Book review “Sovereign Debt Diplomacies” (part 1)

Two centuries of sovereign debt conflicts

After the wave of independences in former colonies, we see “an effort to make international law a resource not for creditors but for countries facing problems of over-indebtedness” .

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


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


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


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


Second period: from 1933 to 1970, in a number of cases, debtor states managed to profit from creditors’ weaknesses in a context of crisis, suspension of debt payments among countries of the North, world war and finally decolonizations.


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


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


In more detail:


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


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


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


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


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


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


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


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


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


It was in this context that the work of the Russian jurist Alexander Nahum Sack was turned to again. Also to be noted is Mohamed Bedjaoui’s [4] “attempt to establish a ‘New International Economic Order’, was a source of inspiration for UNCTAD policies and it can be credited with having substantially influenced development economists and debt campaign movements in the 1960s–70s” (p. 23).


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


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


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


Creditors use international institutions to recover debts. “When a country is unable to service its debt, it can turn to the Fund for loans, provided that its debt is deemed sustainable.” (p. 25) But, the loans are conditional on social and economic policies. Further on the authors highlight that “the Paris Club, the World Bank, regional development banks, and bilateral organizations also use conditionality frameworks in their country financing operations.” These multilateral institutions serve the interests of the powerful States such as the USA and the EU who often use them “to help private creditors recover their loans” (p. 26). The Argentine crisis at the beginning of the 2000s tarnished their image, showing up the part they play “in sovereign debt disputes”.


Thus, since the 1980s, the States again protect creditors who maintain their control over the indebted States. Nevertheless, nowadays, “Debt repayment mobilizes multilateral organizations like the IMF, the World Bank, and the Paris Club, whose practices of conditionality are hard to resist, even by Western countries, such as Greece recently”(p. 27). An important difference with these conditionalities is that they have “a universal reach which no colonial empire (for instance the British Empire before 1914) ever had before” and are imposed as axioms.


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


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


However, International Law is again interested in the odious debt doctrine developed by Sack in 1927, which states, “Debts are odious and should not be repaid when they were incurred by irregular regimes and for improper uses” (p. 28).


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


Some general considerations on the book


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


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


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


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


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


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


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


Bond-holders set up a repayment committee that over 54 years initiated numerous actions to try to obtain repayment. In 1891, one of Maria’s successors finally agreed to pay a paltry amount equivalent to 2.5 million francs, i.e. the amount Queen Maria had managed to recover from the treasury of Dom Miguel. (Remember that the initial loan was for 40 million.)


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


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


A radical analysis of the issues around sovereign debt is missing


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


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


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


(Translated by Mike Krolikowski.)


- Eric Toussaint,





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


[2] London, Haymarket, 2019.


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


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


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


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


[7] Eric Toussaint, How Debt and Free Trade Subordinated Independent Latin America, June 2016.


[8] Eric Toussaint, Newly Independent Greece had an Odious Debt round her Neck, April 2016.


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


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


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