Regimes of Bankruptcy

In the Middle Ages, bankruptcy was nothing more than a rudimentary legal mechanism to prevent absconding debtors from fleeing justice. By the nineteenth century, default had come to shape the fate of nations and structure international relations. Faced with the rise of interventionism by the United States, Latin American political thinkers tried to scale up the mechanics of bankruptcy—the civil means to establish the legality of a debt—to a global scene, but they were afforded all of the shame and none of the rights associated with a declaration of insolvency. 

In the late twentieth century, this trend continued: corporations found forgiveness in default while nations were punished for insolvency. After the 2008 crisis, millions of people targeted their rage at bankers and bonuses—bankruptcy, the mechanism that allowed the board of Lehman Brothers to avoid impunity, survived unscathed. Chapter 11 has enabled corporations to renege on pension plans and the normalization of the use of “strategic bankruptcy” has allowed companies to design, in the past few years, a new dance routine and waltz free from consequences to the rhythm of the Texas Two-Step: corporations that are found guilty and ordered to pay large sums will create a subsidiary entity, make it responsible for repayment, and ensure the new firm declares bankruptcy.¹ Harvey Weinstein’s Company, the Boy Scouts of America, and a number of churches have successfully deployed this strategy to avoid compensating victims of sexual violence.² At the same time, medical bankruptcy remains the most common form of default and disproportionally affects communities of color.³ By virtue of the role of the US economy on the global stage, these visions of bankruptcy are reshaping economic relations across the world.

The dominance of US bankruptcy law was not an inevitability. US bankruptcy culture was once unique in the world: after the American Revolution, legislators chose to show mercy to debtors at the expense of the creditors. US statesmen dismissed the traditional difference between laws of insolvency and bankruptcy; creditors were largely powerless to stop reckless debtors from initiating bankruptcy proceedings and receiving a discharge from the state.⁴ Today, bankruptcy has generated its own international law. Corporations have ensured that bankruptcy is the most frequently instrumentalized form of forgiveness in increasingly unforgiving zero-sum societies, and bankruptcy harms the cash poor and empowers the asset rich. Those who shape bankruptcy rules establish a hierarchy of contracts and promises, and bankruptcy mechanisms have exposed, often with brutal clarity, who had the power to make or break a contract. How insolvency is then resolved on a global scale demonstrates which contracts and agreements were prioritized after the failure to pay.⁵ Considering these norms in a historical light allows us to recover the mission of Latin American jurists to generate a global bankruptcy regime.

Bankruptcy and empire

In establishing what Latin America owed Spain, new Latin American nations sought to resolve what they owed one another. Should Mexico, for instance, pay its debts to the Crown of Spain that had been incurred for the benefits of its people, or should it deny this despotic monarchy any compensation for the colonial system of rule it had imposed on its people? Bankruptcy, argued the Colombian statesman Pedro Gual and the Argentine deputy Julián Segundo de Agüero, would be required to resolve revolutionary debts. This was, they explained, a mechanism to establish a hierarchy of norms, a way to establish what debts ought to be paid, and which ought to be forgotten. It was safe, one Argentine official claimed, as it was frequently used by European merchants to settle their affairs on the basis of the rule of law. But European governments, exploiting the unpaid claims of their merchants, laid violence upon Latin America to settle mercantile affairs. 

Intervention changed the terms of the debate. When Napoleon III sought to exploit the fratricidal US Civil War to turn a red-haired Habsburg archduke into Emperor Maximilian of Mexico, he saddled this young emperor with debts which would boost French financial interests and deliver nothing for Mexico; Maximilian was to pay for the cost of the expedition, the troops, and his court through French loans. When Mexican revolutionary forces defeated and executed Maximilian years later, the question then was: was Mexico liable for these debts?

According to the principle of state succession in international law, Mexico had to pay.⁶ In response, Mexico formulated the first moral defense of default in modern history, proposing to postpone and renegotiate the repayment of its foreign debt on the basis that Maximilian’s regime, which had been recognized as sovereign by these creditor nations, would have never been able to pay it. Manuel Payno, the leading Mexican jurist charged with handling this crisis, wondered how a few paltry debts had justified the invasion of another nation. 

Mexico’s vindication of moral bankruptcy did not prevent the intensification of gunboat diplomacy. Latin American officials, in turn, attempted to bend international law in the face of such interventions. The father of Argentina’s constitution, Juan Bautista Alberdi, crafted the basis of the 1853 Constitution, which remains the core of the nation’s constitutional order to this day, through private law. This charter focused on protecting foreign citizens from the chaos of the republic to serve the interests of foreign merchants and investors. The notion that the state ought to be an arm of private interests, an expression of private law, and a representative of merchant interests, would allow later Argentine jurists to find a way to make bankruptcy go global.  

