Essays and Reports

REVIEW Iraq’s debt relief: Procedure and potential implications for international debt relief

Reviewed by Patricia Adams, Odious Debts Online

December 28, 2007

Martin Weiss, an analyst with the Congressional Research Service, the public policy research arm of the U.S. Congress, has published an updated paper about the treatment of Iraq’s debts by creditor nations following the fall of Saddam Hussein. Three precedents have been set, he says, as a result of Iraq’s experience. Weiss argues, convincingly, that the international community is prepared to protect strategically important countries from onerous debt burdens. But his argument that Iraq’s experience demonstrates an unwillingness of successors to dictators to claim odious debts is less convincing. Following the ouster of the Saddam Hussein regime in the spring of 2003, Iraq’s external debt was estimated to be $125 billion. Weiss points out that reducing the debt to a sustainable level was a priority for the U.S. government so that funds could be released to help support Iraq’s budget, pay for Iraq’s security, and reestablish Iraq’s financial standing with international creditors and the financial markets. The techniques used and the timing of Iraq’s debt write-offs were significant, he says. First, the UN Security Council passed resolution 1483 in May 2003 which prohibited any country from initiating debt claims against the proceeds of Iraq’s petroleum or gas industries until December 31, 2007. This ‘stay’ on the enforcement of creditor rights – sheltering Iraq from a potential rush of debt claims against its petroleum and gas revenues – was, says Weiss, “a radical move in the history of sovereign debt negotiations.” It was especially so for the U.S., which typically lets financial markets resolve their own debt disputes (by allowing creditors to sue foreign governments for debt claims). This official immunization of Iraq’s debts from foreign claims is all the more surprising, he says, because only months earlier the proposed IMF Sovereign Debt Restructuring Mechanism, which included a similar provision that would ‘stay’ creditors rights through a litigation shield, was rejected by some member countries over concerns about the effect of just such a ‘stay.’

This near-overnight reversal of position in the case of Iraq, says Weiss, shows that the U.S. and the international community are willing to shield a debtor from its creditors on an ad-hoc basis, without a formal international bankruptcy regime “for countries that exhibit a perceived threat to U.S. and international security” and through a political institution, such as the UN, rather than a financial institution like the IMF.

The second important precedent, says Weiss, was set when the Paris Club of official creditors wrote off 80 percent of their claims against Iraq, a middle income country, in the largest-ever write-off in the Paris Club’s history. The Paris Club thereby opened the door to political debt relief (Euromoney called Iraq’s Paris Club debt deal “nakedly political”). Traditionally, Paris Club debt restructurings of official debts adhered to relatively strict rules based on a country’s economic situation. Those rules were effectively thrown out in Iraq’s case, cementing a trend for “increasing flexibility in Paris Club debt restructuring treatments.”

The last precedent involving Iraq’s debt experience, says Weiss, is “an unwillingness by successor regimes to claim that their debt is odious and repudiate it.” Here, I think Weiss has misread the signs.

Weiss bases his case on Iraq’s Minister of Finance, Adil Abdul Mahdi, who told Euromoney that his country was seeking debt relief not because of the “principles of public international law such as the odious debt doctrine,” but because of the “economic realities facing a post-conflict country that has endured decades of financial corruption and mismanagement under the Saddam regime.”

Weiss takes this statement as a sign of negotiating weakness when the statement could just as easily signify negotiating strength – an iron fist in a velvet glove. At the time of the Minister’s comment, the word on the street in Iraq – and in much of the press coverage around the world – was that the citizens of Iraq had inherited textbook odious debts from the regime of Saddam Hussein. Many Iraqis believed that they had solid legal and moral grounds to repudiate these debts and would fight to do so if the creditors – mostly rich governments – refused to write them off. So vociferous and unified were the Iraqi public and civil society organizations, and so compelling were the legal arguments, that the Economic and Financial Committee of the Iraqi National Assembly recommended the Assembly reject responsibility for debt repayment and argued for resolution of the claims before an international tribunal (see Resolution). The Assembly later adopted this position. Quite clearly, the moral authority of the Iraqis and the legal threat of exposure and challenge in arbitral proceedings – governed, at least in part, by the principles of odious debts – could not have helped but sway the Paris Club creditors toward writing off their claims.

One cannot know what was in the mind of Iraq’s Minister of Finance at the time. But when, in his bid to secure debt relief, he stated that Iraq would not draw on the “principles of public international law such as the odious debt doctrine,” the Paris Club creditors must have felt the presence of that elephant in the negotiating room.

The threat of odious debt arbitration surely helps explain why Paris Club creditors stepped up their offer of debt forgiveness from 60 percent to 80 percent when the Iraqi negotiating team walked away from the former proposal during the negotiations.

Iraq’s Minister of Finance would naturally have wanted to dispense with this debt quickly in order to reestablish the flow of international finance to his country and to begin the post-war rebuilding project. Given the option of years of arbitration to arrive at approximately the same deal, he understandably opted for negotiations allowing for an immediate “no fault to the creditors” write-off. He did not repudiate the option of arbitration in the event that satisfactory debt write-off negotiations failed. Weiss views the acceptance of the debt deal as an indication that Iraq and other successor regimes in future would shy away from claiming debts as odious and repudiating such debt. Rather, Iraq’s negotiating approach is likely to convince other countries to play the odious debts card. Iraq in 2004 took an approach recommended by Professor Howse, an international law expert with the University of Michigan, and author of the recent paper, ” The Concept of Odious Debt in Public International Law”: When successors to dictators inherit debts they believe to be odious they can make their case, either in debt negotiations or adjudicated in the context of arbitration or domestic litigation.

Finally, Weiss makes a puzzling argument in claiming that Iraq’s case for odious debts would have been “difficult” to make because “many of Iraq’s debts were taken for economic development or commercial purposes and appear legitimate.” Why should Iraqis, or the citizens of any other country for that matter, accept large claims against them on faith because they “appear” to be legitimate to the claimants? Ostensibly legitimate loans can be misused, particularly in a country known for corruption. The civil society of any country would want that money trail disclosed, not buried.

Therein lies the tragedy of Iraq’s debt forgiveness: Iraqis will never know the detail of who financed their country’s dictator and how the money was used. The Paris Club preempted an odious debt arbitral process and that precedent was, unfortunately, not set.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s