June 18, 1999
June 18, 1999
It is my very great pleasure to be here with debt campaigners from around the world who want to breathe life into this legal principle known as the doctrine of odious debts. As you know, from the introduction, I discovered the doctrine of odious debts years ago when I was writing my book about the Third World’s debt crisis. I was thrilled. Here was a principle, published in 1927 by Alexander Sack, then and still the world’s preeminent legal scholar on the treatment of public debts when governments and territories transform. For me, Alexander Sack’s doctrine brought clarity to a complicated situation, and fairness to a tragedy in which the innocent are paying and the guilty are getting away with the money.
Public borrowing is fraught with the potential for abuse. Whenever borrowers can borrow money in the name of others, their interest in borrowing cautiously, prudently, and accountably is weakened. It is a form of moral hazard, which debt campaigners have so aptly highlighted. When those borrowers are governments, and when the lenders believe as Walter Wriston, former Chairman of Citicorp believed that “the country does not go bankrupt….Any country, however badly off, will ‘own’ more than it ‘owes’,” then the lenders start lending loosely. Together they become co-conspirators in a fraud in which money is borrowed in the name of the people, but not used in their interest. The doctrine of odious debts would help stop that fraud from happening, by holding both the lenders and borrowers to account.
Let me give you a quick review of the elegant way in which the doctrine of odious debts would force first world lenders and Third World borrowers to resolve their financial disputes without dragging innocent Third World citizens into it.
Professor Sack wrote his doctrine in a time when colonial territories were becoming independent nation states, monarchies were being replaced by republics and military rulers were being replaced by civilian. Borders were constantly changing and new ideologies of socialism, communism and fascism were overthrowing old orders. Sack’s theories dealt with the practical problems created by such transformations of state. But he was no radical. 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.
With one exception. 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 odious.
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 ….
When a government incurs debts to subdue the population of a part of its territory or to colonize it with members of the dominant nationality, etc. these debts are odious to the indigenous population of that part of the territory of the debtor 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, debts of the regime.
Sack’s definition of debts that are not used in the interests of the state is quite simple: 1) if a government borrows money and uses it to oppress its people, or; 2) if a government borrows money and uses it for personal purposes. Furthermore, Sack said, if a government borrows money to subdue a minority, that minority would not be held liable to repay those debts. All such uses would be “hostile” to the interests of the people and the State.
To avoid abuse of the doctrine by self-serving interpretation, 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, or “in the opinion of competent and impartial representatives of the family of nations,” the debt would be unenforceable.
Among the cases that Sack cited in formulating the doctrine, was the case of the Cuban debts. After the Americans won Cuba from Spain in the Spanish-American War at the turn of the century, the Spanish argued in the peace negotiations that the Cuban debts should be assumed by the Americans. The Spanish argued the prevailing principle of international law: that state obligations belong to a land and its people, not to a regime.
The Americans replied that the so-called “Cuban debt” was “imposed upon the people of Cuba without their consent and by force of arms, [and] was one of the principal wrongs for the termination of which the struggles for Cuban independence were undertaken.”
Furthermore, the Americans added, much of the borrowing was designed to crush attempts by the Cuban population to revolt against Spanish domination, and was spent in a manner contrary to Cuba’s interest. “They are debts created by the Government of Spain, for its own purposes and through its own agents, in whose creation Cuba had no voice.”
“The debt was contracted by Spain for national purposes, which in some cases were alien and in others actually adverse to the interest of Cuba…in reality the greater part of it was contracted for the purpose of supporting a Spanish army in Cuba..”[Moore, Sack. Pg 159]
As for the lenders, the Americans said, “the creditors, from the beginning, took the chances of the investment.”
In the end, the United States never acknowledged liability for the Cuban debt, nor were any Spanish debts assumed by Cuba or by the United States. The holders of the so-called Cuban debt never collected fully on their claims.
Another case, which preceded the formulation of the Doctrine of Odious Debts, but which seems a perfect preview of how the Doctrine would work involved the Royal Bank of Canada which made a loan to the outgoing dictator of Costa Rica, President Tinoco. The new Costa Rican government challenged the debt before Chief Justice Taft of the U.S. Supreme Court who sat as arbitrator and who decided in an 1923 ruling that:
The transactions in question, which in themselves did not constitute transactions of an ordinary nature and which were “full of irregularities,” were made at a time when the popularity of the Tinoco Government had disappeared, and when the political and military movement aiming at the overthrow of that Government was gaining strength.
The payments made by the bank were either in favor of Federico Tinoco himself “for expenses of representation of the Chief of the State in his approaching trip abroad,” or to his brother as salary and expenses in respect of a diplomatic post to which the latter was appointed by Tinoco.
