Law, Ethics, and International Finance

Beginning of article

I

INTRODUCTION

Cross-border financial flows can have dramatic effects on the recipients of the money--for good or for ill. This is particularly true in countries whose economies and capital markets are underdeveloped. A relatively small inflow of foreign capital into such a country can inflate valuations on a local stock exchange or allow the government to distribute pre-election largesse in the form of subsidies, tax breaks, spending on public works projects, and so forth. A sudden outflow of that capital, however, can have disagreeable consequences of an equal and opposite magnitude.

Ethical questions about who should receive cross-border financing, in what amounts, for what purposes, and on what conditions have long engaged the attention of international financial institutions such as the World Bank, the International Monetary Fund, and the regional development banks. There may even still be a few commercial lenders holding to the view that a private creditor should concern itself solely with the profitability of a transaction and the likelihood that the debt will be repaid, to the exclusion of all other ancillary issues, but these probably constitute a dwindling minority. Like it or not, loans that are susceptible to challenge on grounds of illegitimacy or recklessness run a higher risk of non-payment. So, whether viewed under the light of ethics--morality or profit-loss, the issues cannot be avoided.

What, if anything, does the law add to this discussion of ethics and international finance? The law and the machinery of justice are certainly ubiquitous elements in the lending process. After all, cross-border credits are invariably evidenced by contracts of one kind or another that contemplate enforcement in a national court.

Specifically, are the ethical considerations raised by cross-border loans exclusively matters to be taken into account before the credits are extended, or are they also relevant to the interpretation and enforcement of the legal agreements that eventually evidence the credits?

II

THE RULES

Parties entering into a commercial contract want predictability in its interpretation and …