IFI Law - Book Chapter 1

Question 1

For how long have the IMF and the International Bank for Reconstruction and Development existed?

Answer 1

Over 75 years

Question 2

The World Bank Group has had which impact in the past 75 years?

Answer 2

During this time, they have influenced the development policies of many countries around the world and have played prominent roles in the management of international financial and monetary affairs.

Question 3

The IBRD has spurred what kind of debates?

Answer 3

The IBRD has also influenced the debates about the international law applicable to international development projects and to the environmental and social responsibilities of transnational banks and corporations engaged in the financing and construction of these projects.

Question 4

How have the IBRD and the IMF influenced other newer MDBs and regional banks?

Answer 4

These institutions have served as models for the design, structure, and operations of the regional development banks and regional financial arrangements that were established in the years after the end of the Second World War.

Question 5

When was the Bretton Woods Conference?

Answer 5

In 1944.

Question 6

Between the First and the Second World War, what were the three main factors for the worsening of economic conditions?

Answer 6

1) Hyperinflation
2) Decline in exports
3) Unemployment

Question 7

What are the two main factors that led to the collapse of international trade in 1930s?

Answer 7

1) Breakdown of the gold standard
2) Beggar-thy-neighbour policies

Question 8

What was the gold standard, and how did it operate before the First World War?

Answer 8

The gold standard required countries to fix the value of their currency in terms of gold, allowing holders to convert their currency into gold with the issuing country’s central bank. This mechanism aimed to maintain currency stability, especially during trade imbalances.

Question 9

What challenges did countries face in reactivating the gold standard after the First World War?

Answer 9

After World War I, countries faced challenges in maintaining pre-war values of their currencies due to war costs and economic turbulence. Some countries opted for substantial devaluations, triggering competitive devaluations and “beggar-thy-neighbour” policies, worsened by protectionist measures.

Question 10

How did policymakers respond to the economic challenges post-World War II?

Answer 10

Policymakers aimed to prevent a recurrence of the Great Depression and World War II. The Bretton Woods conference in 1944 established institutions like the IMF and the IBRD. Later conferences contributed to the creation of the United Nations, but the International Trade Organization was replaced by the General Agreement on Tariffs and Trade (GATT), addressing trade in goods.

Question 11

What are beggar-thy-neighbour” policies?

Answer 11

“Beggar-thy-neighbour” policies refer to economic strategies adopted by a country to improve its own economic conditions at the expense of its trading partners. These policies are characterized by actions that, while benefiting the adopting country in the short term, may have negative consequences for other nations. The term suggests that one country’s gain comes at the cost or detriment of its neighbors.

One common example of a “beggar-thy-neighbour” policy is currency devaluation. When a country deliberately devalues its currency, it makes its exports cheaper for foreign buyers. This can boost the country’s own exports, making its goods more competitive in international markets. However, the downside is that it can hurt other countries by making their exports relatively more expensive and less competitive.

Other examples of such policies include imposing tariffs or trade barriers, subsidizing domestic industries to gain a competitive advantage, or engaging in unfair trade practices. These actions may provide short-term benefits for the country implementing them but can lead to tensions and negative repercussions in international trade relations. The term is often associated with the economic challenges and competitive devaluations that occurred during the interwar period, particularly in the 1930s.

Question 12

Issuing bonds was not a practice that arose with MDBs. Between the wars, how was bond issuance a practice?

Answer 12

During the inter-war period, a number of states raised funds on international markets in order to finance their war debts, their budget deficits, and their current account deficits. They did so by issuing bonds on major international financial markets. A number of these sovereign borrowers (states) also defaulted on their debts during the inter-war years.

Question 13

What issues did creditors have during the inter-war period when trying to enforce debt against states?

