While the principal tenets of self-determination remain largely uncontested,Footnote 1 several underlying issues have been unresolved. Key among these is the degree to which states can unilaterally exempt themselves from international legal regimes that allegedly threaten – or indeed violate – elements of their self-determination and their parliamentary sovereignty. How far can mechanisms and processes that are otherwise lawful under international law erode these peremptory constitutional principles? In theory, such a conflict need not arise because state consent determines that a rule of international law, as expressed in a treaty or custom, may or may not override constitutional order. However, this explanation of the relationship between domestic and international law is far too simplistic to fully encompass the exact nature of the link between fiscal self-determination and the international financial architecture. The latter is made up from a variety of sources, few of which rest on treaties and custom. A big part of this legal regime is composed of ‘rules’ and practices found in standard contracts, banking practices, market practices, unilateral acts of states and soft law, much of which has transformed into trade usages.Footnote 2 The question that beckons is: Have states consented to be bound to all these ‘rules’ and practices and, if so, how has this been achieved and to what extent are they able to freely disengage themselves on the basis of standard mechanisms available to sovereigns, such as termination (of a treaty or contract) or unilateral repudiation (e.g. of an industry practice or trade usage)?
Of course, while fiscal self-determination may be prescribed expressly in peremptory terms in some national constitutions,Footnote 3 and even implied by reference to the right of political and economic sovereignty possessed by states,Footnote 4 the public-private nature of international finance ultimately entails that market rules enjoy equal force with (some) national constitutions. How is this legally possible? The answer to this question is complex, but it can be summarized as follows. The regulation of international finance is achieved through some degree of self-regulation,Footnote 5 as well as formal regulation by powerful industrial states, which in turn have conferred extensive powers to international financial institutions (IFIs), both public and private. As a result, the negative effects of a report of a private credit rating agency that downgrades the creditworthiness of state A, which in turn is forced out of private (lending) markets and suffers a currency devaluation, among others, is predicated on a sequence of otherwise lawful actions by states.Footnote 6 While such actions – whether unilateral (through legislation) or multilateral (e.g. through measures adopted by IFIs or informal entities such as the Paris ClubFootnote 7) – are not overtly directed at thwarting the fiscal self-determination of state A, this is what they effectively accomplish. Hence, in the absence of a generally agreed international rule prohibiting unilateral or collective acts producing financial (broadly understood) harm to a third state and prejudicing its fiscal self-determination, there is in theory no lawful impediment to such actions.
However, while these actions may be lawful, they are by no means legitimate. Two legitimacy-based approaches have been advanced in the literature, which have been adapted from the perspective of international law: sociological (or descriptive) and normative legitimacy.Footnote 8 The sociological approach is concerned chiefly with the perception of legitimacy ascribed to a particular institution, whereas the normative approach investigates whether such an institution deserves to be regarded as authoritative (or whether its authority is justified). It is evident that both approaches are predicated on external perceptions by relevant constituencies. An institution such as a national legislature or an IFI that makes a claim for normative legitimacy is effectively arguing for the ‘right to rule’, whereas a claim of sociological legitimacy is perceived as already having that right.Footnote 9 Normative legitimacy is prescriptive, whereas sociological legitimacy is agent-relative and subjective.Footnote 10 Legislative legitimacy is inextricably woven around the concept of authority, which ultimately dictates adherence, obedience or even disobedience. Normative legitimacy is clearly lacking in situations where the laws and practices of one state adversely impact a third state, especially where that third state has either not consented – or, worse still, where it is forced to succumb to the laws and practices of the first state. Of course, this is a short description of the microcosm of international finance because of the concentration of capital in private finance in the industrialized North. This private capital and the attendant mechanisms at its periphery (e.g. debt reduction, access to funding in private markets, financing of infrastructure development through public–private partnerships, credit rating assessments) effectively dictate borrower states’ internal and external policies. This necessarily encompasses constitutional and human rights guarantees, including fiscal self-determination.
The key purpose of this article is to discover and highlight the linkages between international finance and fiscal self-determination, with a view to demonstrating the negative impact on parliamentary sovereignty. This article does not address how the various international finance processes and mechanisms can or should be reconciled with fiscal self-determination.Footnote 11 This is chiefly because there is no rule of international law that subjects fundamental human rights and key constitutional guarantees to other processes and mechanisms of a financial nature; otherwise, fundamental human rights would possess the same value as contractual obligations and could therefore be trumped by them.Footnote 12 Not surprisingly, IFIs and private financiers have advanced the argument that where states enter into private contracts by which they bypass or violate their constitutional arrangements, performance is mandatory, even though in the vast majority of cases such contracts lack transparency or were signed in the absence of parliamentary approval.Footnote 13 Moreover, in most cases they were subjected to a governing law that does not render good faith an integral part of contracts, namely English law.Footnote 14
The article is structured as follows: Part II discusses the linkages between self-determination and the global financial architecture, followed by an attempt in Part III to discover an appropriate test for ascertaining when fiscal sovereignty may be deemed to be violated. Part IV discusses the distinct role of conditionalities imposed upon borrowing states by intergovernmental IFIs and outlines possible effects on constitutional sovereignty arising from structural conditionalities, namely transfer of governmental powers, withdrawal of parliamentary sovereignty, assignment of sovereign powers upon third entities and conferral of effective decision-making.
