The Janus Head of Capitalism

Sovereign Debt as a Norm and Point of Crisis after 1945

Prof. Dr. Laura Rischbieter

Abstract

The project focuses on economic crises triggered by illiquidity of states. However, the objects of inquiry are first the expectations and concepts on which the contemporaries tried to reorganize the global economy, secondly the conflicts around their normative and power-political arrangement and thirdly the attempts of the international financial players to handle the economic consequences. Thus, sovereign debt and individual debt crises will not merely be analyzed as the result of macroeconomic constraints or exceptional social and economic events, but will be conceptualized as a history of economic thoughts, political decisions, power relations, and social repercussions.

Financial crises, like all crises, produce situations that demand forward-looking decisions. The Sep-tember 2008 decision to let Lehman Brothers fail, for example, is now widely seen as the start of an international crisis of trust in the financial industry. From today’s perspective this political deci-sion of the regulators may seem shortsighted. Those responsible (apparently) expect a very differ-ent outcome, but their analysis and decisions were limited by myopia. On what basis did the regu-lators form the expectations that led to their decision?
This project investigates how assumptions about uncertain economic situations develop, shape expectations about the future, and influence decisions. Taking the case of international financial organizations (IFOs) it will investigate their approaches to crises of sovereign debt. Between the end of Bretton Woods (1971-73) and the Asian crisis of 1997-1998 there were 58 instances of de-fault. The majority of these sovereign debt crises subsequently led to crises of the banking, and currency systems of the states involved. Many even developed into international financial crises. As lender of last resort (IMF and the Bank for International Settlements), agent of debt restructur-ing (Paris Club), de facto setter of standards (Group of 30), and representative of commercial bank-ing interests (Institute for International Finance), IFOs have played critical roles in such crises. Tak-ing the perspective of international finance organizations and their approaches to sovereign debt crises the project design not only allows individual decisions to be analyzed as historically contin-gent cases but also permits an investigation of the ways in which the expectations of the actors involved in financial crises changed over time.
The project has three goals: First, it looks at the information collected by IFOs to mitigate econom-ic uncertainty. Which information did they consider important for expectations formation und which data influenced their potential crisis scenarios and why? Second, it analyses the politics and practices of the production of knowledge regarding cash-flow forecasts, and asks about the exist-ence of dominant narratives that may have evoked crises or simply prevented risks from being identified. Third, it examines how expectations influenced decision-making in crises; at the same time, however, it seeks to determine whether the crises themselves reconfigured previous experi-ences. Systematic investigation of these three points, through the lens of the IFOs, promises a new understanding of the mechanisms, successes and (mis)judgments associated with volatile market developments – an analysis that goes far beyond the familiar history of events.
Economic sociology, hermeneutics and the sociology of knowledge will provide theoretical ap-proaches for understanding the relationship between expectation formation, crises, and social learning. Case studies of foreign debt crises will be used to demonstrate and explain long-term developments but also breaches in expectation formation. The empirical basis of the project will be archival sources from the IFOs, and pertinent journals.