Iraq's Odious Debts

Iraq’s Odious Debts: Don’t stick Saddam’s victims with the bill for his rule

Editorial
The Wall Street Journal, USA
April 30, 2003

President Bush told cheering Iraqi Americans Monday that the United States would defeat not just Saddam Hussein but “the dictator’s legacy.” In Baghdad, Iraqis meeting to discuss the formation of a new government agreed that one of the worst parts of that legacy would be Iraqi debt.

Estimates of Iraq’s financial obligations vary widely, but the Center for Strategic and International Studies estimates that the figure could be as high as $383 billion. That includes $127 billion worth of debt, $57.2 billion in pending contracts, and $199 billion in actual and potential Gulf War compensation claims. Reconstruction bills could top $20 billion a year for the immediate future. Compare those figures with an annual economy estimated at anywhere between $29 billion and $59 billion, including $18 billion a year in oil sales, and it’s obvious that any Iraqi government will have a hard time meeting the payments.

Everyone knows some of these obligations are going to be written off, others restructured. But the issue of how and on whose terms is the elephant in the room as talks proceed on other aspects of a post-Saddam Iraq. France and Russia are in no hurry to lift United Nations sanctions, hoping they can use their Security Council vetoes as leverage for favorable terms. The 19 nations of the Paris Club of creditors have been meeting to discuss the debt issue.

But does the next Iraqi government really have an obligation to negotiate its way out of this mess? Perhaps not, according to a doctrine known as “odious debt.”

Advanced by (ironically) Franco-Russian legal theorist Alexander Sack in the 1920s, the idea is that “if a despotic power incurs a debt not for the needs or in the interest of the state, but to strengthen its despotic regime . . . this debt is odious. . . . 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.”

That description would certainly seem to fit many of the obligations bequeathed by Saddam. And there is no denying it makes powerful moral sense. But though there are a few historical examples of “odious” debt repudiation–the U.S. unilaterally renounced Cuba’s debt after the Spanish-American War–it is hardly an established international principle.

“Under international law, a debt is owed from one country to another country, not contingent or dependent on who the leader of that country is. It’s a state-to-state relationship,” White House Spokesman Ari Fleischer noted recently. Deputy Defense Secretary Paul Wolfowitz more or less conceded that point as well when he suggested that France and Russia could contribute to reconstruction by forgiving Iraqi debts. (One can always dream.)

We understand why the Bush Administration wants to tread carefully here. Although we can do without France and Russia’s blessing on Iraq rebuilding, provoking more of their obstructionism would hardly be helpful. There is also the risk that promoting the concept of odious debt could lead to a slippery slope, whereby all kinds of regimes might suddenly declare their predecessors illegitimate. Contracts shouldn’t be repudiated lightly.

But we also rate the risk of mass repudiation as rather small given that most new governments will want continued access to international capital markets. Putting the world’s creditors on notice that lending to dictators has extra risks would also help not just in Iraq but many African nations as well. There the Bush Administration has already recognized the serious problem debt poses for poor countries, urging the World Bank to offer performance-based grants instead of loans.

Some Paris Club members, while dismissing the idea of a total Iraqi debt write-off, are at least conceding the point that not all debts are created equal. Hiroshi Watanabe of the Japanese Finance Ministry has suggested distinctions should be made between those countries (like Japan) that loaned money for infrastructure purposes and those (like Russia) that loaned money for weapons: “I think there will be a debate over whether those loans [should] really be treated the same way.”

Let that debate begin. Ultimately, the issue of what to do about Iraq’s debts is not for the U.S. but for the new Iraqi government to decide. But we wouldn’t blame its leaders if they decided that some of those financial obligations are indeed “odious.” And given that this is such an extreme case, international lenders probably wouldn’t hold it against them for long.

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