Iraq's Odious Debts

Odious Debts Online exclusive: Iraq’s Odious Debts

Patricia Adams and Justin Alexander

December 4, 2003

In arguing that Iraq should repay its debts, op-ed contributor Mark Medish was right to cite the legal principle that “contracts should be honored” (Make Baghdad Pay). However, Mr. Medish, a lawyer representing Iraqi creditors, was wrong to ignore another principle: “illegitimate contracts need not be honored.” In 1923, U.S. Chief Justice Taft, acting as arbitrator, upheld this principle in ruling that Costa Rica need not repay the Royal Bank of Canada for loans extended for illegitimate purposes to its former dictator. Such loans, in international law, are called “odious.”

Chief Justice Taft’s landmark ruling is but one of several important precedents contributing to the jurisprudence on odious debts: At the turn of the century, the U.S. government refused responsibility for Cuba’s debts after the Spanish-American War on the grounds that the debts were incurred by the Spanish government without the consent and against the interests of the Cuban people. Earlier, Section 4 of the 14th Amendment of the U.S. Constitution declared that debts incurred by the Southern states “in aid of insurrection or rebellion against the United States” are “illegal and void.” The principle was also applied in the Versailles Treaty of 1919 when the Reparation Commission refused to apportion debts to the newly liberated Poland that had been incurred by the German and Prussian governments to colonize Poland, as a just reversal of “one of the greatest wrongs of which history has record.”

The legitimacy of a dictator such as Saddam Hussein, and thus his ability to create binding financial obligations, matters. So, too, does the use to which the funds are put. Lenders need to beware. If their funds were used to buy weapons, palaces, and instruments of repression, under the doctrine of odious debts, their claims against the people of Iraq will be legally unenforceable.

Iraqis understand this implicitly. Over two dozen leading Iraqis, ranging from the interim Minister of Finance to Islamists opposed to the Coalition, interviewed recently by Jubilee Iraq, were unanimous and impassioned in asserting that many of the debts incurred by Saddam’s regime are unjust and should not be repaid. Some went further, suggesting that the creditors should pay compensation to Iraqis for the harm resulting from their financing of Saddam’s wars and oppression. Mohammed Kamil, a young Iraqi democrat explained: “When Saddam executed people, he used to charge their families for the bullets used – this is precisely what the creditor countries who financed Saddam are asking of Iraqis today.”

There is unprecedented Western support for the Iraqis’ cause, from individuals and organizations of all political stripes. The disposition of Iraq’s debts through a public arbitral process that allows Iraqis to know who lent how much and for what purpose would demonstrate U.S. fair play and the power of democracy and the rule of law.

Mr. Medish’s alternative to an open process – closed door negotiations by creditors who decide on Iraq’s ability to pay – would spawn conspiracy theories, breed cynicism, and be deeply resented by Iraqis. His alternative would appear to be no more than an international fix in which Iraq’s resources were pawns of the creditors, including Russia, France, and the U.S. Indeed, many Iraqis predicted to Jubilee Iraq that, if the creditors refused to recognize the odiousness of much of Saddam’s debt, one of the first actions of an elected Iraqi government would be to repudiate all debts.

Mr. Medish is wrong to predict that chaos will reign in international commerce if arbitration determines the validity of claims against Iraq. In fact, the reverse is true: Chaos might result if creditors refuse an odious debt arbitration, convincing Iraq to repudiate unilaterally. On the other hand, odious debt arbitration, by clarifying the responsibilities of creditors (or borrowers), and thus their rights to repayment (or repudiation), would help eliminate the moral hazard that has plagued sovereign borrowing and thus stabilize international finance. And, more profoundly, by incentivizing creditors to lend only for purposes which are transparent and of public benefit, future Saddams will lose the ability to finance their armies and foreign bank accounts.

Patricia Adams is the Executive Director of Toronto-based Probe International and the author of Odious Debts (Earthscan, 1991). Justin Alexander coordinates London-based Jubilee Iraq.

Read “Make Baghdad Pay,” by Mark Medish

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