395.
87.
See Borchard (1951), pp. 297–298. In 1926, the Commissioner General was replaced by the Financial Committee of the League of Nations. See Pietri (1983).
88.
The Austrian control was followed in 1924 by a financial control for a loan to be raised by Hungary (Protocols No 1 and No 2 with regard to the Financial Reconstruction of Hungary) (signed 14 March 1924) (XXV LNTS 423, 427), in 1926 by a financial control for a loan to be raised by Estonia (Protocol on Currency and Banking Reform in Estonia (signed 10 December 1926) in Hudson 1931, vol. III, p. 2070), and in 1932 by a financial control for a second guaranteed loan to be raised by Austria (Austrian Protocol with three Annexes, signed 15 July 1932) (CXXXV LNTS 285). All these loans were aimed at the financial and economic reconstruction of the borrowing countries, while the Greek loan 1927 (Protocol on the Stabilization of Currency and the Liquidation of Budget Arrears of the Hellenic State and for the Further Settlement of Greek Refugees (signed 15 September 1927) in Hudson 1931 vol. IV, p. 2142) and the Bulgarian loan 1928 (Protocol concerning the Bulgarian Stabilization Loan (signed 10 March 1928) in Hudson (1931), p. 2442) were intended for the settlement of the respective refugees; the City of Danzig 1927 loan was necessary for public works. The controls were characterised by different degrees of intensity; see Cosoiu (1934) and Myers (1945).
89.
See Gisselquist (1981).
90.
For a full account, see Hale (2003).
91.
The report of the Commission raised the theoretical possibility of a default, but this option was rejected as its negative effects would have affected not only Newfoundland but also the whole Commonwealth; other routes taken into consideration were the sale of Labrador and union with Canada. See Keith (1934), pp. 33–35.
92.
Act of the Parliament to empower His Majesty to issue Letters Patent making provision with respect to the Administration of Newfoundland and to authorise Advances to its Government (1933) CXXXVI State Papers 279. In detail, the plan provided for the issue of guaranteed bonds to be offered in exchange to the holders of old stock and bonds; further, the British government would have advanced, as a free gift for the 3 years, the sums to meet the payments on the outstanding bonds and the new loan, if necessary. The non-exchanging holders would have not been paid as long as any sum was due to the British Exchequer under the guaranteed loan. See Keith (1934), pp. 35–36.
93.
Infra, § 4.6.
94.
The request was formally advanced by Greece at the Euro Summit Statement of 26 October 2011, point 10, at http://www.europeancouncil.europa.eu/council-meetings/conclusions.
95.
The Task Force is to be intended as a gesture of solidarity with Greece and not as a means of interference in its domestic affairs. Its success is based upon two preconditions: sound cooperation with Greek authorities and significant support by the Member States, EIB, IMF and OECD. For further details, see the Task Force for Greece, 1st Quarterly Report, at http://ec.europa.eu/commission_2010-2014/president/news/speeches-statements/pdf/20111117_1_en.pdf. The European Commission has been invited to significantly reinforce the Task Force through an enhanced presence on the ground, Eurogroup, Statement of 21 February 2012, at http://www.consilium.europa.eu/media/1440478/statement_on_greece_21_february_2012.pdf.
96.
In 1997, the Security Council intervened in Albania, acting under Chapter VII of the UN Charter, after the eruption of violent turmoil connected with the loss of life savings by most of the population as a result of a mismanaged transition to market economy. The Security Council found that the economic situation of the country was a threat to international peace and security under SC Resolutions S/RES/1101 (1997) of 28 March 1007 and S/RES//1104 (1997) of 19 June 1997. See Boon (2008), pp. 1020–1021.
97.
The most striking instance of economic measure coincides with the international administration of East Timor and Kosovo, Boisson de Chazournes (2007), pp. 67–70. On international administration, infra, § 3.2.1.
98.
In 1861, Spain, France, and Great Britain organised an armed intervention in Mexico, Wynne (1951), pp. 25–27; the military intervention was justified on the grounds that the bonds that had been defaulted on were issued by Mexico in compensation for damages and injuries suffered by nationals of the intervening countries, Dawson (1990), pp. 229–230. However, this was not the first instance of the use of force relating to unpaid debts on American soil as, in 1838, France invaded and occupied the Mexican town of Veracruz to collect debts owed to its nationals. See Costeloe (2003), p. 307.
99.
In 1902–1903, three European powers, Great Britain, Germany, and Italy—to protect their nationals injured by the action of the Venezuelan government—sent their fleets to arrange a naval blockade that ended with the bombardment of two old ports. See Basdevant (1904), Lipson (1991), pp. 202–204, and Tomz (2007), pp. 115–116. The dispute was subsequently resolved by arbitration (see the text of the awards in The Venezuelan Arbitration before the Hague Tribunal 1903, Government Printing Office, Washington 1905).
100.
The note by Minister Drago, dated 29 December 1902, is reproduced in English in (1907) 1 AJIL suppl 1, p. 1.
