States’ Reliance on Capital Markets

At the core of this question are sovereign bonds — securities held by either public or private entities. States have to repay their debt, that is, they have to reimburse a principal and pay interest on a regular basis. They usually refinance their debts by issuing new bonds in order to reimburse the previous ones — but debt has a price. Interest rates depend on how many market agents and rating agencies evaluate a given state’s ability and willingness to reimburse, and its supposedly “sound” economic policies. This includes balanced budgets, low inflation, a competitive job market, indirect taxes, and keeping politics out of monetary and credit matters, which are instead left to the market.

Yet, states’ reliance on global financial markets — and an alienation of their power to the “will of the market” — is hardly “natural.” Until the 1990s, the sovereign debt of countries in the Global South was mostly held by banks or multilateral organizations. The Latin American debt crisis of the 1980s and the US-led Brady restructuring strategy (named after then US Treasury secretary Nicholas F. Brady) introduced sovereign debt securities backed by US Treasury bonds instead of distressed bank loans. This plan led to the emergence of a large secondary market in sovereign debt securities, which placed discipline on states by making their quest for “creditworthiness” into a quasi-natural behavior, thus forcing them to conform to the market’s legal and economic standards.

While they may exert effective control over their own territories and people, if states at “the periphery” of the international financial system are to gain investors’ confidence and sell their bonds on Wall Street or in the City of London, then they have no choice but to submit to the jurisdiction of these financial centers and renounce their own sovereign immunity. As of March 2009, 69 percent of outstanding emerging market bonds issued in international markets were governed by New York law.

By submitting to these jurisdictions, governments accept being considered like any other commercial entity — and thus concede the very thing that distinguishes them as states. Indeed, most states in the Global South cannot borrow from abroad even in their own currency. All these questions come to center stage when debts are not sustainable and creditors engage in restructuring or litigation.

Thus, states are meant to operate as economic agents subject to “free market” funding, depending on their specific economic resources and capacities. But this reading, advanced by liberal economists, hides the material foundation of debt markets. The latter are built on a global financial order entrenched in various national institutions and judicial systems at the global level. Indeed, it is far from the case that states have equal positions relative to the financial markets. Some are more “sovereign” than others making them more dominant in the world of finance.

The Forgotten Resistance to Western Market Rules

When history is written, the history of global economic governance places emphasis on “winners” and the most powerful actors. As a result, economic alternatives, as well as any resistance to Western market rules, are mostly invisible and assume a marginal position alongside so many other so-called “unrealistic” agendas.

Yet, looking back at the most important alternative approaches and instances of resistance to Western market rules provides just the kind of perspective we need to denaturalize states’ alienation by global markets. One act of resistance to consider consists of restoring the New International Economic Order (NIEO) in addition to the concrete political and economic alternative projects that lawyers, economists, and diplomats from the Group of 77 — an alliance of Global South countries at the United Nations — built in the 1960s and ’70s (before the neoliberal wave made any economic alternative unthinkable).

From the Bandung conference in 1955 to the UN resolution for a new international economic order in 1974, the Third World has historically emerged as a political project of its own. In this period, many recently decolonized nations demanded fair international economic rules, empowering them in the production and trade of goods and making them equal partners with Western countries. Reordering international trade would, from this perspective, transform the international financial architecture, monetary policy, and tariffs, as well as support the industrialization process. The NIEO thus stood opposed to the neoliberal project of establishing free trade at the global level.

An important step in this direction was the creation of UNCTAD in 1964. While the General Agreement on Tariffs and Trade (GATT) promoted the reduction and elimination of trade barriers, UNCTAD became a global bastion of critical thinking, advocating for state reordering of market relations. The ideas of Argentinian economist Raúl Prebisch were central to the new organization: without economic regulation, the countries of the Global South were forced to export mainly raw materials and import manufactured goods. This asymmetry was reinforced by the deterioration of the “terms of trade” (i.e., by the continuous increase in the prices of manufactured products relative to the prices of raw materials). UNCTAD’s objective, then, was to rebuild policy levers which could reverse this asymmetry by developing industrial sectors capable of increasing exports and substituting local production for certain imports. This was to be based, in particular, on protectionist measures such as tariff barriers, combined with policies to support the concerned sectors.

Within the UNCTAD framework, states’ overindebtedness was discussed as a direct consequence of the structural disequilibrium between the countries of North and South. Indeed, this has led to imbalances in monetary reserves and structural deficits in state budgets in the countries of the Global South, in turn, led to structural and continuous indebtedness. These countries’ imbalances, monetary reserves, and state budgets were directly determined by the terms of trade through which they claimed to have leverage. Their difficulties or incapacities in repaying their debts was not, in this understanding, an insulated, domestic problem; rather, it was a direct consequence of structural asymmetries of capital flows in global trade.

