The debtors and how best to deal with them is surely one of the continuing but unresolved issues for the international financial system.footnote1 Here I will argue that the evolution of that system has changed the nature of the debt problem, but that neither governments nor markets are any nearer a final solution to the question of how to manage transnational debt than they were in the 1980s. Indeed, the evidence suggests that they may be even further away from a sustainable solution. If so, this is a conclusion that throws serious doubt on many optimistic incrementalist assumptions about the progressive improvement of ‘global governance’ through the increased role of international organizations—assumptions often cherished by some academics—and, of course, in bureau-cratic circles.

By transnational debt, I do not mean only the financial credits extended by governments to other governments. They are but a small part of the story. The term covers all the forms of debt across state frontiers: all the liabilities incurred, and claims established, between institutions or individuals under one political jurisdiction, and institutions or individuals under another political jurisdiction. It would thus include assets claimed by foreign shareholders in enterprises in another country, interbank loans across frontiers, bonds issued to non-nationals both by governments and other institutions and firms, as well as credits or guarantees extended by states or multilateral organisations like the imf or World Bank or the regional development banks in Asia, the western hemisphere or Africa.

The purpose here is not to give a comprehensive survey of all the recent developments in the international financial system. That would be a vast undertaking. Even to survey all the developments in the treatment of transnational debt would be a massive task. Rather, my aim is the more limited purpose of analyzing—and if possible explaining—how the system has changed in recent years, and with what consequences for social classes, for creditors and debtors, and for institutions, including firms as well as national governments. The main purpose is neither descriptive nor prescriptive, but analytical and interpretative. It can be boiled down to finding the answers to three rather straightforward questions.

The first, obviously, is what has changed since the 1980s, and what is the same—and why. The next is who, in the 1990s, has been involved in transnational lending and borrowing—which players, new and old, political and financial, have to be taken into account when it comes either to state or intergovernmental policy-making or, for that matter, corporate strategy. The third question is whether transnational debt is in any sense a threat or potential danger to the international financial system. It certainly was believed to be so in the early 1980s. By the late 1990s, it is not so clear whether and when it is, or is not, threatening the financial foundations of the world market economy.

One basic point in political economy has to be remembered. The phenomenon of borrowing—getting money today in exchange for money tomorrow—is economic. But how such transactions are managed is political. To political economists, it is clear that how national societies manage debt within the borders of state authority differs fundamentally from how the collectivity of national governments manage transnational debts. Within national market economies, it became clear even in the nineteenth century that the national economic interest was not well served by a legal system that relied on deterrence, by punishing debtors when they failed to meet their obligations to creditors. Prison was no solution. Some other arrangements had to be evolved: either ways had to be found to rehabilitate the indebted enterprise or individual, usually by agreement with the creditors to accept only part repayment; or else ways had to be devised that would allow others to take control in exchange for assuming the debtor’s liabilities in whole or in part. Either arrangement had to have the legitimacy of an enforceable legal contract. Bankruptcy therefore, whether temporary or permanent, could be imposed on debtors—and their creditors—only with the authority of the state.

That is much more difficult when the debt is transnational, involving two or more state authorities and legal systems.footnote2 It has been particularly difficult when one of the parties to the borrowing was itself a supposedly sovereign state. The international political system had developed no general rules for the treatment of bankrupt states. Such states there had been, in the nineteenth century as in the twentieth century.footnote3 Each had been dealt with in an ad hoc manner. In rare cases, like Egypt in the 1880s, or Central American banana republics in the early 1900s, creditor states intervened and acted as receivers, temporarily taking over the country’s financial management from the indebted government. A kind of delegated collective form of receivership was developed in an ad hoc way in the 1920s for the administration of countries getting loans from the League of Nations—although in fact the funds were subscribed by the British and French. More commonly, creditors’ governments either ignored their nationals’ losses as bad luck, or practised the exclusionary strategy of simply closing off their credit systems to the government and nationals of the defaulting state. This was the Western response to the Soviet Union’s renunciation of Tsarist foreign debts in the 1920s.

The preference for uncertainty and ad hoc solutions goes back a long way. It was Lord Palmerston in 1848 who first devised the smart policy of leaving open and undecided whether, in any particular case of bad transnational debt, the British government would or would not intervene, possibly with naval force, to recover unsettled claims by British investors. This uncertainty addressed the problem of moral hazard at both ends. It discouraged rash investors—usually bondholders at the time—from thinking that their government would always be ready with military or naval force to come to their aid. At the same time, it left the debtors in some doubt as to whether their country might suffer the humiliation and disruption of military intervention if they failed to honour their foreign debts.