101.
Drago had the opportunity to develop his doctrinal approach in a paper on the relation between foreign indebtedness and international policy, published both in English (1907a) and in French (1907b).
102.
Cf. infra, § 3.3.2.
103.
Borchard (1915), pp. 321–322. Drago emphasised that his position was not intended as “a defense for bad faith, disorder, and deliberate and voluntary insolvency”.
104.
Moulin (1907), p. 467. In this regard, Alvarez (1909), pp. 334–335, held that the Drago doctrine was superfluous as the Monroe doctrine already precluded military intervention by non-American States in the American continent.
105.
The Drago doctrine, prohibiting the use of force as a means of pressure for the payment of foreign debts, became part of the wider perspective of the Calvo doctrine, which debarred, inter alia, the recourse to diplomatic protection in favour of foreign citizens, Hershey (1907), p. 31.
106.
At the Pan-American Conference held in Rio de Janeiro in 1906, the Argentine proposal for an acknowledgment of the Drago doctrine as part of the American international law was rejected; see Alvarez (1910). However, the Conference expressed the view that the use of force should be restricted to situations of fraud, injustice, or infringement of treaties and recommended that its delegates to the Hague Conference should submit the point to the other participants; Strupp (1925), pp. 95–98.
107.
In this context, the intransigence of Drago’s position was mitigated by the intervention of the US delegate, General Porter. Porter’s intention was to restrict the employment of armed force to collect defaulted debts from foreign States, Scott (1908), p. 87. See the text of the Convention on the Limitation of the Employment of Force for the Recovery of Contract Debts in Scott (1909b) vol. II, pp. 357–361. The Convention was signed on 18 October 1907 and is part of the framework of the 13 Conventions adopted at the Second Peace Conference held at The Hague from 15 June to 18 October 1907 on the initiative of US President Roosevelt, Scott (1909a), vol. I, pp. 386–422.
108.
The reference to “contractual debts” raised many issues of interpretation, Borchard (1915), pp. 321–322.
109.
As it implicitly legalised the use of force, the formulation of the norm did not meet the favour of many Latin American States, which made reservations so as to confine the submission to arbitration only in case of injustice and after the exhaustion of local remedies, Borchard (1913), pp. 491–492. In effect, “[i]f the use of force for the collection of the loan were lawful, the bonds should be issued on terms reflecting not the financial and political hazards of the borrowing state, but the superior military power of the state of the lender”, Jessup (1950), p. 115.
110.
Cf. infra, § 14.2.
111.
These two fundamental norms of the Convention deserve some remarks. First of all, the Convention concerned contractual obligations, in whose domain loans fell squarely, thereby excluding obligations deriving from tort. Second, the debts had to have been contracted between States and foreign citizens and not between States. Third, the submission of the dispute to arbitration was not compulsory as a State retained its freedom to submit or not, although in the awareness of the consequences of its behaviour. Fourth, the use of force was legitimated at treaty level, in a manner much wider than under the approach envisaged by Minister Drago in his note to the Argentine ambassador in Washington (n. 100); see Strupp (1925), pp. 109–111.
112.
It was mainly for this reason that the Convention never entered into force, Borchard (1951), pp. 272–273.
113.
Benedek (1992), p. 1103.
114.
All peace treaties have historically provided for the payment of indemnities to the victors. Following the First World War, the term “indemnities” was replaced by the more neutral “reparations”. See Seidl-Hohenveldern (2000).
115.
Article 231 of the peace treaty with Germany (n. 55) established that “[t]he Allied and Associated Governments affirm and Germany accepts the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by aggression of Germany and her allies”. This formulation originated much debate as to whether war expenses should be included among the damages. See Holmgren (1998), pp. 26–30.
116.
The decisions of the Commission dated 12 March 1922 were published in (1922) 16 AJIL suppl 238.
117.
For an overview of the economic situation of Germany, see Kindleberger (1984), pp. 310–328. As a means of reprisal and pressure, France and Belgium undertook the military occupation of the Ruhr in 1923; see Zieger (2000).
118.
See Boyden (1924). The second committee, chaired by the English representative McKenna, endeavoured to analyse the causes that had led to the economic crisis in Germany, which was mainly ascribable to capital flight, Finch (1924), pp. 424–425.
119.
In order to achieve monetary stability and to curb the growing rate of inflation, the Report proposed the establishment of a new bank of issue. The new institution (the Reichsbank) would be chaired by a German president assisted by a managing board; in addition, the bank would have a further governing body, the General Board, composed of seven Germans and seven foreigners. Among the foreign members, there would be a Commissioner entrusted with the task of controlling the issue of notes and the reserves of the bank, partially constituted by a foreign loan. See Finch (1924), pp. 425–426.
120.
