Who Must Lose for Debt to Work?

The Price of Freedom

In 1825, Haiti gained international recognition of its independence from France (and was recognised by France as having done so). The price was 150 million francs, paid as “compensation” to former slaveholders for the people they had enslaved. That debt consumed more than 50 percent of Haiti’s national budget for decades. When the country could not pay, it borrowed from French banks at punitive rates just to keep servicing the original demand. France enforced the arrangement with gunboats.

This was not a tragic anomaly. It was the system working as designed. For French creditors to profit, Haiti had to bleed. For the former colonial power to preserve its wealth, the former colony had to surrender any hope of building its own. The loss was not collateral damage. It was the point.

The pattern has changed form, not function. Today’s sovereign debt system is built on the same foundations: for some to win predictably, others must lose consistently. The difference is that the tools have grown more sophisticated and the actors more obscured. Haiti’s debt was eventually cancelled, but not before a century and a half of extraction. It was not forgiveness that ended the cycle. It was exhaustion. Haiti entered the 19th century as the richest colony in the world. It ended it among the poorest countries on Earth. The wealth did not vanish. It was extracted.

From Public to Private Power

Private creditors now hold about 60 percent of developing country external debt. That figure was almost inconsequential in the 1990s. Bonds and commercial loans have overtaken public lending. Countries that once negotiated with the World Bank or Paris Club creditors now face institutional investors in New York, London and Paris - and the rules have changed. Official creditors may delay repayments or offer relief to stabilise a region. Pension fund managers and bondholders have no such responsibility. Their mandate is simple: maximise returns and prioritise the position of their principal – the saver or investor within their pool of clients. If a struggling country must keep paying even while it cuts healthcare, that is not a contradiction. It is a condition.

Delay is not Dysfunction, it is Leverage

Zambia’s restructuring tells us how this plays out. The country defaulted in 2020. The IMF was ready to help. Bilateral lenders, including China, offered relief. Private bondholders refused for two and a half years. While schools closed and basic services broke down, they held out - and they got their way. In the final deal, taxpayers in China and other states absorbed the cost. The private sector walked away largely protected. This is a pattern. Private creditors have no obligation to share losses. When negotiations begin, they often demand that all other options be exhausted first. They use delay as leverage. They know governments will prioritise speed, and they bet that official creditors will blink first. It works. Just one reason why it all works is the Damocles’ Sword that hangs over the whole process… the credit rating agencies threatening default ratings for anybody who dares alter the original contract between debtor and creditor.

What makes this arrangement even harder to challenge is its deep interconnection with the Global North. The same bondholders extracting value from distressed countries often include pension funds, insurance firms, and asset managers based in the UK, US, and EU. Their profits do not disappear into the ether. They fund retirement payouts. They stabilise portfolios. They keep developed economies ticking over. In the modern age, they are the lifeblood of the developed world.

Credit Ratings: The Invisible Enforcer

That makes the system far more intimate than many may care to admit. When Ghana pays 8 percent on a Eurobond, the yield goes to a London pension fund. When Sri Lanka restructures its debt, the losses are absorbed by institutions in Germany or Canada. One country’s pressure becomes another’s profit. Credit rating agencies play a crucial role in preserving this arrangement. Their decisions are framed as objective assessments of risk. Yet, the methodologies consistently prioritise creditor assurance over sovereign flexibility. In fact, I argue consistently that they are legally obliged to do so. The system demands this structure. A downgrade comes when a government most needs room to move. An upgrade rarely follows, even after deep reform.

This is what I have called the credit rating impasse. Countries face the threat of punishment when they try to restructure. They receive little reward when they succeed. The system is not broken. It is calibrated. The agencies do not need to act maliciously for this to be true. Their frameworks already bake in what counts as risk - and risk, in their logic, often looks like debtor empowerment. Ghana again offers a clear example. It held onto investment grade ratings while piling up unsustainable debt. When default became unavoidable, downgrades came in waves - each one closing off options just when the government needed support. The message was clear: serve the debt, or pay the price.

Structure, Not Conspiracy

Private creditors know how to use this. They structure their portfolios around rating decisions. They time exits to coincide with rating downgrades. They point to agency reports to justify their demands in restructurings. This is not conspiracy. It is coordination - not of intention, but of incentives. The system works because each actor behaves as expected. Pension funds maximise returns. Rating agencies apply their models. The result is a structure where sovereign distress becomes someone else’s stability.

During negotiations, this logic is clearest. Private creditors demand maximum recovery, minimal haircuts, and instruments that limit future risk. They do this not because they are villains, but because the rules encourage it or, perhaps, demand it. When enough players act this way, the outcomes harden into structure. The architecture of the debt market reflects this. Bond pricing already assumes private creditors will be protected. Secondary trading adjusts around rating triggers and IMF programmes. The whole system is built to reward those who know how to navigate it - and to extract from those who do not.

Time to Redraw the Blueprint?

Recognising this is not about blaming individuals. It is about understanding how power and profit flow. A pensioner in Toronto is not sabotaging a policymaker in Lusaka. However, their fortunes are interlinked - and only one of them has room to move. This does not mean change is impossible. It means change starts with clarity. Credit ratings could evolve to value resilience, not just repayment and have this evolution legally supported in key legal centres like London or Washington, D.C. Restructuring rules could rebalance the losses. Debt systems could be reoriented around sustainability, not just solvency.

None of that happens if we keep treating these outcomes as accidents. Haiti’s debt was not a glitch. It was a blueprint. The modern debt system is its descendant. The question is whether we keep inheriting its design - or decide to draw something else.