National debt and secession

[Akka]

I don't really think that passing on national debt onto a province that is breaking away makes sense either. The province in question might not have had any impact on what money gets spent where federally speaking. So why punish them for the spending decisions of a government they don't control?

That's just childish. Under the assumption that they were part of a democratic country before, they had proportional control of said government before. They also benefited from the proportional spending of such government (spending which is by definition the reason of the existence of said debt).
So saying "nah, no debt for me, I just keep the stuff and leave you with the bill" is just incredibly wrong.

 

[Camikaze]

Succession actually is the right word for this aspect of secession crises. The question is, who is the legal successor to the state which owes the debt? In the case of Spain/Catalonia, would the new iteration of Spain be the successor to the old iteration of Spain, or would it be a new country? As a matter of international law, i.e. as far as anyone outside the country is concerned, this is the significant question. Any question of internal distributive fairness is irrelevant to the international creditor.

Of course, this is theorising sovereign debt as a creature of international law rather than a creature of domestic law, and it's more complicated than that. But the more generalised question of rights and obligations surrounding secession is squarely within the wheelhouse of the international law doctrine of succession.

 

[Hygro]

That's just childish. Under the assumption that they were part of a democratic country before, they had proportional control of said government before. They also benefited from the proportional spending of such government (spending which is by definition the reason of the existence of said debt).
So saying "nah, no debt for me, I just keep the stuff and leave you with the bill" is just incredibly wrong.

Again, everything is in play for a negotiation of an amicable split. A country's wants with regards to its financial system is far too complicated to be thought of as who is footing a bill. Further, a country's ability to service is dramatically altered by whether or not it issues that denomination of money. Moreover, the parent country might not want the seceder to have such an impact on the currency in question—the currency of the parent country and not of the seceder! A proportional allocation of debt in the original currency by any rubrik (divided by population, gdp/capita, value and location of spending) is not going to yield the same burden as a service allocation done the same while they were the same country. Any simple talk of "fair's fair" is arbitrary and not considering the depth of the question.

El Machinae started this thread saying all of the understanding he's made in the nature of debt doesn't lead to any particular logical conclusion, and he's right to think so.

 

[Hrothbern]

OP has an interesting question.
Some thoughts I would like to add:
In case violence was important:
Here the international recognition of the new state becomes very important and whether the new state can trade with other nations in a sufficient way for her needs. Hereby it does matter whether that secession is part of a geopolitical conflict or not.

In case of a peaceful secession/separation:

The relative size will be important, so for separations of similar sized areas: When Czechoslovakia separated peacefully into the Czech Republic and Slovakia after the breakdown of the Soviet Union, they divided territory, assets, etc and were almost immediately internationally recognised. I could however not find hard figures on the national debt and the distribution of it. Only that it was very small to begin with at the moment of separation and easily covered by privatising some of the big pool of state owned assets, which was also used to fuel the build up of the countries. https://en.wikipedia.org/wiki/Dissolution_of_Czechoslovakia
So brainstorming on another theoretical possible separation of similar sized economies, taking Belgium , assuming both regions would want to, the fair distribution of the national debt would be I think an unavoidable and important part of the separation negotiations.

For smaller areas seceding in a peaceful way, I think that the new state, needing the recognition and trade of the international community, is more or less forced to accept a fair share of the national debt. For the simple reason that other nations will typical protect their own interests, being that if they would face a secession themselves, they would want to shift a fair share of their national debt as well.
I guess you only get a mess when the, as such peaceful, secession is or becomes part of a geopolitical struggle and big nations jump at the opportunity for their own interests, at the expense of the interests of the direct peoples involved. In general the international community, supported by international law and the UN should mitigate or stop this, but the reality is often different.

 

[dutchfire]

Hygro said everything I wanted to say, but just to reiterate: You can't even start answering this question without taking into account in which currency the debt is issued and which currencies the future independent countries are going to use.

 

[Arent11]

When we talk about secession (not succession, sorry for the thread title), the apportioning of the nation's debt strikes me as the biggest factor in where I don't actually have any answers. If a province wants to say that the territory under their jurisdiction is now theirs, meh, we live in a progressive world. And obviously any debts owned by the citizens remain intact.

Well, it's not that easy. You can't just say "we live in a progressive world", because countries in history were often conquered, people subjugated. If you just form some small country without actual military, chances are that you will be gobbled up. Like in a real civilization game

If you want to break apart you first and foremost need the military means to back your claims up. And concerning your actual question, namely the debt, it is, obviously, about the ability of the creditor to enforce his claims. In fact, any country could, in theory, just stop paying their debt. The problem is, of course, that then no one would anymore lend them money.

