New push could result in debt reduction: campaigners

Daily News – Zimbabwe
May 31, 2002

A prudential system will help both sides, campaigners say, and unlike the “Drop the Debt” campaign fronted by Bono, will avoid the problem of countries being labelled deadbeats for repudiating debts by making the role of the banks explicit.

LONDON – A precedent dating from the 19th century is to be used by debt activists in a new push which they say could result in up to half theUS$2.4 trillion owed by some of the world’s poorest countries being declared illegitimate.

Coinciding with a high profile trip to Africa by rock star Bono and US Treasury Secretary Paul O’Neill, campaigners hope to build the sort of public pressure which has wrung US$34.5 billion in debt relief from rich countries for poor nations. The doctrine they hope to use, that of “odious debts,” originated in 1898 when the United States said the people of Cuba and the US were not liable to pay debts incurred by Spain in a war with the US over the island.

Campaigners now hope to use the doctrine to re-examine issues such as the legacy of apartheid-era debts in South Africa and loans to Argentina’s military junta which contributed to the country’s default on US$140 billion of borrowings this year.

Loans for corrupt projects in the Philippines during the presidency of Ferdinand Marcos, debts incurred in 32 years of Suharto rule in Indonesia, Yugoslav debts related to Slobodan Milosevic and debts owed by the Democratic Republic of Congo for Zairean dictator Mobutu Sese Seko might all be classified “odious.”

“I would not be surprised to see half developing countries’ debt being classified as questionable,” said debt campaigner Joseph Hanlon who is writing a paper on the subject for a Norwegian church group.

The campaign, which will link pressure groups in poor and rich countries, aims to build on the success of the Jubilee Movement which put tens of thousands of people on the streets and in just five years pushed debt relief to the top of the political agenda. Crucially, this campaign will target private bank lending by arguing that many banks failed to observe prudential rules they would use in rich nations and pushed loans on poor countries and were either fully aware of the end uses of those loans or wilfully negligent about not finding out their use.

A study by the Centre for International Sustainable Development Law at Canada’s McGill University for Canadian churches defines odious debts as “those contracted against the interests of the population of a state, without its consent and with the full awareness of the creditor.” Campaigners like Hanlon argue that private banks have continued to benefit from debt repayments and that it is only fair that they bear their share of debt relief. “What we have is international socialism for the banks and capitalism for everyone else,” Hanlon said.

A prudential system will help both sides, campaigners say, and unlike the “Drop the Debt” campaign fronted by Bono, will avoid the problem of countries being labelled deadbeats for repudiating debts by making the role of the banks explicit. “If the banks are let off the hook, they will do it again,” said Patricia Adams of the Canadian advocacy group Probe International. The main problem for the debt campaigners is that few countries have been willing to make use of the Cuban precedent because of concerns that they would be cut off from aid and investment.

From 1985 to 1995 – the height of the Latin American debt crisis – there were no international arbitrations involving the enforcement of a loan of a less developed country debtor and a creditor government or private bank. The McGill study does cite some potential precedents which could be used should a country be willing to take the issue to a court or tribunal.

In 1917, a British court ruled that Costa Rica was not liable for loans made by Royal Bank of Canada for debts incurred by dictator Federico Tinoco which were used for his personal gain. There is also a post-World War One ruling that Poland was not liable to repay bonds issued by Germany which were used to forcibly purchase Polish land for German settlement.

The Soviet Union repudiated, and has not settled, Tsarist era debts, but surprisingly few countries have taken this route, preferring instead to keep on good terms with financial markets and bodies such as the World Bank.

Importantly for the campaigners, there are moves at the International Monetary Fund to reform the global financial system. The IMF has put forward proposals for an international bankruptcy system, a revolutionary move which would allow countries to seek protection from creditors in the same way that companies can.

A recent paper presented by two Harvard academics at an IMF seminar brought up the issue of odious debts and suggested that future bank lending could be influenced if there were a risk that a country’s government could be declared odious. Professor Michael Kremer and graduate student Seema Jayachandran argued that banks would be much more prudent if they knew there was a risk that a government could be declared odious and that a successor regime could repudiate illegitimate debts. “In fact this sanction works precisely by eliminating the existing incentive of creditors to collude with dictators and issue loans that help the dictator and themselves at the expense of the people; even unscrupulous creditors will abide by this sanction,” they said.

A range of institutions has been suggested by debt campaigners from the International Court of Justice to take action via the domestic courts of borrower countries or courts in New York or London whose laws govern many loan and bond contracts. For the debt activists, the key issue is that the perceived legitimacy of the concept of odious debts is raised, rather than the legal status of each debt. Kremer and Jayachandran believe their approach would at least offer the banks some protection as it could head off the more radical approach of some debt campaigners.

Categories: Africa, Odious Debts

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