Responsible Sovereign Lending and Borrowing
Sovereign debt problems were once thought to be a third world affliction. They still are. But as events of the last two years have shown, undisciplined sovereign borrowing -- and the complacent lending that it requires -- is not exclusively a third world problem. For the first time in living memory, investors have begun to question the long term sustainability of the public debt loads of a number of industrialized countries.
All sovereign debt has this feature in common -- the people who must ultimately pay the money back (the future taxpayers of the debtor state) may be, at best, only the remote and indirect legatees of the original benefits of the borrowing. Sovereign debt therefore involves one group of people (the incumbent borrowers) committing another group (their paying posterity) to a financial obligation that is, in the eyes of public international law, virtually ineradicable. This is a situation that imposes a heavy duty of discipline and prudence on the part of those contracting the debt as well as those who lend the money and expect to receive an enforceable right to recover it down the road.
This article analyzes the unique features of sovereign borrowing that give rise to these special fiduciary duties. It then discusses the reciprocal duties of both the sovereign debtors and their lenders in contracting and managing these liabilities. The concluding part of the article attempts to identify ways in which the existing machinery for the legal enforcement and voluntary renegotiation of sovereign debt can be adjusted to discourage irresponsible lending and borrowing practices.