 

[warpus]

That's just childish. Under the assumption that they were part of a democratic country before, they had proportional control of said government before. They also benefited from the proportional spending of such government (spending which is by definition the reason of the existence of said debt).
So saying "nah, no debt for me, I just keep the stuff and leave you with the bill" is just incredibly wrong.

Ok, so explain to me how you would fairly calculate how much of the debt they owe.

Correct me if I'm wrong but there is 0 precedent for this sort of thing.

 

[innonimatu]

Succession actually is the right word for this aspect of secession crises. The question is, who is the legal successor to the state which owes the debt? In the case of Spain/Catalonia, would the new iteration of Spain be the successor to the old iteration of Spain, or would it be a new country? As a matter of international law, i.e. as far as anyone outside the country is concerned, this is the significant question. Any question of internal distributive fairness is irrelevant to the international creditor.

Of course, this is theorising sovereign debt as a creature of international law rather than a creature of domestic law, and it's more complicated than that. But the more generalised question of rights and obligations surrounding secession is squarely within the wheelhouse of the international law doctrine of succession.

True. In the event of a split like Catalonia leaving Spain, if rump Spain is the successor state and Catalonia would have to apply for all international organizations, treaties, etc, anew, then Spain would get to keep the international obligations also. That much is clear.

Which is something neither Spain not the EU (with its fetishes on national debt) can allow.

Ok, so explain to me how you would fairly calculate how much of the debt they owe.

Correct me if I'm wrong but there is 0 precedent for this sort of thing.

I do believe there is. Anyone knows how the debt of the former USSR was dealt with? Russia was the successor state for all international commitments, did it get the debt also?

 

[Akka]

Ok, so explain to me how you would fairly calculate how much of the debt they owe.

Correct me if I'm wrong but there is 0 precedent for this sort of thing.

Either a proportion of population or GDP sounds fine. As Hygro said, the practical minutiae would be down to negotiation, but that's a good point to start from.

 

[warpus]

I'm not convinced at all that this would be fair. If we're trying to be fair, why not hire a bunch of economists & interns to compute the economic contribution to the economy of the breakaway region, as well as how much money they contributed to the existing debt?

 

[Hrothbern]

I'm not convinced at all that this would be fair. If we're trying to be fair, why not hire a bunch of economists & interns to compute the economic contribution to the economy of the breakaway region, as well as how much money they contributed to the existing debt?

agree
I guess the list will even be longer
there are as well state assets, natural resources, financial obligations from rents, state employees, domestic contracts, international trading contracts (with geographically asymetrical cost/benefits), etc.
I think all this is pretty important in peaceful secessions of rich developed nations and there is an abundancy of professionals that do little else as a job in the commercial sector when busy with big Due Diligences, mergers, and splitting of chunks of big companies to sell off.

 

[warpus]

It's way too complicated to figure out, and it seems to me that you can use a variety of methods to arrive at different conclusions as well. That's probably why it's usually not done.

 

[EnglishEdward]

agree
I guess the list will even be longer
there are as well state assets, natural resources, financial obligations from rents, state employees, domestic contracts, international trading contracts (with geographically asymetrical cost/benefits), etc.
I think all this is pretty important in peaceful secessions of rich developed nations and there is an abundancy of professionals that do little else as a job in the commercial sector when busy with big Due Diligences, mergers, and splitting of chunks of big companies to sell off.

The way I see it, it is remarkably simple.


Re: "State Assets"

If it is in Catalonia, it goes to Catalonia. Otherwise it remains with remnant Spain.

Re: "Natural Resources"

If it is in Catalonia, they are Catalonian. Otherwise they are Spanish.

Re: "financial obligations from rents"

If government rented building is in Catalonia, then Catalonia takes the liability. Otherise it is remnant Spain.

Re "state employees"

If Catalonian nationals, then Catalonia must take responsibility for employing,transferring or sacking them and paying them and pensions. Otherwise remant Spanish o#ligation.

Re: domestic contracts, and international trading contracts

This is presumably where the central Spanish government is itself the legal contracting party.
In that case you take the agreed population or GDP or combination of such ratio, and
apply it to the national debt and all such arrangements.

