Department of Economics, Furman University
September 27, 2006
The Odious Debt Doctrine and
Iraq After Saddam
Economic Growth and Development Class
Department of Economics
Greenville, South Carolina
Thank you for this invitation to speak to the economic growth and development class on the subject of odious debts. Professor Peterson asked me to introduce the subject and I suggested that I do so in the context of Iraq and Saddam Hussein’s odious debts, which we both thought would be timely and interesting for your class.
OK, let me first give you the primer on odious debts.
What are odious debts?
In 1927, a Russian professor of law named Alexander Sack, teaching in Paris, published the most extensive and the most important works on the treatment of state debts. Professor Sack was no radical. He had been a minister in the Tsarist regime and had seen the Bolshevik repudiation of the Tsarist debt. He believed that government debts should be repaid when a new government came to power. Otherwise, he said, chaos would reign in relations between nations and international trade and finance would break down.
But he also believed there was one exception to this rule. Sack believed that debts not created in the interests of the state should not be bound to this general rule.
Some debts, he said, are odious.
And he defined an odious debt this way:
“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, for purposes that are manifestly personal, etc., this debt is odious for the population of all the State.”
In this case, Professor Sack said, “the creditors have committed a hostile act” against the people. They can’t therefore expect that a nation freed from a despotic power will assume the “odious” debts, which Professor Sack called “a personal debt of the power that has incurred it.” When this power falls, he said, the debt “consequently . . . falls with the fall of this power.”
Though he was writing 80 years ago, Professor Sack could have been talking about modern day Iraq. With the fall of Saddam Hussein, there was widespread recognition that the debts created by his regime were used to finance weapons, palaces, and instruments of repression against the Iraqi people. I believe, and Iraqis believe, that the majority of the debts that Iraq inherited from the regime of Saddam Hussein, are odious in law, and thus not legally enforceable.
Saddam’s debts are classic “odious debts.”
How do we know?
Well, we don’t know for sure. In fact, no one knows for sure exactly what the money was spent on. Official government statistics weren’t systematically kept; those that do exist aren’t precise and don’t add up; some documents were looted, some bombed; and the creditors, by and large, aren’t talking. The World Bank and IMF hadn’t been in the country since the 1980’s, hence the World Bank’s table on external debt left the line for Iraq completely blank. Soon after the fall of Saddam Hussein, the IMF did a “debt sustainability analysis” and contacted some 50 countries, requesting information about any outstanding debt and arrears owed to them by Iraq. But, the IMF admitted, its “staff has no way of verifying this information.”
Meanwhile, evidence that the debts were odious grew: while in power, Saddam accumulated some $40 billion in overseas private assets, the country’s GDP was cut in half, and Iraq went from having no debt to being the most indebted nation in the world.
Well the creditors started to line up to claim their money back and it turned out that most of the money was actually owed to other governments, not to private sector lenders: $42 billion was claimed by governments that form the Paris Club, $60-$65 billion is owed to non-Paris Club sovereign creditors, and the balance – $3 billion to commercial banks and $12 billion to corporations – is owed to the private sector.
This is very striking!
Iraq’s creditors were mostly governments. Iraq’s debt crisis was caused by governments – the German government, the French government, the Russian government, the American government – that lent money according to political criteria, not market criteria. As one prominent American commentator put it in the Wall Street Journal, “All of it had to do with politics, in one way or another.”
So what was Iraq to do?
A number of us – lawyers, civil society organizations in the U.S., Canada, Britain and Iraq, and professional arbitrators – suggested a plan to the emerging Iraqi administrations, following Alexander Sack’s recommendation, that Iraq should resolve its debt crisis, not by pleading for mercy from its creditors, but through arbitral procedures to determine just who financed the regime of Saddam Hussein and exactly where the billions upon billions of dollars went under United Nations Commission on International Trade Law. We argued that the new Iraqi administration should not agree to repay any debt incurred by Saddam’s regime until creditors submitted proof of the legitimacy of the debts. In requiring this proof, we argued, the Iraqi people do not need, nor should they feel compelled to seek, approval from those governments or from international bodies such as the U.N., the Paris Club, the World Bank or the IMF.
Because they are supported by the rules of natural justice for minimum standards of fair decision-making: The Iraqi people are entitled to be informed about the claims against them, in detail, not just in aggregate; they were entitled to a fair hearing in which they could make legal representation; and they were entitled to a unbiased adjudication of claims in which no adjudicator has an interest – pecuniary or proprietary – in the outcome.
This would rule out the Paris Club.
In the world of international finance, bad public sector loans are negotiated at the Paris Club, a group of major creditor governments coordinated by the French finance ministry. The Paris Club operates in secret and informally, avoiding embarrassment to lenders and borrowers alike. Government creditors bring their claims to the Paris Club table, but only in aggregate form, not on a loan by loan basis. Iraq’s creditors preferred to write off Saddam’s debts in this closed environment to avoid the alternative -an embarrassing public challenge. The Paris Club would cover-up the West’s odious loans to Saddam, and Paris Club members would bury their politically-motivated mistakes under the guise of “an orderly restructuring process,” based on what they would decide is Iraq’s ability to pay, rather than on the rightness of Iraq having to do so.