Answer 13

The creditor banks or bondholders would have to try and enforce their contractual rights in the national court of either the borrowing state or one of the creditors. The law that would govern the dispute would be determined either by the terms of the debt contract or by the rules of private international law. As a result, the creditors could find it challenging to convince a court that it should hear their case. First, pursuant to the law in the key creditor jurisdictions, the sovereign debtor would have immunity from suit. Second, it was unclear if the sovereign debtor’s home courts would have jurisdiction over the case. The sovereign might also have immunity in its own jurisdiction. Alternatively, the courts might determine that the debts were (p. 12) outside their jurisdiction on other grounds, such as the location of the debt or the terms of the contract.

Question 14

Bonds between states and investors, do they qualify as as international agreements under international law?

Answer 14

Since these transactions were between a sovereign state and private investors, they did not qualify as international agreements under international law. Consequently, they were structured as private contracts that were subject to the domestic law of the state in which the bonds were issued.W

Question 15

Where can we find a source in international law that bond contracts between a private investor and a state are private contracts?

Answer 15

As the Permanent Court of International Justice (PCIJ) said in paragraph 86 in France v Yugoslavia, a case involving Serbian debts: ‘Any contract which is not a contract between States in their capacity as subjects of international law is based on the municipal law of some country’.

Question 16

Private investors, besides trying to enforce their debt before domestic courts (of the host state), what other option did they have?

Answer 16

The creditors’ other option would be to seek one or more of their home state’s support in upholding their rights. To this end, they would form committees of bondholders to negotiate both with the borrower and with their own sovereigns. In the case of the latter, they would seek to convince their own sovereigns to take up their case and advocate for their interests either through diplomatic channels or through other means.

Question 17

What new enforcement option did creditors gain with the creation of the PCIJ in 1920?

Answer 17

Creditors gained the ability to enforce their claims by having disputes heard in the PCIJ (Permanent Court of International Justice), which could adjudicate matters between sovereigns.

Question 18

What legal principles did a sovereign debtor violate if it defaulted on its debts, according to the arguments that could be presented in the PCIJ? Think from the POV of the investor.

Answer 18

A sovereign debtor would be argued to violate international legal principles related to the fair and equitable treatment of foreign investors and citizens within its jurisdiction. This included not interfering with foreign property and avoiding discriminatory or unfair treatment.

Question 19

Under PCIJ dispute settlements, to whom was the international responsibility of a defaulting state directed, and what did it entail?

Answer 19

The international responsibility of a defaulting state was directed towards the foreigner’s home state. It involved addressing the injury caused to the home state through the harm inflicted on its citizens by the defaulting state’s actions.

Question 20

What crucial condition determined the justiciability of a creditor’s claim under international law in the PCIJ?

Answer 20

The justiciability of a creditor’s claim in the PCIJ depended on whether the creditor could convince its own state to take on the case. Without the support of its home state, the creditor would not have a justiciable claim under international law (early case of state-to-state dispute settlement).

Question 21

What were the primary international law cases during the inter-war period (under the PCIJ) that dealt with sovereign default on debt obligations, and which countries were involved?

Answer 21

The primary international law cases involved France bringing cases in the PCIJ against Brazil and Serbia, both of which had defaulted on their obligations in specific debt transactions.

Question 22

What was the key issue in the cases against Brazil and Serbia brought by France in the PCIJ?

Answer 22

The key issue was the interpretation of payments-related contractual clauses in bonds issued by Brazil and Serbia before the First World War. The nominal value of the French franc, in which the debts were specified to be repaid, had declined in terms of gold after France went off the gold standard.

Question 23

Why did the bondholders persuade the French government to bring an action against Brazil and Serbia in the PCIJ?

Answer 23

The bondholders sought redress for the decline in the value of the French franc, in which the debts were denominated. They persuaded the French government to accuse the debtor countries of causing injury to France by not paying the full value of their debts, as determined by the gold content of the French franc specified in their contracts.

Question 24

What was the outcome of the PCIJ cases against Brazil and Serbia regarding the interpretation of payments-related contractual clauses?

