Iraq's Odious Debts

Iraq’s debt

The Financial Times, UK
June 16, 2003

Richard Perle, the influential neo-conservative thinker, has put forward the idea that Iraqi debt should be cancelled, because this would punish bankers for lending to a “vicious dictatorship”. This, astonishingly, puts him in the same camp as bleeding-heart liberals and radical anti-globalisers. But these extremes agree on a policy that is both unworkable and unnecessary.

The principle that Mr Perle is attacking is sovereign continuity – the idea that governments should honour debts contracted by predecessors. Without this, there would be no lending to governments. Against it, however, is the notion of “odious debt”, which originated in 1898, after the Spanish-American war. The US then claimed, as Mr Perle does today, that neither the US nor Cuba should be responsible for debt incurred under Spanish rule, because it was neither arranged with the consent of the Cuban people nor used for their benefit.

The idea that the debt of illegitimate regimes should be unenforceable is, at first glance, attractive. Lenders would know that loans to tyrants are un-enforceable. They would then either refuse to make the loans or impose costlier terms. Yet this idea is also unworkable. The difficulty lies in determining who judges whether a regime is illegitimate and on what criteria.

The US itself has happily watched international lending to Chile under Augusto Pinochet, to the Philippines under Ferdinand Marcos and to South Korea under Park Chung Hee. It could, of course, propound the simple principle that loans to tyrannies it dislikes should be unenforceable and vice versa. But the chances that this notion would be accepted by the rest of the world are smaller than Mr Perle may think they ought to be.

If the notion of odious debt were to be made the basis of a predictable and transparent international regime, the determination of a government’s legitimacy would, instead, have to be handed over – Oh horrors! – to a multilateral organisation. There would have to be a sanctions regime under United Nations auspices. Even so, the principle could not be applied to loans made before the sanctions came into effect, as is now proposed for Iraq.

If the notion of odious debt is unworkable, it is also unnecessary. What matters is that debt should be serviceable. Instead of embarking on a theological discussion of whether the debt contracted by Saddam Hussein is legitimate, creditors should swiftly reduce the country’s debt-service obligations to manageable proportions.

Since Iraq’s leading creditors are the Gulf states, Russia, Japan and the commercial banks, the bigger the cut in debt the more these opponents of the overthrow of Saddam Hussein will be punished. Mr Perle is dressing up US self-interest in the garb of morality. But the US should not pursue the idea of odious debt, since the precedent is certain to come back to haunt it. It should focus, instead, on obtaining the debt relief Iraq now needs.

Letter to the Editor: How to establish criteria for debt By Chris Gilbert Published: June 23, 2003

From Mr Chris Gilbert.

Sir, In your editorial “Iraq’s debt” (June 16), you assert that using the notion of “odious debt” – debt incurred by an illegitimate government – as a basis for cancelling debt is unworkable because it is too difficult to determine when a government is illegitimate. And yet there are criteria regularly used to determine this type of thing; for example, whether elections are fair. Of course there would need to be an international body that would weigh the evidence and pronounce judgment; but there are already financial bodies that determine credit ratings based on other criteria, more or less successfully. Why not add “legitimacy” or “democracy” criteria?

Chris Gilbert, Berkeley, CA 94707 US

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