Iraq's Odious Debts

Stop financing dictators

Sylvain Charat
Jerusalem Post
November 22, 2004

On November 19, the Paris Club decided to write off 80 percent of Iraq’s $120 billion debt. That was the least it could do since most of the loans were tainted in the first place.

But on this point, the very secretive Paris Club remains silent.

The club, coordinated by the French Finance Ministry, has 19 governments as permanent members and holds large claims on other governments. It aims at finding coordinated and sustainable solutions to the payment difficulties experienced by debtor countries, which often are more dictatorial than democratic.

It either reschedules debts or writes them off, as it largely did in the case of Iraq.

But with its prestigious-sounding name and reputation, it is rarely noted that this club is a convenient way for democratic governments to clean up after shamefully-hidden loans to less than savory recipients.

Democratic peoples are not told that their own governments are using taxpayers’ money to finance dictatorial regimes; a rogue club for rogue states.

The major creditors of Saddam Hussein’s Iraq were France, Germany and Russia. Those countries – the strongest opponents of toppling Saddam, by the way – were looking for a 50-percent debt reduction, while the United States and the United Kingdom wanted to reach a 95-percent reduction.

The resulting 80-percent compromise is, then, quite good for Iraq’s new democracy. But this does not solve the general problem of lending to dictatorships.

A despotic government borrowing money without the consent of its own people and using it to buy weapons, build palaces, oppress its citizens or pay off corrupt Western political elites, creates an obligation that can only be called odious debt.

In this context, the crucial question is: Should a people just set free from a brutal regime and moving toward democracy be penalized by debts inherited from their oppressors? Would it have made sense to saddle the Iraqi people with a debt for the money used to enslave them?

Liberated countries, like Iraq, should not need to prove that these debts are illegitimate. It is, rather, for the creditors to prove that their loans were made for legitimate purposes.

Nevertheless, some arguments may be raised against cancellation of debts. Among the most important is the fact that, according to the rule of law, all contracts should be honored.

Yet the rule of law is based on a society of free citizens. It cannot justify illegitimate loans that disrupt the spirit of the rule of law by their use: repression, oppression, and corruption.

Such debts, then, must not be honored in order to preserve the sanctity of the rule of law.

Another question arises: Would non-payment of such debts in any way shake the world economy?

No, because these loans were politically motivated, not market-oriented; 90 percent of the Iraqi debt concerned military purchases.

We should then be confident there would be no impact on the global economy.

A last argument concerns creditor countries boycotting debtor countries, a sort of economic retaliation against non-payment. In the case of Iraq it seems impossible this would ever occur: A land where almost all infrastructure must be rebuilt is a country worth billions of dollars in contracts. No boycott is expected.

Cancellation of odious debt should be the norm. Yet the doctrine of odious debt should not be applied unilaterally – which might result in excessive cancellations – but should become a multilaterally-decided part of international law.

Thus the international community would send a strong signal to democratic governments – that since they may not get their money back for their shameful loans; and to despotic regimes – that the days of easy money from the West are over.

It is a question of ethics. Financial profits should not be made on the backs of oppressed people.

Furthermore, there is a strategic side. Cutting off rogue states would mean less fuel for the terrorist groups they support.

If the odious debt doctrine became international law, it would be more efficient than most embargoes, shaking the corrupt foundations of despotic regimes while [hurting] civilian populations less.

Sylvain Charat is director of policy studies at the French Eurolibnetwork think tank.

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