Answer 24

In both cases, the PCIJ ruled in favor of the debtor countries. The court emphasized that the interpretation of contractual clauses depended on the governing law specified in the contracts or determined by applicable private international law rules. It recognized the principle that a state is entitled to regulate its own currency, allowing alterations in currency value to be respected as legal tender in settling outstanding debts.

Question 25

What are the international legal principles might be applicable to disputes involving sovereign default on debt, and how do they apply?

Answer 25

The international legal principles are pacta sunt servanda, clausula rhebus sic stantibus, and the principle of necessity.

Pacta sunt servanda, a general principle of customary international law, requires both parties to a contract to fulfill their obligations. However, clausula rhebus sic stantibus (Fundamental Change of Circumstance) allows parties to be excused from their obligations due to fundamental changes in circumstances.

In the context of international finance, these principles may be invoked, but given that creditors usually provide funds before debt repayment, clausula rhebus sic stantibus may offer limited help to defaulting sovereign debtors.

Question 26

What does pacta sunt servanda mean in the context of international finance, and how does it impact the relationship between creditors and defaulting sovereign debtors?

Answer 26

In the context of international finance, pacta sunt servanda means that both parties to a debt contract must fulfill their contractual obligations as agreed. This principle is particularly relevant for creditors seeking to enforce debt contracts against defaulting sovereign debtors.

Question 27

How does the principle of clausula rhebus sic stantibus qualify the principle of pacta sunt servanda, and why might it offer limited help to defaulting sovereign debtors in financial contracts?

Answer 27

The principle of clausula rhebus sic stantibus allows parties to be excused from their contractual obligations due to fundamental changes in circumstances. In financial contracts where creditors provide funds before debt repayment, this principle may offer limited help to defaulting sovereign debtors, as it may not provide sufficient grounds for excusing their obligations.

Question 28

What is the principle of necessity, and under what circumstances could it offer relief to a defaulting debtor?

Answer 28

The principle of necessity justifies a state in committing an international wrongful act, such as breaching agreements, if it deems it necessary to protect its essential interests in a situation of grave and imminent peril. It could offer relief to a defaulting debtor when the debtor can prove that its situation had deteriorated to an extent where it faced extreme peril and needed to default on its debt obligations to address the existential threat. However, given that the doctrine was not specifically designed for financial transactions and debt contracts were often detailed, the debtor would face a high bar to successfully invoke this defense.

Question 29

What burden does a debtor have when invoking the principle of necessity, and why might it be challenging for a debtor in the context of financial transactions?

Answer 29

A debtor has the burden of proving that its situation deteriorated to the point of facing extreme peril, necessitating a default on debt obligations to address the existential threat. The principle of necessity was not specifically designed for financial transactions. The debtor would need to overcome a high bar for the defense to be successful.

Question 30

What were the two objectives of the Bank for International Settlements (BIS) when it was established in 1930?

Answer 30

The primary objective of the BIS was to act as the agent for the settlement of German reparations payments, where the Germans would make payments to the BIS, and the BIS would distribute the amounts to recipient countries. However, due to the Nazi regime’s refusal to pay German debts, the BIS did not fulfill this role.

The second objective was to facilitate cooperation between central banks. As a result, the BIS hosted regular meetings between the member central banks until the outbreak of the Second World War. The bank also acts as a banker to central banks. In this capacity, it was expected to perform its services in a neutral and technical manner. It continued to perform this function throughout the war. This meant that it provided services to the German central bank throughout the war.

Question 31

How was the BIS structured in terms of ownership, and what role did Japan and the United States play in its ownership?

Answer 31

The BIS was initially envisaged to be owned by the central banks of the states that participated in the Young Plan conference. However, Japan and the United States decided that private banks, rather than their central banks, would hold their shares in the BIS.

Question 32

Under what legal framework was the BIS established, and how did Switzerland treat the BIS in terms of international law?

