Published by EH.Net (March 2016)

Ali Coşkun Tunçer, Sovereign Debt and International Financial Control: The Middle East and the Balkans, 1870-1914. Houndmills, UK: Palgrave Macmillan, 2015. xii + 243 pp. $119 (cloth), ISBN: 978-1-137-37853-8.

Reviewed for EH.Net by Rui Esteves, Department of Economics, University of Oxford.

Sovereign debt and default are among the most studied subjects in economics and economic history, for good and unfortunately also for bad reasons. The very concept of “sovereign debt,” i.e. of a sovereign obliged to repay a debt obligation, borders on being an oxymoron. This characteristic has made the topic a popular object of research among economists. Some have attempted to rationalize sovereign debt as a form of incomplete contracts enforced through extra-judicial means (political or economic sanctions) or as the outcome of a pure reputational equilibrium, where the sovereign’s incentives are aligned by the threat of future loss of funding. Others have taken the theory to the data to test whether it predicts how sovereign risk is priced by markets. In pure reputational models, spreads are driven by the credibility of the borrower, which in turn depends on such observables as stability of political institutions, fiscal capacity of the state and economic fundamentals. This book follows on this literature by offering four detailed case studies of emerging nations in the Eastern Mediterranean (the Ottoman Empire, Egypt, Greece and Serbia). The first signal contribution of this book lies in its unapologetic historical detail.

Ali Coşkun Tunçer combines a critical review of the secondary literature with new evidence from archival and statistical sources to weave a compelling narrative about the emergence of these nations into the perilous sea of international finance, about how they ended up defaulting and, more interestingly, about the consequences of default. For all of these reasons, this book will certainly become a go-to reference for historians interested in the region and economists seeking better understanding of the mechanisms of default. Apart from geography, the unifying principle of these four cases is that in all of them default gave rise to a loss of sovereignty. As part of the agreement to settle their defaults, each nation had to surrender a fraction of its fiscal sovereignty to external organizations allegedly representing their creditors. Tunçer refers to these as “international financial control” (IFC) organizations. Standard economic theory would predict that substituting foreign control for non-credible sovereigns reduced the risk of buying these nations’ bonds. And, indeed, Tunçer broadly confirms this through a statistical analysis of bond prices using breakpoint tests.

However, the connection between IFCs and improved credit is neither direct nor one-way. Instead, Tunçer uncovers a more nuanced story whereby the joint commitment of creditors and sovereigns to the IFCs was the key for a good outcome. The Ottoman Empire is the prime example of a successful cooperation since the Sublime Porte saw in the creation of the Dette Ottomane in 1881 an opportunity to increase the efficiency and the returns of its tax collection. In a similar way, the institution of an IFC over Egyptian finances in 1876 led to a permanent reduction in borrowing costs, although the establishment of the British protectorate six years later abolished any agency on the part of the Egyptian authorities. At the other extreme, the two IFCs created after the Serbian and Greek defaults, in 1895 and 1898 respectively, were considerably weaker institutions, with less control over tax revenues than their Ottoman and Egyptian counterparties. Not only were they weaker at birth (at the insistence of the sovereigns), but they also had to live in constant conflict with the local governments, especially in Greece. Unsurprisingly, Table 8.1 in the book shows that while spreads halved for Egypt and Turkey, after the establishment of their IFCs, they only fell by a quarter in the other two countries.

This nuanced discussion of historical IFCs is a distinct advance over the literature on sanctions or “super-sanctions,” which takes them as a black box enforcement mechanism for sovereign debt. In other words, the imposition of IFCs did not turn nations into fiscal colonies of European powers, except when fiscal control was just an inroad into effective political control, as in Egypt. Although compelling, this focus on spreads may be partly misleading. The same Table 8.1 also shows that Egyptian debt per capita stagnated after the institution of an IFC and even fell in Turkey, compared to a large increase in Greece and especially Serbia. One therefore wonders whether spreads were compressed by restored credibility or by credit rationing imposed by the more powerful IFCs. Similar arguments have been made about the pricing of colonial bonds and it would be interesting to disentangle the importance of the two effects — reduced demand and expanded supply of funds.

Tunçer then goes on to ask what determined the relative degrees of cooperation of sovereigns with their international creditors by resorting to a political economy of taxation framework. Around the mid-nineteenth century, all of these nations had a fiscal structure based on direct taxes on land and agriculture. The transactions costs of raising revenue were correspondingly high and the actual collection was often outsourced to tax farmers. In this context, foreign control over these sources offered an opportunity to raise revenue more efficiently, and the Ottoman government in particular acted on it by actually enlarging the scope of taxes managed by the Dette Ottomane in 1888. A similar opportunity was not present in countries such as Greece and Serbia, where the share of indirect taxation was higher in the 1890s. It is therefore not surprising that the IFCs were given short shrift by the local governments. A final element in this framework is the degree of political representation. The Ottoman Empire and Egypt were ruled by centralized elites, which were prepared to share control over costly taxation with the IFCs in exchange for future credibility. Greece and Serbia, on the other hand, were constitutional monarchies where this kind of deal was harder to reach and enforce in the face of greater political instability. This analysis leads the author to question, quite rightly, the association between limited governments and protection of property rights (at least the rights of external creditors) so common in the literature.

Toward the end of the book, Tunçer reveals another intriguing outcome of default in the Eastern Mediterranean. Even though nations that adopted stronger forms of IFC (Turkey and Egypt) gained more in terms of credibility and borrowing costs over the short-to-medium run, they may have lost over the long-run. In fact, by outsourcing their fiscal capacity they ended up postponing necessary reform, whereas in Greece and Serbia the higher costs of borrowing worked as the catalyst for monetary and fiscal reforms. On the eve of World War I, the fiscal capacity of these two nations had converged toward the European norm, whereas revenue per capita in Egypt and the Ottoman Empire had stagnated. So, not only were IFCs not a sufficient condition to improve credibility (as assumed in the literature on sanctions) but they were also not a necessary condition, and may actually have harmed the build-up of state capacity. Development economists worry today about the need to empower governments in developing nations, rather than outsource state functions to more efficient international organizations or NGOs, and they will find confirming evidence in this book. To be sure, this framework is not fully worked out yet and perhaps the main omission in the narrative is war. Charles Tilly famously declared that “States make war, and wars make states” (Tilly 1990). War and military build-up is a constant presence in the history of the Eastern Mediterranean all the way to the large conflagrations of the Balkan Wars and the Great War. It would be interesting to understand how the second part of the dictum applied in this very unstable corner of Europe, i.e. how ability to tax (state capacity) and fiscal credibility reacted to military ambition rather than high borrowing costs.

In sum, this is an admirable work of nuanced historical interpretation that questions received generalizations and raises many questions for future research. Economists and economic historians interested in sovereign default, state capacity and even the debt crisis in the Eurozone will do well to read it.


Charles Tilly (1990), Coercion, Capital, and European States, Cambridge: Basil Blackwell.

Rui Esteves is Associate Professor in Economics in the Department of Economics, University of Oxford. He is the author of “Like Father like Sons? The Cost of Sovereign Defaults in Reduced Credit to the Private Sector” (with João Jalles), Journal of Money, Credit and Banking (forthcoming)

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