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”[1].
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”[2].
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”[3].
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.
[1]
Hawtrey, R.G., Economic aspects of sovereignty, Longmans, Green and Co., 1930, p.
3.
[2]
Hawtrey, R.G., Economic aspects of sovereignty, Longmans, Green and Co., 1930,
p. 55.
[3]
Hawtrey, R.G., Economic aspects of sovereignty, Longmans, Green and Co., 1930,
p. 90.
No comments:
Post a Comment