As far as the budget was concerned, the Dawes Report introduced the fundamental rule that the fiscal burden on the German population should be as heavy as that on the nationals of the victorious powers and that, on this assumption, the paying capacity of Germany should vary in accordance with her economic conditions. With reference to the second point, the Report recommended the issuance of gold mark first mortgage bonds over the German railways; in order to facilitate the payments on these bonds, German railways were to be converted into a stock company, managed by a board consisting of 18 members, half of which was appointed by the trustee of the bonds. Even the industrial sector was called upon to contribute to the payment of the German external debt, issuing first mortgage bonds, administered by a trustee appointed by the Reparation Commission. See Finch (1924), pp. 426–428.
121.
See the Agreement between the Reparation Commission and the German Government of 9 August 1924 (1925) 19 AJIL suppl 24; the Agreement between the Allied Governments and the German Government concerning the Agreement of 9 August 1924 between the Reparation Commission and the German Government of 30 August 1924, ibid, 36; the Agreement between the Allied Government and Germany of 30 August 1924, ibid, 42; the Inter-Allied Agreement of 30 August 1924, ibid, 49; and the Agreement between the governments represented on the Reparation Commission to modify Annex II to Part VIII of the Treaty of Versailles of 30 August 1924, ibid, 51.
122.
Although the Commissioner for the affected revenues was not involved in the administration of the assets, he was entitled to refuse his consent to a reduction of the rate of the revenues proposed by the German government as “[s]i les revenus affectés doivent fournir une garantie suffisante pour des payments budgétaires et, collatérale, pour des autres, il y a toute raison de stipuler que ces garanties ne soient pas diminuées sans consentement préalable du représentant des créanciers”, Affaire relative a l’interprètation de l’article 11 du protocole de Londres du 9 Aout 1924 (Réparations allemandes) (1926) II RIAA 756, 772.
123.
Although the high rates of interest deriving from inflation had attracted a growing level of capital to Germany, this trend did not produce a surplus in the balance of payments, that was the parameter used to determine the payment of reparations. As the situation was unsatisfactory, in 1929 a group of experts (including German nationals) was given the task of submitting proposals to amend the Dawes Plan and to define the amount of German external indebtedness (the text of the Young Plan is reproduced in (1930) 24 AJIL suppl 81). In effect, the Achilles’ heel of the Dawes Plan was that the amount of the German liability was not defined, Finch (1930), p. 348.
124.
The debt was divided in an unconditional portion, the payment of which was derived from a direct tax on the railways, and a conditional portion, the payment of which could be postponed. The transfer of the sums was operated via the Bank for International Settlements, which was established to act as trustee for the Young Plan (cf. infra, § 5.4). Further to the remaining collateral of customs duties and consumer goods taxes, the sole guarantee was the German pledge to honour the debt. See Coing (2000).
125.
The Lausanne Conference of 1932, in line with the Young Plan, provided for the cancellation of 90 % of the German debt, reducing the outstanding amount to three billion marks, Holmgren (1998), pp. 33–34. Nevertheless, this step was not sufficient to assure the full payment of the residual liabilities, Auden (1934).
126.
Agreement on German External Debts (signed 27 February 1953) 333 UNTS 3. The Agreement contained recommendations for the settlement of Reich debts and debts of other public authorities (Annex I), medium and long-term German debts resulting from private capital transactions (Annex II), standstill debts (Annex III), claims arising out of goods and services transactions, certain claims arising from capital transactions, and various other claims (Annex IV) and also included an agreement regarding liability in respect of Austrian governmental debts. See Simpson (1957) and Coing (1997).
127.
In particular, the decline of the bonded loans dated back to the crisis of 1929; see Gisselquist (1981), pp. 83–84, and Zanghirati (1986–1987), p. 140.
128.
This machinery was institutionalised in 1948 through the creation of the Organisation for European Economic Cooperation, Adam (1949).
129.
Gilpin (1987), p. 311.
130.
The World Bank was established for the reconstruction of the European economies destroyed by the Second World War and for the promotion of the economic development; although the very first interventions were focused on reconstruction, the implementation of the Marshall Plan permitted the World Bank to devote its resources to developing countries. See Focsaneanu (1963) and Touscoz (1970).
131.
By the end of the 1970s, the most prominent borrowers on the syndication market were sovereign States or para-statal entities, McDonald (1982), p. 49.
132.
There were several reasons why developing countries resorted to private lending. Bilateral lending was often tied to the purchase of goods and services by the lending country and driven by political considerations. As to multilateral financing, the use of the resources of the International Monetary Fund (IMF) were generally subject to detailed conditions in the field of political economy, often in conflict with the objectives of the national governments, while the resources of the World Bank were usually provided for specific projects and not for the general purposes of the recipient country. In addition, many developing countries were growing economically, which made them ineligible for the International Development Association (IDA) loans. Finally, financial resources available from the multilateral financial institutions were (and still remain) limited in comparison with the needs of the developing countries. See Barnett et al. (1984), pp. 90–92.
133.
