The Doctrine of Odious Debt

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This presentation, with my annotations,  of the  doctrine of odious debt elaborated by Alexander Nahum Sack (1890 to 1955) and considered to be one of the founders of the doctrine, is based on the study of the subject done by Eric Tousaint.

Sack was a Russian lawyer who taught in Saint Petersburg then in Paris. He was not a humanist interested in protecting people or nations from the nefarious actions of Heads of State, or creditors prepared to plunge the community into debt using fraudulent or even criminal means. His main aim was not to bring ethics or morality to the world of international finance. His aim was to reinforce the international order in place, by ensuring the continuity of debt repayments so that creditors could recover the money they had lent.

The doctrine has come in for a lot of debate, often disparaged and widely -avoided or ignored in university courses. Nevertheless, it has been the topic of hundreds of articles and dozens of specialised books.Commissions have published documents, taken a stand and organised seminars on the topic as, debts whose legitimacy and validity may be questioned, are constantly under discussion in the field of international relations. Even though he wrote this doctrine during a different era in different times, the world has moved on and the concept is relevant even today.

“A national bankruptcy is by no means illegal”

The jurist Gustave Hugo, often called the father of the historical school of jurists, says: and whether it is immoral or unwise depends altogether on circumstances. One can hardly ask of the present generation that it alone shall suffer from the folly and waste of its predecessors, for otherwise in the end, a country could hardly be inhabited because of the mass of its public debts.”

Another jurist Zachariae, according to Edwin Borchard,maintains that a government has a higher duty than the payment of its debts, which is to keep its citizens alive, and that creditors must be disregarded when there is no alternative.

Gregoire Dimitresco: “The State has the right to retract on total or partial execution of the contract it has entered into with its creditors, or to modify the clauses of that same contract if deemed appropriate and if the circumstances demand it. The State derives this right from the nature of the contract. To enter an engagement under any other conditions would indeed be incompatible with the role and functions of the State.”

Evgeny Korovin, of the Institute of Soviet Law, considers that there is no succession of debt in the case of political transformation. What were personal debts for the former government are ‘res inter alios acta’  for the new one, and as such, do not concern it.

Carl Ludwig von Bar K. von Bar, a well-known authority, says: “If all the creditors could actually levy execution upon the State property, they could bring the State machinery to a standstill. Public debts, therefore, issued under a special law, contracted with a certain number of creditors, rest upon the condition that the State is in a position – of which the State by legislation is the judge – to perform its obligations. The State has so to speak a beneficium competentia in the widest sense; it must first preserve itself, and the payment of its debts is a secondary consideration.”

A. Wuarin: “It is by a law (or decree) that the loan is authorised; it will be through the promulgation of another law (or another decree) that the State, with no need to explain, may declare itself free of any commitment or may decree the suspension of the amortisation of the payment of interest, annul all guarantees.”

A. de La Pradelle and N. Politis: “The debt resulting from a loan is as binding in law as is any other debt. It is nevertheless true that, having been contracted in the public interest, the debt is subject for its execution to the conditions imposed by the financial and administrative necessities of the debtor State: as it was created by virtue of legislative measures, so may it be modified by virtue of further legislative measures.”

Gregoire Dimitresco: “The State has the right to retract on total or partial execution of the contract it has entered into with its creditors, or to modify the clauses of that same contract, if deemed appropriate and if the circumstances demand it. The State derives this right from the nature of the contract. To enter an engagement under any other conditions would indeed be incompatible with the role and functions of the State.”

The Russian jurist could not avoid pointing out that there is an important exception to the sacrosanct rule of continuity in debt repayment and a limit to (private) creditors’ rights: in certain circumstances, creditors must agree to the cancellation of their debt if it can be demonstrated that the debt is odious. He also accepts two fundamental points: Namely, that when there is a presumption of odious debt, it is incumbent upon the creditors to prove their good faith; and should they fail to do so, their acts may be considered as hostile to the nation.

It is all the more significant that the proposal to write off odious debts should be made by someone like Sack who was not predisposed to favouring debtors. Despite his clear bias in favour of creditors, Sack considered that in exceptional cases debts may be written off. Sack believed that creditors should accept the cancellation of certain debts if it can be shown the government which contracted them intended to use them against the interests of the nation.

Sack’s conception of odious debt

Sack considered that several circumstances could give rise to debt of an odious character. A debt to be considered odious, must fulfill the following conditions:-

The purpose for which the former government wanted to cover by the debt in question is clearly against the interests of the people and the creditors were aware.