In the late 1960s, UNCTAD launched a joint effort to measure the debt servicing issues faced by countries in the Global South and made recommendations for reforming the international financial architecture. During the preparation of the UNCTAD conference in Lima in 1971, proposals for a debt restructuring mechanism were discussed for the first time but were quickly rejected by Western countries.

Yet, the idea of a restructuring mechanism was not completely abandoned. With the oil crisis of 1973, the debt of Global South countries deteriorated further; and calls for truly international remedies to a structural problem soon returned to the table. Following a resolution adopted that same year, UNCTAD formed the Intergovernmental Group of Experts on Financing for Development. The countries of the Global South took a clear position: to create an international forum in which it would be possible to discuss debt problems collectively, and to take action toward restructuring. This collective was envisaged as a means of rebalancing the international economic system. Far from asking for restructuring in the name of “development,” the countries of the South were calling for a more egalitarian system based on fairer economic governance.

But this was met with resistance. Opposed to such structural reform, the US government and its larger diplomatic apparatus pushed a case-by-case approach — each country would take responsibility for renegotiating its own debt — which effectively left the resistance to the prevailing order divided, weak, and ineffective. Indeed, documented diplomatic cables of the time reveal how US authorities closely monitored tactics of cooperation and attempts to unite the Global South. Such international solidarity, and UNCTAD’s support for it, were identified as the enemies.

One 1974 diplomatic cable reveals US diplomats’ concern for “the desire of the Low-developed countries to publicly maintain ‘Third World’ unity.” The author of this document confessed that he was pinning his hopes on the “second thoughts” that “some of the more advanced” countries of the G77 might have: “fearing that an unsuccessful conference (and unsuccessful cooperation on a debt restructuring mechanism) could have adverse effects on their creditworthiness in international capital markets.” Here, the idea of creditworthiness — an economic concept referring to the likelihood that a country will default on its debt obligations — was used to weaken the cohesion of the G77 coalition, to reframe debt problems as something to be dealt with on an individual basis, and to rule out any coordinated or structural solution.

The US government’s strategy of containment, backed by its Western allies, sought to snuff out cooperation and maintain division. But this was aided by the financial elites of the strongest countries in the Global South, who maintained a self-centered focus on their own creditworthiness. The logic of individual responsibility was entirely congruent with a problematization where debt problems are seen as an effect of domestic factors at the local level, and can be treated according to market devices and a contractual ideology that treats states like commercial entities and private investors.

This approach also imposed a certain “subjectivity” for the state itself. Here, domination is achieved by constructing a system of individualized states that have to face their individual responsibilities on an asymmetrical basis. States can only blame themselves as the cause of their own failures and troubles — considered to be morally “deserved positions” — and assume the consequences alone, just as an individual household or an indebted consumer would do. Starting in the 1980s, advanced countries waged and then won a political battle to marginalize systemic financial issues from UNCTAD’s mandate.

The Heritage of the NIEO

This history demonstrates that economic governance projects were far more ambitious than the debt suspension or relief proposed today in the midst of the COVID-19 crisis. Yet this heritage is kept alive through UNCTAD. In 2006, its debt branch began to work toward the establishment of principles that would regulate and give a soft framework to sovereign debt restructuring.

On this basis, principles of “responsible sovereign lending and borrowing” were published in 2010. UNCTAD claimed that lenders, just like borrowers, have responsibilities for preventing situations of overindebtedness. Hence, it stipulated the following principles: “Honesty; Realistic assessments; Pre-disbursement diligence; Post-disbursement diligence; Aligned incentives; Sanctions regimes; and Renegotiation” for lenders; and the duties of the borrowers are described as: “Legal obligations; Candor; Disclosure; Internal approvals; Debt management offices; Project due diligence; Preparation for debt management.”

From 2013, UNCTAD worked on a new institutional project for debt restructuring based on such principles. This meant that states would benefit from an institutional process established precisely to deal with their debt when they come to default or when debt becomes unsustainable. Building on UNCTAD’s work, in August 2014, Argentina and Bolivia made an important move at the United Nations by tabling a resolution for the adoption of an international debt restructuring mechanism. This mechanism would override domestic courts, such as New York’s, that are de facto hegemonic and transnational.