In fact, the first oil crisis (1973–1974) had replenished the coffers of US and European banks with petrodollars. As these sums were so huge that it was not possible to exhaust them in the traditional channels of employment in the industrialised countries, banks were happy to direct them towards new forms of investment. The reasons that induced banks to lend these sums to developing countries were manifold: the borrowing countries had a solid financial creditworthiness, and some of them (such as Brazil, Argentina, and Mexico) had rates of economic growth higher than those of the industrialised countries; moreover, the first oil crisis had caused economic stagnation in industrialised countries and had reduced their internal demand for credit. Barnett et al. (1984), pp. 88–90, and Guttentag and Herring (1986), pp. 132–137.
134.
Krugman (1990), p. 141, and Woodward (1992), p. 25. In this regard, Winkler (1933), p. 19, poignantly observed that “[a] State (…) with its government taking no matter what form, may continue to exist through the ages, and continue to hold out hope, however vain, of settlement of its debt”.
135.
Santos (1991), p. 84.
136.
Cline (1995), p. 426, and Rieffel (2003), pp. 190–192.
137.
To cope with inflationary pressures, the industrialised countries adopted monetarist-style policies, which brought about an increase in interest rates. The consequences of these policies had negative effects on the external indebtedness of developing countries. On one hand, the rise in the interest rates made it more difficult to contract new loans; on the other hand, the appreciation of the US dollar, the currency in which loans were contracted, made the repayment of the debts more burdensome; in addition, the restriction on the circulation of currency generated a fall in the internal demand in the industrialised countries, which affected the level of imports from the developing countries. See Panizza (1995); also, Eskridge Jr (1985), pp. 295–297, and Focsaneanu (1985), pp. 313–317.
138.
These errors were ambitious expenditure, investments in projects with low returns, lack of control on the level of external debt, and imbalances in payments, Nowzad (1982), 156.
139.
The debtor States were obliged to allocate a growing fraction of their gross domestic product to the service of the debt while modifying their economic policies, expanding fiscal revenues, and reducing public spending. The outcome was a contraction in their economic growth, which produced a general impoverishment in the population. Default was a consequence of this. See Franco Montoro (1995).
140.
The other significant case was Brazil. See Barnett et al. (1984), p. 98, note 88, and Eskridge Jr (1985), pp. 305–306.
141.
The BIS made available a line of credit of US$1.8 billion, while the United States advanced US$1 billion against future oil supplies and contextually guaranteed loans for the importation of basic foodstuffs, Castro Tapia (1984), p. 5.
142.
In order to cope with this situation, in August 1982 the Mexican government arranged a meeting in New York with the representatives of all the creditor banks. The Mexican government formalised its inability to service the debts and adopted drastic measures tailored to spur an economic recovery. These included a currency devaluation, an increase in prices of goods and public services, and temporary restrictions on foreign exchange. See Castro Tapia (1984), p. 4.
143.
See Vasquez Pando (1988).
144.
To cope with the new liquidity crisis in October 1985, the US Secretary to the Treasury James Baker proposed a new plan of action based on structural reforms, financial resources from the multilateral financial institutions, and new bank loans; this approach was not completely successful and was followed by the more radical Brady Plan. See Vasquez Pando (1988), pp. 217–218 (infra, § 11.7).
145.
The increase in the rate of population growth demanded a corresponding growth in agricultural production; this growth was characterised by intensive farming and severe deforestation, which caused soil erosion and desertification. Moreover, the farming was not sufficiently sustained by public intervention, as the governments chose to pour their resources into urban centres where political instability had brought a large proportion of civil population. The same political instability discouraged foreign investment. See Sedlak (1986), pp. 1353–1362, and James (1996), pp. 513–514.
146.
See Sedlak (1986), pp. 1364–1365.
147.
See Haile-Mariam (1990), pp. 58–59.
148.
See Bogdanowicz-Bindert (1985/1986), pp. 272–273.
149.
See Njenga (1995), pp. 97–98.
150.
In the late 1980s, all sub-Saharan adjustment policies incorporated the following preconditions: devaluations of local currencies, price decontrols, high interest rates, lower taxes, lower public expenditures, import liberalisation, higher domestic petroleum prices, Abulgasem Abokshem (1995), p. 336.
151.
Even a straightforward debt cancellation would have left the structural problems untouched, Baloro (1991), pp. 49–50.
152.
The lack of liquidity had its seeds in the economic programmes endorsed by the IMF, in particular in the so-called “dollarification” of the peso, i.e. the pegging of the exchange rate of the Mexican currency to the US dollar. This measure at first achieved positive results, as it led to a reduction in the inflation rate and attracted foreign capital; nevertheless, in the long term it brought certain negative effects, reducing exports and increasing imports. This situation caused an imbalance in foreign payments, which was covered by issuing short-term bonds denominated in US dollars (Tesobonos); Mexico was aware of the volatility of this type of investment but tried to prevent capital flight, creating a propitious environment for foreign investment. However, in 1994, in connection with a series of setbacks, international investors began to reconsider their portfolio investment in Mexican bonds. See Chun (1996), pp. 2654–2657.
153.