Once these two points are established, it becomes incumbent on the creditor to prove his good faith.

As to the need for creditors to have been aware, should be added the words: “or ought to have been aware.”

I would like to add also: Give all assistance to creditors to pursue their legal remedies against those members of the previous regime who are accountable. Such a policy has the added advantage in that it will create a route to recover the assets stolen.

However, if the State cares about its reputation and creditworthiness, it will prefer to proceed with the approval of its creditors rather than by use of authority. It will be possible to obtain this approval if the debtor extends his cooperation to the creditor in pursuing his legal remedies against members of the regime who contracted the loan.

In an opinion published in 2002 by the IMF review Finance & Development, Michael Kremer and Seema Jayachandran define the odious debt doctrine as: “The legal doctrine of odious debt makes an analogous argument that sovereign debt incurred without the consent of the people and not benefiting the people is odious and should not be transferable to a successor government, especially if creditors are aware of these facts in advance.”

Justifying repudiations

As examples of odious debts, Sack cites debts that have personally enriched government representatives, and creditors’ dishonest machinations: “We can also put into this category of debt, loans clearly incurred in the personal interest of government members or persons and groups related to government for purposes that are not related to the government. He says debts of this kind were repudiated in the US in the 1830s. He mentions the repudiation of certain debts by several North American States. One of the main reasons was the squandering of the sums borrowed: they were usually borrowed to establish banks or build railways; but the banks failed and the railway lines were never built. These questionable operations were often the result of agreements between crooked members of the government and dishonest creditors.” He notes that in this particular case that involved four different States, these debts were not incurred by despotic governments.

However, this continuity in the transfer of debt from one regime to the next has not been universal, far from it. Several new regimes have repudiated the debt contracted by the governments who preceded them. Though not exhaustive, some of them are listed below:-

Debt repudiation

The three waves of by the United States in the 1830s, 1860s and 1870s,

The Mexican debt repudiations in 1861,1867,1883 and in the 1910s;

The repudiation by Peru of the debt reclaimed by the Parisian bankers ’Dreyfus’,

The 1898 repudiation by Cuba of the debt reclaimed by Spain,

The repudiation by the British of the debt reclaimed on the Boers after the conquest of the Boer Republics in 1899-1900,

The repudiation by the Bolsheviks in 1918 of the debt left by the Tsars,

The repudiation of Germany’s debts on Poland and its African colonies in 1919,

The abolition of the debt of the part of Poland that was colonised by the Tsarist Empire,

The abolition, by the Bolsheviks in 1920, of the debt of the three Baltic States and of Persia,

The repudiation by Costa Rica in 1922-23 of the debt reclaimed by The Royal Bank of Canada,

The large debt repudiations made by Brazil and Mexico in 1942-43;

The Chinese debt repudiations in 1949-52,

The repudiation by Indonesia of the debt reclaimed by the Netherlands in 1956,

The repudiations by Cuba in 1959-60,

The repudiation of the colonial debt by Algeria in 1962,

The three Baltic Republics’ repudiation of the debts reclaimed, this time by the other former members of the USSR, in 1991,

The abolition of Namibia’s debt, by Nelson Mandela’s South African government in 1994,

The abolition of Timor-Leste’s colonial debt in 1999-2000,

The abolition of 80% of Iraq’s debt in 2004,

Paraguay’s repudiation of debts reclaimed by Swiss banks in 2005,

Norway relaxing its claims on five countries (Ecuador, Peru, Sierra Leone, Egypt and Jamaica) calling for repayment of debts concerning the production and delivery of fishing boats in 2006,

The abolition, in 2009, of the part of the Ecuadorian debt, that had been identified as non-legitimate by the 2007-2008 Debt Audit Commission.

Now that Sri Lanka has declared that the country is bankrupt, she should take the cue from countries like Ecuador and Greece and do a full audit of public debt starting from 1948 and apprise all Sri Lankan voters of the lessons that could be learnt. Ecuador’s President Rafael Correa appointed a Commission in 2007 to do such an audit of Ecuador’s public debt.  In 2015, the President of the Hellenic Parliament set up the Greek Debt Truth Commission.

The following are some of the projects that need to be investigated for odious debts:-

Hambantota Harbour, Mattala Airport, Port City, Lotus Tower, Sooriyawewa cricket stadium and Others.

If Sri Lanka is able to establish that the people have not benefited from these projects, there is no reason why it cannot, the country’s external debt burden of $ 51 billion could be reduced drastically and made sustainable without increasing further the burden on the people.

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By Brigadier (Rtd) Ranjan de Silva