Pay You Want a Revolution

February 9, 2009 10:11 AM

If there was a revolution and the British state was completely overthrown, what would happen to the Government debt?

I assume there are precedents, analogues and international laws that have dealt with this issue, and that this is more than 'hypothetical filter'.

If there was a revolution in the UK (or any other country for that matter) that overthrew the entire state and replaced it with a system that was distinct from and unrelated to the old one, what would happen to the previous government's debts?

Are there any precedents?

posted by popcassady to law & government (10 answers total)

There's a longstanding system of "successor states," where one state is treated as having taken over the responsibilities, treaties, etc, of a previously existing one. this is the relevant wikipedia entry. Essentially, yes, debts are one of the things that could be transferred; however, the circumstances that result in this overthrow are important. If it was, say, an uprising replacing the current system with another comparable system, it would probably assume the debts of the current state; if, on the other hand, it was - for example - a hyper-protectionist xenophobic takeover, it might simply say "This debt was imposed by our earlier evil overlords, whose actions we decry."

In short, it depends, but as a rule yes.
posted by Tomorrowful at 10:19 AM on February 9, 2009

It varies enormously. Russia has repudiated a lot of the USSR's international debt, left over from 1991.

Iraq is an interesting case: Saddam ran up huge international debts, especially with the Russians buying their military equipment. The Russians want the new Iraqi government to take responsibility for that debt, but it isn't yet clear whether they will. UNSC resolutions have temporarily deferred that question, but in the next couple of years it's going to come up.

I expect the Iraqi government to repudiate that debt, too. See "Odious debt".
posted by Chocolate Pickle at 10:27 AM on February 9, 2009

Governments don't need to pay their debts at all. That's what's nice about being a government, you get to make up the rules.

On the other hand, paying your debts allows you to borrow more easily in the future, and paying old government debts would allow you to keep up your international credit rating, it would keep confidence in your markets, etc.

So basically the arguments for a revolutionary government paying back old debt are the same as for an existing government paying those debts.
posted by delmoi at 10:31 AM on February 9, 2009 [2 favorites]

It would really come down to what the new government wanted to do, or what its creditors forced it to do.

I think there might be some precedent in some of the African countries that have changed governments in recent memory; I think some of them ended up honoring past debts, at least in part, in order to get new financing from other countries, or due to IMF pressure. (I'll do some searching and post some links if I can find them.) It's not unheard of for countries to default on external debt even without a revolution; Argentina did, at least in part, in 2002. There's been some speculation that Ecuador might as well. It's obviously not something you do lightly; it has major consequences and can effectively make you an economic pariah state if enough creditors are scared off.

I suspect that a new government refusing to honor debt issued by the previous government might actually be less catastrophic for an economy than a government simply deciding to default on external debt, since at least in the case of a revolution, you can reassure creditors by claiming that it's a brand new day. It's tougher to do that if the same people are still in power.

However, my strong suspicion is that most new governments tend to take on preexisting external obligations, even if they were hostile to the government that accrued them, just to preserve the relationships that would otherwise be lost with the rest of the world.
posted by Kadin2048 at 10:35 AM on February 9, 2009

When I lived in Singapore, you could go down to the flea markets and buy millions in pre-revolutionary China debt notes for a couple cents each.
posted by nomisxid at 11:14 AM on February 9, 2009

Russia partly did this after the fall of the Soviet Union (and during the 1998 financial crisis) and it seriously hurt its currency and foreign investment. Russian bonds pay a lot of interest because its considered a high-risk investment, when typically a government bond is a low-risk investment. Considering Russia has had two major financial emergencies since the fall of communism, the ruble is not regarded as a strong currency.

Whatever national currency is tied to the revolution will be hurt if the revolutionaries dissolved all the debt. Think massive inflation, foreign divestment, and a good chance of pissing off a neighbor with a stronger military who will waltz in, take you out of power, and put someone in who will pay the debt. Needless to say, there is a lot of external pressure to pay debts, especially when you need your government recognized by world powers.
posted by damn dirty ape at 11:49 AM on February 9, 2009

In the latest episode of Planet Money, they mentioned one of the Founding Fathers (Hamilton?) making a point of ensuring that the fledgling U.S. Federal Gov't honored the debts owed to those who funded the revolution, as a way of legitimizing the new regime.

Not a direct example, but I think it fits the idea.
posted by mkultra at 12:03 PM on February 9, 2009

The fourth section of the 14th Amendment says that the US Government will not honor the debt of the CSA or any other government debt which was run up in the service of insurrection.
posted by Chocolate Pickle at 1:26 PM on February 9, 2009

You don't have to have a violent, revolutionary overthrow for this to happen.

Ecuador very recently defaulted on a portion of its foreign debt. Essentially, the current president of the country just stood up and said, "Screw you guys."
posted by Cool Papa Bell at 2:41 PM on February 9, 2009

The foundation of the question concept is that the previous debt is a "burden". If you - New King of England - decide to not pay me - Collective Rest of World who lent you money, or me, Another Country - you could do that.

Simply put however, if you dont pay me, I will never lend to you again and you will have demonstrated to the rest of the world that you may not be worthy of credit and most probably no one will lend to you. You might not care thinking you will not need to borrow (you wont run up a deficit and wont need foreign investment in your treasury bonds) you will live off your orth Sea Oil reserves and you will have a balanced budget. But it's not over. I also wont BUY your stuff, since I'm pissed. I'll buy my oil from somewhere else. And other countries may not buy your stuff. Now your GDP drops, your exports drop, your country has to lay off workers who make the stuff I wont buy, now you get less income taxes, people spend less so less VAT/Sales tax. Now you have less to spend.

My hope is you spend less on military so I can kick your ass. And if I'm not feeling war-like that day you are still economically and therefore nationally weakened by severing global relationships.

The previous state's debt on the whole is probably less a "burden" than the economic consequences of not paying it. It's probably better to pay me. ;)
posted by Kensational at 8:27 PM on February 9, 2009