This past Monday, financial writer extraordinaire Matt Levine posted on his Money Stuff blog on Bloomberg about the Securities and Exchange Commission’s having charged a Houston-based pastor and self-described financial planner (who has been barred from the industry) with fraud for selling US$3.4m+ in defunct decades-old pre-Communist Chinese sovereign bonds. As the SEC notes, the bonds have been in default since 1939 and the Chinese government does not acknowledge the debt.
Levine mulls that such schemes, which turn up with some regularity, is that they have a “certain magico-religious” appeal and he is not wrong. The fraud’s at least early success – the pair did sell millions of dollars in ink & paper – was also clearly predicated on one other crucial matter, a lack of understanding of the principal of ‘successor states’.
These are governed by the Vienna Convention on Succession of States in respect of State Property, Archives, and Debts. Good bedtime reading, I promise. The principle of state succession before that is significantly more complicated, and part of the reason that these defaulted Chinese bonds, or other decades and centuries’ old sovereign debts, still get attention from time to time.
Arguably the most famous example of state succession is that of Russia after the collapse of the Soviet Union. Russian jurists actually went further and argued the Russian Federation was a continuation of of the Soviet Union but as part of the agreements between the post-Soviet republics, Russia eventually emerged as not only its clear legal successor but also as the inheritor of its nuclear arsenal and, most importantly, of its UN Security Council seat. But it also inherited the Soviet Union’s foreign assets and its debts.
The last of its interstate debts was finally paid out in March 2017 but its private debts remain a trickier question – those of Vnesheconombank ultimately defaulted after the 1998 crisis and were restructured into high-yielding bonds due in 2030 – which the Russian government is only now finally buying out (I touched on these briefly in my piece on Russia’s latest bond issuance here after it came to be a key factor in the build-up and ultimate fall down of Otkritie, Russia’s largest private financial institution, last year – Max Seddon’s reporting on this at the FT is a must read if interested, see here on its role in Otkritie’s rise and here on its role in Otrkitie’s fall).
But Russia has in fact also repaid one other notable ‘successor state debt’. in 1996 it announced it would make good on decades old imperial bonds that had been repudiated by Vladimir Lenin. Of course holders were not paid on original terms, which would have left them with an outstanding face value of some US$200bln according to reports at the time. But it ultimately paid out US$400m over four years for decades-old paper. However, some were still not happy with the terms – they have their own organization, AFIPER – and continue to launch lawsuits or media campaigns, including as recently as 2017, despite their consistent lack of success in French courts.
Then-Russian president Boris Yeltsin had agreed to repay the bonds not out of any real legal obligation, but as a political consideration. (There are even still some Soviet-issued bonds whose fate and fortune is not wholly resolved although given they were sold under Soviet law, as the successor state, Russian law applies to them, largely defanging them.) France’s president at the time was Jacques Chirac, who had introduced austerity measures after narrowly defeating his Socialist opponent the year before the renegotiation. Given that some elderly French pensioners still held some of the Russian imperial notes and that they had been passed down in many families – they were quite decorative after all – the repayment agreement gave Chirac an easy political victory, although in fact France gave Russia funding far in excess of the US$400m repaid for the imperial notes and Chirac pushed for it to get a US$10bln IMF loan earlier that year. A foreign policy win for Yeltsin and a domestic policy victory for Chirac – thanks to the magic of decades-old bonds.
The inherently messy nature of states’ collapse and subsequent succession, means the topic is by no means a wholly-settled area of international law, which enabled the politically-advantageous Yeltsin-Chirac bond deal. (For further messiness and to see just how head-spinning state succession can become, see Professor Mark Milanovic’s discussion of the continuing questions around successor states in reference to the collapse of Yugoslavia at the European Journal of International Law’s blog).
And as I have argued recently that private sovereign bondholders are increasingly political actors (though I would also argue they always have been, if just more subtly in recent decades), it is perhaps no surprise that as Chinese holdings of US Treasuries is a widely-discussed, if often poorly understood and often overblown, topic that some Americans seek to again use these old repudiated Chinese debts as a tool for both their political aims and for fraud. A very good and digestible analysis of the implications of Beijing’s holdings of US treasuries is available from CSIS.
Much like France’s AFIPER, there is a similar equally hopeless organization in the US – the American Bondholders Foundation – which is seeking to raise funds to sue China for notes issued between 1900 and1940. These bonds were issued by the Qing Empire or the original Republic of China, which the People’s Republic of China does not see itself as the successor to, at least from the perspective of international law. The bondholders would perhaps have a better argument (logically if not legally) against Taiwan, which is formally still the Republic of China. However, the island is a US ally and even with the the presently-befuddled state of US foreign policy, and the serving president’s ignorance regarding issues around Taiwan’s recognition, it is all but impossible to imagine Washington politicizing the bonds with regards to Taiwan.
Back in 2011, however, Fox
News ran an op-ed that called for China to honor them, essentially arguing they would balance out China’s holding of US debts, although of course it didn’t touch on any of the legal issues. Fingers crossed Fox & Friend’s does not bring it up while the president is watching.