Seema Jayachandran, Michael Kremer, Jonathan Shafter
Stanford University Program on Global Justice
June 10, 2006

Abstract: Odious debts are debts incurred by the government of a nation without either popular
consent or a legitimate public purpose. While there is some debate within academic circles
as to whether the successor government to a regime which incurred odious debts has the
right to repudiate repayment, in the real world this is currently not an option granted
legitimacy either by global capital markets or the legal systems of creditor states. There are
compelling reasons to reform the law of odious debts to allow for such a repudiation in
strictly limited circumstances. Beyond the moral problem of requiring the formerly captive
citizens of a tyrant to repay their oppressor’s personal debts, the burden of odious-debt
servicing can perpetuate the cycle of state failure which has direct national security
consequences. In addition, a properly designed odious debt reform could function as an
alternative sanctions mechanism to trade sanctions with fewer harmful implications for the
general population of the targeted state. Classical proponents of odious debt reform
advocate for recognition of a legal rule under which successor governments could
challenge the validity of debts incurred by prior regimes against the odious debt legal
standard in a judicial-style forum. We make the case for an alternative “Due Diligence”
model of reform which provides far greater ex ante certainty for lenders both as to which
debts might be classified as odious debts and what steps the lender must take to protect its
investments from subsequent invalidation. The Due Diligence Model also solves certain
time-consistency problems inherent to the Classical Model.