NewsMax.com
December 6, 2003

President Bush has appointed former Secretary of State James A. Baker III to oversee the daunting job of getting Iraq out from under its crushing foreign debt. “Secretary Baker will report directly to me and will lead an effort to work with the world’s governments at the highest levels, with international organizations and with the Iraqis in seeking the restructuring and reduction of Iraq’s official debt,” Bush said in a statement.

As the president’s personal envoy on the issue, Baker will tackle a key problem in the rebuilding of Iraq, a country with a debt carrying annual servicing charges of $7 billion to $8 billion.

These annual servicing charges aside, most experts agree that Iraq’s underlying foreign debt is somewhere in the vicinity of $130 billion. However, when reparations for the first Gulf War, compensation claims, and pending contracts are added in, the figure swells to a staggering $300 billion.

Some experts opine that Iraq’s transformation to a modern democracy may depend on the hope that some or all of these debts can be forgiven.

But at the latest G7 meeting in Washington, the German Finance Minister, Hans Eichel, made it clear Germany will insist on repayment.

Steadfast Germany, however, like fellow big-time creditors France and Russia, are willing to use the good offices of the committee called the Paris Club of rich creditor countries, established in 1953. Under typical Paris Club negotiations, debts are usually agreed to be repaid, but there are large discounts, renegotiations and rescheduling.

The Paris Club will, of course, be looking ahead to the prospect of loads of cash being generated by Baghdad once the oil industry starts producing at full tilt. About half of Iraq’s debt is owed to nations that make up the Paris Club.

But critics of the Paris Club scenario point to what they see as a critical shortcoming: the rules and principles of the Club contain no mandate for judging debt legitimacy – only for restructuring debt at risk of default. In effect, the Club represents the interests of the creditors – and the determination of debt legitimacy may require a more neutral body.

To that end, officials from Iraq and some creditor countries are developing an arbitration tribunal to assess which of the financial claims on Saddam Hussein’s regime should legally and justly pass on to the Iraqi people.

Such an arbitration tribunal would look to the principle known as “odious debt.”

Odious debt is a tool that was initiated in 1927 by Alexander Sack, an expatriate Russian law scholar in Paris. Sack’s credo: “When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc., this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime…and consequently it falls with the demise of the regime.”

Can Iraq’s debt be classified as odious? Yes, say many experts. Furthermore, there are valuable precedents:

In 1883, Mexico repudiated debts incurred by the Austrian Hapsburg Emperor Maximilian to prop up his reign over Mexico between 1863 and 1867 and suppress an uprising there.

In 1898, the United States pushed to wipe out debts Cuba owed Spain, on the grounds that the debts prevented the Cuban people from rebelling against Spanish colonial rule.

The Treaty of Versailles in 1919 decided that Poland would not be held responsible for bonds Germany issued to pay for Polish land bought by Germans.

In 1923, the Costa Rican government distanced itself from money lent by Great Britain to Federico Tinoco, the dictator in Costa Rica from 1917-1919.

The states of the former Yugoslavia are currently in negotiations to avoid paying back funds lent to Yugoslavia to finance military action against its breakaway republics. On the other side of the coin, however, there is certainly a history of countries biting the bullet and paying off odious debt. Indonesia, Nigeria, and South Africa, among others, are all currently repaying debt incurred by authoritarian governments.

Baker’s challenge: World Bank President James Wolfensohn has said that at least two-thirds of Iraq’s foreign debt will need to be written off to rebuild the country properly.