Bretton Woods Project
February 1, 2005
High-profile debt cases in South Asia, Argentina and Iraq are leading to increased calls worldwide for independent tribunals to determine which debts are not legally enforceable.
On 14 January, Argentina launched its offer to exchange $102.6 billion in defaulted debt, offering approximately 30 cents on each dollar. Argentine economy minister Roberto Lavagna announced that the government would be satisfied if just 50 per cent of bondholders participate in the restructuring. Bondholder associations believe a 75 per cent acceptance is necessary. The IMF has demanded 80 per cent participation.
Local pension funds holding 17 per cent of the bad debt have already signed up for the exchange. The offer has also been approved by the market regulators of two of the largest holders of the bonds, the US and Italy. This weakens the prospects of a creditor revolt. The main obstacle to success is the Global Committee of Argentina Bondholders which says it represents $38 billion of the debt in default that will not be swapped. The final result will not become clear until close to the 25 February deadline for creditors to accept the deal.
Last August the IMF suspended its agreement with Argentina pending the government reaching a deal with its bondholders. The country faces a steep increase in debt payments this year and will have to choose whether to repay its $15 billion obligations to the Fund or negotiate a new deal to rollover the debt. Many commentators both in Argentina and abroad have called for the country to cut its ties to the Fund.
Complicating matters for both private and multilateral creditors is the question of how much of the debt might eventually be declared illegitimate. Argentine MPs Mario Cafiero and Maria Angelica Gonzales sent a letter to the US Securities and Exchange Commission last July highlighting the omission of relevant legal information from the proposed issue of new sovereign bonds. They point to an Argentine federal court decision in July 2000 that found that many of the 152 sovereign debt bonds to be swapped were illegal in origin. In the decision, judge Jorge Ballestero placed blame on the “complicity of international lending agencies, international private banks and transnational companies which, while knowing the prevailing economic conditions of our country and due to the lack of democratic controls, decided to enter agreements with the military regime.”
While Cafiero and Gonzales plan to table an odious debt bill in the congress, a similar challenge will be brought before the Argentine courts. Two investigators, Alejandro Olmos Gaona and Daniel Marcos, will request that the debt swap be halted until legal questions over the origins of the debt are resolved. Both efforts aim to have foreign debt contracted by the military dictatorship (1976-83) declared odious.
“If a despotic power incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime, to repress the population that fights against it, etc., this debt is odious for the population of all the State.” – Russian scholar of international law, Alexander Sack, 1927
Iraq: loans for “destruction and war”
In November, Paris Club creditors agreed to write off 80 per cent of Iraqi debts. Thirty per cent would be written off immediately, another 30 per cent tied to an IMF standby programme expected in mid-2005 and a further 20 per cent to be cancelled in 2008 if Iraq completes the three-year IMF programme. The US has cancelled 100 per cent of the $4.1 billion it says it is owed by Iraq, contingent on the completion of the Fund programme.
Mahdi al-Hafez, Iraq’s minister of planning, said that the Paris Club plan does not go far enough and that Iraq seeks the cancellation of 95 per cent of its debts: “Iraq will resort to international arbitration if negotiations with these states reach a dead end.” Finance minister Adel Abdul Mahdi said that Iraq had considered designating some of its obligations as “odious debt,” loaned for “destruction and war,” which need not be repaid. Civil society groups have said that the imposition of IMF conditions on the repayment of odious debt adds insult to injury. Mohammed Kamil of the Iraqi Prospect Organisation: “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.”
In mid-December Iraq cleared $110 million of overdue debt payments to the World Bank. Payment of the arrears was necessary to allow the resumption of BWI lending, however observers have questioned the logic which sees a country at war and with infrastructure in tatters making such a payment at this time. “The World Bank, IMF, and Iraq’s other state creditors – who account for 90 per cent of claims against Iraq – want to bury their mistakes. They would rather give up their claims under the guise of charity than have the spotlight of international arbitration expose that they financed a vicious dictator against his people,” said Patricia Adams, author of Odious debts: Loose lending, corruption and the third world’s environmental legacy.
Haiti: loans to slave-holders and dictators
In early January, the World Bank announced it would release $73 million in cash to Haiti’s government. The resumption of funds marked the end of a nearly four-year freeze on disbursements. For Haiti to get the World Bank cash it had to pay $52 million in outstanding arrears, for which Canada gave a $12.7 million grant. An aid freeze was imposed on Haiti in 2000 after it failed to meet IMF conditions and maintain democratic standards. The new loans are being handed over to the government of Gerard Latortue which seized power in a coup after elected president Jean Bertrand Aristide was forced from office.
Debt campaigners have argued that a country as poor as Haiti should not be sending $40 million to the World Bank. According to the Haiti Support Group, “in 1825 Haiti had to pay France $21 billion (in 2004 dollars) to compensate French slave-holders for their loss of property. Haiti’s debt to international financial institutions and foreign governments has grown from $302 million in 1980 to $1.13 billion today. About 40 per cent of this debt stems from loans to the brutal Duvalier (Papa and Baby Doc) dictators. According to international law, this debt need not be repaid.”
Congo: paying back Mobutu’s stolen billions
Congo’s total debt is $12.9 billion, over twice its GNP. A quarter of which is owed to multilateral financiers, the largest proportion owing to the World Bank. There have been no payments to official creditors since 1994, and there is no prospect of debt relief until a lasting ceasefire is in place and steps are taken to bring back economic stability. When former president Mobutu Sese Seko died in 1998, his personal fortune was estimated at $5 billion. None of this was used for economic development, and his stolen wealth (together with capitalised interest on the loans) accounts for a substantial part of Congo’s current debt burden.
Audit the debts
To date, international institutions have failed to address the issue of odious debt. Civil society organisations have called for an independent assessment of which debts are legally enforceable. In November, NGO Jubilee South hosted an international workshop on debt auditing in Brasilia. Attended by 17 activist organisations from Latin America and the Caribbean, the workshop called for a detailed analysis of the motives and manner in which external debts had been contracted, the amounts repaid on interest charges and debt servicing and the resulting impact on the citizens of each of the countries concerned.