States and the Masters of Capital: Sovereign Lending, Old and New by Quentin Bruneau

Author:Quentin Bruneau
Language: eng
Format: epub
Publisher: Columbia University Press

THE RESUMPTION OF PRIVATE SOVEREIGN LENDING

If by the interwar period the old lenders still had the upper hand, when, then, did the new sovereign lenders triumph? My claim is that this world was not fully developed at any point before the 1970s. Books on sovereign debt and sovereign lending tend to shun the period from the 1930s to the 1970s, preferring to focus on its immediate predecessor and aftermath.41 The reason for this is that private lending to foreign sovereigns declined markedly during these years. After the Great Depression and its flurry of sovereign defaults, private international capital flows largely came to a halt. This remained the case throughout the 1940s until the late 1950s. As one scholar puts it, “The postwar consensus on regulating capital was opposite the nineteenth century’s validation of capital mobility,” an arrangement that constituted a key part of “embedded liberalism.”42

In this context, capital to fund sovereign debt mostly came through two channels. One channel consisted of official creditors, chief among them international financial organizations such as the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), to which one should add government-to-government loans, and quasi-governmental agencies (e.g., export credit agencies).43 As one observer points out, it was only by 1980 that private international capital flows caught up with and overtook official aid.44 Although such forms of public sovereign lending are excluded from the purview of this study, which is concerned with sovereign lending by private financiers, it is nonetheless worth noting, again, that the way in which the IMF and the World Bank operated and engaged in sovereign lending was inherited from the League of Nations.

The second crucial source of funding, which did not involve any cross-border lending and mostly concerned economically developed countries, was private capital from domestic sources. Indeed, under the arrangements of the Bretton Woods system, private capital was trapped within national boundaries, rendering it unable to move around the world in search of the most lucrative opportunities.45 Capital controls allowed for what two economists have called the “liquidation of government debt.”46 Governments forced captive domestic financial institutions to hold low-interest-rate sovereign debt. It also limited the interest rates banks could charge on loans to individuals and companies, to give them an incentive to invest in sovereign debt. Put differently, this system was the equivalent of a tax on private creditors, which allowed governments to repay their debts without engaging in austerity measures, a set of arrangements sometimes referred to as “financial repression.”47

The era of Bretton Woods did not, therefore, witness the triumph of the new world of sovereign lending, as joint stock banks and rating agencies were either made redundant by official creditors or forced to buy domestic sovereign debt, rendering their statistical methods pointless, as they had almost no choice to lend to their “home” sovereign. This is not only one of the reasons why credit rating agencies suspended their sovereign ratings until the 1970s but also why the rating activities of large joint stock banks “were downsized, and did not regain importance until the 1970s.

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