Legal Scholars Advance the Principle of Odious Debts

The Due Diligence Model: A New Approach to the Problem of Odious Debts

(January 3, 2007)

Jonathan Shafter
Abstract: Odious debts are debts incurred by a government without either popular
consent or a legitimate public purpose. There is a debate within
academic circles as to whether the successor government to a regime
that incurred odious debts has the right to repudiate repayment. In the
real world, however, repudiation is not currently an option granted
legitimacy by either global capital markets or the legal systems of
creditor states.

There are, thus, compelling reasons to reform the law
of odious debts to allow for such 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
punitive 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. I make the case for an alternative “Due Diligence
Model” of reform that 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.

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