II. Self-determination and the role of international finance in sovereign debt
Article 1(1) and (2) of the ICCPR and ICESCR expresses a fundamental rule of international law. This is true of both political and economic self-determination and cannot be trumped, save by a rule of higher or equal value, which at the time of writing does not exist. Financial self-determination thus requires that, irrespective of the fluidity and volatility of international markets, currency rates and the prices of commodities – all of which may lead a state to borrow or otherwise enter into debt – contracting into and servicing of the debt cannot be achieved by intentionally undermining constitutional order and fundamental human rights. This is not to say that states should not pay their debts, but that debt-creation and payment must be both lawful and legitimate. If that were not so – in which case debt servicing (as a corollary to the absolute sanctity of financial contracts) and self-determination would constitute rules of equal value – then by implication an indebted state would be obliged to mortgage or even surrender its natural resources to its lenders in order to repay or service any debt, even if it were unlawful or illegitimate. This eventuality was categorically ruled out some time agoFootnote 15 because it would lead to an outright loss of sovereigntyFootnote 16 or some form of (financial) occupation to the same effect.Footnote 17
It is perhaps instructive at this point to set out the contours of sovereignty and its fiscal dimension. Scholars generally emphasize the existence of various strands of sovereignty. Krassner suggests the following: domestic; interdependence; international legal; and Westphalian sovereignty.Footnote 18 This categorization is shared by Jackson, who argues that it is possible for a state to enjoy some but not all of these variants. He goes on to distinguish between ‘positive’ sovereignty, in the sense of a state’s capacity to dictate its own affairs (e.g. food security, job creation, maintenance of an appropriate defence mechanism) and ‘negative’ sovereignty, which entails freedom of external interference and recognition.Footnote 19 In this sense, sovereignty is no longer viewed as a set of immutable rights enjoyed in perpetuity by state entities and their leaders, but rather as recognition and conferral of obligations towards the international community and one’s subjects. Krassner has taken this view further, arguing that sovereignty is challenged by human rights,Footnote 20 further reinforced by Reus-Smit in that where sovereignty is stronger, human rights weaken, and vice versa.Footnote 21 Overall, the forces of globalization have led to the erosion of both negative and positive sovereignty.Footnote 22 It was the humanitarian crises of the early 2000s that brought about the conceptualization of sovereignty as encompassing a certain degree of responsibility to both one’s population and to the international community as a whole.Footnote 23 Deng, a former UN Secretary-General Special Representative on Internally Displaced Persons, emphasized that a state allowing its citizens to suffer ‘cannot claim sovereignty in an effort to keep the outside world from stepping in’.Footnote 24 It is clear that respect for and fulfilment of fundamental human rights is an integral part of contemporary sovereignty, and this is further entrenched by reference to self-determination. States are therefore bound, at least at the internal/constitutional level, to observe fiscal self-determination that is consistent with fundamental constitutional and human rights, while at the international level there is an obligation not to interfere with the legitimate fiscal self-determination of other states and their peoples.Footnote 25
Fiscal self-determination and unlawful debt creation
Fiscal sovereignty clearly dictates that states are free to choose when and how to finance themselves, and scholarship accepts that this is a complex phenomenon.Footnote 26 For the purposes of this article, it encompasses two distinct, yet ultimately interrelated, phenomena: the status of sovereign indebtedness; and access to sovereign funding, whether for indebted states or as a means of alternative finance. The legal literature generally focuses on the latter, assuming that if a state is in search of finance and liquidity, its debt is lawful and legitimate.Footnote 27
The Greek post-2008 debt crisis is of this nature. The parliamentary committee set up by the Greek Government in 2015 to discover the truth about the country’s debt ascertained that:
1. The key driver of the growth and accumulation of Greek sovereign debt was not ‘excessive public spending’, but rather the high real interest rates paid by Greece in the 1980s and 1990s.Footnote 28
2. The factor triggering the Greek fiscal crisis, namely the massive difference between the deficit estimate of early 2009 (3.7 per cent of GDP) and the revised estimates of late 2009 and 2010 (12.7 per cent of GDP in October 2009, 13.6 per cent of GDP in April 2010 and 15.4 per cent of GDP in November 2010), was not the result of massive ‘electoral cycle’ overspending, but of statistically and legally problematic revisions of the way in which the costs of arrears in hospital spending, the losses of public enterprises and the liabilities stemming from derivative contracts were to be accounted.
