Towards a More Ethical Lending to Sovereigns

This chapter examines the relationship between a private household in one country and the foreign government whose bond the household has purchased. What is the ‘right’ thing for a household to want to do when the government encounters economic difficulties and faces pressure to cut back social spending that was advancing human rights objectives? Individual bondholders are in any case rarely empowered to act on their ethical priorities. The nature of sovereign bond contracts gives ethical savers little room to give vent to their ethical preference. The chapter also specifies the concerns that ethical savers have to face when they have lent to a sovereign government that defaults on its foreign bonds. After specifying the characteristics of the problem, the chapter addresses an actual case in point, which, while not a sovereign case per se, involves the essential characteristics of the sovereign case. It will be argued that the source of the ethical frustration derives from the structure of the bond contract. The suggested solution is to redesign sovereign bond contracts in a more human rights-supportive way.