Odious Debt

Odious debt, also known as illegitimate debt, is a legal theory that states that the national debt incurred by a despotic regime should not be enforceable. Such debts are considered personal debts of the government that incurred them and not debts of the state. The concept is analogous to the invalidity of contracts signed under coercion. Whether or not it is possible to discharge debts in this manner is a matter of dispute.

The concept has antecedents dating back to the 1800s and support from diverse fields such as economics, philosophy, political science, history, and law. The concept of odious debt was formalized in a 1927 treatise by Alexander Nahum Sack, a Russian émigré legal theorist. It was based on two 19th-century precedents—Mexico’s repudiation of debts incurred by Emperor Maximilian, and the denial by the United States of Cuban liability for debts incurred by the Spanish colonial regime.

Sack theorized that such debts are not enforceable when (1) the lender should have known that (2) the debt was incurred without the consent and (3) without benefit to the populace. There are many examples of similar debt repudiation. Chief Justice William Howard Taft, acting as an arbiter, used the doctrine in 1923 to find that Costa Rica did not have to pay the United Kingdom debts incurred by the Federico Tinoco Granados regime.

Despite such rulings, Mitu Gulati argues that odious debt is not part of international law because “[n]o national or international tribunal has ever cited Odious Debt as grounds for invalidating a sovereign obligation.” Patricia Adams, executive director of Probe International, a Canadian environmental and public policy advocacy organization and author of Odious Debts: Loose Lending, Corruption, and the Third World’s Environmental Legacy, stated: “by giving creditors an incentive to lend only for purposes that are transparent and of public benefit, future tyrants will lose their ability to finance their armies, and thus the war on terror and the cause of world peace will be better served.” In a Cato Institute policy analysis, Adams suggested that debts incurred by Iraq during Saddam Hussein’s reign were odious because the money was spent on weapons, instruments of repression, and palaces.

A 2002 article by economists Seema Jayachandran and Michael Kremer renewed interest in this topic. They propose that the idea can be used to create a new type of economic sanction to block further borrowing by dictators. Jayachandran proposed new recommendations in November 2010 at the 10th anniversary of the Jubilee movement at the Center for Global Development in Washington, D.C. Subsequently, the loan sanctions model has been adopted by the Centre for Global Developments and has been the base for a number of further suggestions. Some think the doctrine could aid international development. Others think that the doctrine should allow even more kinds of debt to be canceled.
After acquiring Puerto Rico through the Spanish–American War, the United States refused to pay the colony’s creditors, asserting they held odious debt. In December 2008, Ecuadorian President Rafael Correa attempted to default on Ecuador’s national debt, calling it illegitimate odious debt, because corrupt and despotic prior regimes contracted it. He succeeded in reducing the price of the debt letters before continuing paying the debt. After the overthrow of Haiti’s Jean-Claude Duvalier in 1986, there were calls to cancel Haiti’s debt owed to multilateral institutions, calling it unjust odious debt, and Haiti could better use the funds for education, health care, and basic infrastructure. As of February 2008, the Haiti Debt Cancellation Resolution had 66 co-sponsors in the U.S. House of Representatives. Several organizations in the United States issued action alerts around the Haiti Debt Cancellation Resolution, and a Congressional letter to the U.S. Treasury, including Jubilee USA, the Institute for Justice & Democracy in Haiti and Pax Christi USA.

Odious debt is not an established principle of international law, but is often given as a rationale by the victors of civil or international conflict to repudiate their defeated opponents’ debts. The successful application of the concept of odious debt presents a significant risk for investors in sovereign debt and may increase borrowing costs for countries under threat of regime change.

When a corrupt governmental regime borrows money in the name of the state, and then steals or squanders the proceeds, must the future citizens of that country repay the loan? The law says yes, but the moral instinct of most people says no. The odious debt controversy is, at base, a struggle to find a workable legal doctrine that will avoid a morally repugnant result (visiting the sins of corrupt governors on innocent citizens), without undermining the legal basis of all sovereign borrowing. No counterparty, at least no commercial counterparty, would lend money to a sovereign believing that the loan was personal to the administration that contracted it, and could legally be disavowed following the next election, the next revolution or the next coup d’etat. One possible solution is to craft a doctrine of public international law that would relieve successor regimes from the legal obligation to repay the debts incurred by their odious predecessors.

Since then, there have been attempts to define an explicit legal doctrine of legitimate debt, but the adoption of such a doctrine has remained rare in international negotiations. Today, the notion of odious debt is best thought of as a principle rather than a defined set of international laws. It holds that debt issued without public consent and serving no public purpose at the time of issuance ought not to be inherited by successive governments. This, however, runs against key tenets of international law, which maintain that debt issuance depends on the apolitical durability of obligations.