Odiousness Ratings for Public Debt
Well-functioning markets should have shut down the Venezuelan regime’s access to finance long before US President Donald Trump did. The fact that they didn’t not only shocked the moral sentiments of many, but also revealed a fundamental defect in sovereign debt markets’ institutional architecture.
CAMBRIDGE – On Friday August 25, the US government imposed financial sanctions on Venezuela, restricting the ability of President Nicolás Maduro’s government and its oil company, PDVSA, to issue new debt in American capital markets. The sanctions were imposed in response to the regime’s unconstitutional and fraudulent election of a constituent assembly and the de facto closure of the constitutionally elected National Assembly, with its two-thirds opposition majority.
Well-functioning markets should have shut down the Maduro regime’s access to finance long ago. The fact that they didn’t not only shocked the moral sentiments of many, but also revealed a fundamental defect in sovereign debt markets’ institutional architecture. Little good will come from Venezuela’s economic catastrophe, but one positive outcome would be a reform that puts such markets on a more solid financial – and moral – footing.
All debts imply a commitment by the borrower to repay what was borrowed, with interest. In the case of public debt, the pacta sunt servanda principle implies that future governments are obliged to respect the commitments assumed by their predecessors. But, as Alexander Sack argued in 1927, successor governments should not always do so: “When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc., this debt is odious for the people of the entire state.”