Answer 32

The BIS was established under Swiss law. Although it was not established under international law, the Swiss government agreed to grant immunity to the BIS and treated it like an international organization, even though it was established under Swiss law.

Question 33

What role did the BIS play during the Second World War?

Answer 33

The BIS continued to function as a banker to central banks throughout the Second World War. Despite the war, it provided services to the German central bank, maintaining its role as a neutral and technical service provider.

Question 34

How does the BIS contribute to international monetary affairs today?

Answer 34

Today, the BIS fosters cooperation between central banks and plays a crucial role in providing information and analysis on the international financial and monetary systems. It also supports international financial regulatory cooperation.

Question 35

Why was the BIS significant in historical terms?

Answer 35

The BIS was the first independent legal entity to play a role in international financial and monetary affairs.

Question 36

During the inter-war period, how were the social and environmental impacts of international activities perceived by sovereign states and international organizations?

Answer 36

The social and environmental impacts of international activities were generally considered as domestic issues falling within the exclusive jurisdiction of each sovereign state. Other states and international organizations were expected to refrain from commenting on these issues unless the activities or transactions had cross-border impacts.

Question 37

What is the Trail Smelter arbitration, and which two countries were involved in the dispute?

Answer 37

The Trail Smelter arbitration involved a dispute between Canada and the United States. It concerned polluting activities in Canada that had adverse environmental impacts in the United States. This case, which involved polluting activities in Canada having adverse environmental impacts in the United States, resulted in Canada paying damages to the injured US parties . It also helped establish the ‘polluter pays’ principle as part of international law. Both parties signed a bilateral agreement to establish an arbitration tribunal.

Question 38

How did the Trail Smelter case impact the perception of environmental issues in international law?

Answer 38

The Trail Smelter case marked a significant development by recognizing the transboundary nature of environmental impacts and establishing the principle that the country responsible for pollution should bear the costs, contributing to the ‘polluter pays’ principle in international law.

Question 39

Did the inter-war period witness significant global attention to environmental and social impacts in international transactions?

Answer 39

No, during the inter-war period, limited attention was paid to environmental and social impacts in international transactions unless these issues had cross-border impacts. They were generally seen as domestic matters under the jurisdiction of each sovereign state.

Question 40

What laws governed international financial transactions prior to Bretton Woods?

Answer 40

International financial transactions were governed by municipal law. Both sovereigns and corporations raising foreign exchange had to do so in domestic financial markets, either by borrowing funds from banks or issuing bonds subject to the law of the state where the creditor bank or bond market was located.

Question 41

What were the primary instruments for raising foreign exchange before Bretton Woods, and who played the leading roles in global financial affairs?

Answer 41

The primary instruments for raising foreign exchange were borrowing funds from banks or issuing bonds, bought by private banks and investors. Private bankers and investors played the leading roles in global financial affairs, with minimal institutional arrangements for the governance of international financial and monetary affairs.

Question 42

What role did states typically play in international financial affairs before Bretton Woods?

Answer 42

States became involved in international financial affairs if requested by private parties and if they agreed to the request. Additionally, states played a role in cases of debts owed by one sovereign to another, such as war reparations.

Question 43

How did the governance of international financial affairs differ before and after Bretton Woods, according to the chapter?

Answer 43

Before Bretton Woods, governance relied on municipal law, private bankers, and investors, with minimal institutional arrangements. After Bretton Woods, international organizations like the IMF played a more central role in governing international financial affairs.

Question 44

What motivated the establishment of the IMF and IBRD?

Answer 44

The establishment of the IMF and IBRD was motivated by the determination to avoid the economic problems that characterized the inter-war period, believed to have contributed to the Great Depression and the Second World War.

Question 45

How were environmental and social issues addressed in the drafting of the Articles of Agreement for the IBRD and the IMF?

Answer 45

Environmental and social issues played a relatively insignificant role during this period, and they were not directly addressed in the drafting of the Articles of Agreement for the IBRD and the IMF.