We have already made clear that for a State to be considered sovereign it has to be autonomous (for complete article follow link). One of the aspects that integrate the autonomy of a State is indeed its economy. By autarchy we mean the economic independence a State must have in relation to other States. The fact that a population is not able to meet its needs and has to recur to its pairs, international organization or any other means apart from the internal ones so to achieve a certain balance within its accounts may lead to other consequences analyzed below that could potentially attempt against its sovereignty.
The State creates law for its population. In other words, the designated authorities create and interpret law for the inhabitants of a specific territory. It is part of its sovereign prerogatives to determine what is legal and/or illegal.
One of the aspects that constitute a State is its economy. As part of the whole system, the economy of a State will be also regulated by norms.
To mention some of the elements that form that economic structure of a State we may enumerate a few such as: financial institutions, financial intermediaries, insurance companies, taxes, national and international budget, etc.
“According to political science all the economic institutions of society are determined or at any rate defined by law and are therefore subject to the sovereign authority”.
Therefore, the economy of a State and the economic infrastructure that sustains it are directly linked to its sovereignty as its sovereign government through the law creates and shapes every single element that result in forming a State as well as the procedures they are supposed to follow.
Nowadays’ world introduces many realities from States with a strong economic structure to others that continuously depend on international aid from their pairs, the World Bank and/or any other international organization.
Although this States continue being autonomous in the legal sense of the world, factually they are in debt. This situation puts in risk the notion of sovereignty in both, the normative and the real environment.
“The world has become familiar with the problem of sovereignty that arises when this process of decay occurs. […] A time comes when the Government begins to deteriorate. Public spirit ebbs. The people cease to respect their rulers or to hope for any real assistance from them. Facilities for economic development are denied or delayed, or granted subject to impossible conditions. The process of development falls into arrears”.
Consequently, we observe that although the economic structure of a State is determined, dictated and created by such a State exercising its sovereignty we think that they are directly and irreversibly interlinked in a reciprocal relation: the sovereign State establish through its legal system the economic structure; however, in order for that State to remain fully sovereign that economic structure must be autarchic.
What does it mean for a State to be in serious international debt in terms of its sovereignty?
It is common that third world States (or more modern, emerging economies) borrow large amounts of money (either in terms of capital or goods). Even developed States do so for very different reasons: simply to cover an overdraft on their expenses, to stimulate trade with a certain area, to create or develop a specific market, so soften bilateral relations with a given pair, etc. The ways or procedures a State may put in place can differ but in general they can be explained as follows:
a) by issuing bonds (national and/or internationally) in order to borrow money from nationals of that State or people, companies and/or any other subject of law abroad;
b) by borrowing money from international organizations such as the World Bank;
c) by borrowing money from another State.
In the first case, the State issues bonds (government or sovereign) at a certain price to be sold to anyone who wants to buy them with the promise to rescue them at a predetermined point in time in the future paying back a specified amount of money. These bonds are bought and sold in the open market and their yield also varies throughout the time they are valid till their maturity date.
The only difference between government and sovereign bonds is that the former are often denominated in the State’s domestic currency and the latter in foreign currencies.
The State may decide to “recover” the bonds before the stipulated date and will be able to do so by cancelling them (repaying the holders).
Although this kind of bonds are usually referred as “risk free” (particularly the government’s ones), it can also happen that the State is not able to fulfil its obligations and not repay the holders at any point in the lifetime of the bond (not even at its maturity). This phenomenon is known as sovereign default. The defaulting State and the creditor(s) can renegotiate the terms of their agreement. Moreover, the State itself may modify its conditions (i.e.: length of the bonds lifetime, maturity date, etc.). This of course will directly affect the international credibility of that State in any future similar instance.
The second case follows the same general rules a private bank has when it lends money to individuals or companies. As international financial organizations this institutions focus their activities on making profits through lending money. As any other loan, the State will have to fulfil certain requirements such as to specify the reasons for borrowing the money and agree on a repayment plan and respective interests. Depending on the capacity and punctuality of repayment, the State will have a different credit rating (part of the country risk).
“A country’s power of borrowing abroad will depend partly on its reputation for good faith in fulfilling its engagements, but mainly on its capacity to pay”.
If it does not repay the repayment plan will be rescheduled. There is no thing such an international sanction if for whatever reason the State cannot fulfil its obligations. However, its international prestige as a borrower and good faith payer for future loans will be diminished. It may be possible for this State however to be granted a new loan but the conditions will be for sure stricter.
The third type of loan is between States. The conditions will be agreed between the States part on the transaction similarly to any other loan. The usual scenario in third world States (emerging economies) is that they borrow money from a first world State (developed economies) at a certain interest rate. As far as we can see this would be a normal loan with different subjects than the traditional (States instead of individuals) with all its components: a borrower, a lender, and agreement and money to be borrowed/lent.
We will continue with this topic and how the lack of autarchy may affect sovereign States next Friday.
Hawtrey, R.G., Economic aspects of sovereignty, Longmans, Green and Co., 1930, p. 3.
Hawtrey, R.G., Economic aspects of sovereignty, Longmans, Green and Co., 1930, p. 55.
Hawtrey, R.G., Economic aspects of sovereignty, Longmans, Green and Co., 1930, p. 90.