3. The liquidity crisis triggered by deficit estimates revisions created the conditions under which the nationalization of the risks stemming from private cross-border borrowing (feeding the geometrical growth of Greek public debt since the Greek State became a Eurozone Member) and the reconfiguration of debt legal relationships (with sovereigns replacing private parties both as creditor and debtor) could be undertaken without any significant opposition.Footnote 29
The Committee thus came to the logical conclusion that not only was Greece not over-indebted, but that the complete access of risk mitigation by German and French banks in purchasing full ownership of Greek private banks culminated in a private debt crisis that would otherwise have engulfed these two economies. Rather than allowing German and French banks to falter, Greece was effectively asked (but more correctly coerced) to nationalize the private debt of its banks (and in the process bail out French and German banks) and sink into financial chaos. The Committee had no problem characterizing Greece’s post-2008 debt as odious, illegal and illegitimate.Footnote 30 Such a debt is emblematic of an external denial of fiscal self-determination, and this is not an isolated incident.
An argument may be made that the Government of Greece, as well as others in its position, made a calculated political decision, weighing all the possible financial and political consequences in agreeing to nationalize its indebted private banks. While such argumentation may explain the government’s actions from a political perspective, it is of little legal significance. The proposition that debt is always payable is in stark conflict with the positive obligation of states to fulfil fundamental human rights if, by servicing their debt, they fail their people. In fact, human rights treaty bodies have made it clear that states cannot invoke their financial obligations to IFIs (and, by implication, private lenders) in order to avoid satisfying their human rights obligations.Footnote 31 Moreover, the 2014 Human Development Report emphasises that ‘access to certain basic elements of a dignified life ought to be de-linked from people’s ability to pay’.Footnote 32 Moreover, given that states borrow for no other reason than for the benefit of their people, the economic self-determination of sovereign debt is of critical importance; debt that is contracted by the state but used (in the knowledge of the lender) for other private benefit cannot burden the people of that state. This naturally brings into question several principles of general international law. For one thing, despite some contention, no state is ‘required to execute pecuniary obligations if this jeopardizes the functioning of its public services, disorganizes its administration’ or has a detrimental effect on fundamental rights.Footnote 33 Recent awards by investment tribunals have confirmed this. In LG & E, an International Centre for the Settlement of Investment Disputes (ICSID) tribunal held that Argentina’s crippling financial situation justified an invocation of a state of necessity. This was evidenced by an unemployment rate of 25 per cent; further, half the country’s population lived below the poverty line, the healthcare system had effectively collapsed and per capita spending on social services had decreased by 74 per cent.Footnote 34 Indeed, the near-collapse of a domestic economy, in addition to
the social hardships bringing down more than half of the population below the poverty line; the immediate threats to the health of young children, the sick and the most vulnerable members of the population … that all this taken together [qualifies] as a situation where the maintenance of public order and the promotion of essential security interest of Argentina as a state and as a country was vitally at stake.Footnote 35
This is not merely an entitlement, but rather an obligation on the part of states; such human rights obligations therefore supersede conflicting pecuniary obligations. Such a conclusion is consistent with fiscal sovereignty (itself an emanation of economic self-determination) and the tools by which this is exercised.Footnote 36 Chief among these is the doctrine of executive necessity, which posits the idea that contracts and promises made by government are unenforceable in the public interest if they fetter the future competence and powers of the executive.Footnote 37 As a result, it is artificial and wholly illegitimate to construe loan agreements and debts outside the framework of international human rights.Footnote 38
The second exception to general international law is that a succeeding government is not obliged to succeed to pecuniary obligations incurred by its predecessor when these provide no benefit to the people and are otherwise illegal.Footnote 39 The principle that governments succeed to all the obligations inherited by their predecessors was not meant to cover odious, illegitimate or illegal debt, or to serve as a pretext for the violation of human rights.Footnote 40
As a result of the above considerations, states saddled with an odious, illegal or unsustainable debt continue to owe human rights obligations to their people. These obligations supersede other obligations under pertinent debt instruments.Footnote 41 States are entitled to employ a variety of mechanisms in order to abide by their human rights obligations. These include unilateral repudiation of debt arising from debt instruments, repudiation of awards in direct conflict with fundamental constitutional guarantees,Footnote 42 repudiation of unconscionable concession agreements and, finally, unilateral insolvency. Although there is significant practice – particularly in the late nineteenth and early twentieth centuries – of states becoming unilaterally insolvent,Footnote 43 and this is recognised by investment tribunals as a reality,Footnote 44 there is fierce resistance to its eventuality, at least as a matter of sovereign right.Footnote 45
Fiscal self-determination and the mechanics of sovereign lending