At that time, Argentina was passing through a crucial episode of its debt saga. This started in 2001 with its declaration of default — without IMF permission — on over $80 billion of its sovereign debt (the largest in history) after a major economic, currency, and political crisis. The Argentinian state was under the pressure of hedge funds and holdout creditors who were litigating against it in New York courts, preventing the execution of a restructuring agreement that the state had reached with 93 percent of bondholders. With the support of Evo Morales across the border in Bolivia, Argentinian diplomacy tried to mobilize the international community and to repoliticize this struggle by breaking it out of courtrooms.

The result was a vote at the United Nations General Assembly in favor of “principles for debt restructuring” that would provide “the sovereign right” of any country “to restructure its debt.” At first glance, Argentina and the G77 won a diplomatic victory: 134 countries voted in favor, forty-one abstained, and six voted against (United States, Japan, Germany, Israel, the United Kingdom, and Canada). Other European Union countries abstained — a polite way of saying no. The Western countries’ blatant disregard was a crystal-clear message to the United Nations that any initiative would be considered as an illegitimate intrusion and financial centers’ rules cannot be challenged.

The vote on Argentina’s proposal was thus a Pyrrhic victory that failed to translate into any concrete policy action, and UNCTAD was once again kept off the territory reserved for the international financial institutions (the IMF and the World Bank). Yet, this also made explicit the internal divisions that plague the G77, especially on the concept of sovereignty — dividing, for instance, Russia, China, and African countries. The countries of the Global South’s increasing concerns to maintain market access through creditworthiness also explained a certain reticence to support Argentina in pushing for a supranational mechanism.

Here, emerging countries had to choose between defending their immediate interest as individual borrowers seeking access to private capital markets, and their collective interest in developing a restructuring process. While governments felt a duty to safeguard the legacy of NIEO and the solidarity principles anchored in the history of non-aligned countries, they also had strong economic and financial incentives to behave selfishly by conforming to the creditworthiness requirements designed by the Bretton Woods Institutions. In other words, solidarity between countries in the Global South was undermined by a dynamic that goes hand in hand with the idea that states should become market players.

Alone in the Room

Argentina’s debt is now back in the spotlight. Amidst the pandemic, its minister of economy, Martín Guzmán — a Columbia University economist akin to Joseph Stiglitz who has been recognized worldwide for his expertise on debt restructuring — faces tough negotiations with different types of creditors that are more or less “restructuring friendly” or willing to go into litigation: big asset managers, but also hedge funds that specialize in distressed debt investment. Some private creditors are pressuring Argentina and are ready to take court action arguing that the country is using the COVID-19 crisis as another opportunity to default on its repayments.

If Argentina is a textbook case, this is also because, unlike many states that have to settle under unfavorable and asymmetrical conditions, the country has been able to draw on considerable financial and legal resources — for example, by recruiting some of the most well-known lawyers to litigate on the state’s behalf. This was possible through the deployment of a domestic financial system — an alternative to capital markets — which consists of re-nationalizing pension funds, using the assets of nationalized banks and the Central Bank to finance the Treasury, and heavy reliance on soy exports to China.

The government led by Néstor and Cristina Kirchner from 2003 to 2016 implemented a Keynesian policy agenda that challenged neoliberal templates. This involved an embrace of state intervention through subsidies for the industrial sector, capital controls, currency restrictions, and paying for what it considered to be its social “duties.” In this vein, they made part of the Argentinian Central Bank’s mandate the alleviation of unemployment, as well as other social goals, in order to combat inflation and capital flight. But Argentina’s strategy has also often been ambiguous. Despite the impression of disobedience, the Republic has constantly defended its sovereignty in US courts of justice, insisting on its own good faith and thereby playing the financial and legal credibility card with regard to the global market community.

The dilemma in which the various states are caught — having to act as individualized market actors even as they demand global restructuring — thus helps to naturalize the legitimacy of financial law that favors investors and paves the way for strategies exploiting asymmetries in the trade and international financial architecture. These intertwined stories show how a “credible” policy or even a domestic attempt to resist, isolated from the rest of the dominated countries, is not sufficient. Whenever a country is alone in the room faced with its creditors (be they official or private), market hegemony persists.

The lesson from history, then, is that a consensual debt relief or suspension, as recently proposed by the Institute of International Finance, that works only as a “break” given by private creditors or a “reset button” is far from sufficient if it is followed by business as usual. In fact, this would likely mean a hardened discipline being imposed on states’ economic policies and a range of action for social measures. States, with the help of mechanisms and institutions uncolonized by the culture of the private capital markets, should instead coordinate to emancipate themselves from the interests and ideologies of financiers. This would mean disciplining global finance — and doing so under the control of an international force that stands up for the public good.