Odious Debts

Make Baghdad pay

Mark Medish
The New York Times
November 4, 2003

An Op-Ed article on Tuesday [see below] about Iraq’s foreign debt should have more fully disclosed the background of its author, Mark Medish. Mr. Medish, an international lawyer and former Treasury official, represents corporations that are owed money by Iraq.

The economic consequences of regime change in Iraq could get worse if the United States, Great Britain and their coalition partners act on radical impulses to make grand gestures. A case in point is Iraq’s sovereign debt.

Iraq’s debt includes $40 billion owed to Paris Club official creditors, most notably Japan, France, Germany and Russia; at least $30 billion to other official creditors; at least $3 billion to London Club commercial banks; and perhaps $10 billion owed to corporate creditors.

What is to be done? Already we hear calls from the right and the left to impose what might be called a “zero option”; that is, cancellation of Iraq’s debt. From the right, Richard Perle and William F. Buckley Jr. have called for freeing Iraq of its “odious debt” on moral grounds. From the other end of the political spectrum, Oxfam and Jubilee Iraq have taken much the same position, while Joseph Stiglitz, the Nobelist, is advocating relief on more prudent grounds, citing the lessons of the 1919 Treaty of Versailles, which required Germany to pay heavy war reparations.

These recommendations, though doubtless well intentioned, are misguided. A country like Iraq, with the world’s second-largest proven oil reserves, should be expected to be able to pay its obligations. Furthermore, the moral charge that the debts are odious is simply too sweeping. Acting on it would be bad for Iraq and would set a damaging precedent for the international financial system.

For Iraq to normalize its external financial relations, it must respect one of the first principles of the rule of law: contracts should be honored. Without this presumption, markets cannot work. The threshold for overturning the presumption must be kept high to prevent chaos. In the case of Iraq, the threshold has not been met.

Several myths have gained currency in the debt debate. The first is that Iraq’s debts are invalid because they were accumulated under Saddam Hussein’s regime. This is overbroad and misleading. First, much of the debt, including the bulk of what Iraq owes to banks and corporations, went to finance civilian construction – roads, hospitals, apartments and utilities. By contrast, military-related debt can and should be separated out and perhaps even forgiven.

It’s worth remembering, too, that much of Iraq’s debt was incurred in the 1970’s and 1980’s, before sanctions were imposed, when the United States was willingly doing business with the Hussein regime.

Another myth is that historical precedents dictate that zeroing out the debt would be prudent. Post-Versailles Germany is a frequently cited case. But there is an important difference between punitive reparations and commercial debt incurred by a country for civilian projects. Moreover, in the last decade countries like Poland, Egypt and Yugoslavia have escaped their heavy debts not because their debts were forgiven but because the financial community created reasonable long-term repayment plans.

Third is the myth that companies have already written off the Iraqi debts and no longer care about them. This is ridiculous. How companies account for bad debts on their books is irrelevant to the legal status of their claims. It would be a perverse result to extinguish debt simply because a debtor has not paid.

Iraq is entitled to have its special case heard. So far it has been granted an official moratorium through 2004. When the international community decides to begin tackling the wider debt problem, it should follow several simple maxims: avoid radicalism and bad precedents; promote an orderly, market-friendly debt repayment schedule based on financial analysis; and encourage creative solutions, including debt swaps.

Finally, for solutions to be meaningful, Iraq must negotiate with creditors on its own behalf. This, after all, is a major aspect of sovereignty.

The Iraqis should also favor an orderly debt repayment process. The country has been a financial rogue state for the past 12 years. What the new Iraq needs is a reputation for honoring its word.

Mark Medish, a lawyer, was deputy assistant secretary of the Treasury from 1997 to 2000.

Please read a response to this op-ed by Justin Alexander of Jubilee Iraq and Patricia Adams of Probe International, published by Odious Debts Online, here

Categories: Odious Debts

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