Odious Debts

The legal doctrine of odious debts was given shape by Alexander Nahum Sack in 1927. Sack, a lawyer in Tsarist Russia, adviser to the Provisional Government in 1917, and after the Russian Revolution, a professor of law in Paris, Chicago and New York, authored a major work on the obligations of successor systems: The Effects of State Transformations on Their Public Debts and Other Financial Obligations. With colonial territories becoming independent nation states and colonies changing hands, with monarchies being replaced by republics and military rule by civilian, with constantly changing borders throughout Europe, and with the ascendant new ideologies of socialism, communism and fascism overthrowing old orders, Sack’s debt theories dealt with the practical problems created by such transformations of state. Like many others, Sack believed that liability for public debts should remain intact, for these debts represent obligations of the state — the state being the territory, rather than a specific governmental structure. This he based not on some strict dictate of natural justice, but on the exigencies of international commerce. Without strong rules, he believed, chaos would reign in relations between nations, and international trade and finance would break down.But Sack believed that debts not created in the interests of the state should not be bound to this general rule. Some debts, he said, were “dettes odieuses.”

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, etc., this debt is odious for the population of all the State. This debt is not an obligation for the nation; it is a regime’s debt, a personal debt of the power that has incurred it, consequently it falls with the fall of this power.

The reason these “odious” debts cannot be considered to encumber the territory of the State, is that such debts do not fulfill one of the conditions that determine the legality of the debts of the State, that is: the debts of the State must be incurred and the funds from it employed for the needs and in the interests of the State.

“Odious” debts, incurred and used for ends which, to the knowledge of the creditors, are contrary to the interests of the nation, do not compromise the latter — in the case that the nation succeeds in getting rid of the government which incurs them — except to the extent that real advantages were obtained from these debts. The creditors have committed a hostile act with regard to the people; they can’t therefore expect that a nation freed from a despotic power assume the “odious” debts, which are personal debts of that power.

Even when a despotic power is replaced by another, no less despotic or any more responsive to the will of the people, the “odious” debts of the eliminated power are not any less their personal debts and are not obligations for the new power….

One could also include in this category of debts the loans incurred by members of the government or by persons or groups associated with the government to serve interests manifestly personal — interests that are unrelated to the interests of the State.

For creditors to expect any protection in their loans to foreign states, their loans must be utilized for the needs and interests of the state, otherwise the loans belonged to the power which contracted them, and were therefore, “dettes de régime.”

The doctrine of odious debts is open to abuse by self-serving interpretation. So, to avoid arbitrarily repudiated debts, Sack proposed that a new government be required to prove that the debt ill-served the public interest and that the creditors were aware of this. Following these proofs, the onus would be upon the creditors to show that the funds were utilized for the benefit of the territory. If the creditors could not do so, before an international tribunal, the debt would be unenforceable.

Since those words were penned by Alexander Sack, Probe International’s own Patricia Adams argued in her landmark book, Odious Debts: Loose Lending, Corruption, and the Third World’s Environmental Legacy that the legitimacy of the Third World’s debts should be tested according to the Doctrine of Odious Debts and the rule of law. Now, citizens, governments, and legal scholars the world over are collecting the evidence, building the legal arguments, and writing the legislation to challenge the Third World’s debts and change the workings of international finance forever.

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United Nations Development Program (UNDP)

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