The state is insolvent ⋯ and pacta sunt servanda? [Die staat is na sy swernoot ⋯ en pacta sunt servanda?]

Abstract

Through the centuries it became clear that sovereigns and states very often do not abide by their contractual undertakings either because they are unable to do so or because they are merely unwilling due to some or other whim or political reason. Examples of such actions can be found as far back as in the days of Dionysius of Syracuse and Phillip II of Spain, where the person in question either devalued the currency when he was pushed for payment or simply changed the terms of the agreement, amended interest rates and declared a debt standstill when it did not suit him to continue with payment. The reliance on reprisals and attachment of the person or goods of even the citizens of the country involved to ensure that the principle of pacta sunt servanda was properly adhered to continued until the early 1900s, when it was thought that less violent methods should rather be used to force a sovereign to comply with its obligations. Gunboat diplomacy was no longer the order of the day and it was left to the creditors to rely on the courts for enforcement of their debts. If an individual or corporation were to renege on their obligations or indicate that they are no longer able to service their debts, insolvency proceedings exist that could be utilised in order to ensure that the creditors are treated equally and are paid. This option is not available in international law: there are no customary international law principles relating to insolvency that can be used to assist the creditors of sovereign debtors. In the past, ad hoc procedures were used to assist the so-called highly indebted poor countries via loans from the International Monetary Fund, negotiations through the Paris and London Clubs, debt restructuring and eventually mainly debt relief. The current situation in Europe is again calling for the establishment of an international insolvency regime that would be applicable to all states. The use of specific clauses in contracts (eg collective action clauses) assists only a small group of creditors and then only the super-majority of those; a code of conduct; the creation of an international insolvency tribunal or even an arbitration tribunal are also possible solutions that can be considered, even the conclusion of a treaty in terms of which these problems can be solved. However, no matter what, if politics do not take a back seat in this car, nothing is going to change. States have to keep to their obligations: it is their contractual and moral duty. Instead of dealing with the problems that arise after a state's insolvency, the focus should be on prevention. Why should a state end up in a situation where it cannot service its debts? Is the provision of credit too cheap? Are the risks properly quantified? The rule normally is that the lower the risk the cheaper the credit and vice versa. Are creditors insisting on the provision of proper security? Is the international community prepared to assist creditors in enforcing their rights against sovereigns in national courts? Unless there is a movement back to the principles of the law and pacta sunt servanda is rigorously enforced, we are not going to have legal certainty in dealings with sovereigns; and unless the international community is going to be prepared to refrain from falling back on politics, there will not be an easy answer and solution to the problem of state bankruptcies.