Fiscal sovereignty is based on the ability of a state to exact and utilize taxes, in addition to other forms of lending finance. In general, the sovereign power to tax is prescribed in so-called express exclusion (or carve-out) provisions in BITs (which defer instead to bilateral tax agreements), as well as customary international law – although the latter is arguably lex generalis. Recent treaty practice very much confirms respect for tax sovereignty in order to achieve an important public purpose. Article 6(5)(a) of Chapter 17 of the EU–Singapore Free Trade Agreement (FTA) states that nothing in the agreement ‘shall prevent Singapore from adopting or maintain tax measures which are needed to protect Singapore’s overriding public policy interests arising out of its specific constraints of space’. Moreover, a succession of investment courts have made it clear in cases alleging tax-related expropriation that if the economic benefit from the investment is reduced by taxation, in the absence of a specific commitment made by the host state to the investor, tax measures will not be expropriatory.Footnote 46 Tax sovereignty has also been reinforced by the notion that there is no duty on a state to adapt its tax regime in foreign investors’ best interests.Footnote 47 Therefore, the calculation of taxes merely unfavourable to a foreign investor does not equate to expropriation.Footnote 48
Sovereign financing is typically achieved through syndicated and bonded loans. In syndicated loans, a number of banks pool financial resources in favour of a single borrower state, not only in order to diversity the risk but also because a single bank may not have sufficient resources.Footnote 49 The lenders (or holders of the loan) may subsequently sell their portion of the loan to the secondary market, whether through novation or assignment. In novation, the initial financing contract is terminated and a new contract between the new novator and novatee state is established. Similar arrangements are made in the case of assignment. The exposure of banks involved in syndicated loans to severe non-performance necessitated a change in the financing of states. This came about through the process of bonded loans. There are two types of bond issuance, namely direct placement through an auction and indirect placement by means of an international issuance. It is in respect of the latter that investment banks play a key role because the loan possesses an international character and banks possess the attributes of foreign investors protected under BITs.Footnote 50
When states are unable of raising finances through the private financial markets because of their excessive and non-performing debts, three multilateral forums exist for debt relief, namely the London Club, the Paris Club and the International Monetary Fund (IMF). The London Club is an informal group of private financial institutions that control sovereign debt, whereas the Paris Club is an informal grouping of states that control sovereign debt in either a bilateral or multilateral capacity. The Paris Club deals with the debt relief of middle-income and low-income countries, whereas the IMF has devised a program known as the Highly Indebted Poor Countries (HIPC) Initiative, later supplemented by the Multilateral Debt Relief Initiative (MDRI).Footnote 51 Debts that qualify for the stringent HIPC criteria are excluded from the ambit of the Paris Club. Debt relief under the Paris Club results in either debt reduction or debt rescheduling, whereas under the HIPC it results only in debt reduction for countries that have satisfied all requirements and completed it.
In order to be considered for HIPC Initiative assistance, a country must undergo three stages: pre-decision, decision and completion points. At the pre-decision stage, the IMF and the World Bank assess whether the country meets the poverty and indebtedness criteria required under the HIPC, namely that the applicant: (1) be International Development Association (IDA)-only and poverty reduction and growth facility (PRGF)-eligible; and (2) face an unsustainable debt burden that is beyond traditionally available debt-relief mechanisms. In order to meet the requirements of the decision point stage, the applicant country should have: (1) demonstrated a record of macroeconomic stability, exhibited through the implementation of an IMF program for three years; (2) paid any outstanding arrears to preferred creditors; (3) established a track record of reform and sound policies through IMF and IDA-supported programs; and (4) developed a poverty-reduction strategy paper (PRSP)Footnote 52 on the basis of broad public consultation.Footnote 53 Once a country has met or made sufficient progress in meeting these criteria, the Executive Boards of the IMF and IDA formally decide on its eligibility for debt relief and the international community subsequently commits itself to reducing debt to the agreed sustainability threshold. In order to receive the full and irrevocable reduction in debt available under the HIPC Initiative, however, the country must: (1) establish a further track record of good performance under IMF and IDA-supported programs; (2) implement satisfactorily key reforms agreed at the decision point; and (3) adopt and implement the PRSP for at least one year.Footnote 54 Once a country has met these criteria, it reaches its completion point. Debt relief under IMF initiatives has been supplied either by the Paris Club or through other forms of debt restructuring. Since the adoption of the PRGF, the Paris Club has offered better debt restructuring to HIPC-eligible countries than to non-HIPC countries. Participating creditor countries and the debtor country usually sign an agreed minute at the end of a negotiation session. This is not a legally binding document, but merely a recommendation by the heads of delegations of participating creditor countries to their governments to sign a bilateral agreement implementing the debt treatment. When there are only a few creditors concerned, the Paris Club agreement is exchanged through mail between the chair of the Paris Club and the government of the debtor country, and is called terms of reference. In some cases, the multilateral debt agreement is implemented (in addition) through an MoU. Non-Paris Club creditors typically enter into bilateral agreements with debtor states, either under the HIPC or independently of it. Numerous bilateral agreements have been concluded in this manner, whether as treaties or MoUs.Footnote 55
Although the Paris Club is formally distinct from the IMF, Paris Club members own the bulk of the special drawing rights in the IMF, and hence control this IFI. In practice, no debt relief is possible before the Paris Club if the applicant has not entered into an agreement with the IMF. As a result, the requirements of the IMF and the latter’s seal of approval are necessary,Footnote 56 an eventuality that renders the two institutions inextricably linked.