This source of investment bore an intrinsic risk: conceived as short-term speculative investments, bond investment was subject to the risk of arbitrary and irrational disinvestment, facilitated by the advances in computer technology that permitted financial transactions to be carried out in a few seconds. This flawed scenario was aggravated by the fact that, with financial markets interdependent, the decision to shift investment could not only destroy the financial reputation of a country but could also spread to other countries with similar characteristics. See Naim (1995), pp. 127–128, and Chun (1996), pp. 2665–2668. From this perspective, recourse to foreign exchange controls (as was made in the 1982 crisis) was useless since the premises on which financial investors based their portfolio choices were constituted by liberty and rapidity of disinvestment, Lichtenstein (1995), p. 1775.
154.
The United States provided US$20 billion through the Exchange Stabilisation Facility, while the IMF approved a Stand-by Arrangement of nearly US$18 billion, with the industrialised countries pledging US$10 billion through the BIS: not only were these financial packages linked to a plan of economic readjustment, but the US Treasury also established a Mexico Task Force with the mandate to monitor closely the Mexican economic situation. See Lustig (1997), pp. 58–62. Cf. infra, § 4.4.1.2.
155.
Berenson (2000), pp. 257–258.
156.
Carrasco and Thomas (1996), pp. 571–572.
157.
For a detailed account, see Buckley (2008), pp. 56–66.
158.
The absence of prudential regulation and supervision, the indiscriminate grant of loans to an over-indebted industrial sector, and the inter-involvement of banks and governments all concurred to make the system collapse, Arner (1998), pp. 391–392. See also Shim (1997) and Traisorat (1997).
159.
Only in the case of Indonesia did a sovereign restructuring default arise (bilateral and bank debt); in the other cases, insolvency mainly affected banks and corporations. Rieffel (2003), pp. 203–208.
160.
The common features of the reform programmes consisted of the closure of non-viable financial institutions, the recapitalisation of viable financial institutions, and the strengthening of regulation and supervision, Arner (1998), pp. 394–395; see also Feldstein (1998).
161.
The inability to meet both internal and external obligations reverberated on the national credit system as domestic banks had heavily invested their liquid assets in governmental bonds, Davidovski (1998).
162.
Makich-Macias (2001), pp. 1778–1779. For a full account, see Gilman (2010).
163.
The escamotage saved Russia from defaulting on her IMF commitments and prevented the sums from being used for other purposes, Lowenfeld (2008), pp. 717–718.
164.
Scott (2003), p. 108.
165.
Restructuring affected the foreign holders of domestic treasury bills. Those non-residents who decided not to participate to the restructuring offer were repaid in full, but the proceeds were to be placed in a restricted account and subject to a 5-year repatriation restriction. See Sturzenegger and Zettelmeyer (2007), pp. 107–109.
166.
Buckley (2000), p. 107.
167.
Argentina is not new to default: in the 1980s, as a consequence of contagion from the Mexican crisis (supra, § 2.4.1), the country faced a heavy financial crisis with relevant restructuring (de La Cruz 1988). For a historical outline of the financial crises that have affected this country since its independence from Spain, see Peters (1934).
168.
Investors were induced to purchase bonds because of the commitment to maintain the dollar-peso parity, Rieffel (2003), p. 216.
169.
Access to the markets was regained for two main reasons: first, the introduction of the euro had caused a convergence and a lowering of interest rates among bonds issued in the EMU area, with the result that investors turned towards more profitable forms of investment; second, the managers of the Argentine public debt issued medium- and long-term bonds, which were considered to be an indication of greater stability, Mussa (2002), pp. 24–25.
170.
Mussa (2002), pp. 25–26. For a vivid description of the economic and political turmoil following the crisis, see Lowenfeld (2008), pp. 726–727.
171.
More than half of the bonded debt was in the hands of institutional investors and the remainder in the hands of individual holders: 40 % was held by domestic holders and 60 % by foreign holders; of the latter, Italian holders constituted more than 15 %, Garcia-Hamilton Jr et al. (2005), pp. 256–257 and 269, note 129.
172.
See infra, § 12.5.3
173.
See Reinhart and Rogoff (2009).
174.
Wallenstein (2009), pp. S9–S10. The combination of low interest rates and large volumes of investment from outside the United States and the United Kingdom contributed to the channelling of a huge amount of resources towards attractive asset-backed securities issued in these countries, especially mortgage-backed securities. As a result, the mortgage market was enlarged to customers with a weak credit profile. Further, the basic form of securitisation underwent a process of sophistication, well illustrated by collateralised debt obligations (CDOs), a sort of securitisation of securitised assets. The mechanism broke down when interest rates rose, causing residential mortgage borrowers to experience difficulty in keeping their payments regular and discouraging prospective house purchasers from entering the mortgage market. As a result, the cash flow coming from the basic assets of the securities (the residential mortgage loans) diminished. See Arner (2009), pp. 92–95.
175.
See Hudson (2009), p. 1199.
176.
