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Published online by Cambridge University Press: 25 March 2011
Risk and liability change the initially stipulated terms of contracts, overruling their otherwise binding nature. Risk encourages careful assessment of debtors' abilities to service debts. Errors and negligence in assessment, and even external shocks, make creditors suffer losses. Disregarding one's duty of care or professional standards, or engaging in tortious or illegal behavior makes actors liable to compensate for any resulting damage—a necessary systemic element of the framework markets need to function well. Neither mechanism was allowed to work properly in sovereign lending.
This essay analyzes why risk and liability are necessary mechanisms of well-functioning markets, and discusses how risk can be handled. In the United States, inappropriate regulatory norms hindered providing against risk in the case of sovereign debt. The absence of liability—a market imperfection—has produced debts no decent legal system would recognize as legitimate domestic debt, thus aggravating the sovereign debt problem, and giving rise to concepts such as criminal, odious, and illegal debts. Discriminating sovereign debtors and disobeying the rule of law caused market distortions, resulting in not only grave damages to debtors, but also losses to creditors that the mechanisms risk and liability would have avoided. Finally, I briefly present proposals to repair these shortcomings in order to avoid the disasters of the past.
1 Compare Alberto Acosta, “La increíble y triste historia de América Latina y su perversa deuda externa,” in Chris Jochnick and Patricio Pazmiño Freire, eds., Otras caras de la deuda, Propuestas para la acción (Quito/Caracas: CDES/Nueva Sociedad, 2001), pp.17–40; Kunibert Raffer, “Schemes for Resolving the External Debt Problem,” in OPEC Fund for International Development, ed., Financing for Development, Proceedings of a Workshop of the G-24 Held at Nigeria House, New York, September 6– 7, 2001 (Pamphlet Series No. 33, 2002), pp. 147–51.
2 John M. Makin, The Global Debt Crisis: America's Growing Involvement (New York: Basic Books, 1984), p. 41.
3 Angus Maddison, Two Crises: Latin America and Asia, 1929– 38 and 1973– 83 (Paris: OECD, 1985), p. 28.
4 Richard Fletcher, “Lessons of Recent Debt Reorganizations,” in Khadija Had, ed., The Lingering Debt Crisis (Islamabad: North South Roundtable in Collaboration with UNDP Development Study Programme, 1985), p. 91.
5 See Kunibert Raffer and H. W. Singer, The Economic North-South Divide: Six Decades of Unequal Development (Cheltenham, U.K., and Northampton, Mass.: Edward Elgar, 2001; repr. in paperback, 2002; 2004), pp. 133–37.
6 U.S. Senate Committee on Foreign Relations, Bretton Woods Agreements Amendments Act of 1977, United States Senate, 95th Congress, 1st Session, Report No. 95-603 (Washington, D.C.: Government Printing Office, 1977).
7 Ibid., p. 22.
8 Ibid.
9 Kunibert Raffer, “Schemes for Resolving the External Debt Problem,” pp. 142–47.
10 IBRD, World Debt Tables 1992/93, vol. 1 (Washington, D.C.: IBRD, 1992), pp. 10–11. Emphasis in original.
11 See, e.g., Alfred Herrhausen, “Die Zeit ist reif—Schuldenkrise am Wendepunkt,” Handelsblatt no. 124 (June 30, 1989). Mindful of the United States, he proposed a period of up to five years with interest rates on already existing debts substantially reduced (with exceptions, such as trade financing) to allow banks with insufficient provisions to increase theirs before the haircut.
12 Edward Bransilver and Ernest T. Patrikis, “Lending Limits and Regulatory Constraints under U.S. Law,” in Michael Gruson and Ralph Reissner, eds., Sovereign Lending: Managing Legal Risk (London: Euromoney Publications, 1984), p. 6.
13 Compare Kunibert Raffer, “Tax-Deductible Loan Loss Reserves and International Banking: An Economist's Unbiased Analysis,” Working Papers in Commerce WPC 91/19 (Birmingham University, Department of Commerce, Birmingham Business School, U.K., 1991); more recently, Raffer, “Internationalizing U.S. Municipal Insolvency: A Fair, Equitable, and Efficient Way to Overcome a Debt Overhang,” Chicago Journal of International Law 6, no. 2 (2005), pp. 363–82.