During the process from pre-decision to completion point, the Paris Club and the IMF impose several conditionalities on applicant states. Although the subject matter of conditionalities is examined in more detail in a subsequent section of this article, suffice to state here that conditionalities imposed under the Paris Club and HIPC have been classified as structural or quantitative.Footnote 57 Structural conditionalities require the applicant state to undertake political, legislative and institutional reforms, whereas their quantitative counterpart demand the achievement of macroeconomic targets, such as the reduction of fiscal deficits and the accumulation of international reserves.
Despite the fact that, in theory, a cardinal principle for the design of the PRSP is ‘local ownership’, this is a fiction. It is equally fictitious to claim that debtor states consent to the conditionalities agreed with the IMF or the Paris Club. The international finance architecture is structured in such a way that developing states or states in distress are unable to make alternative choices. By way of illustration, over-indebted states are naturally excluded from private financial markets, or if they are not, the interest available to them is so high that it ultimately makes borrowing impossible. At the same time, their currency would have been devalued to such an extent that it is internationally undesirable, and in all probability they will suffer from a trade deficit or imbalance. In addition to being unable to meet their domestic fiscal needs, states distressed in this manner will be pressured by their creditors to repay their external debts. Ultimately, in the absence of liquidity and constant pressure, indebted states are forced to submit to the demands of their creditors in the form of conditionalities. Even though these are negotiated between debtors and creditors, there is little to no transparency involved and in practice the negotiating power of the debt is diminished significantly, if not outright extinguished. In certain circumstances, states that defy debt relief proposals from the IMF or the Paris Club are coerced even further to succumb, as the case of Greece aptly illustrates, particularly with regard to the pressure exerted in the run up to the country’s crucial July 2015 referendum, which is explored later in the article.
It is clear from this discussion that states are effectively (de facto) disposed of their sovereign decision-making power as well as their ability to make fiscal or other social policy, both of which constitute the essence of self-determination. The international finance architecture does not allow indebted states to opt out or to effectively declare and pursue unilateral insolvency, or indeed to design their own debt restructuring.Footnote 58 In the following section we will see how sovereignty is extinguished by contemporary conditionalities.
III. The test for sovereignty as a matter of law
The political/IR contours of sovereignty were set out in a previous section. For the purposes of obligations arising for states under international law, a legal test of sovereignty is of paramount importance for several reasons. First, where a state has been deprived of fiscal sovereignty, it would be the controlling entity that is liable for any fiscal or financial obligations entered on behalf of the deprived state – assuming that it is not under UN-sanctioned administration.Footnote 59 Second, any contracts, agreements or treaties entered into by the controlling entity that encompass self-interest, or that are detrimental to the interests (including human rights) of the deprived state, would be void, in accordance with general principles of contract and treaty law. In cases where national parliaments are bypassed by the controlling entity, no agency arrangements would be deemed to have been established, such that would equate the acts of the agent with those of the principal.Footnote 60 Third, any unilateral act, including promulgation of laws, adopted by the controlling entity on behalf of the deprived state would not bind the latter state, as they could not be attributed to it.
A similar test is that applied for determining the existence of belligerent occupation under international humanitarian law. An occupation exists if a territory is effectively occupied, irrespective of whether this is admitted or disguised by legal or other means by the occupier.Footnote 61 By analogy, a country is sovereign where it is effectively empowered, without pressure or coercion, to make all policy decisions required to run the state machinery and satisfy the fundamental needs of all its people (at the very least), both individual and collective. Where a state’s effectiveFootnote 62 power to implement these two items is in any way curtailed or diminished by the actions of third parties (states) that state is no longer sovereign or legitimate.Footnote 63 Because states can generally ward off even the predatory acts of private actors, the latter cannot on their own diminish a state’s sovereignty unless they pursue their claims through another state.
A state’s effective policy-making and decision-making power is effectively curtailed (entailing a loss of sovereignty), in the opinion of this author, where (1) it has been substituted in these functions by a third state or an organ appointed by a third state or a group of states; (2) it is prevented from taking a particular action, such as unilateral default or designing its own debt-restructuring mechanism; (3) it is forced to violate fundamental domestic laws, including its constitution or the clear outcome of a referendum or; (4) external pressure is exerted against its government and institutions with the aim of creating extreme fiscal and financial volatility so that it succumbs to such pressure and the demands behind it.Footnote 64 Clearly, in all these circumstances, the fact that a state formally consents to the action stripping it of its effective policy-making and decision-making power is illegitimate and also illegal.Footnote 65
Whereas the four strands in the test applied in the previous paragraph chiefly concern the relationship between the indebted state and other states (and perhaps other stakeholders), the link between sovereignty and self-determination also brings rights-holders into the equation. The indebted state must ensure that its people enjoy fundamental human and constitutional rights, including the collective right not to be deprived of natural resources and the right to development.Footnote 66 In equal manner, civil and political rights, as well as their socio-economic counterparts, entail an extra-territorial dimension from which these other states cannot escape.Footnote 67 A state that is unable to offer the full gamut of rights to its people in a sustainable manner because of other obligations that are claimed by third states cannot be said to be sovereign.
