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Sovereign immunity and the Argentina debt saga

Published:Wednesday | August 27, 2014 | 8:00 AM
President of Argentina, Cristina Fernández de Kirchner - File

Walter Molano, Guest Columnist

The notion of sovereignty is one of the tenets of human society that spans the spectrum of geography and time.

As the Chief Justice of the US Supreme Court, John Marshall, wrote in 1812: "The jurisdiction of the nation within its own territories is necessarily exclusive and absolute. It is susceptible of no limitation not imposed by itself".

In other words, sovereignty is a logical construct.

An independent sovereign nation is in charge of its own affairs. Otherwise, it is not an independent sovereign nation. It is part of another nation.

Within this framework, all sovereign states are legally equal. They may be politically different, with variances in economic and military power. However, as long as they are sovereign states, they are the same, with the power to govern their own affairs.

The equality of states allowed sovereigns to send emissaries and ambassadors to each other for representation and consultation, without fear of retribution or violence. If a country no longer wanted to recognise the sovereignty of another nation, it could resort to war and coercion. However, this would entail a sacrifice of lives and resources.

The international legal aspects of sovereignty and the inviolability of the state thrived during periods of multipolarity, when the international system was fragmented and divided. The period of the Peloponnesian War in 430 B.C. and the Treaty of Westphalia, following the Thirty Years War in 1648 were periods when the international community was populated by a vast array of kingdoms, city states and principalities.

The emergence of larger nation states, such as France, Spain and the United Kingdom at the end of the Middle Ages, began to erode the notion of sovereignty.

The disproportionate difference in relative power between states allowed the larger sovereigns to impose their will on the smaller ones.

The process accelerated during the 20th century, with the emergence of the bipolar world and culminated with the end of the Cold War and the rise of the hegemonic state. Nevertheless, national leaders are extremely sensitive to their inviolable rights as sovereigns.

It is within this context that the subject of international debt develops its complexities.

Sovereigns are equal; they are not subject to any law other than the common practices among nations that have become known as international law. Therefore, there is no over-riding body or institution that can claim jurisdiction over another nation, unless they are willing to invade that country and put it under its own jurisdiction.

This was a common collection tactic employed by creditor nations during the 19th Century, when governments would deploy gunboats to capture foreign ports and take over the customs house until they recouped the funds that were owed. However, it was a costly process and full of political pitfalls.

Today, a sovereign country that assumes an external financial liability will service its obligation as long as it is willing to do so. That is why sovereign credit analysis consists of two components, a country's capacity to pay and its willingness to pay.

This is in sharp contrast to corporate credit analysis, which is relegated to service capacity. If a company defaults, creditors will use the legal system to enforce their rights.

A sovereign's willingness to pay has been the subject of countless academic studies. Scholars have analysed countries' ideological orientations, economic structures and organisational arrangements.

Yet, the most important explanatory factor that pops up each time is its access to future capital inflows. In other words, governments will pay their external obligations if, and only if, they want to ensure access to additional external capital flows - which brings us to the ongoing Argentine debt saga.

There is no doubt that the concept of sovereign immunity does not apply to cases where the government agrees to surrender it, as Argentina did when it issued debt under New York and international jurisdictions. Nevertheless, under the tenets of international law, Argentina's abdication of its immunity is only predicated on its willingness to continue to do so.

First, it is important to underscore that President Cristina Fernández de Kirchner considers herself to be the leader of a sovereign state. More so, she considers herself to be consubstantial with Argentina - in other words, one and the same.

Judge Griesa's inflexibility and stubbornness in defending a questionable group of hedge funds only serves to make the situation worse.

Second, the sovereign - in other words, President Fernández de Kirchner, does not think that she needs access to the international capital market, at least for now.

The domestic capital markets are still functioning, and it may get her through the end of the year or perhaps her term.

Therefore, she will exercise her sovereign prerogative to do as she pleases.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities, LLC.wmolano@bcpsecurities.com