Can The "Odious Debt" Incurred By Leaders Like Saddam Be Forgiven?
Developing Nations May End Up Paying Anyway

By RAJA RAGHUNATH
Tuesday, May. 13, 2003

At the G-8 summit in France next month, the United States will press for the forgiveness of Saddam Hussein's state debts, on the ground that since that money was not borrowed on behalf and for the benefit of Iraq's people, Iraq's people should not have to repay it. The debt should be forgiven because it is, in this sense, odious.

The notion of "odious debt" may appear novel, but it has a long history in international law. Indeed, the U.S. first made the argument when it sought to repudiate the debts of another "liberated" state at the turn of the previous century. At the time, the Spanish-American War had just ended, and the U.S. was occupying Cuba.

Not In Their Name: Why Saddam's Debt Is Not Truly the Iraqi People's

Alexander Sack coined the term "odious debt" in the 1920's and sketched the boundaries of the doctrine. Under Sack's reasoning, creditors who lend to governments ruling without the consent of the governed commit a "hostile act" against those people. When regime change occurs, that prior debt cannot be enforced against the new government, whatever its character.

Why? For the same basic reasons that charges on your stolen credit card are not your liability: the thief didn't have your consent to borrow in your name in the first place, and you didn't benefit from his theft.

Those reasons are only two of the three prongs of Sack's original odious debt doctrine, which consists of: 1) the absence of consent; 2) the absence of benefit; and 3) the lender's awareness of these two things.

The concept of "odious debt" is thus an attempt to introduce norms of democratic accountability into the notoriously norm-free world of international lending. It introduces a clear principle: loans incurred by despots for their own benefit cannot be the responsibility of the people or the nation after that despot's reign is ended.

The Paradox of Odious Debt: Even a Nation that Forgave Another's Still Must Pay Its Own

After Namibia became independent, South Africa took the extraordinary step of forgiving the odious debt incurred by Namibia's prior apartheid client regime. But despite its admirable moral example, South Africa has not been accorded any similar treatment by its own creditors.

Instead, liberated South Africa spends 20% of its annual budget repaying the interest and principal on loans borrowed to shore up the dying apartheid government. Its present government admits that it has little choice. South Africa's credit rating would plummet if it declared its debts unenforceable, making international capital too expensive or entirely unavailable to the nation.

A Just-Sounding Doctrine That Lacks the Force and Consistency of Law

There are many obstacles to bringing the odious debt doctrine from the pages of well-meaning publications into international practice.

First and foremost, developing nations (at least, those without a powerful supporter like the U.S.) who attempt to assert that their odious debts are unenforceable will simply be in default, because the doctrine as a defense to default is not supported by any significant state practice or judicial rulings. In fact, developing nations refuse to even hint that they recognize the theoretical legitimacy of the odious debt doctrine, for fear of branding themselves as potential deadbeats.

What little precedent that exists for the doctrine (mostly involving "war" or "subjugation" debts incurred in military conflicts) refers to successor nations, rather than successor governments. It is overwhelmingly held in international law that - as the controlling U.S. ruling on this question notes - "though the government changes, the nation remains, with rights and obligations unimpaired." History is replete with actions taken, for any number of reasons or for no reason at all, in exception to this rule, but great resistance still greets any proposed exceptions to the obligations of successive governments.

International Lenders Reject Any Attempt to Deem Past Debt "Odious"

Another daunting obstacle is the structure of international finance itself. Much of the developing world's present sovereign debt dates back to a wave of commercial lending in the 1970's. The pile-up of debt during this period, which from the beginning was well in excess of the countries' abilities to repay, led to predictable defaults and a major international debt crisis in 1982.

So, in the 1980's, a second wave of lending followed - this time as agreements restructuring and refinancing loans, or converting them into saleable instruments such as bonds that were in turn sold and converted again. In this way, many of the odious debts of despots were consolidated with non-odious ones, while others were sold many times over, spreading them thin through pension funds and endowments worldwide. Today, the entire developing world pays more than $300 billion per year in debt service, while the US pays only $20 billion on an almost equivalent dollar-amount of debt.

For these reasons, many advocates of institutionalizing the odious debt doctrine seek to have declarations of the "odiousness" of a regime issued against future lending, rather than retroactively against creditors who may in all ways lack the awareness required by the third prong of Sack's original doctrine. This is classic game theory - creditors are only able to alter their future conduct in response to changes. Retroactive changes might simply encourage them to abandon the game altogether.

Such declarations would, of course, have to issue from a recognized, impartial multilateral body with binding powers, such as the International Court of Justice or an entirely new entity, to have any effect.

Why Even a Future-Oriented Odious Debt Doctrine Would Be Controversial

It should come as no surprise that history clearly demonstrates that lenders prefer refinancing debt to forgiving it or declaring it unenforceable. For example, the ongoing debt-reform initiative begun in 1996 by the G-8, IMF and World Bank - for forty-two Heavily Indebted Poor Countries (HIPC) with debt-to-export ratios greater than a "sustainable" 150 percent - mostly refinances debt.

Even when the HIPC initiative "forgives" debt, that debt is actually paid off out of a trust fund built from rich-nation contributions. The initiative is based wholly on economic rather than moral justifications (odious lenders are still paid back), and structural-adjustment conditions are attached that often eviscerate potential domestic funding gains.

Why Developing Countries May End Up Paying Either Way

Almost a quarter, or $500 billion, of the total developing world debt derives from loans given to the past dictators of twenty-five different countries, according to Jubilee 2000, a nongovernmental organization that advocates for the forgiveness of odious and non-odious developing world debt alike. This $500 billion is only the kernel of what many commentators agree would be a much larger "odious" portion of that total debt.

Some have pointed out that forgiving odious debt will lead to a "drying up" of credit to the developing world. Even a fairly-applied, prospective odious debt doctrine, whose intent is to protect lenders by providing clear guidelines for future loans, might be considered the "tip of the wedge" to wider, retroactive debt relief; such a perception might have the same effect on lenders as actual forgiveness.

As others have noted, this might not be a bad thing, especially if the loans so ubiquitous in present-day international aid were replaced in the future by development grants, which would not have to be repaid.

But even if key entities like the World Bank were to sign on to wholly grant-based aid, the global pool of money available for such aid would almost certainly be far smaller than the present-day pool of credit. This shrinkage, in the end, might subtract as much as - or more than - odious debt repayment presently does from the funds available in the developing world for human needs and economic development.

You may ask: Why is the world structured so that, whatever path they choose, newly-liberated nations remain the only ones responsible for the debts of past despots, rather than the lenders and despots themselves?

The answer is simple: Because either way, the money will continue to flow in the same direction - from the developing world into the bank vaults of Europe and North America.


Raja Raghunath is a labor lawyer with Gilbert & Sackman in Los Angeles.

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