Patricia Adams
Department of Economics, Furman University
September 27, 2008
Odious Debts
The Odious Debt Doctrine and
Iraq After Saddam
Economic Growth and Development Class
Department of Economics
Furman University
Greenville, South Carolina
Thank you for
this invitation to speak to the economic growth and development class on the
subject of odious debts. Professor Peterson asked me to introduce the subject
and I suggested that I do so in the context of Iraq and Saddam Hussein’s odious
debts, which we both thought would be timely and interesting for your class.
OK, let me first
give you the primer on odious debts.
What are odious
debts?
In 1927, a
Russian professor of law named Alexander Sack, teaching in Paris, published the
most extensive and the most important works on the treatment of state debts.
Professor Sack was no radical. He had been a minister in the Tsarist regime and
had seen the Bolshevik repudiation of the Tsarist debt.He believed that government debts should be
repaid when a new government came to power.
Otherwise, he said, chaos would reign in relations between nations and
international trade and finance would break down.
But he also
believed there was one exception to this rule. Sack believed that debts not
created in the interests of the state should not be bound to this general rule.
Some debts, he
said, are odious.
And he defined
an odious debt this way:
“If a
despotic power incurs a debt not for the needs or in the interest of the State,
but to strengthen its despotic regime, to repress the population that fights
against it, for purposes that are manifestly personal, etc., this debt is odious
for the population of all the State.”
In this case,
Professor Sack said, “the creditors have committed a hostile act”
against the people. They can’t therefore expect that a nation freed from a
despotic power will assume the ‚Äòodious’ debts, which Professor Sack called
“a personal debt of the power that has incurred it.” When this power
falls, he said, the debt “consequently . . . falls with the fall of this
power.”
Though he was
writing 80 years ago, Professor Sack could have been talking about modern day
Iraq. With the fall of Saddam Hussein, there was widespread recognition that
the debts created by his regime were used to finance weapons, palaces, and
instruments of repression against the Iraqi people.I believe, and Iraqi’s believe, that the
majority of the debts that Iraq inherited from the regime of Saddam Hussein,
are odious in law, and thus not legally enforceable.
Saddam’s debts
are classic “odious debts.”
How do we know?
Well, we don’t know for sure. In fact, no one knows for sure exactly what the
money was spent on. Official government statistics weren’t systematically kept;
those that do exist aren’t precise and don’t add up; some documents were
looted, some bombed; and the creditors, by and large, aren’t talking. The World
Bank and IMF hadn’t been in the country since the 1980′s, hence the World
Bank’s table on external debt left the line for Iraq completely blank. Soon
after the fall of Saddam Hussein, the IMF did a “debt sustainability
analysis” and contacted some 50 countries, requesting information about
any outstanding debt and arrears owed to them by Iraq. But, the IMF admitted,
its “staff has no way of verifying this information.”
[Meanwhile,
evidence that the debts were odious grew: while in power, Saddam accumulated some
$40 billion in overseas private assets, the country's GDP was cut in half, and
Iraq went from having no debt to being the most indebted nation in the world.]
Well the
creditors started to line up to claim their money back and it turned out that
most of the money was actually owed to other governments, not to private sector
lenders: $42 billion was claimed by governments that form the Paris Club, $60‚Äë$65
billion is owed to non‑Paris Club sovereign creditors, and the balance – $3
billion to commercial banks and $12 billion to corporations – is owed to the
private sector.
This is very
striking!
Iraq’s creditors
were mostly governments. Iraq’s debt crisis was caused by governments ‚Äì the
German government, the French government, the Russian government, the American
government – that lent money according to political criteria, not market
criteria. As one prominent American commentator put it in the Wall Street
Journal, “All of it had to do with politics, in one way or another.”
So what was Iraq
to do?
A number of us
–lawyers, civil society organizations
in the U.S., Canada, Britain and Iraq, and professional arbitrators –suggested a plan to the emerging Iraqi
administrations, followingAlexander
Sack’s recommendation, that Iraq should resolve its debt crisis, not by
pleading for mercy from its creditors, but through arbitral procedures to
determine just who financed the regime of Saddam Hussein and exactly where the
billions upon billions of dollars went [United Nations Commission on International
Trade Law]. We argued that the new Iraqi administration should not agree to
repay any debt incurred by Saddam’s regime until creditors submitted proof of
the legitimacy of the debts.In requiring
this proof, we argued, the Iraqi people do not need, nor should they feel
compelled to seek, approval from those governments or from international bodies
such as the U.N., the Paris Club, the World Bank or the IMF.
Because they are
supported by the rules of natural justice for minimum standards of fair
decision‚Äëmaking: The Iraqi people are entitled to be informed about the claims
against them, in detail, not just in aggregate; they were entitled to a fair
hearing in which they could make legal representation; and they were entitled
to a unbiased adjudication of claims in which no adjudicator has an interest –
pecuniary or proprietary – in the outcome.
This would rule
out the Paris Club.
In the world of
international finance, bad public sector loans are negotiated at the Paris
Club, a group of major creditor governments coordinated by the French finance
ministry. The Paris Club operates in secret and informally, avoiding
embarrassment to lenders and borrowers alike. Government creditors bring their
claims to the Paris Club table, but only in aggregate form, not on a loan by
loan basis. Iraq‚Äôs creditors preferred to write‚Äëoff Saddam’s debts in this
closed environment to avoid the alternative – an embarrassing public challenge.