Economic interests frequently exposed the transactionality of international relations. When the Argentine diplomat Carlos Calvo travelled to Britain to negotiate a peaceful resolution to a diplomatic incident surrounding the claims of a professed British citizen, the British Prime Minister refused to meet him. Eventually, having engineered a lobbying campaign with articles and commentaries on the crisis in newspapers across Europe, a secretary to the Prime Minister curtly told Calvo that the matter “ought to be resolved in Paraguay, and in a manner that would be to the complete satisfaction of Her Majesty’s government.”⁷

Calvo believed that these words signalled the absurdity of the principle of might and in response developed the Calvo Clause, the principle that foreign claims ought to be settled in the country where they were negotiated. This meant that foreign creditors would have to respect local constitutions and domestic laws when settling unpaid debts. Latin American nations would draw on this principle in the face of intervention. A divide emerged, whereby European and North American powers favored the resolution of these disputes through arbitration, and Latin American officials defended instead the principle of the Calvo Clause. Calvo would also develop the Calvo Doctrine, which required granting the same rights to foreigners as citizens in resolving these disputes. In other words, Latin American officials sought to foreclose the intensification of gunboat diplomacy by shoring up respect for their sovereignty in international law.⁸ This move pitched the principle of consent, a cornerstone of modern democracy, against the sacred principle of private contracts in international law—a problem that continues to haunt the international order today.     

States as merchants

The rise of a new financial superpower initially allowed Latin American officials to generate leverage over their creditors. Mexico only resolved its debts with the European powers that financed the rise of Maximilian once the US entered the world seen as a regional creditor—Mexico could finally leverage US lending offers against European nations eager to retain their influence in the nation’s banking industry. 

Only a few years after the United States established its first unified national bankruptcy law at home, one that mapped out an easy pathway for debtors to seek redemption, it pursued an aggressive policy of intervention over debts in Central and Latin America. In 1906, in response to disputes over foreign debt in Venezuela, Cuba, and Santo Domingo, and in the aftermath of a number of controversial North American interventions in Central America which aimed to strengthen North American control of the Panama Canal, President Theodore Roosevelt established the Roosevelt Corollary to the Monroe Doctrine. The Corollary stated that the United States would mediate the resolution of disputes between European private creditors and American states. Roosevelt hoped this policy would quiet criticisms that his interventions in the region breached international law. The Corollary granted the United States the capacity to intervene, “however reluctantly,” in states where the ties of “civilized society” were weakened, and private contracts were neglected.⁹

Struggling to finance its foreign debt, the Venezuelan government invoked the Calvo Doctrine to reject arbitration regarding unpaid claims, a doctrine which the United States did not recognize. Tensions rose as Germany and the United States vied for greater influence in Latin America, and Germany, along with Britain and Italy, enforced a blockade on Venezuela over its refusal to accept the settlement through arbitration over un-paid debts to their citizens. This affair overlapped with Venezuela’s ongoing dispute with Britain regarding British Guyana, which was settled when Britain accepted the Monroe Doctrine as a norm. In exchange, the United States promised to exclude from arbitration any lands that had been settled by British subjects for more than fifty years. After referring the matter of these unpaid claims to the Hague Tribunal, the Court favored the claimants of those nations which had participated in the blockade. It was in this context that the Argentinian jurist Luis María Drago, drawing on his nation’s own engagement with foreign debt and the history of interventionism in Latin America, wrote his famous Drago Doctrine where he stated that war could not be used to force the payment of public debt. Drago tried to hold the US to account by pointing to the inconsistency in its punishment of insolvency at home and abroad.

Drago accepted the idea that a state was a merchant, simply another private actor. War, like homicide, was only just when it was committed in self-defense: the creditor to the state was in fact a better place to recoup their benefits from bankruptcy because while the “bankrupt company” could sometimes disappear without providing relief to its creditors, the state endured.¹⁰ The purchaser of bonds took on the same risk that an investor did in buying any stock—the threat of violence to force repayment was as inadequate in the resolution of state debts as it was in the resolution of private insolvency.¹¹ The rule of caveat emptor, or “let the purchaser of bonds beware,” had yet to be scaled up to international law. Building on Calvo’s ideas, he argued that the issuing of public bonds was part of a state’s monetary policy, and any conflict that arose from said bonds had to be settled domestically.¹² 

Drago, in short, tried to outlaw war over financial failure. But the US refused to accept this effort, arguing that while contract debts did not justify the use of force, the failure to pay public debts did. The most consequential impact of Drago’s writings was felt at the second Hague Convention of 1907, generally known as the Drago-Porter convention. Thanks to the efforts of the North American jurist Elihu Root, these terms prioritized the use of arbitration and permitted the use of force. Still, Article One of this convention established that contract debts—crucially excluding public debts—did not provide a justification for the use of force. In Latin America, the division between private contracts and public debts was blurry, as national banks owned and managed by local governments and domestic financiers were only set up after the 1920s, and in cooperation with local foreign creditors that had dominated the nation’s financial life.¹³