The conclusion drawn from the aforementioned analysis boils down to this. Where a state is not sovereign, it is either a failed state or under effective occupation. A failed state may be sovereign (in the sense of empowerment) but suffer from weak institutions. This is not the case with the scenarios described above. Hence, a state not truly (fiscally or financially) sovereign as a result of the actions of third states or entities, while retaining its statehood, should be deemed as being under a sui generis occupation by these third states or the institutions controlled by them (such as IFIs).Footnote 68 This reality deserves to be more widely recognised and regulated by a fusion between the law of military occupation and the law of state responsibility, as well as a revised and much more human rights-compliant international law on the responsibility of international organizations.Footnote 69 Sadly, it is beyond the small and narrow scope of this article, which seeks merely to identify how and when sovereignty is lost in situations of indebtedness.Footnote 70
IV. Conditionalities and sovereignty
Conditionalities are now an integral part of loan agreements granted or guaranteed by inter-governmental development banks, as well as all debt-relief mechanisms. Hence, their impact on fiscal self-determination is worthy of examination. This author takes the view that conditionalities can, in fact, be beneficial – especially for states with weak governance regimes.Footnote 71 To this end, conditionalities should aim at improving governance and minimizing the reach of the (corrupt or ineffective) state in the financial or other resources provided by creditors, while at the same time ensuring that conditionalities as a whole are not retrogressive and do not impede the fulfilment of fundamental human rights. Quite clearly, one of the advantages of conditionalities ‘imposed’ against the governments of authoritarian and fragile states is that it does not allow these to manage or possess disbursement powers in respect of public finances. On the contrary, any unchecked assistance or aid to such a government would violate self-determination and could lead to serious human rights violations.Footnote 72
Given that, in all cases of debt relief, the key beneficiaries are the lenders – private as well as public, whether through neo-colonial involvement in the economies of indebted states,Footnote 73 the diversion of ‘bail out’ funds to their private banksFootnote 74 or even by making a direct profitFootnote 75 – it is a fallacy to assume that creditors have no financial interest (that is, interesting in making a profit) in debt relief. In fact, there could well be more financial incentives from debt relief than ordinary debt repayment. This is because states – even poor ones – can always generate money through taxes, transit fees, customs and other duties, and they can effectively mortgage their natural resources. Conditionalities, therefore, are not necessarily aimed at decreasing poverty or increasing growth and development, nor is the necessary human rights retrogression a mere side-effect.Footnote 76 If lenders have a direct interest in seeing the debt repaid, avoiding unilateral default and/or exploiting in an advantageous manner the natural resources of the indebted state, it is in their interest to impose such conditions that help them achieve their aims.
In all cases of indebted nations, many structural conditionalities led to: (1) the appointment of a supervisory authority, which was effectively endowed with power to ratify all or crucial laws in defiance of constitutional democracy; (2) effective withdrawal of parliamentary sovereignty because the authority over certain matters had become a matter of contract; (3) powers vested in the people and exercised by the government being assigned to or conferred upon third parties by virtue of contract (public utilities becoming the subject of compulsory privatization); or (4) conferral of effective policy-making to a third entity (typically an IFI or the political organ of an intergovernmental organization, such as the Eurogroup)Footnote 77 because the debtor is assessed periodically and has become wholly dependent on the lenders’ conditions, and is unable to refuse or resist the conditionalities ‘suggested’.
In equal manner, even if no structural conditionalities were imposed (which is virtually impossible), their macroeconomic dimension can, in and of themselves, strip a state of its sovereignty. Where a state is forced to make policy based solely and exclusively on fiscal considerations, the welfare of its people is rendered meaningless and the state in question merely serves a function akin to an accountant or a tax collector. Where a state is forced to undergo strict fiscal consolidation, as was the case with Greece, several things occur that are directly or indirectly related to self-determination. The Greek Debt Truth Committee demonstrated that:
Without austerity the Greek economy would only have stagnated rather than lose 25 per cent of its GDP. Consequently, in the absence of austerity, the 2014 debt to GDP ratio would actually be 8.1 percentage points lower. Furthermore, had only tax increases been implemented, without spending cuts, the 2014 estimated debt-to-GDP ratio would be 37.1 percentage points below its actual level. The implementation of fiscal and wage austerity in Greece, which already lacks structural competitiveness, produced prolonged recession and unemployment with adverse feedback effects on the financial fragility of the government … The austerity policies had a dramatic effect on investment: the volume of gross capital formation fell by 65 per cent in 2014 compared to 2008 and labour productivity by 7 per cent. The latter is the result of a decrease in capacity utilisation rate which is reflected in the growth of the fixed capital-to-GDP ratio, from 3.6 in 2007 to 4.9 in 2013 and 4.8 in 2014. In the manufacturing sector, the capacity utilisation rate decreased from 73.5 per cent in 2006-2010 to 65 per cent in 2013 and 67.7 per cent in 2014.Footnote 78
Although several examples of structural conditionalities may be cited that entail an effective loss of sovereignty, this section of the article will base its conclusions on the case of Greece, which constitutes a paradigm in this respect for all four points raised above.Footnote 79 We shall devote a brief section to each of these.
