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How should governments address sovereign debt?

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Despite Greece being the current poster child for sovereign debt, national debt crises are nothing new and won’t be going away anytime soon. Governments habitually solicit capital loans only to default. In a new article for Public Discourse, Samuel Gregg discusses not only Greece, but also some of the deeper issues surrounding sovereign debt crises. He asks:

What is the most reasonable framework through which governments should try to address such matters? Should they try to resolve them through appeals to necessity and pragmatism? Or should they seek more principled approaches that take justice seriously? If so, where may such methods be found?

When facing these financial woes, governments often turn to–what some would consider–justifiable, but unethical solutions:

As shocking as it may seem, some commentators would contend that such actions are within the remit of governments. Thomas Hobbes, for instance, argued that the sovereign ultimately decides through the laws that he makes who is the rightful owner of property. Thus the state could legislate for the expropriation of private property to help pay its debts, or even declare that it simply no longer wishes to pay its debts. In Hobbes’s schema, what would prevent governments from acting in such ways would be not a commitment to justice but rather attention to their longer-term self-interest: the knowledge that defaulting on sovereign debt would damage the state’s capacity to access capital loans in the future.

Yet the sheer number of sovereign debt defaults and repudiations throughout history suggests that self-interest has not always deterred governments from unilaterally altering or disavowing the terms of debt agreements into which they have freely entered. As Adam Smith commented in his Wealth of Nations:

When national debts have once been accumulated to a certain degree, there is scarce  . . .  a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy: sometimes by an avowed one, but always by a real one, though frequently by a pretended payment.

By “pretended payment,” Smith had in mind currency devaluations, the injustice of which he was not slow to underscore. These, Smith said, enriched “the idle and profuse debtor at the expense of the industrious and frugal creditor.”

Moreover, considerable evidence shows that in many cases when states default, they quickly regain access to capital markets at interest rates that don’t reflect the history of their previous misdeeds. One of the first actions taken by the Bolsheviks after seizing power in Russia in 1917 was to repudiate approximately 30 million tsarist bonds issued between 1827 and 1917. Yet by the mid-1920s, the Soviet Union was receiving capital loans from American businesses—despite the US State Department officially barring such loans because, in the words of Secretary of State Charles Hughes, providing such credit would “give encouragement to repudiation [of debts accrued under the previous tsarist government] and confiscation [of private property].” Repudiation, it seems, did not hinder the Communist regime from acquiring new sources of credit.

The face of the $10 bill and the subject of the latest hit musical, Alexander Hamilton had a good response to financial woes:

Confronting the challenge of solving the immense debt problems facing the young republic, Hamilton underscored that there would be occasions in which governments’ responsibility to meet debt repayments would not or could not be realized in perfect concordance with their formal obligations. Faced, for example, with external military aggression, it would be reasonable for a government to accord a lower priority to debt repayments as it rearranged its finances to meet the threat. Clearly Hamilton understood that concern for the polity’s well-being cannot be reduced to the fulfillment of contracts.

That said, Hamilton did not think that sovereign states should behave in a cavalier fashion with regard to debt, even when confronting sudden and expensive contingencies. Part of his reasoning was economic self-interest. Any breach, Hamilton wrote, “of the public engagements, whether from choice or necessity, is in different degrees hurtful to the public credit.” Nonetheless, Hamilton also argued that unilateral adjustments to sovereign debt payments had to be directed “by a scrupulous attention, on the part of the government, to carry the violation no farther than the necessity absolutely requires, and to manifest, if the nature of the case admits of it, a sincere disposition to make reparation, whenever circumstances can permit.”

Read “Sovereign debt, justice, and state authority” in its entirety at Public Discourse.

 

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Sarah Stanley

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