As seen in the Serbian and Brazilian Loans Cases in the previous chapter, Governments defaulting on their debt often invoke necessity – the claim that economic and political circumstances render the timely performance of their financial obligations unbearable or impossible. Financial necessity could be a circumstance precluding international responsibility. Article 25 of the ILC Articles on State Responsibility is widely regarded as reflective of customary international law on necessity. The Russian Indemnity Case (1912), discussed below, recognised that non-payment of public debt to another state could be justified in extreme economic and financial circumstances.

By contrast, the German Constitutional Court in 2007 rejected the proposition that necessity could temporarily suspend a debtor country's repayment obligations to private bondholders under municipal law. From a private international law perspective, the case raised the issue whether the Argentine payment moratorium deserves recognition as ‘internationally mandatory rules’. There is a need for further clarification on the status of financial necessity in international law.

The ‘Russian Indemnity Case’

The Ottoman government first borrowed internationally in 1854 following the Crimean War. Borrowing increased rapidly, and reached £220 million by 1875.

On 6 October 1875, the Ottoman government announced its inability to pay, and declared a moratorium on all payments. The Decree of Mouharrem of 1881 settled the debt, and consolidated the existing debt into four series. Austria, England, France, Germany and Italy created the Council of the Ottoman Public Debt to protect the interests of their bondholders and to supervise payments.