War reparations have been a common feature in peace settlements for thousands of years. The chapter provides an overview of how historical reparations were paid, and then an overview of the literature on the transfer problem, one hundred years after Keynes started the debate. Whether direct transfers of money or indirect transfers of assets, transfers affect trade flows and future income in the short or the long run. Financing a transfer is a budgetary problem in the short run, and if a country can borrow the money, the constraint is a willingness to pay, not the capacity to pay. But a transfer can also have second-order effects on savings, investments, consumption, and output, because interest rates or the terms of trade might mitigate or exacerbate the economic costs of the transfer. I show that the terms of trade, for the most part, improved in the years following the announcement of reparations, and that sovereign debt markets allowed countries to finance reparations by borrowing.

Chapter 6 studies the case of Franco-Prussian War indemnities of 1871. France paid the indemnity of 25 per cent of output in three years to Prussia. The years following the end of the war featured several default-like characteristics (output contraction and high debt levels) but saw neither a devaluation of its currency nor a fall in real wages. France had easy access to loans at reasonable interest rates, with high investor participation from both foreign and domestic sources. The most important factor was that France had accumulated a high stock of foreign assets, meaning its net debt was essentially zero, which incentivised a settlement that did not include sanctions or confiscations. In this case, enforcement of sovereign debt played a positive role, in that a default would have been more costly than repayment. It is also likely that military enforcement was not needed, because France was incentivised to repay because of its easy access to debt and stock of foreign assets. The macroeconomic situation was, crucially, one in which the current account was positive, meaning that while France repaid the indemnity it did not do so by indebting itself.

What happens when countries cannot default on their debt? This history of war reparations shows that state survival trumps economics. This chapter introduces and summarises the book.

Chapter 13 makes the argument that militarily enforcing sovereign debt is akin to a debtors prison for states, based on the cases in the book.

Chapter 3 discusses sovereign debt theory and practice. It goes through the history of sovereign debt and how the current theories of borrowing and lending developed in the 1980s. I argue that countries want to be part of global society, and that means they sometimes repay unsustainable debt. The chapter dives into why countries might default, when they might default, how often countries have defaulted, and what the economic and political costs are. I then describe what happens when countries need to restructure their sovereign debt, both in theory and with a practical guide for the process. Finally, in another technical section, I describe a sovereign debt model. The model explains when countries should have no willingness to repay their debt. It allows me to characterise a set of stylised macroeconomic facts that usually accompany sovereign debt defaults. The default set that comes out of the model states when countries should default. These facts and default set (not part of the technical section) are used in Chapters 6, 8, and 10. Chapter 3 is the last overview chapter; the rest are case studies.

Chapter 5 is a brief history of Haitian indemnities to France. The chapter gives an overview of how France used gunboat diplomacy to negotiate a large indemnity in exchange for recognition of the Haitian state. Even though Haiti won its independence in 1804, transfer to France had to be paid until 1947. Haiti had to borrow from French banks to finance the transfers, which settled them with a crippling stock of sovereign debt for more than a century. I discuss how the debt can be considered odious.

Standards are valuable not only to their users but also to the organizations that develop and promote them. It is simplistic to only view the economic function of standards from the standpoint of its use cases. We should also recognize and examine how the setting of standards contributes to the empowerment of private standard-setting organizations and their advocacy agenda. This chapter analyzes the standard-setting activities of the Institute of International Finance and argues that those activities are an important factor that accounts for its continued existence and relevance.

The chapter uses Adam Smiths wealth of nations to complicate simple laissez-faire notions of economic development. Adam Smith argued that public works were crucial for economic development. Since they wouldnt always be provided by private firms there would need to be some government involvement. However, Smith argued that government waste and debt would continue to be risks of infrastructure, so he argued that infrastructure should be governed by cost-internalizing principles. Also, Adam Smith argued for natural monopoly, which would be exempt from market forces, which provided the groundwork for the idea of public utilities.

Protecting individual rights is a core feature of democratic constitutionalism. The centralization of the means of coercion gave rise to the Hobbesian dilemma, the fear that this enormous power might be abused unless it be effectively controlled. In addition to dividing power among different branches of government or sharing it between the federation and its units, constitutions have fortified individual rights with judicial review and enforcement mechanisms against the executive branch to rein in state power.

Proposing a collective right to effective self-government sits oddly with a vision that pitches free individuals against an all-powerful state. Such a right can, however, be justified on two interrelated grounds. First, in the absence of effective protection by a state, individual civil and political rights remain empty declarations. Stateless people, Hannah Arendt has taught us, are the most vulnerable; they have no legal rights and no way of seeking protection as a matter of right.

This study explores the fragmented contemporary international legal instruments and practice relevant to sovereign defaults and has examined the question of whether and to what extent these instruments and practice can be reconceptualised as a regulatory framework for sovereign debt restructuring.

This study has pursued a balance between bondholder protection and respect for sovereign debt restructuring at various stages of litigation and arbitration proceedings. An appropriate balance inevitably depends on the context and circumstances of specific cases and cannot, by its nature, be articulated in a precise manner. Instead, the present study has pursued a framework within which an appropriate balance may be explored and attained in specific cases. Such a framework is constructed by applicable contract, statutory and treaty provisions to be interpreted in a manner that certain deference is paid to debtor sovereigns’ policy decision-making during debt restructuring and that the chance of checks and balances by courts or tribunals is ensured.

The relevance of broader public policy considerations in the sovereign debt discourse cannot be ignored given the rise of the perception of sovereign default as a global concern. Recent literature tries to introduce a public law or policy perspective into the sovereign debt discourse, such as the theory of international public authority, l’ordre public de la dette souveraine and an incremental approach. As a matter of judicial interpretation, however, public policy arguments as such cannot override the text of the contract or treaty provisions in force. A better approach will thus be to examine whether and to what extent the applicable contract, statutory and treaty provisions afford such public policy considerations through interpretation in such a manner that practical solutions to holdout problems are deduced without losing the balance between bondholder protection and respect for sovereign debt restructuring.

The jurisdiction of arbitral tribunals to entertain sovereign bond disputes, which is primarily governed by the definition of investment as provided in applicable investment treaties, is the first stage at which such an appropriate balance is to be explored. This study has found that both the inclusion and exclusion of sovereign bonds as a protected investment reflect the policy decisions of contracting parties, and the ‘negotiated restructuring’ exception may embody a possible balance between bondholder protection and respect for negotiated debt restructuring. In the absence of an explicit reference to sovereign bond instruments, interpretative yardsticks, such as contribution, risk and territoriality as identified either in investment treaties or in the ICSID Convention may afford a balanced consideration taking into account of both the modern development of financial markets and policy decisions regarding the extent to which treaty protection should be provided.

Unlike 1720 or 1793–97, the bubble of the 1820s was generated by the financial system itself: The new expansion of the banking system both domestically and internationally, the Bank of England’s monetary policies, the structure of corporate finance, and sovereign lending practices produced the bubble without any need for malfeasance or exogenous shocks. The bubble burst in late 1825, leading to the failure of more than 100 British banks and more than 1.000 businesses. At the height of the Panic of 1825, the decision about priorities and interests was taken not by a political sovereign or a regulatory legal institution, but by a private bank: Rothschilds bailed out the Bank of England, showing the power of financial markets over governance. For the first time, it was clear that financial markets could both cause and end financial crises regardless of political institutions. After 1825, financial crises became a predictable and intelligible part of life, caused by impersonal and abstract international markets, managed by central banks independent of political accountability, explained and analyzed by a self-authorized body of economic thought, with the costs borne by domestic populations and nobody in particular at fault.