Where it may get more complicated is when looking at things such as aeroplanes and ships,
and their allocation and the allocation of support infrastructure which in some cases may not be sufficiently
replicated to be divisible need to be shared for a while with each portion playing a proportionate cost.

EU's job would be to apportion MEP seats, budget contributions and benefits payments.

The key thing is determining the start date and the ratio.

None of this was a problem in Ireland or India, where the real problem was the boundary.

 

[Mise]

It doesn't seem fair to lumber (say) 80% of the country with 100% of the debt that is issued by that government, but if they claim to be the legitimate successors to that country and that the government and country is a continuation of the government and country that issued the debt, then this just seems like a risk associated with issuing and buying government bonds.

I would expect that investors would want New Country to buy back some proportion of Old Country's debt, if they want access to the bond market at all. Such a buy back could involve issuing their own debt in their new currency simultaneously, in order to fund the purchase of Old Country's bonds. This could provide both the mechanism and the price.

 

[Hrothbern]

I would expect that investors would want New Country to buy back some proportion of Old Country's debt, if they want access to the bond market at all. Such a buy back could involve issuing their own debt in their new currency simultaneously, in order to fund the purchase of Old Country's bonds. This could provide both the mechanism and the price.

There are several constructions feasible,
But the international aspect will be very important. You need to be recognised and you need to be able to get money from bonds as new nation.
The critical point will be what interest rate you will have to pay and in how far your secession will create a currency inflation in the original nation, making the existing bonds less valuable and increasing the interest rates for new bonds.
Who is going to pay that ?

These financial aspects will in practice be a big hurdle, unless the secession is economically smooth, or the existing situation is so bad (warlike) that any secession leading to peace can only improve the economy of both areas and as a consequence keep the cost of getting money stable or lower.

 

[hobbsyoyo]

Depends on how the independence happens, I think.

Usually, if a country fights for independence and wins, international custom is to saddle it with none of the parent country's debt. Seems reasonable. Much of that debt would have been contracted in the course of trying to prevent the new country's independence anyway, and one can hardly expect the new country to pay for, say, the weapons used to kill its own people. That's what happened with South Sudanese independence in 2011. (Unfortunately, gaining independence without debt did not prevent massive overspending on military forces and civil war a few years later.)

Otherwise, it gets a bit messier. I think it's reasonable to suggest that each seceding territorial unit should, in the case of a peaceful and negotiated transition, continue to honor the debts contracted by it as an individual territorial unit, i.e. if Virginia were to secede from the US right now it would have to pay for the Commonwealth of Virginia's debts. The national debt would have to be a matter of negotiation between the parent country and the seceding country, because while much of it was undoubtedly contracted for reasons totally unrelated to the seceding country, some of it was contracted for reasons related to the seceding country. Ideally the seceding country would assume some proportion of the national debt based on these negotiations. I don't think it's possible to get more granular than that: you'd have to deal on a case-by-case basis.

I would think a per capita split would be simpler and therefore fairer than trying to sort out the division of administrative costs (and surplus) between the two states. I say it's fairer because trying to divvy things up as a function of governmental units will end up being very complicated and easily abused or manipulated.

 

[Evie]

Problem with Per Capita is that ot has little relation to economic weights or govt benefits a region has received, and could conceivably see a high-pop, but poor and government-ignored region get saddled with a gross part of the debt.

 

[Hrothbern]

Problem with Per Capita is that ot has little relation to economic weights or govt benefits a region has received, and could conceivably see a high-pop, but poor and government-ignored region get saddled with a gross part of the debt.

This discussion is on this is like us discussing how a heart surgeon should operate patients.
Using the whole pipapo of a country is standard, even boring work, for standard financial controllers.

the only advantage of using GDP or population only is that the tabloids can follow it, and politicians can tweet on it.

 

[innonimatu]

It doesn't seem fair to lumber (say) 80% of the country with 100% of the debt that is issued by that government, but if they claim to be the legitimate successors to that country and that the government and country is a continuation of the government and country that issued the debt, then this just seems like a risk associated with issuing and buying government bonds.

That does seem fair to me if a country claims to be the successor. Consider Spain and Catalonia: if Spain claims exclusive right to membership of international organizations, and said organizations claim that is valuable (see the EU's demand on the UK), then there is a financial benefit to successor status. They should keep the international obligations as well as the benefits.

 

[tuckerkao]

The national debt is already almost 20 trillion dollars, I'm wondering when it'll hit one quadrillion. It was only around 4 trillions during the Bill Clinton years.