The Revenge of Defaulters. Sovereign Defaults and Interstate Negotiations in the Post-War Financial Order, 1940–65

The postwar era holds a special and important place in the long history of sovereign debt disputes. The majority of states suspended interest payments on their foreign obligations after 1931. In 1945, nearly half of all countries representing 40 per cent of the world income were in default (Reinhart & Rogoff, 2009, p. 73; Suter, 1992). Never before had creditors faced a wave of defaults of this magnitude. Previous scholarship has demonstrated that the economic consequences of the Great Depression were the main causes of debt defaults, and the Second World War further delayed the negotiations between borrowers and bondholders in certain cases (Eichengreen, 1991; Eichengreen & Portes, 1989). Less well known, however, are the important changes affecting the actors, tools, and forums governing the settlement of debt disputes. For debtors and creditors, the postwar settlement of debt disputes represented an enormous task not only because of the sheer amount of debt in default but also because old methods of debt settlement no longer applied. The methods that debtors and creditors use to settle debt disputes have greatly varied over time. Since the mid-nineteenth century, bondholder committees had furnished creditors with their most efficient method to protect their rights against recalcitrant states. Bondholder committees derived their authority from the capacity to sponsor market access to preferred customers and to refuse to list new bonds from a creditor in default through stock exchange regulations (Hautcoeur & Riva, 2012; Flandreau, 2013). Yet, when the question of debt repayment resurfaced in 1945, capital markets were virtually shut down. Having abandoned bond markets, states borrowed domestically or through public lending schemes from Export Promotion Agencies and multilateral organizations. Syndicate bank lending emerged as the main source of private external finance, while sovereign bond issuances would not return to prewar levels until the post Brady-plan era of financial globalization. This major shift in the structure of debt financing critically