When the apartheid regime fell in South Africa, the newly elected African National Congress (ANC) government enjoyed an incredible outpouring of goodwill and a general recognition of the illegitimacy of the previous regime. If ever there was a case for forgiveness of a country’s debts, incurred under a repressive regime without the benefit of most citizens in mind, South Africa in the mid-1990s would have seemed a good fit. And yet, once the ANC came to power, they acknowledged the debts of the apartheid government, maintaining the common norm of debt continuity across regimes. To many observers, this was the only reasonable response to a monolithic international financial system that demanded that new governments honor previous borrowing commitments. However, as argued by Odette Lienau, this need not necessarily have been the case.
Lienau’s Rethinking Sovereign Debt is a thought-provoking account of the historical development of norms of repayment in sovereign debt markets. At its core, the book rests on a critical yet often ignored point: Any analysis of sovereign debt requires an inherent understanding of “sovereignty.” What sovereignty properly entails has evolved over the past century, especially following movements toward popular rule (in various waves of democratization) along with self-determination (during waves of independence from colonial powers). Each of these developments in the international system prompted a reconsideration of sovereignty—beyond simple control of a bounded area—to also incorporate notions of rule via popular will for the public benefit.
Despite this evolution of sovereignty in the political sphere, Lienau notes that bond markets have relied more or less continuously on an understanding of sovereignty as “the state as a shell,” with little regard to the internal functions of government. This narrower focus on de facto control of a country, without consideration of such control as achieved via popular mandate or for public benefit, has important consequences for the ability of new regimes to seek debt forgiveness, particularly in cases of “odious debt” contracted by dictators with the purpose of repressing popular resistance. Such attempts to discredit past borrowing by linking it to nondemocratic outcomes have largely failed to date. However, Lienau argues that in a post–Cold War environment in which finance may be less constrained by geopolitical considerations, we have begun to see an opening in some sovereign debt treatments that may suggest new room for growth for a “discontinuous” notion of sovereignty that would permit pursuit of forgiveness of odious debt.
From a normative standpoint, it is difficult to argue with the main thrust of Lienau’s work: Given modern notions of sovereignty based on some conception of the public will, it seems unfair to burden the people of a country—especially a developing country with already limited economic resources—with debts incurred for the private benefit of previous dictators. The practicalities of implementing such a system, however, prove somewhat more problematic. Following landmark work on the role of reputation in maintaining sovereign debt markets in Michael Tomz’s (2007) Reputation and International Cooperation, Lienau argues that an odious debt system need not be inconsistent with a reputation-based market. While normatively attractive, the potential for new governments to alleviate past burdens by simply declaring them illegitimate raises a series of new challenges. Lienau admits this difficulty, and suggests that markets could still punish defaulters for “repudiation of debt not considered sufficiently ‘odious’ by the relevant audience—be it private creditors making a reputational judgment or a tribunal or court adjudicating an asset seizure” (p. 232). However, exactly what sorts of institution might be required, or what precise guidelines would be necessary to reach a judgment, are left largely in the background. The informational burden associated with adjudicating such claims—which, given the sums involved, are almost certain to be subject to conflict—makes it difficult to imagine the implementation of such a system without much more careful consideration.
Although this book is explicitly not a quantitative exercise, Lienau’s detailed discussion of a number of historical cases of debt repudiation suggests several important avenues for future research for political scientists. For example, she notes that following the repudiation of tsarist debt by Russian revolutionaries, several American financiers sought to make lines of credit available to the new regime, but were eventually quashed by the U.S. government due to ideological concerns about support for communism. As a result of this intervention by American authorities, no new lending was made available to the Soviet government, a fact often noted in reputational accounts. However, Lienau argues that a reliance on large-scale data on sovereign issuance, as often used in studies of sovereign debt in economics and political science, misses an important source of variation: The “zeroes” in such a data set are not all the same.
While there has been recent work on issues of selection bias in sovereign borrowing (see Emily Beaulieu, Gary W. Cox, and Sebastian Saiegh, “Sovereign Debt and Regime Type: Reconsidering the Democratic Advantage,” International Organization 66 [2012]: 709–38), this work focuses largely on the selection effects that differentiate no borrowing from non-zero borrowing, and has primarily emphasized country-level factors. Lienau’s work raises an alternative and nuanced critique: While characteristics of sovereign borrowers are clearly important in determining market access, we may need to pay more attention as well to characteristics of sovereign lenders if we wish to fully understand the dynamics of international bond markets. Layna Mosley’s (2003) work in Global Capital and National Governments has made important advances to our comprehension of investor-side incentives, but the book under review helps highlight that more work remains to be done in unpacking the supply and demand dynamics that undergird sovereign debt.
Finally, Lienau’s attention to the evolution of international norms surrounding debt continuity points to a broader critique that has of late been relevant for the subfield of international political economy, where much study on sovereign debt is conducted. The dominant “open economy politics” (OEP) approach, with explanations for international outcomes largely a function of domestic political factors, has recently been critiqued in works by Thomas Oatley (“The Reductionist Gamble: Open Economy Politics in the Global Economy,” International Organization 65 [2011]: 311–41) and by Stephen Chaudoin, Helen V. Milner, and Xun Pang (“International Systems and Domestic Politics: Linking Complex Interactions with Empirical Models in International Relations,” International Organization 69 [2015]: 1–35). Lienau argues that behavior in sovereign debt markets is, in part, a function of broader norms of sovereignty that inhere in the international system but that may be subject to change. This argument resonates with critiques of OEP that look for a greater explanatory role for the international system. While most of the cases covered in Rethinking Sovereign Debt suggest the difficulty for new regimes to achieve debt reduction—even in cases of broad agreement on the illegitimacy of past government—her conclusion points to the possibility of changing norms in global financial markets. If true, this suggests that greater attention to change in the system is warranted.
This book is a penetrating and enjoyable account of the evolution of norms undergirding sovereign debt, which will be a valuable read for scholars of economic history, political philosophy, and modern political economy alike.