This uncertainty had negative effects on the market dealing in these instruments, Arner (2009), p. 96.
177.
The key feature of the story was governmental intervention to avoid the threat of financial collapse: the United Kingdom nationalised Bradford & Bingley; Belgium, Netherlands, and Luxembourg nationalised Fortis; Germany announced the first rescue of Hypo Real Estate; Iceland nationalised Glitnir; and the United States facilitated the sale of Wachovia. For a vivid account, see Arner (2009), pp. 112–117.
178.
“Financial regulators, policy makers and institutions failed to appreciate the full measure of risks in the financial system or address the extent of the growing economic vulnerabilities and their cross-border linkages”; see the Outcome of the Conference on the World Financial and Economic Crisis and Its Impact on Development, point 9, adopted by UN General Assembly through Resolution A/RES/63/203 of 13 July 2009.
179.
As regards transparency and accountability, two crucial aspects were emphasised, the transparency of complex financial products and of financial firms; as regards regulation, the focus was put on strengthening financial regulatory regimes, prudential oversight, and risk management, as well as on the assurance that all financial markets, products, and participants are subject to proper regulation; as regards integrity, the accent was put on enhanced regulatory cooperation, on the promotion of information sharing about market stability, and on rules and sanction regimes for cross-border misconduct; as regards international cooperation, two profiles were underscored, the necessity to improve cooperation and coordination through all the segments of the markets and the need to strengthen crisis prevention, management, and resolution; as regards international financial architecture, much weight was given to the reform of the Bretton Woods Institutions so as to equip them to cope with financial crises. See the G-20 Declaration of the Summit on Financial Markets and the World Economy of 15 November 2008, available at www.g20.org. The implementation of these principles was confirmed by the G-20 Declaration on Strengthening the Financial System of 2 April 2009, available at www.g20.org, which went further down this route in eight crucial areas: a Financial Stability Board, international cooperation, prudential regulation, the scope of regulation, compensation, tax havens, accounting standards, and credit rating agencies. On all these aspects, see Arner (2009), pp. 120–134.
180.
See Boyes (2009).
181.
See Waibel (2010).
182.
The legal basis is given by European Parliament and Council Directive 94/19/EC of 30 May 1994 on the deposit-guarantee scheme [1994] OJ L 135/5, amended by European Parliament and Council Directive 2005/1/EC of 9 March 2005 [2005] OJ L 79/9. EU legislation is applicable in the EFTA countries on the basis of the European Economic Area Agreement (22 May 1992) [1992] OJ L 1/3.
183.
This conclusion was “stimulated” by the decision of the UK government to freeze the assets of the Icelandic banks in the UK on the basis of sec 4 of the Anti-Terrorism Crime and Security Act 2001, enacted in the aftermath of the attack to the Twin Towers, Public General Acts 2001, c 24. See McCormick (2010), pp. 126–127.
184.
Both documents do not qualify as international agreements but rather qualify as a loan and guarantee contracts subject to municipal law (English law) and submitted to the exclusive jurisdiction of the English courts.
185.
‘Iceland’, in Flanz (1999).
186.
See Black (2010), p. 124.
187.
OECD (2011), p. 16.
188.
The EFTA Court was established on the basis of Art 98(2) of the EEA Agreement (n. 182), Evans (1996), pp. 368–370.
189.
The EFTA Court, in its judgment of 28 January 2013, Case E-16/11, EFTA Surveillance Authority v Iceland, held that Iceland had not infringed her obligation under Directive 94/19/EC on the deposit-guarantee schemes (n. 182) as public authorities are not obliged to ensure compensation if a deposit-guarantee scheme is unable to fulfil its obligations in the event of a systemic crisis (para 144) and as the transfer of deposits to New Landsbanki does not fall within the scope of the principle of non-discrimination contained in the Directive (para 216).
190.
Greece joined the monetary union in January 2001, two years after the introduction of the euro, on the basis of a substantively political decision that overrode the incomplete fulfilment of the Maastricht parameters. The motivations behind this decision can be ascribed to the limited impact of the Greek economy on the euro area GDP; unfortunately, its effects in the event of a financial crisis were highly misjudged. See Echinard and Labondance (2010).
191.
For a vivid account, see Lynn (2011).
192.
OECD (2009), p. 9.
193.
The Stability and Growth Pact is an intergovernmental agreement formalised in an Annex to the Amsterdam Council Conclusions of 16 and 17 June 1997 [1997] OJ C 236/1 and implemented through Regulations Council Regulation (EC) 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies [1997] OJ L 209/1 and Council Regulation (EC) 1467/97 of 7 July 1997 on speeding up and clarifying the implementation of the excessive deficit procedure [1997] OJ L 209/6. It was modified the first time in 2005 (see Council Regulation (EC) 1055/2005 of 27 June 2005 [2005] OJ L 174/1 and Council Regulation (EC) 1056/2005 of 27 June 2005 [2005] L 174/5) and the second time in 2011 through The Euro Plus Pact: Stronger Economic Policy Coordination for Competitiveness and Convergence, an Annex to the Conclusions of the European Council of 24/25 March 2011, at http://www.europeancouncil.europa.eu/council-meetings/conclusions.aspx.