Transfer of governmental powers
There are several examples of countries being effectively administered by foreign powers – especially in the event of default, as was the case with Egypt and Morocco, which were incorporated in existing empires. In the case of modern post-2010 Greece, since entering into its ‘bail-out’ agreements in 2010, a supervisory authority known as the ‘troika’ and composed of the European Union (Commission), the European Central Bank (ECB), the IMF (and subsequently re-baptised ‘institutions’Footnote 80 in 2015) and later the European Stability Mechanism (ESM) was imposed by Greece’s multilateral creditors.Footnote 81 The role of the troika was to supervise the implementation of the agreements between Greece and its creditors, which also meant that all related laws and policy actions required prior approval by the troika. In the event that a law or policy did not meet with the troika’s approval, the next tranche of funds would be in jeopardy. Given that the bulk of the conditionalities were contained MoUs, the aim of which was to render any issues arising therefrom inadmissible from local or international courts,Footnote 82 the authority of the troika was exceptionally broad, and in practice could sanction any policy or law – even if not directly related to the Greek debt-restructuring plan. Even if successive Greek governments were somehow inclined to adopt a more humane policy for the under-privileged or increase public spending in order to boost the economy, the troika would effectively reject any such proposals. In this manner, the IMF, ECB and EU informal institutions, such as the EuroGroup, replaced the authority of the Greek government to adopt policy and laws in a sovereign manner, even though the latter was found not to be accountable under EU law.Footnote 83 In fact, no entity in the family of lenders, including facilitating institutions, such as the EC Commission, retained any kind of liability in its contractual or extra-contractual dealings with borrower states.Footnote 84
The same is also true regarding the recent Puerto-Rican debt crisis. Following its indebtedness, the US Congress feared that the billions of dollars invested in sovereign bonds by US mutual funds, chiefly paid for by small bondholders, would never be repaid. As a result, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was adopted in 2016, setting up a fiscal control board with authority to oversee Puerto Rico’s finances. It was empowered to approve the Governor’s budget plan or, if not satisfied, ‘draft, adopt and enforce’ a plan of its own. It was given authority to ‘enforce balanced budgets and government reform if Puerto Rico [did] not do so independently’. Furthermore, the law prohibited the Government of Puerto Rico from ‘exercising any control, supervision, oversight or review over the federal control board’.Footnote 85
Withdrawal of parliamentary sovereignty
As to point (2), namely effective withdrawal of parliamentary sovereignty, all the agreements essentially required the debtor state to circumvent its constitution and violate its international human rights treaty obligations.Footnote 86 By way of illustration, in order to secure implementation of these conditionalities it was necessary to bypass constitutional requirements. According to Article 36(2) of the Greek Constitution, international agreements must be ratified by an implementing law adopted by the plenary of parliament. International agreements require a qualified majority of three-fifths of the deputies in accordance with Article 28(2) of the Constitution.Footnote 87 The Loan Agreement of 8 May 2010 (as amended by a subsequent agreement of 12 December 2012), however, was not even distributed to parliament, nor was it publicly discussed, including the severe austerity measures contained therein. In fact, in a document entitled ‘Statement on the Support to Greece by Euro Area Member States’ of 11 April 2010,Footnote 88 it was announced that the Euro Area member states, together with the ECB and the IMF, were prepared to provide a loan to Greece and that the terms of the loan had ‘already been agreed’. This demonstrates that none of the parties involved had any intention of respecting the procedures of the Greek Constitution or of complying with even elementary requirements of transparency.Footnote 89
Moreover, Article 1(4) of Law 3845/2010 granted the Finance Minister authority to negotiate and sign the texts of all pertinent loan and financing agreements (including treaties, contracts and MoUs). Although it was required under the Constitution that all such agreements be subject to parliamentary ratification, this never happened. Five days after its adoption, Article 1(9) of Law 3847/2010 modified Article 1(4) of Law 3845 by stipulating that the term ‘ratification’ [by parliament] is replaced by ‘discussion and information’. Moreover, all pertinent agreements (irrespective of their legal nature) were declared as producing legal effect upon their signature by the Finance Minister.Footnote 90 Hence, Articles 28 and 36 of the Constitution were effectively abolished by a mere legislative amendment. Furthermore, Law 3845 included two of the three MoU as mere annexes, relegating them to the status of ‘programme plan’.Footnote 91
Assignment of sovereign rights to third entities
As concerns point (3), namely assignment of sovereign rights to third entities, a few examples will be highlighted. Oosterlink highlights the past practice of guaranteeing reimbursement through the imposition of controls on government spending. She goes on to say that:
In many countries, such as Egypt, Greece or the Ottoman Empire, the debt was at some point administered by institutions representing the interests of foreign bondholders. The United States also prompted several countries such as Santo Domingo, Haiti, Honduras and Nicaragua to pledge their custom revenues to repay their external debt and this under U.S. supervised receiverships.’Footnote 92
With respect to post-2010 Greece, under section 18.104.22.168 of the MoU appended to the 2010 EFSF Framework Agreement 2010 and the 2012 Master Financial Assistance Agreement with Greece,Footnote 93 the EFSF bailout was channelled through an escrow account. This account was controlled by an external commissioner of the troika and the majority of the funds have not gone through the government’s budget, as is required under Greek law or out of respect for the borrower’s fiscal sovereignty.Footnote 94
