Selling Out Sovereignty: Lessons from the Greek Debt Crisis

Michael Goodyear
Vol. 40 Executive Editor

On August 20, 2018, Greece emerged from its third bailout.[1] The Greek debt crisis created over a decade of austerity measures in Greece and shook the European Union to its core.[2] However, despite having survived the third bailout package without needing a fourth, Greece still owes over 250 billion Euros to its creditors and is not scheduled to have paid this king’s ransom off until 2059.[3] While many of these creditors are from the private sector, the vast majority of Greek debt is held by the European Union. In its bailout negotiations, Greece agreed to implement a series of domestic austerity measures.[4] Greece will be beholden to its international creditors for over fifty years by the time the crisis concludes.

As in the case of Greece, issuing sovereign debt can severely compromise a country’s self-determination, putting its sovereignty at risk. International law has consistently upheld the importance of sovereignty, but sovereign debt has created a dangerous gap that, if countries are not careful, may open up serious risks to their independence.

Sanctity of Sovereignty

International law has preserved the sanctity of sovereignty. Particularly in the post-colonial context, an encroachment on a country’s sovereignty was seen as an attack on that country’s very independence.

Woodrow Wilson’s Fourteen Points advocated for self-determination among nations,[5] and from here the ideal percolated into international law. The United Nations Charter stipulates the “sovereign equality of all its Members.”[6] The World Trade Organization has stressed that it only limits sovereignty to the extent that a country has agreed to constrain its actions to the WTO Agreement.[7] The WTO Agreement and the associated Dispute Settlement Understanding repeatedly defer to the country, for example to choose its own health protocols and how to adjust a measure to make it WTO-compliant.[8] Other international agreements have similarly stressed the importance of sovereignty.[9]

Fundamentals of Sovereign Debt

Issuing debt is a commercial activity that both companies and countries can do. Sovereign debt refers specifically to government-issued debt. Taking on debt can be useful for both companies and countries to gain ready cash to pay for an improvement that will benefit economic output in the long run.

When a company or country issues too much debt and cannot meet its payments, it needs to be restructured if it is to survive. Restructuring involves negotiating an entity’s debt, possibly through rescheduling or reducing the face value of a country’s debt. The idea is that if the debt burden is delayed or reduced, a country may be able to strengthen its economy and thereby improve its ability to repay its debt.[10] Tied to sovereign debt restructuring are bailouts, or official public sector lending to prop up the country’s finances. These lenders are usually international organizations (the International Monetary Fund, the World Bank), national banks, and governments (the Group of Seven are particularly active).[11]

However, companies also have the option to declare bankruptcy. Bankruptcy strips the company of its assets to pay its liabilities, but allows the company to survive and exit thoroughly shaken, but debt-free. Unlike corporations, a country can never declare bankruptcy and have a fresh start. A national bankruptcy would be the epitome of the loss of independence and it is impossible.

Risky Compromise

While issuing debt can be extremely useful for a country, it also creates obligations to creditors. Naturally there must be some guarantee that creditors can recover from the debt issuer, even if it is a sovereign country. Usually a creditor can seize assets from the debtor to recover some of its investment. However, since most of a country’s assets are inside its own borders, and given the principle of sovereign immunity, it is much harder for a creditor to recoup its losses through asset seizure. This makes sovereign debt a risky investment.

On the other hand, taking on debt opens a country up to restructuring if it fails to meet its obligations. Bilateral and multilateral treaties, such as the WTO Agreement, are limited in scope and guarantee that countries will not be constrained to a greater extent than they have negotiated. Restructuring, however, expands far beyond what was initially negotiated: it can mandate policies and create economic hardship. It is impossible to know what obligations might be effectively forced upon a country in a restructuring. Although the country can negotiate its terms, it is negotiating from a position of extreme weakness. Yet without a restructuring or bailout, the debt crisis will likely create a severe financial crisis in the country. That crisis will also predictably have spillover effects in other countries, especially for a country like Greece that is a member of the European Union.[12] The end result is putting the country that needs to restructure between a rock and a hard place.

International law has become increasingly concerned with sovereign debt sustainability since the end of the Cold War, as evidenced by numerous UN Resolutions and efforts by the IMF.[13] However, there is no set international structure to regulate sovereign debt restructuring. Contractual clauses and an international bankruptcy court have been offered as potential solutions,[14] but as of right now nothing has come to fruition.