194.
In this fraudulent action, the Greek government was substantively helped by Goldman Sachs, which elaborated a series of fictitious swap arrangements to disguise the exact level of the Greek debt, Lynn (2011), pp. 119–120.
195.
Greek bonded debt amounted to roughly 294 billion euros. French and German banks had major exposures to this, institutional investors smaller exposure, while retail investors held a small number of bonds, Buchheit and Gulati (2010).
196.
Letter of Intent accompanying a Memorandum of Economic and Financial Policies and a Technical Memorandum of Understanding of the Greek government dated 3 May 2010 requesting financial support of 30 billion euros under a multi-year programme, Stand-by Arrangement dated 9 May 2010 through which the Executive Board of the IMF granted a first tranche of financial support amounting to 5.5 billion euros under the exceptional access policy and the emergency financing mechanism that permits the provision of financing at short notice. The documents are attached to Greece: Staff Report on Request for a Stand-by Arrangement, IMF Country Report No 10/110, available at www.imf.org.
197.
See http://ec.europa.eu/economy_finance/eu_borrower/greek_loan_facility/index_en.htm. The Greek Loan Facility is set out in two documents: in a first document dated 8 May 2010—the Intercreditor Agreement—the 15 Euro countries committed themselves to provide 80 billion euros to Greece pursuant to the contribution keys; in a second contextual document—the Loan Facility Agreement—the Euro countries formalised the terms of the loans with Greece. The documents are available at http://www.oireachtas.ie/documents/bills28/bills/2010/2210/b2210d.pdf. See Megliani (2013) pp. 75–77.
198.
On the balance-of-payments facility see Megliani (2013), pp. 69–72.
199.
See Council Regulation (EC) 3603/93 of 13 December 1993 specifying definitions for the applications of the prohibitions referred to in Articles 104 and 104b (1) of the Treaty [1993] OJ L 332/1, which, inter alia, specify that “overdraft facilities” means any provision of funds to the public sector that may amount to a debit balance [Art 1(1)(a)] and the intra-day credit by the European Central Bank or the national banks to the public sector is not to be considered as a credit facility under the Treaty (Art 4).
200.
This rule means that the liabilities of member States are not backed by implicit guarantees of the European Union or of other member States, with the result that financial markets must be driven by the sole creditworthiness of the borrowing country (Smits 1997, p. 77) and are called to exert a discipline on non-performing States by raising the yields on their bonds and lowering their credit ratings (Lastra 2006, p. 253).
201.
Vigneron (2010), pp. 490–491. This treaty provision encapsulates some elements of force majeure, intended as a circumstance precluding wrongfulness in interstate relations (cf. Art 23 of the International Law Commission’s Articles on State Responsibility), as well as a general principle of law (cf. Denkavit Belgie NV v. Belgium, Case 145/85 [1987] ECR 582, 586).
202.
As economic contingencies are normally the cumulative effects of external and internal factors, the operation of Art 122 should be confined to natural events, Townsend (2007), p. 108.
203.
The Council acting by qualified majority (the requirement for a majority was introduced by the Nice Treaty in place of the unanimity required under the Maastricht Treaty) upon the proposal of the European Commission may grant financial assistance under certain conditions; in this connection, the Council retains ample discretionary powers not only in relation to the choice to intervene but also with reference to the measures and conditions attached to the intervention. Furthermore, as the Parliament is not involved in the process, the President of the Council is required to inform the European Parliament of the decision. This non-involvement of the EU Parliament has meant that the EU action has been seen as lacking democratic legitimacy. Louis (2010), p. 983.
204.
In this situation, it would be unsafe to let a euro country fail, Louis (2010), pp. 984–985. To make it compatible with the no-bail out clause of Art 125, assistance under Art 122 is to be subject to conditionality, cf. the Pringle judgment, infra Ï 18.5.3.6.
205.
The codified procedure for EU action does not exclude the non-codified procedure for the intervention of member States, as occurred in favour of Latvia, which received financial assistance from certain Nordic countries, Louis (2010), p. 985.
206.
The retroactive maturity extension would bring the terms into line with those provided under the IMF Extended Fund Facility and lower the spread to around 3.7 %; Greece: Fourth Review Under the Stand-by Arrangement and Request for Modification and Waiver of Applicability of Performance Criteria, IMF Country Report No 11/175, 8, at www.imf.org.
207.
The official assistance will be provided through the European Financial Stability Facility, and the maturity of the loans will range from a minimum of 15 years up to 30 years, with a grace period of 10 years; EFSF loans will be provided at rates equivalent to those of the Balance of Payments facility (3.5 %). Statement of the Heads of State and Government of the Euro Area and EU Institutions of 21 July 2011, points 2–3, at http://www.europeancouncil.europa.eu/council-meetings/conclusions.aspx.