Moreover, Greece’s debtors established a Fund for Privatisations (TAIPED)Footnote 95 to implement the conditionality of privatisations. Previously in this article, reference was made to the privatization of Greek airports, the vast majority of which were already profitable. TAIPED decided to sell them to the German company FRAPORT, in which the German state possesses shares, Germany being the largest creditor of Greece and a key player in the Eurogroup, the ECB and to a lesser degree the IMF. Although little information is available regarding the stakeholders (and their connections) in the process of the privatisations, evidence demonstrates that FRAPORT did not possess the necessary capital to purchase the airports and the Greek government has been forced to act as a guarantor of the purchase!Footnote 96 This is typical of privatisations at the urging of lenders and IFIs engaged in debt-reduction programs, whereby profitable public enterprises (all set up through taxpayers’ money) are effectively transferred to private enterprises with little or no money, thus depriving the local population of resources and access to public goods.Footnote 97
Conferral of effective decision-making to a third entity
In point (1), it was established that lenders may appoint an agent that is endowed with broad supervision powers that are tantamount to governmental powers. However, even where such an agent has not been appointed the same result can be achieved through other structures or mechanisms. Given that the disbursement of funds to indebted nations is periodical (or in tranches) and over significant periods of time, and the same is true of all forms of debt relief and repayment schedules, it is evident that in time the indebted state will become politically and financially dependent on the terms of its particular debt relief.Footnote 98 As a result, throughout this period the lenders can demand new and even harsher measures from the indebted state, which the latter cannot easily refuse – especially if the next tranche of funds is linked to the state’s performance in international markets or the immediate payment of pensions or other liabilities.Footnote 99
Given that the indebted state is rendered incapable of accessing private financial markets during the extended period of debt relief – and hence will lack liquidity in hard currencies – even if its political elite were willing to disengage the country from its debt relief program and refuse to accept the additional conditions demanded by its creditors, it would be unprepared to face the dire consequences in the short term. Moreover, its creditors would ensure that additional pressure is exerted on the government and the people with a view to abandoning the idea of a return to full sovereignty. In the particular circumstances of Greece, creditors make new demands or expand on existing ones days or weeks before the next tranche is due and this leads to new rounds of negotiations.
Just like other rights and freedoms upon which sovereign debt has a significant impact without much visibility, the linkages between debt and self-determination are manifold and interwoven. The larger picture may not always be evident to the general public. A country’s debt will inevitably be linked to other actions demanded or imposed by the global system of international finance, such as unrestricted trade liberalization or reliance on mechanisms, such as NEPAD, that may exacerbate poverty and inequality rather than combat it.Footnote 100
We make use of the word ‘effective’ in order to test whether a particular action, contractual clause or other measures produces an outcome that is otherwise offensive to self-determination. This is not always easy because economic self-determination is sparse in the human rights literature. In this article, we have put forward the proposition that a state is sovereign where it is effectively empowered, without pressure or coercion, to make all policy decisions required to run the state machinery and satisfy the fundamental needs of all its people (at the very least), both individual and collective. A state’s effective policy and decision-making power is effectively curtailed where: (1) it has been substituted in these functions by a third state or an organ of that state; (2) it is prevented from taking a particular action, such as unilateral default; (3) it is forced to violate fundamental domestic laws, including its constitution or the result of a referendum; or (4) external pressure is exerted against its government and institutions with the aim of creating volatility and uncertainty concerning its finances so it succumbs to such pressure.
In all cases of indebted nations, many structural conditionalities led to: (1) the appointment of a supervisory authority, which was effectively endowed with power to ratify all or crucial laws in defiance of constitutional democracy; (2) effective withdrawal of parliamentary sovereignty because the authority over certain matters had become a matter of contract; (3) powers vested in the people and exercised by the government being assigned to third parties by virtue of contract (public utilities becoming the subject of compulsory privatization); or (4) conferral of effective policy-making to a third entity (typically an IFI or the political organ of an intergovernmental organization, such as the Eurogroup) because the debtor is assessed periodically and has become wholly dependent on the lenders’ conditions, and is therefore unable to refuse or resist the conditionalities ‘suggested’.
The penultimate goal associated with the above considerations is to entrench the notion that states effectively denied their sovereign right to decide their fiscal affairs in accordance with their constitutions bear no liability to creditors for any debts created in their name. Legitimacy, and not strict legality, is key to this process. If this notion were to be entrenched into law, or even emerging norms, then it is certain that lending, debt-creating and debt-collection practices would become far more responsible and human rights-oriented, and far less intrusive to constitutionally sanctioned fiscal sovereignty.