“The case of the Royal Bank depends not on the mere form of the transaction but upon the good faith of the bank in the payment of money for the real use of the Costa Rican Government under the Tinoco regime. It [the Royal Bank of Canada] must make out its case of actual furnishing of money to the government for its legitimate use. It has not done so.
The bank knew that this money was to be used by the retiring president, F. Tinoco, for his personal support after he had taken refuge in a foreign country. It could not hold his own government for the money paid to him for this purpose.” The position was essentially the same in respect to the payments made to Tinoco’s brother.
The Royal Bank of Canada cannot be deemed to have proved that the payments were made for legitimate governmental use. Its claim must fail.
The Doctrine of Odious Debts, it seems, was tailor-made to challenge much of the Third World’s debts today. If a government borrows money to arm itself against its people, as the apartheid regime did in South Africa, I believe a strong case can be made that such debts were odious. If a government borrows money to subdue the population of a part of its territory or to colonize it with members of the dominant nationality, as in the case of Indonesia or China, then those debts could be deemed odious for those people. If a government borrows money for an infrastructure project but uses the money to line cronies’ pockets, as appears to have happened when the Canadian government sold a nuclear reactor to Argentina, those debts should be subject to a charge of odiousness. Whenever money was borrowed for broadly governmental purposes – to finance an electric utility or for balance of payments’ support – they are subject to challenge if the money is used in a manner hostile to the interests of the State.
Sack’s doctrine of odious debts is important in today’s debt debate because it holds both borrowers and lenders responsible for the proper, legitimate use of state borrowings. If lenders were not vigilant in ensuring that the borrowed money was used to serve the interests of the borrowing State – and I believe they weren’t and it would be easy to prove it with forensic audits, and discovery procedures – then those odious lenders would have to reclaim their money from the assets of the regime to which they lent money (the personal banks accounts, the investments of the leaders to whom they lent money), not from the people of the Third World nation or their nation’s resources. I think the lenders and the borrowers deserve each other and they should settle their financial disputes on their own.
I have one concern about the Jubilee initiative: that is, if debts are canceled without the lenders — be they public or private — suffering losses, then I fear the lenders will continue to be reckless and new illegitimate debts will be created.
Let there be no mistake. The World Bank, the IMF, the export credit agencies — the main creditors of the poorest countries — want no-fault debt relief to avoid financial accountability for their odious loans. You may think they are the most powerful financial institutions in the world, but they are extremely vulnerable to the bad loans they made. Their survival depends on maintaining a facade of financial solvency. HIPC, Paris Club work-outs, and bilateral debt cancellation helps them cover up their losses. They must get bad loans off their books, and they must do it in such a way that does not look like write-offs, otherwise their triple-A credit ratings will disintegrate. They know they are financially vulnerable. They also know they are legally culpable. More than anything, they want to avoid odious debt investigations. In most cases, Northern governments knew that substantial portions of their loans — up to 30%, says the World Bank — went into the pockets of corrupt officials, for their personal uses. In the case of South Africa, the World Bank feared the South African people would overthrow the apartheid regime and repudiate its debts, so it reduced the payback period of its loans from the normal 30 years to 10 years. If the World Bank and other public agencies faced arbitration panels that could deem their loans to have been odious, the outcome could bankrupt them. Debt relief, without odious debt investigations or audits to determine the legitimacy of the loans, will help the negligent lenders bury their mistakes. And they will do it all over again.
When I wrote my book, Odious Debts, I merely reviewed legal thought and history. I think you, the citizens of the south could now make history. Challenging just one foreign loan as odious, would have an incalculable ripple effect through the financial industry. It would help eliminate the moral hazard that has dominated public borrowing since the Second World War, and that has so damaged the economic, political, and social fabric of the Third World. It would, I believe, shift the balance of power in debt negotiations in favor of citizens. Creditors, fearing scrutiny of their own loans for odiousness would likely become more sympathetic to debt write-offs or write-downs. Current lenders would probably be much more specific about the uses to which their credits could be put, and exercise due diligence to make sure that the money is used for legitimate governmental purposes. It would probably be the fastest way to secure the measures for accountable public finance that citizens in South Africa and Latin America have so thoughtfully articulated. Lenders would soon demand evidence that the borrowing public knows about, and consents to, government borrowing before extending credit.
I don’t know exactly how much of today’s $2 trillion debt burden could be relieved if it were challenged as odious. Joe Hanlon gives a ball-park estimate of about $400 billion. That would be wonderful. Whether it is that much, or less, I think the course of financial history would be altered if the Doctrine of Odious Debts became the standard for determining legitimate uses for governmental borrowing. Odious lenders of the past must pay for their recklessness and negligence, otherwise we will be here again in 20 years time, seeking relief from the next generation of debt. I am sure that recourse to odious debt arbitration, would protect future generations from living through more debt debacles. In that, I think we have a duty to advance these principles to the best of our ability.
Categories: Africa, Odious Debts
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