Lex Rieffel
The Financial Times, UK
May 26, 2003

Sir, Michael Kremer and Seema Jayachandran (“Make sovereign debt too risky to issue”, May 9) have resurrected the concept of “odious debt” and have proposed a scheme for preventing lending to unsavoury dictatorships by declaring that any successor regime would not be responsible for such loans.

They misread history when they argue that “the world needs a system to determine which loans should be considered legitimate”. The world already has such a system; the Paris Club process.

A close examination of the 350 Paris Club debt restructuring operations since 1956 reveals numerous cases where bad loans made by bilateral creditor agencies to corrupt governments were largely written off.

The most impractical feature of their proposal is the requirement for reaching an international consensus on which governments are legitimate and which are not. Until substantial convergence has occurred among political agendas of the 200 nations in our world, the only practical approach to sovereign debt restructuring will be ad hoc negotiations based on the evolving principles and practices of the Paris Club (for bilateral agency debt), the London Club (for commercial bank debt), and the new forum that will soon materialise for restructuring bond debt (necessitated by the case of Argentina).