During a visit to Buenos Aires that year, Root endorsed the view that the United States would not use force to demand the repayment of claims from a Latin American government. As he proclaimed this principle, North American armed forces were mobilized in Santo Domingo to enforce the compensation of foreign private claimants, despite the negotiations at the Drago-Porter convention. Seven years later, Root would defend the view that the Monroe Doctrine was not a cover for the United States’ interventionism as US marines reached the Mexican port of Veracruz.¹⁴

It would take a revolution to force the US to respect the doctrines of Calvo and Drago. In 1910, the civil war that would become known as the Mexican Revolution exploded as a result of the government’s inability to address popular complaints about the unequal and irregular distribution of land and property in the country. The United States intervened twice in the conflict. It was important, according to Woodrow Wilson, who spearheaded the highest number of interventions in this era, to protect North American oil interests and “to teach the South American republics to elect good men.”¹⁵

The 1917 Mexican Constitution established the state’s ownership over all underground minerals, the right of Mexicans to receive land grants for the mining of the subsoil, and the conditional award of these rights to foreign citizens who surrendered their claims to invoke protection from their respective governments. The purpose of this constitutional reform, emboldened by the use of the Calvo Clause, was to prevent foreign intervention. It triggered intense protests from board members of North American oil companies, whose profits had soared on the basis of booming US demand for cars. In the 1920s, Mexican representatives would craft new arguments in favor of the rights of debtor nations in the face of opposition from the United States.¹⁶

In Cuba, Fidel Castro dedicated several books and a number of lengthy interviews to historical digressions on the need for Latin America to denounce the illegitimacy of its foreign lenders, all while benefiting from the generous aid from the USSR. Castro portrayed the Latin American default on foreign loans as the natural and long-awaited conclusion of the independence process started in the 1820s by Latin American revolutionaries. The Cuban statesman encouraged his readers to imagine meeting the founding fathers of Latin American independence like Bolívar, “and the libertadores of Haiti,” and explaining to them how, after achieving freedom and independence, foreign debt had trapped Latin America back into a state of dependence.¹⁷

A union of bankrupt states

In the US, bankruptcy grew into a mechanism to punish states abroad, and Latin America in particular. Now, these same stories are being used to absolve the asset-wealthy and justify cuts to the state at home. US President Donald Trump is threatening to use bankruptcy to bend other nations, like Iran, to his will, globalizing a strategy he used throughout his life against his creditors.¹⁸ But an even more insidious casuistic vision of bankruptcy is on the rise: right-wing voices in the US are casting fears about states going bankrupt to justify cuts to state spending and to reconfigure its policies abroad.¹⁹

As the US descends into an economy of coercion, the establishment of a global bankruptcy law is an opportunity to redeem and reinvent multilateralism anew. In 2014, the UN General Assembly, encouraged in part by Latin American ministers and campaigners, adopted a resolution on a sovereign restructuring scheme that generated a multilateral framework for countries to emerge from financial commitments.²⁰ Ten years later, the General Secretary acknowledged that existing debt relief mechanisms ought to be more robust.²¹ In the UK, discussions are taking place around a Debt Relief (Developing Countries) Bill that builds on an 2010 initiative that curbed the speculative practices of private creditors over distressed national debts. As Karina Patricio Ferreira Lima, one of the authors of the bill, has shown, the need to repay foreign debt is overriding the provision of welfare for citizens in debtor countries.²²

Generating international agreements on this point would require setting ablaze the veil that typically covers the true power relations of international finance—it would require the Paris Club, which was originally created in order to settle Argentina’s debts, to negotiate a common framework with China. Today, the Inter-American Development Bank’s China-Latin America Commercial Loans Tracker displays how Argentina is the recipient of the highest number of Chinese loans, and no other nation has renegotiated its loans with the IMF and the World Bank more times than the Casa Rosada.²³ Echoing Drago’s solutions today could allow Argentina to become a leading mediator in global discussions about debt disputes. 

How we resolve debt in our financialized world establishes, more than international law, what we owe one another. Ideas of climate and racial reparations and debates about the differences between Chinese government lending practices and the IMF and the World Bank are rarely discussed in the same breath, but they reflect a growing need to reconcile old notions of the global moral economy with the changing world order—a call to establish a new global hierarchy of obligations.

This text was adapted from Odious Debt: Bankruptcy, International Law, and the Making of Latin America, published by Oxford University Press in 2024.