Needless to say, the Paris Club machinery went into high gear in order to treat the debts of Saddam Hussein’s regime as debts of the Iraqi people, legitimizing them in the process. To entice the Iraqis they offered an unprecedented 80% debt write-off.
The Interim Iraqi National Assembly responded by saying in effect, “we don’t want your charity. We want our rights, and the rule of law. Saddam’s debts are odious debts. They are not the debts of the Iraqi people.” 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, they said.
The Iraqi Interim National Assembly then considered a proposal introduced by the assembly’s Economic and Financial Committee that invoked the international doctrine of odious debts and cited the many precedents to this time-honored legal principle: for example, in 1898, the U.S. repudiated the “Cuban debts” after the Spanish-American War on the grounds that the money was spent contrary to the interests of the Cuban people; in 1919, the Reparation Commission refused to apportion debts under the Versailles Treaty to newly liberated Poland that had been incurred by the German and Prussian governments to colonize Poland; in 1923, Chief Justice Taft, sitting as arbitrator, ruled against the Royal Bank of Canada’s claim to repayment for monies it lent to a Costa Rican dictator.
The Iraqi Assembly said it had “a responsibility to the Iraqi People to protect their current and future interests … [which] are threatened by the Paris Club cartel of creditors which refuses to accept that any of the debts are illegitimate, and is attempting to get Iraq to sign … an agreement to repay a significant portion of the odious debt. There is a strong basis in international legal principle and precedent to define these debts as being “odious,” and thus not legally enforceable.”
In the end, in the interests of expediency, the Iraqi National Assembly accepted the 80% offer of the Paris Club countries. Though a legal challenge, under UN arbitral procedures, of Iraq’s debts would have advanced the jurisprudence on the law and strengthened similar claims by other Third World countries that their debts are odious too, huge advances were nevertheless made because of the widespread and learned debate over the treatment of Iraq’s debts.
Campaigns – some by law-makers, the judiciary and the citizenry – that had been growing in other countries such as South Africa, Argentina, Nigeria, the Philippines, and Indonesia to name just a few, were suddenly given new credence, largely because public opinion felt overwhelmingly that the Iraqi people should not be held responsible for Saddam’s debts. And if Iraqis should not be held responsible, then why should Nigerians under their military dictatorships, and how about Indonesians under the vastly corrupt regime of President Suharto? And so the applicability of the Doctrine of Odious Debts to all Third World debt has grown, and grown, and grown.
Many of us in civil society and academia are challenging creditors like the World Bank and IMF to perform forensic audits to find out just what happened to the billions of dollars they now claim be paid back by Third World nations. Your own Senate Committee on Foreign Relations has done path-breaking work on the corrupt use of loans from the multilateral development banks. Conceivably, the great majority of the Third World’s debts could be found to be illegitimate, leaving those countries with a manageable debt load they could refinance without debt relief. It they do need debt relief, the relief should be for legitimate, not illegitimate debt.
Some creditors, such as the IMF, have issued dire warnings of financial chaos should debtor countries pursue odious debt arbitration. A damaging precedent for the international financial system would be set, they warn. The rule of law must prevail and contracts must be honored, they argue.
But, we argue, in order for creditors to claim this first principle of law, they have a prior
duty to establish the legitimacy of a contract.
This due diligence is neither unusual or onerous. Indeed, in much lending and project financing today, private lenders know the purpose of the loans and an elaborate set of representations and warranties binds the borrower. If a lender doesn’t exercise the due diligence to establish whether the steel imported is used for cannons rather than cradles, or for guns to shoot innocent civilians rather than criminals, then I say as the American commissioners to the Spanish-American War peace conference said: “The creditors, from the beginning, took the chances of the investment.” In other words, “lenders beware.”
The doctrine of odious debts, rather than promoting financial chaos, would promote creditor scrutiny of loans of an allegedly public nature. It would discourage reckless lending, and it would provide diligent creditors with security to defend their loans in future.
The public international lending agencies, such as the IMF and World Bank, should champion this application of the rule of law, rather than disparage it. While an odious debt regime might not stop all dictators in their tracks, it would stop many and it would isolate as pariahs those who survived by selling off their nation’s assets. By giving creditors – public or private – an incentive to lend only for purposes that are transparent and of public benefit, the IMF et al. would change the culture of international lending and reduce the moral hazard that has destabilized international finance for the past 60 years. It would also promote sound investment and growth, starve tyrants of their ability to finance themselves against their people, and thus better serve the cause of world peace.
Categories: Debt Relief, Iraq's Odious Debts, Odious Debts, Patricia Adams, Paul Wolfowitz
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