Iraq's Odious Debts

U. S. considering ‘odious debt’ doctrine for Iraq

Alan Elsner
Reuters
April 29, 2003

WASHINGTON – Some in the U.S. administration are pushing to invoke a controversial financial doctrine to free Iraq from a mountain of debt amassed by Saddam Hussein but if history is any indicator it appears unlikely.

With Iraqi debt restructuring or forgiveness now a major issue in the effort to rebuild the country, the idea to declare the hundreds of billions of dollars owed to foreign creditors as “odious debt” is being promoted by some conservatives in the Bush administration.

The “odious debt” doctrine holds that obligations incurred by “repugnant” governments should not be passed on to their successors. But, while enunciated more than a century ago, it has never been endorsed in international law and strong resistance is likely to emerge in Iraq’s case as well.

Harvard University economist Michael Kremer said the Iraqis could make a case for the relief in light of the tremendous debt amassed by Saddam.

“The Iraqi people have a strong case to argue that much of that money was spent lining the pockets of Saddam and his cronies and on banned weapons and on their own repression so they should not have to pay it back,” Kremer said.

He suggested an international organization be set up to declare regimes as “odious” as a way of warning potential lenders they might not be repaid if the repressive government is eventually replaced.

EXACT DEBT UNKNOWN

Nobody knows exactly how much oil-rich Iraq owes now that Saddam has been deposed but it could be as high as $385 billion — including loans from foreign governments, banks, companies and institutions, compensation claims and pending contracts.

According to one study by the Center for Strategic and International Studies, Iraq owes $199 billion in unresolved claims for compensation from creditors in more than a dozen nations arising from the 1990 invasion of Kuwait; $127 billion of debts owed to other nations, and $57.2 billion in pending foreign contracts both public and private.

Other sources give slightly differing figures, depending on how they calculate interest, since Iraq has not been servicing most of its external obligations for more than a decade.

Major debtors include Russia, which has an estimated $12 billion outstanding, much of it for arms; Kuwait, $17 billion, the Gulf states, $30 billion, and smaller sums to Turkey, Jordan, Morocco, Hungary, Bulgaria, Poland and Egypt.

The United States has only around $2 billion outstanding, making it vastly easier for Washington to back calls for debt relief or forgiveness since it is talking mainly about other peoples’ money.

U. S. Deputy Defense Secretary Paul Wolfowitz, one of the key architects of the war, told a U.S. Senate committee earlier this month that Russia, France and Germany should consider writing off “some or all of the debt” facing Iraq’s new government.

“I hope … they will think about the very large debts that come from money that was lent to the dictator to buy weapons and to build palaces and to building instruments of repression,” Wolfowitz said.

The doctrine of “odious debt” originated in 1898, after the Spanish-American War. During peace negotiations, the United States argued neither it nor Cuba should be held responsible for debt the former Spanish colonial rulers of the island incurred without the consent of the Cuban people, which was not used for their benefit.

Spain refused to accept the validity argument but ultimately assumed the debt. But the doctrine did not acquire international legitimacy since it would have opened the way for many governments to try to evade debts accumulated by their predecessors.

In recent times, the doctrine was not applied after the fall of the apartheid government in South Africa or the collapse of the Soviet Union. In those cases and others, the successor governments took responsibility for the “odious debts” left by their predecessors.

Still, forgiving or restructuring Iraqi debts may be seen as more pressing since Iraq’s obligations amount to more than 12 times the country’s annual gross domestic product of around $30 billion.

After the First World War, Germany was saddled with reparations totaling about twice its gross domestic product. The debts proved to be an impossible burden, destabilizing the country and contributing to the rise of Nazism.

“It is extremely important that most of Iraq’s oil resources are reinvested back into the country to give the Iraqi people and the Iraqi economy a chance,” said Nancy Geenen, who from 1998-99 worked for the United Nations Compensation Commission that handled claims arising from the 1990 Iraqi invasion of Kuwait and the subsequent war.

Geenan said currently 30 percent of Iraq’s oil revenues allowed under the U.N. oil-for-food program went to repay those claims.

Even if there is wide agreement that Iraq’s debt needs to be reduced, some countries and creditors seem certain to argue strongly it should not be entirely eliminated.

The Paris Club — a forum in which 19 creditor nations have negotiated the rescheduling of debt repayments since Argentina’s debt crisis in 1956 — broached the issue of Iraqi debt during regular talks in the French capital last week.

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