By Juan Carlos Portilla
The 2011 International Monetary Fund’s annual meeting unsuccessfully tried to find solutions to calm the turbulence in the sovereign debt market. The fiscal deficit nightmares in the euro zone, the unsustainable debt of the U.S. government and the resulting risks of default have again induced a global economy slowdown. The inability to provide answers to such market failures has evidenced the weakness of the international financial architecture. It is conformed fundamentally by the International Monetary Fund, the World Bank Group, and the Bank for International Settlements. It is crucial to adjust this unstable market. Nevertheless, it is uncertain if governments might legally intervene in sovereign debt markets. To counter such a difficulty, states must negotiate and ratify a Global Law for Sovereign Bankruptcy. Hence, it is imperative to discuss the origin of this market failure, its regulatory needs, and the treaty-making process.
Sovereign debt market failures have been recurrent for decades. In the 1980s, the Latin America debt crisis seemed to arise came out of the blue. Multilateral banks, creditors, and debtors were unprepared to handle it, which caused a further economic downturn, which was so great as to deserve the moniker “the lost decade.” Prior to the crisis, the Latin American economy was in an expansion phase because of a steady rise in traditional exports. Commercial banks, whose surplus of money from the oil industry had to be recycled, lent exorbitant amount of petrodollars to the region. Later on, this source of funds dried up, and due to the oil crash the economy stopped growing. The region experimented a drop in agricultural production. Creditors, acting as cartels, raised interest rates on loans. All this meant that countries’ sovereign debt exceeds their export revenues. Consequently, some countries like Mexico experienced such difficulty that they declared a moratorium on interest payments from their debts.
In the 1990s, the Asian tigers’ economies meltdown since the sovereign debt market was deregulated. The liberalization of capital markets promoted the free flow of capital from developed countries into emerging markets. Currency shocks, and no taxes on capital flow led to massive foreign capital flight from these economies. Local stock markets collapsed. By 1998, the effect had proved contagion since the crisis had dispersed worldwide. In 2008, the world’s financial system crashed. Since 2010 many European Union countries have tried in vain to cut their sovereign debts. Undoubtedly, the Sovereign Debt Market has been inefficient generating high transaction costs for the global economy.
Sovereign debt market failures demand efficient solutions. In a perfectly competitive market, neither suppliers nor consumers are supposed to hold any power to set prices for good and services they exchange. The economy is benefited under such circumstances. On the other hand, in a deregulated economy markets are the rulers. However, some doubt this standard story. Richard Posner disbelieves such movement and the powers of laissez-faire capitalism. Markets fail because of the abuse of monopoly power, asymmetric information, and externalities. Locally, governments intervene to adjust markets. Sovereign debt market must be regulated, but what can be done concretely remains unclear. Others, Joseph Stiglitz included, go further than Posner suggesting that the U.S. bankruptcy law can be applied internationally to sovereign debt. Therefore, one possible solution to the sovereign debt crisis is to negotiate and ratify a global law for sovereign Bankruptcy
The treaty-making process.
Since states are the primary source of the international public law, the process to enact a global law for sovereign bankruptcy should remain within their purview alone. Institutions, such as the International Monetary Fund and other foreign creditors, cannot attain this critical goal due to an evident interest conflicts. These economic agents are dominant decision makers on sovereign debt market. They aspire to maximize their profit, and aim to protect it during economic chaos. Thus, states are the more sensible actors to have leading the treaty-making process.
The constitutional procedure to ratify international treaties is a feature from both nation-state and popular sovereignty, but also a time-consuming route. In accordance with preferences for checks and balances, in some cases, each of the three branches of government has the legal power to negotiate and enact international treaties. Modern governments have various modus operandi to confirm treaties. The most common method may be as follows:
After reaching an agreement on a treaty, the chief of government submits the treaty to the legislative branch. For instance, in the U.S., the President presents a treaty to the Senate Foreign Relations Committee. In some cases, congresses decide whether the state adheres to the treaty or not. The ratification process officially starts at this stage. In many states, courts resolve their constitutionality. This is true for Colombia where the Constitutional Court[i] can disapprove the constitutionality of a treaty by indicating its disconformity to the Constitution. Otherwise, heads of government exchange diplomatic notes among them to bring into force treaties. Evidently, constitutional processes to ratify treaties are inefficient.
Sovereign debt market has failed recurrently for decades. Although, there are plainly difficulties to establish any type of regulation for such market it must be regulated. One of the more efficient solutions to govern the sovereign market debt is through the enacting of a global law for sovereign bankruptcy. Nonetheless, the treaty-making process to negotiate and enact such international law is complex and sluggish.
- Posner A. Richard, A Failure of Capitalism (2009).
- Stiglitz E. Joseph, Making Globalization Works (2006).
[i] Constitutional courts are the highest court in a constitutional jurisdiction also in Spain, Germany, South Africa, Chile and China –Taiwan, among others.