Iraq's Odious Debts

Late converts to dropping the debt

Tina-Marie O’Neill
Sunday Business Post , Ireland
April 12, 2003

As United States Abrams tanks rolled through the streets of downtown Baghdad last week, the formidable task of putting together an interim Iraqi authority and settling Iraq’s finances dominated the agendas of most western governments.

At issue was what to do about Iraq’s ‘odious debt’. Odious – or illegitimate – debt is sovereign debt incurred without the consent of a nation’s people and not used to benefit those people, and which should not be transferred to successor governments or assumed by its citizens. To be deemed `odious’, the lender or creditor must be aware that the loan is contrary to the interests of the nation.

The concept was introduced in the 1920s by the legal scholar and Russian professor Alexander Sack, who was teaching in Paris at the time. His Doctrine of Odious Debts, an extensive treatment of state debt,was based on the idea that government debt should not be repaid when a new government or sovereign came to power if the debt was not created in the interest of the state.

Sack was more specific: “When a government incurs debts to subjugate the population of a part of its territory or to colonise it with members of the dominant nationality, these debts are odious to the indigenous population.” States that lent money to such regimes were considered to have committed a hostile act, according to the doctrine.

Harvard economists Michael Kremer and Seema Jayachandran updated Sack’s theory with their publication of ‘Odious Debt’ last year. They argued that an institution established to identify odious debt would deter banks from financing tyrannical regimes in the first place and the borrowing capacity of illegitimate regimes would be shut down as a sort of economic sanction in itself.

When Saddam Hussein seized power in Iraq in 1979, the country’s foreign currency surplus was about $35 billion thanks to the 1970s oil boom. The cost of an eight-year war with neighbouring Iran left Iraq with a foreign debt of about $50 billion 10 years later. Today, that debt is thought to be over $100 billion. The US defence department is now using the doctrine to urge Iraq’s creditors to repudiate the debt.

As the leaders of France, Germany and Russia prepared for a Friday meeting in St Petersburg to discuss the future of Iraq, US deputy defence secretary Paul Wolfowitz delivered his much-anticipated retribution for those governments’ lack of support for the war.

Testifying to the Senate Armed Services Committee on Thursday, the Pentagon hawk said: “I hope they’ll think about the very large debts that come from money that was lent to [Saddam Hussein] to buy weapons and to build palaces and instruments of repression. I think they ought to consider whether it might not be appropriate to forgive some or all of that debt so that the new Iraqi government isn’t burdened with it. This is the time to think about the future.”

He singled out France. “I agree the French have behaved in ways … that have been very damaging to [the North Atlantic Treaty Organisation]. I think France is going to pay some consequences, not just with us but with other countries who view it that way, but I don’t think we want to make the Iraqi people the victims of our particular quarrel.”

Iraq’s overall debt – including its foreign debt of over $100 billion, $57 billion in pending contracts and $199 billion in compensation claims related to Iraq’s invasion of Kuwait in 1990 – totals some $383 billion. Of the still unresolved compensation claims, French interests only account for one per cent, the same as Israel’s.

Iraq is thought to owe France an estimated $8 billion.

According to research undertaken by the Washington-based Centre for Strategic and International Studies (CSIS) – a private, non-partisan research organisation – known Iraqi creditors include Egypt, Hungary, Russia, Bulgaria,Turkey, Poland, Jordan,Saudi Arabia, Kuwait and other Gulf states. Even Korea’s Hyundai conglomerate is owed money.The interest alone on Iraq’s debts now stands at $47 billion.

The suggestion that the legality of those contracts could only be decided by an elected Iraqi government has angered the signatories. They argue that America’s `reconstruction’ of Iraq and its future government will put the fate of their contracts beyond doubt.

Whether the Iraqi people should be responsible for the future loss of earnings of those public and private companies and willing creditors is also in doubt. It’s unlikely that a fledgling, post-Saddam Iraq would be able to pay those debts at all. The annual gross domestic product of the country is only $30 billion dollars, much of which will be used on rebuilding the Iraqi economy and infrastructure projects in health and education.

Even Iraq’s second-largest proven oil reserves in the world would not take the pressure off repaying Saddam’s foreign debt. Analysts argue that years of war, regime mismanagement and trade sanctions have hurt Iraq’s petroleum industry. It will take years of significant (and undoubtedly American) investment in new technology and repair before Iraq can reach its optimum oil production levels.

It could, however, sell production rights in still-untapped oil reserves for about $100 billion, which could be used to rebuild the country. A further $64 billion gathered under the United Nations oilfor-food programme could also be used for immediate humanitarian assistance. Repaying debts out of those funds would hamper much-needed development.

James Surowiecki of the New Yorker magazine wrote: “Asking the Iraqi people to assume Saddam’s debts is rather like telling a man who has been shot in the head that he has to pay for the bullet.” Surowiecki suggested that even the most hardnosed western lenders now understood that burying new regimes under old debt was no way to encourage the spread of capitalism and democracy.

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