The Paris Club would cover‚Äëup the West’s odious loans to Saddam, and Paris Club
members would bury their politically‚Äëmotivated mistakes under the guise of
“an orderly restructuring process” based on what they would decide is
Iraq’s ability to pay, rather than on the rightness of Iraq having to do so.
Needless to say,
the Paris Club machinery went into high gear in order to treat the debts of
Saddam Hussein’s regime as debts of the Iraqi people, legitimizing them in the
process. To entice the Iraqis they offered an unprecedented 80% debt write-off.
The Interim
Iraqi National Assembly responded by saying in effect, “no,” we don’t want your
charity. “We want our rights, and the rule of law. Saddam’s debts are odious
debts. They are not the debts of the Iraqi people.” “When Saddam executed
people, he used to charge their families for the bullets used – this is
precisely what the creditor countries who financed Saddam are asking of Iraqis
today,” they said.
The Iraqi
Interim National Assembly then considered a proposal introduced by the
assembly’s Economic and Financial Committee that invoked the international
doctrine of odious debts and cited the many precedents to this time-honored
legal principle: for example, in 1898, the U.S. repudiated the “Cuban debts”
after the Spanish-American War on the grounds that the money was spent contrary
to the interests of the Cuban people; in 1919, the Reparation Commission
refused to apportion debts under the Versailles Treaty to newly liberated
Poland that had been incurred by the German and Prussian governments to
colonize Poland; in 1923, Chief Justice Taft, sitting as arbitrator, ruled
against the Royal Bank of Canada’s claim to repayment for monies it lent to a
Costa Rican dictator.
The Iraqi
Assembly said it had “a responsibility to the Iraqi People to protect their
current and future interests … [which] are threatened by the Paris Club
cartel of creditors which refuses to accept that any of the debts are
illegitimate, and is attempting to get Iraq to sign … an agreement to repay a
significant portion of the odious debt. There is a strong basis in
international legal principle and precedent to define these debts as being
“odious” and thus not legally enforceable.”
In the end, in
the interests of expediency, the Iraqi National Assembly accepted the 80% offer
of the Paris Club countries.Though a
legal challenge, under UN arbitral procedures, of Iraq’s debts would have
advanced the jurisprudence on the law and strengthened similar claims by other
Third World countries that their debts are odious too, huge advances were
nevertheless made because of the widespread and learned debate over the
treatment of Iraq’s debts.
Campaigns – some
by law-makers, the judiciary and the citizenry – that had been growing in other
countries such as South Africa, Argentina, Nigeria, the Philippines, and
Indonesia to name just a few, were suddenly given new credence, largely because
public opinion felt overwhelmingly that the Iraqi people should not be held
responsible for Saddam’s debts. And if Iraqis should not be help responsible,
then why should Nigerians under their military dictatorships, and how about
Indoensians under the vastly corrupt regime of President Suharto? And so the
applicability of the Doctrine of Odious Debts to all Third World debthas grown, and grown, and grown.
Many of us in
civil society and academia are challenging creditors like the World Bank and
IMF to perform forensic audits to find out just what happened to the billions
of dollars they now claim be paid back by Third World nations. Your own Senate
Committee on Foreign Relations has done path-breaking work on the corrupt use
of loans from the multilateral development banks. Conceivably, the great
majority of the Third World’s debts could be found to be illegitimate, leaving
those countries with a manageable debt load they could refinance without debt
relief. It they do need debt relief, the relief should be for legitimate, not
illegitimate debt.
Some creditors,
such as the IMF, have issued dire warnings of financial chaos should debtor
countries pursue odious debt arbitration.
A damaging precedent for the international financial system would be
set, they warn. The rule of law must prevail and contracts must be honored,
they argue.
But, we argue,
in order for creditors to claim this first principle of law, they have a prior
duty to establish the legitimacy of a contract.
This due
diligence is neither unusual or onerous. Indeed, in much lending and project
financing today, private lenders know the purpose of the loans and an elaborate
set of representations and warranties binds the borrower. If a lender doesn’t
exercise the due diligence to establish whether the steel imported is used for
cannons rather than cradles, or for guns to shoot innocent civilians rather
than criminals, then I say as the American commissioners to the
Spanish-American War peace conference said: “The creditors, from the beginning,
took the chances of the investment.” In other words, “lenders beware.”
The doctrine of
odious debts, rather than promoting financial chaos, would promote creditor
scrutiny of loans of an allegedly public nature. It would discourage reckless
lending, and it would provide diligent creditors with security to defend their
loans in future.
The public
international lending agencies, such as the IMF and World Bank, should champion
this application of the rule of law, rather than disparage it. While an odious
debt regime might not stop all dictators in their tracks, it would stop many
and it would isolate as pariahs those who survived by selling off their
nation’s assets.By giving creditors –
public or private – an incentive to lend only for purposes that are transparent
and of public benefit, the IMF et al. would change the culture of international
lending and reduce the moral hazard that has destabilized international finance
for the past 60 years. It would also promote sound investment and growth,
starve tyrants of their ability to finance themselves against their people, and
thus better serve the cause of world peace.