Dangerous Trend 

There has been a chronic problem of countries over-borrowing in the twenty-first century.[15] In addition to Greece, Argentina also defaulted on $82 billion in foreign bonds in 2001.[16] Argentina’s debt crisis, which lasted until 2016, was characterized by extreme involvement by the United States and interference by American courts.[17] In the European Union, Spain, Portugal, and Italy also have gross debt that is over 100% of their country’s GDP.[18]

The IMF’s predictions only go so far, and woefully failed in the case of Ukraine, forcing Ukrainian bond restructuring in 2015.[19] In the case of Greece, the IMF was too weak to effectively negotiate between Greece and its creditors.[20] There is no magic bullet to perfectly restructure a country’s debt.

Restructuring of sovereign debt and bailouts have also led to severe backlash among the people, striking back at their perceived lack of control. Restructuring can and did lead to dangerous political contagion. Greek restructuring involved mandated austerity measures that led to mass opposition by the Greek populace and demonization of Germany and its creditors.[21] This not only epitomizes the loss of sovereignty that sovereign debt restructuring creates, but also warns of its consequences.

Conclusion

While taking on sovereign debt can be helpful for a country in financing, if not carefully managed it risks infringement on national sovereignty. Countries have been far too apt to rashly take on more debt. While an international legal structure might be able to better manage these risks in the future, especially given that international law consistently upholds sovereignty, for now it is most important for the world’s countries to learn from the Greek debt crisis and engage in issuing sovereign debt very carefully or risk economic downturn, political crisis, and a loss of sovereignty.


[1] Agence France-Presse, Greece Emerges from Eurozone Bailout After Years of Austerity, Guardian (Aug. 20, 2018), https://www.theguardian.com/world/2018/aug/20/greece-emerges-from-eurozone-bailout-after-years-of-austerity.

[2] Peter Eavis, Greek Exit Would Shake, but Most Likely Not Shatter, Eurozone, N.Y. Times (June 17, 2015), https://www.nytimes.com/2015/06/18/business/dealbook/greek-exit-would-shake-but-most-likely-not-shatter-eurozone.html.

[3] Charles Forelle, Pat Minczeski, & Elliot Bentley, Greece’s Debt Due, Wall St. J., http://graphics.wsj.com/greece-debt-timeline/ (last updated Oct. 11, 2018).

[4] See Lefteris Papadimas & Jan Strupczewski, EU, IMF agree $147 Billion Bailout for Greece (May 1, 2010, 9:16 PM), https://www.reuters.com/article/us-eurozone/eu-imf-agree-147-billion-bailout-for-greece-idUSTRE6400PJ20100502.

[5] Woodrow Wilson, President of the United States, Fourteen Points (Jan. 8, 1918), available at http://avalon.law.yale.edu/20th_century/wilson14.asp.

[6] UN Charter art. 2, ¶ 1.

[7] See, e.g., Appellate Body Report, Japan – Alcoholic Beverages II, 13-14, WTO Doc. WT/DS8/AB/R (adopted Nov. 1, 1996).

[8] General Agreement on Tariffs and Trade art. XX(b), Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, 1867 U.N.T.S. 187; Understanding on Rules and Procedures Governing the Settlement of Disputes art. 19, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401.

[9] See, e.g., Convention Relating to the Status of Refugees, art. 9, July 28, 1951, 189 U.N.T.S. 137.

[10] Molly Ryan, Note, Sovereign Bankruptcy: Why Now and Why Not in the IMF?, 82 Fordham L. Rev. 2473, 2479-80 (2014).

[11] Id. at 2480.

[12] See Anna Gelpern, Sovereign Debt: Now What?, 41 Yale J. Int’l L. Online 45, 76 (2016).

[13] Juan Pablo Bohoslavsky & Matthias Goldmann, An Incremental Approach to Sovereign Debt Restructuring: Sovereign Debt Sustainability as a Principle of Public International Law, 41 Yale J. Int’l L. Online 13, 24 (2016).

[14] Id. at 14.

[15] Ryan, supra note 10, at 2484-86.

[16] Gelpern, supra note 12, at 69.

[17] Id. at 70-71.

[18] Ashley Kirk, European Debt Crisis: It’s Not Just Greece That’s Drowning in Debt, Telegraph (Feb. 8, 2017), https://www.telegraph.co.uk/news/0/european-debt-crisis-not-just-greece-drowning-debt/

[19] Gelpern, supra note 12, at 81.

[20] Id. at 77-78.

[21] See Wolfgang Rüdig & Georgios Karyotis, Who Protests in Grece? Mass Opposition to Austerity, 44 Brit. J. Pol. Sci. 487 (2013).

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