14 Bransilver and Patrikis, “Lending Limits and Regulatory Constraints under U.S. Law.”
15 Kunibert Raffer, “International Debts: A Crisis for Whom?” in H. W. Singer and Soumitra Sharma, eds., Economic Development and World Debt (London and Basingstoke: Macmillan, 1989), p. 54 (selected papers of a conference at Zagreb University in 1987).
16 Kenneth A. Guenther (then the IBAA's executive vice president), Letter to Senator Bill Bradley, July 31, 1986.
17 Kunibert Raffer, “Applying Chapter 9 Insolvency to International Debts: An Economically Efficient Solution with a Human Face,” World Development 18, no. 2 (1990), p. 310, n. 4.
18 Quoted from Steven L. Schwarcz, “Sovereign Debt Restructuring: A Bankruptcy Reorganization Approach,” Duke Law School Working Paper no.1 (1999), p. 145, n. 239; available at http:\\papers.ssrn.com/paper.taf?abstract_id=203671.
19 Eric Helleiner, “The Strange Story of Bush and the Argentine Debt Crisis,” Third World Quarterly 26, no. 6 (2005), p. 956.
20 Raffer, “Applying Chapter 9 Insolvency to International Debts”, p.310, n. 3.
21 Phillip Inman, “Court Cancels Debt that Grew from £6, 000 to £380, 000,” Guardian, July 28, 2005; available at http:\\www.guardian.co.uk/business/story/0,, 1537428, 00.html. Upholding the county court's decision, the court of appeal declined to say whether it agreed with the judge that the loan at an annual interest rate of 34.9 percent was “extortionate.”
22 ILA Committee on International Monetary Law, “Committee Report, Warsaw Conference” (1988), p. 9, para. 21.
23 OECD, Shaping the 21st Century: The Contribution of Development Co-operation (Paris: OECD, 1996), p. 18.
24 Christian Barry, “Ethical Issues Relevant to Debt,” International Affairs Working Paper 2006-05 (March 2006), p. 6, http://gpia.info/docs/wkg_papers/Barry_2006-05.pdf.
25 OECD, Development Co-operation, 1999 Report: Efforts and Policies of the Members of the Development Assistance Committee (Paris: OECD, 2000), pp. 31–32.
26 Compare Kunibert Raffer, “Is the Debt Crisis Largely Over?—A Critical Look at the Data of International Financial Institutions,” in Richard Auty and John Toye, eds., Challenging the Orthodoxies (London and Basingstoke: Macmillan, 1996), pp. 23–39. Warning of growing arrears and the impeding crisis, this text, written in June 1994, was presented at the Development Studies Association Conference at Lancaster in September 1994, before the Mexican crisis.
27 Dani Rodrik, “Understanding Policy Reform,” Journal of Economic Literature 34, no. 1 (1996), p. 17.
28 IBRD, OED, 1998 Annual Review of Development Effectiveness (Washington, D.C.: IBRD, 1999), p. 2; see also Raffer and Singer, The Economic North-South Divide, pp. 150–51.
29 For details, see Kunibert Raffer, “International Financial Institutions and Financial Accountability,” Ethics & International Affairs 18, no. 2 (2004), pp. 68–70; or Raffer, “Delivering Greater Information and Transparency in Debt Management” (paper presented at the 5th UNCTAD Inter-regional Debt Management Conference, Geneva, June 20–24, 2005); available at http:\\r0.unctad.org/dmfas/speakerspapers.htm.
30 Raffer, “International Financial Institutions and Financial Accountability,” p. 68.
31 Adding insult to injury, IFIs have made these reserves “one of the widely-used targets of poverty reduction strategies in Africa.” UNCTAD, Economic Development in Africa: From Adjustment to Poverty Reduction: What Is New? (Geneva: UN, 2002), p. 31.
32 See Raffer, “International Financial Institutions and Financial Accountability”; and Raffer “Delivering Greater Information and Transparency in Debt Management.”
33 “Secretariat Report of the Consultation,” Multi-stakeholder Consultations on “Sovereign Debt for Sustained Development” (Concluding Session, held in Conjunction with the Fifth UNCTAD Debt Management Conference, Geneva, June 20–22, 2005), p. 6; available at http:\\www.un.org/esa/ffd/09multi-stake-consul-flyer-debt-Report.pdf.
