Creditor Government Intervention in Sovereign Debt Crises

Abstract

For centuries, debt has been an important financing vehicle for governments around the world, and ever since the liberalization of cross-border capital movement that started in the US in 1974 and spread quickly through the rest of the West in the second half of the 1970s, states have been borrowing billions of dollars in the international private capital market. All governments are not willing or able to pay their debts at all times, however, and when they are not, a sovereign debt crisis is born. Unlike domestic bankruptcy proceedings, there is no standard default resolution mechanism in sovereign debt, leaving the debt restructuring process ad-hoc, highly unpredictable, and extremely susceptible to political influence. This dissertation studies the behavior of creditor governments---the home governments of private creditors who have lent to foreign states---during such crises and how they step in to intervene in the process of crisis resolution and sovereign debt restructuring. It turns out that creditor government intervention can vary greatly from case to case, and it varies mainly in two dimensions: whether the creditor government compels the debtor state to repay debt (and, in order to do so, commit to structural economic reforms and fiscal austerity), and whether the creditor government uses its own public funds to provide temporary but immediate financial relief to the distressed debtor (known as a “bail-out”). This dissertation argues that the variation in creditor government behavior can best be explained by two factors in the creditor country: the interest of finance and public sentiment against foreign bailout. Strong, concentrated interests of big players in finance causes the creditor government to demand full debt repayment from and impose austerity demands on the debtor. Strong public opposition to foreign bailouts, driven by ongoing economic recessions in the creditor country itself, constrains the creditor government’s ability to tap into public funds to provide bilateral finance. This dissertation tests the theory using a mixed-methods research design, exploiting both quantitative and qualitative data to test three hypotheses proposed in support of the theory. It presents an original data set that comprises over 700 observations of creditor government intervention from 1981 to 2016, and uses structured comparisons of study cases to uncover causal mechanisms between the interest of finance, public sentiment, and creditor government behavior.