208.
Euro Summit of 26 October 2012, Statement, point 12, at http://www.europeancouncil.europa.eu/council-meetings/conclusions.aspx. Cf. infra, § 12.5.1.
209.
The EFF arrangement constitutes an exceptional access to IMF quotas amounting to 2,159 % of the Greece quota, http://www.imf.org/external/np/sec/pr/2012/pr1285.htm.
210.
Cf. infra, § 18.5.3.4.
211.
Ireland: Request for an Extended Arrangement, IMF Country Report No 10/366. The resources were made available on the basis of a Letter of Intent accompanying a Memorandum of Economic and Financial Policies and a Technical Memorandum of Understanding of the Irish government dated 1 December 2010; this requested a 3-year Extended Arrangement under the Extended Fund Facility (EFF) on the basis of the exceptional access policy and emergency financing mechanism, at www.imf.org.
212.
The financial assistance was granted through a loan to be disbursed over 3 years with a maximum average maturity of seven-and-a-half years. The loan was made available by the European Commission in a maximum of 13 instalments; the first instalment was subject to the entry into force of the Loan Facility Agreement and the Memoranda of Understanding. Cf. Council Implementing Decision on granting Union financial assistance to Ireland of 7 December 2010 (2011/77/EU) [2011] OJ L 30/34, subsequently amended by Council Decision of 30 May 2011 (2011/326/EU) [2011] OJ L 147/17 and Council Decision of 2 September 2011 (2011/542/EU) [2011] OJ L 240/11. To meet these financial commitments, the European Commission decided to raise capitals on the markets, launching bond issuances up to 17.6 billion euros in 2011 and up to 4.9 billion euros in 2012; EFSF Newsletters January and April 2011, at www.efsf.europa.eu.
213.
To meet the financial commitment, the EFSF decided to raise capital on the markets, launching bond issuances up to 16.5 billion euros in 2011 and up to 10 billion euros in 2012; EFSF Newsletters January and April 2011, at www.efsf.europa.eu.
214.
The contribution of the United Kingdom amounted to 3.250 million pounds sterling, Loans to Ireland Act 2010, in Public General Acts 2010 c 41.
215.
Portugal: Request for a 3-Year Arrangement Under the Extended Fund Facility, IMF Country Report No 11/127. The resources were made available on the basis of a Letter of Intent accompanying a Memorandum of Economic and Financial Policies and a Technical Memorandum of Understanding of the Portuguese government dated 17 May 2011; this requested a 3-year Extended Arrangement under the Extended Fund Facility, which was approved under the fast-track emergency financing mechanism procedures, at www.imf.org.
216.
The financial assistance was granted through a loan to be disbursed over 3 years with a maximum average maturity of seven-and-a-half years. The loan was made available by the European Commission in a maximum of 14 instalments; the first instalment was subject to the entry into force of the Loan Facility Agreement and the Memoranda of Understanding. Cf. Council Implementing Decision on granting Union financial assistance to Portugal of 30 May 2011 (2011/344/EU) [2011] L 159/88, amended by Council Decision (2011/541/EU) [2011] OJ L 240/8. To fund this loan, the European Commission, on behalf of the European Union, has launched bond issuances, at http://ec.europa.eu/economy_finance/eu_borrower/portugal/index_en.htm.
217.
To meet the financial commitment, the EFSF decided to raise capital on the markets, launching bond issuances of up to 18 billion euros in 2011 and up to 17 billion euros after 2011; EFSF Newsflash June 2011, at www.efsf.europa.eu.
218.
At the Euro Summit of 29 June 2012, it was agreed that the assistance for Spain to be provided through the EFSF would have been transferred to the ESM once operational without gaining the preferred status, at http://consilium.europa.eu/uedocs/cms_data/docs/pressdate/en/ec/131359.pdf.
219.
See http://ec.europa.eu/economy_finance/assistance_eu_ms/spain/index_en.htm.
220.
Infra, § 12.5.1.
221.
The programme addresses Cyprus’s financial sector imbalances, including an appropriate downsizing of the country’s financial sector, fiscal consolidation, structural reforms, and privatisation; http://www.esm.europa.eu/about/assistance/cyprus/index.htm.
222.
The first tranche has been transferred in two separate disbursements: two billion in May 2013 and one billion in June 2013; see http://www.esm.europa.eu/pdf/ESM%20Press%20Release%20ESM%20disburses%20the%20first%20tranche%20of%20financial%20assistance%20to%20Cyprus.pdf.
223.
Cyprus: Request for Arrangement under the Extended Fund Facility, IMF Country Report No 13/125.

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Catholic University, Milan, Italy
Mauro Megliani

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Megliani, M. (2015). A Historical Outline of Sovereign Indebtedness. In: Sovereign Debt. Springer, Cham. https://doi.org/10.1007/978-3-319-08464-0_2

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DOI: https://doi.org/10.1007/978-3-319-08464-0_2
Published: 19 July 2014
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