Essays and Reports

Odious Debt: definition, application and context

Ashfaq Khalfan
Eurodad Annual Conference 2006
October 30, 2006

The co-author of Advancing the Odious Debts Doctrine addresses how the doctrine can be applied and in which contexts. Legal scholar Ashfaq Khalfan responded to several long-standing questions regarding the implementation of the odious debts doctrine in his recent address to this year’s annual Eurodad NGO conference – From Illegitimacy to Responsibility: Transforming Development Finance.

Mr. Khalfan, the director of the Canadian-based Centre for International Sustainable Development Law (CISDL), illuminated certain aspects of the doctrine he described as “grey areas,” such as the recovery of odious debt repayments by debtor countries, and discussed at length the
doctrine’s emerging strength as a legal resource.

What is clear, Mr. Khalfan said, “is that any sensible lender – whether a state, international financial institution, or private lender – should by now know that the odious debts doctrine can cause them legal difficulties, particularly in the most blatant cases of odious debts where loans are directly going into the personal coffers of the ruler. It is likely that at least some lenders will soon begin to consider the odious debts doctrine prior to granting loans to governments known for their corrupt behavior.”

Almost all legal disputes relating to debts are resolved in negotiations, Mr. Khalfan pointed out. And when parties negotiate, they ‘bargain in the shadow of the law.’ That is to say, they take into account a number of factors including political leverage, legal rights, and moral considerations. Prerequisites for odious debts to be raised in negotiations, he says, include: a situation of ‘Mobutu variety’ debts where corruption of the government is well documented and notorious; and two, guts! The main obstacle to invoking the doctrine of odious debts is political, he points out, in which financial retaliation is threatened by lenders such as creditor states, international organizations and private banks.

Iraq, however, is a good example of the gains debtor countries stand to win when they face down opposition, he said.

When the president and senior ministers of Iraq’s interim government, as well as several U.S. officials, made reference to the odious debts doctrine in calling for Saddam-era debt to be canceled, this pressure “almost certainly influenced” the extent of debt cancellation offered to Iraq by the Paris Club of creditor nations, Mr. Khalfan said.

Iraq won an unprecedented 80% write-down. Similarly, Nigeria was offered a significant write-down of its debts, in part because the Nigerian parliament emphasized the “irregular nature of previous lending” when it called for debt repudiation.

The doctrine would secure greater international acceptance, Mr. Khalfan said, if debtor states burdened by odious debts could “forcefully raise the doctrine, with a credible threat of repudiation.”

Action by creditors (state, inter-governmental or private) to write-off debts explicitly based on the principle of odious debts as a legal impediment to the collection of debt, he said, would also help make the doctrine more acceptable in practice (and strengthen the international law argument in favor of its implementation).

Mr. Khalfan also said the legal advice scholars give to states can have a significant impact on State practice and decisions of international and national tribunals.

“The trends in the treaty law, general principles of law and decisions of tribunals all point towards greater acceptance of the doctrine,” he concluded.

Read Khalfan’s paper here

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