Why not default? The political economy of sovereign debt (2024)

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Why not default? The political economy of sovereign debt

. By

Jerome

Roos

.

Princeton, NJ

:

Princeton University Press

.

2019

.

398

pp. Index. £34.00. Isbn978 0 69118 010 6. Available as e-book.

Carla Norrlof

University of Toronto, Canada

Corresponding author: carla.norrlof@utoronto.ca

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International Affairs, Volume 96, Issue 1, January 2020, Pages 239–242, https://doi.org/10.1093/ia/iiz269

Published:

01 January 2020

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Accepted:

06 December 2019

Published:

01 January 2020

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Debt involves an obligation to repay the creditor, principal plus interest. But how does one oblige a sovereign state to honour its debt obligations? While creditors can bring defaulting private borrowers before a court and lay claim to their income and assets in order to compensate for default losses, sovereigns are not so easily summoned. In the absence of a supranational authority to enforce repayment of sovereign debt, and without legal means to seize a sovereign debtor's assets, why don't sovereign borrowers just repudiate their loans and default? Recognizing this hazard, historically creditors have attempted to enforce their claims using armed and naval force via gunboat diplomacy. But even this practice could backfire.

In the latter half of the nineteenth century, Napoleon III went to great lengths to coerce Mexico into financial submission. After the nationalist Benito Juarez swept to power and suspended debt payments in 1861, France sent troops and naval fleets for a full-blown invasion of Mexico. Maximilian I was appointed to the Mexican throne. Mexico fought back. Interest payments on the loan soared to the order of 100 per cent of Mexico's national income. The net effect was to further deepen Mexico's resistance to France, whose attempt to enforce creditor claims failed miserably. By the end of the 1860s Napoleon III had withdrawn all contingents from Mexico. Only Maximilian stayed. He was summarily executed. In The Execution of Emperor Maximilian, the nineteenth-century modernist painter Édouard Manet immortalized the salvo of the firing squad after the Emperor dramatically circled his heart and uttered, ‘aim well, Muchachas’.

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Book Reviews Political economy, economics and development

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I am an expert in political economy, economics, and development, with a deep understanding of sovereign debt dynamics. My knowledge extends to the intricate connections between political structures and economic policies, particularly in the context of international relations. I have a comprehensive understanding of the challenges and complexities surrounding sovereign debt and the factors influencing a nation's decision to default.

Now, diving into the content of the article titled "Why not default? The political economy of sovereign debt" by Carla Norrlof, published in International Affairs, Volume 96, Issue 1, January 2020, let's explore the key concepts presented:

  1. Debt Obligations and Repayment: The article starts by highlighting that debt involves an obligation to repay the creditor, including both principal and interest. It poses the fundamental question of how sovereign states can be compelled to honor their debt obligations, especially when compared to the mechanisms available for private borrowers.

  2. Enforcement Challenges for Sovereign Debt: One of the central themes of the article is the challenge in enforcing sovereign debt repayment. Unlike private borrowers who can be taken to court, sovereigns lack a supranational authority to enforce repayment. Legal means to seize a sovereign debtor's assets are also limited, leading to the question of why sovereign borrowers don't simply repudiate their loans and default.

  3. Historical Perspective: The article provides historical context, mentioning that historically, creditors attempted to enforce their claims through armed and naval force, employing gunboat diplomacy. The example cited is from the latter half of the nineteenth century when Napoleon III tried to coerce Mexico into financial submission. This historical case study illustrates the limitations and risks associated with using force to enforce creditor claims.

  4. Case Study: Napoleon III and Mexico: The specific case of Napoleon III's attempt to enforce creditor claims in Mexico is discussed. After Benito Juarez suspended debt payments in 1861, France sent troops and naval fleets for a full-blown invasion. The consequence was a significant increase in interest payments, contributing to the deepening resistance of Mexico. Ultimately, the attempt to enforce creditor claims failed, and by the end of the 1860s, Napoleon III had withdrawn from Mexico.

  5. Artistic Depiction: The article references Édouard Manet's painting, "The Execution of Emperor Maximilian," which immortalized the firing squad execution of Maximilian I in the context of the failed attempt to enforce creditor claims in Mexico. This artistic portrayal adds a cultural and visual dimension to the historical events discussed.

In summary, Carla Norrlof's article delves into the intricate relationship between political and economic factors in sovereign debt dynamics, using a historical case study to illustrate the challenges and consequences associated with enforcing creditor claims on sovereign states. The exploration of these concepts contributes to a nuanced understanding of the political economy of sovereign debt.

Why not default? The political economy of sovereign debt (2024)

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