The International Organization of Third World Debt

Literature › Works

Charles Lipson (1981). The International Organization of Third World Debt. International Organization, Vol. 35, No. 4 (Autumn 1981). Cambridge University Press / International Organization Foundation.

Type	journal article
Scope	Comparative and methods
Method	policy analysis
Period studied	1956–1981
Regions	Third World / LDCs generally, Latin America, East Asia, Euromarkets (London)
Themes	macro fiscal finance debt, sanctions divestment, comparative theory
Citation key	lipson1981

Argument

Lipson argues that sovereign debt in the Third World is enforced by a distinctive 'debt regime' built on private and multilateral actors rather than on the power of capital-exporting states. Lending syndicates, cross-default clauses, ad hoc creditor clubs and the IMF's conditional lending deter default among solvent borrowers and manage insolvent ones case by case. Debts are expected to be honoured even when incurred by defunct or disreputable governments, so repudiation is very rare. He traces how the Euromarkets and petrodollar recycling built the debt stock, and warns that the regime is poorly institutionalised and could strain if many debtors failed at once. The case is argued through institutional description, aggregate debt data and illustrative cases (Peru, Zaire, Nicaragua, Iran, Turkey).

Evidence and method

Secondary financial data (Morgan Guaranty World Financial Markets, BIS reports, IMF Survey), US congressional hearings, financial press (Euromoney, Institutional Investor, The Banker), World Bank and IBRD documents, and case material on Peru, Zaire, Nicaragua, Iran and Turkey. No South African material.

Findings

• Debt service burdens of major non-oil LDC borrowers rose sharply in the 1970s. (p. 2)

  In 1980, by contrast, their interest payments totaled $18.4 billion and absorbed over 14 percent of export earnings.

• Sovereigns are constrained by creditor-organised sanctions and incentives, not mainly by other states. (p. 5)

  sovereigns are constrained less by other sovereigns than by sanctions and incentives organized primarily by multinational banks and official multilateral lenders.

• The debt norm requires servicing even disreputable predecessors' debts. (p. 5)

  Debts are to be honored even if economic conditions are hard, even if the debts were incurred by defunct governments now held in disrepute.

• Revolutionary governments largely kept to the norm; the Sandinistas did not repudiate Somoza's corrupt debts. (p. 6)

  the refusal of the Sandinistas to repudiate even the corrupt debts of Somoza.

• Cross-default clauses and syndicate structure give banks a collective deterrent. (p. 14)

  Written into all syndication agreements, these clauses give every syndicate discretionary power to call its loans in default even if all payments are current

• The IMF acts as the creditors' collective coordinator and monitor. (p. 19)

  By providing resources for debtors on its own conservative terms, the Fund effectively provides public goods for creditors.

• Rescheduling was rare and creditors kept debtors on a short leash. (p. 22)

  Of the countless billions loaned by governments and commercial banks between 1956 and 1978, only about $10 billion had to be rescheduled.

• Banks learned from Peru that only the IMF can impose conditionality. (p. 23)

  They drew the lesson that commercial banks could not impose conditionality, only the IMF could.

• The regime is built on private sanctions and multilateral oversight, not state power. (p. 30)

  a structure built not on state power but on private sanctions and multilateral oversight.

• Default is effectively excluded unless the debtor is insolvent or willing to break with the capitalist world economy. (p. 29)

  no state will default unless it is insolvent or is willing to accept a radical rupture with the capitalist world economy.