Sovereign Debt and International Financial Control

The period from the 1870s to 1914 was the peak of the nineteenth-century globalisation characterised by increased movement of capital across the world.¹ Britain — specifically, the London market — was the major source of foreign capital flows, accounting for 62 per cent of foreign investment in 1870. In 1914, Britain (at 43 per cent), France (20 per cent) and Germany (13 per cent) together accounted for 76 per cent of total foreign investment (see Table 1.1). The major part of the remaining investment was held by Belgium, the Netherlands and Switzerland.²

Both sovereign debt and defaults have a long history and they have drawn the attention of economists, historians and legal scholars. This chapter reviews the literature on the governance of the sovereign debt market before 1914 with particular reference to the response of creditors to defaults. It outlines the broader international institutional context within which the borrower countries of the Middle East and the Balkans contracted loans, defaulted on their obligations and finally were faced with IFC. After reviewing the relevant literature, it offers an interpretative framework to explain the functioning of the sovereign debt market during the period in question.

This chapter documents the functioning of the IFC in Egypt from its early years until 1914. Egypt can be considered as an exception among the cases of this book, because the IFC eventually served as a prelude to de facto colonisation of the country after the British military intervention in 1882. Therefore, unlike other cases, Egypt lost its political sovereignty and the Egyptian government had no choice but to comply with the foreign creditors. Consequently, the IFC functioned in a more complex political and institutional environment, where imperialist rivalry over controlling Egypt gave direction to the formation of a wider range of instruments of political and financial control. Our discussion, therefore, heavily draws on these unique historical characteristics in order to untangle the impact of the IFC from the broader colonial history of Egypt. In the first half of the chapter, I aim to picture the historical context and discuss the milestones in history of sovereign debt in Egypt from the initial sovereign borrowing in 1862 to 1914. In the second half, I examine the characteristics of the IFC in Egypt and try to determine the scope of its activities. A brief summary and conclusion follows to highlight the major characteristics of the IFC in Egypt during the period under study.

This chapter provides a brief history of international financial control as experienced in the Ottoman Empire from 1881 to 1914. In the first section, I provide the longer-term context and give a historical outline of the process of accumulation of sovereign debt, which started in 1854 and ended with a catastrophic default in 1876 stirring international financial markets. The second part of the chapter will deal with the activities of the IFC by mostly relying on reports of the Council of the Ottoman Public Debt Administration. Unlike the Egyptian case, the Ottoman government never lost its political sovereignty against foreign powers. However, the broader impact of the IFC over fiscal and monetary affairs was still far from being negligible, as the Ottoman government chose the amenable path of cooperating with its foreign creditors.

The IFC experiences of Egypt and the Ottoman Empire emerged in late 1870s as a result of a wave of defaults, which newly independent states of the Balkans managed to avoid as they were still at the early stages of borrowing in international financial markets. However, the 1890s witnessed another surge of sovereign debt crises, which resulted in the defaults of Greece and Serbia. Following the chronological order of IFC appearances in the region, in this chapter I first explore Serbia’s experience of foreign control, which was established in 1895 — just three years earlier than the Greek case. The first section provides a brief review of Serbia’s history of sovereign borrowing from the Berlin Treaty to the foundation of IFC in 1895. In the second half of the chapter, I discuss the functioning of the Autonomous Monopoly Administration of Serbia, which represented a transition from direct fiscal control of creditors to a less intrusive method of financial supervision.

This chapter focuses on the final historical case of IFC, which was established in Greece in 1898 following the default of 1893. The Greek case perhaps represents another extreme where the role of IFC remained limited to entirely supervisory matters, it operated through an independent company, and its impact on overall creditworthiness of the country was, as a result, relatively minor. The IFC worked efficiently in managing the revenues under its control, however, there was significant discontent at the sides of both foreign bondholder representatives and Greek government. As a result, the IFC operated in a politically challenging environment and either could not achieve most of the intended reforms or reforms were implemented only partially and late. In the first half of the chapter, I start by outlining the history of sovereign borrowing in Greece, from the independence loans in 1820s to the establishment of IFC in 1898. The second half of the chapter will discuss the activities and organisation of the IFC from 1898 until 1914.

The aim of this chapter is to explore the impact of IFC over sovereign risk of each country in a comparative and analytical framework and to provide a long-term picture of the evolution of sovereign risk in the Ottoman Empire, Egypt, Serbia and Greece. As presented in previous chapters in detail, the administration of each IFC and their policies in host countries showed significant variation. The changing degrees of infringement on sovereignty implied disparities in introducing monetary reforms, establishing international trade links and supervising public finances among other things. Although there seems to be a consensus in the recent historiography that IFC had a positive impact on the sovereign risk of debtor countries, the differences amongst the cases has never been addressed and discussed systematically.

The discussion so far suggests that IFC represented an era of recovery and restoration of the credibility for the economies of the Ottoman Empire, Egypt, Serbia and Greece as evidenced by recovery of cost of borrowing, bond spreads and access to international markets. Moreover, I examined the turning points in the history of sovereign risk of each country and highlighted the role of political, monetary, institutional and other factors in explaining the historical trends. However, so far I have not dealt with the mechanisms through which IFC led to a decline in the sovereign risk nor have I attempted to explain the differences in the degree of recovery and success among the cases. This chapter provides a comparative picture of the political and fiscal institutions of the Ottoman Empire, Egypt, Greece and Serbia before 1914 and puts forward a framework to interpret the different ways that IFC functioned in each case.