34 Jeffrey Winters, “Criminal Debt,” written statement, “Combating Corruption in the Multilateral Development Banks,” Hearing before the Committee on Foreign Relations, U.S. Senate, 108th Congress, 2nd session, May 13, 2004; available at http:\\foreign.senate.gov/testimony/2004/WintersTestimony040513.pdf. See also Raffer, “International Financial Institutions and Financial Accountability,” pp. 64–65.
35 See Costa Rica's Tinoco case in 1922, described below.
36 Allied Bank International v. Banco Credito Agricola de Cartago, 566 F Supp 1440, 1443–44 (SDNY 1983); Allied Bank International v. Banco Credito Agricola de Cartago, 757 F2d 516 (2d Cir 1985); UNCTAD, Trade and Development Report 1986 (Geneva: UN, 1986), p. 142; and Raffer, “Internationalizing U.S. Municipal Insolvency,” p. 365.
37 Allied Bank International v. Banco Credito Agricola de Cartago, 757 F2d 516 (2d Cir 1985).
38 Letter by Congresswoman María América González and Congressman Mario Cafiero to the Securities and Exchange Commission, Washington, D.C., c/o Mr. Russell Clause, dated July 29, 2004 (with official letterhead Cámara de Diputados de la Nación).
39 See Ann Pettifor, Liana Cisneros, and Alejandro Olmos Gaona, It Takes Two to Tango: Creditor Co-responsibility for Argentina's Crisis—and the Need for Independent Resolution (London: Jubilee Plus, NEF, 2001), pp. 8–9.
40 Letter by González and Cafiero.
41 IMF, Independent Evaluation Office, “Report on the Evaluation of the Role of the IMF in Argentina, 1991–2001” (2004), p. 81; available at http://www.imf.org/External/NP/ieo/2004/arg/eng/index.htm.
42 Ibid., p. 91.
43 Raffer, “Applying Chapter 9 Insolvency to International Debts,” p. 309.
44 IMF, “The Design of the Sovereign Debt Restructuring Mechanism—Further Considerations” (November 27, 2002), p. 68; available at http://www.imf.org/external/np/pdr/sdrm/2002/112702.pdf; and Kunibert Raffer, “What's Good for the United States Must Be Good for the World: Advocating an International Chapter 9 Insolvency,” in Bruno Kreisky Forum for International Dialogue, ed., From Cancún to Vienna, International Development in a New World (Vienna: Kreisky Forum, 1993), p. 68; available at http:\\homepage.univie.ac.at/Kunibert.Raffer.
45 IBRD, World Debt Tables, vol. 1 (Washington, D.C.: IBRD, 1988), p. xx.
46 Reginald H. Green, “External Debt, Internal Debilitation: The Philippine Context,” Institute of Development Studies, Brighton, U.K. (1988), mimeo.
47 Fox Butterfield, “Marcos Fortune: Inquiry in Manila Offers Picture of How It Was Acquired,” New York Times, March 30, 1986, p. 12.
48 John Gapper and Richard Gourlay, “Damages Win Leads Lloyds to Rethink Advice,” Financial Times, September 5, 1995, p. 9.
49 Juan Pablo Bohoslavsky, Responsabilidad por concesión abusivo de crédito soberano (European Ph.D. thesis at the Faculty of Law, University of Salamanca, 2006).
50 For details, see Kunibert Raffer, “The Present State of the Discussion on Restructuring Sovereign Debts: Which Specific Sovereign Insolvency Procedure?” in UNCTAD, ed., Proceedings of the Fourth Inter-regional Debt Management Conference and WADMO Conference 10–12 November, 2003 (Geneva and New York: UN, 2005), pp. 69–74; available at http:\\r0.unctad.org/dmfas/pdfs/raffer.pdf; and Kunibert Raffer, “The IMF's SDRM—Simply Disastrous Rescheduling Management?” in Chris Jochnick and Fraser Preston, eds., Sovereign Debt at the Crossroads, Challenges and Proposals for Resolving the Third World Debt Crisis (Oxford: Oxford University Press, 2006), pp. 246–67.
51 For details, see Raffer, “Applying Chapter 9 Insolvency to International Debts”; Raffer, “International Financial Institutions and Financial Accountability”; and Raffer, “Delivering Greater Information and Transparency in Debt Management.”
52 See Raffer, “International Financial Institutions and Financial Accountability.”
