"Odious Debt" - A Definition

Tyler Durden's picture

Perhaps it is time to look at some basic defintions for a term that will soon be quite prevalent...

Odious debt

In international law, odious debt is a legal theory which holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, should not be enforceable. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion.

Defintion

The doctrine was formalized in a 1927 treatise by Alexander Nahum Sack, a Russian émigré legal theorist,[citation needed] based upon 19th century precedents including Mexico's repudiation of debts incurred by Emperor Maximilian's regime, and the denial by the United States of Cuban liability for debts incurred by the Spanish colonial regime.

According to Sack:

When a despotic regime contracts a debt, not for the needs or in the
interests of the state, but rather to strengthen itself, to suppress a
popular insurrection, etc, this debt is odious for the people of the
entire state. This debt does not bind the nation; it is a debt of the
regime, a personal debt contracted by the ruler, and consequently it
falls with the demise of the regime. The reason why these odious debts
cannot attach to the territory of the state is that they do not fulfil
one of the conditions determining the lawfulness of State debts, namely
that State debts must be incurred, and the proceeds used, for the needs
and in the interests of the State. Odious debts, contracted and utilised
for purposes which, to the lenders' knowledge, are contrary to the
needs and the interests of the nation, are not binding on the nation –
when it succeeds in overthrowing the government that contracted them –
unless the debt is within the limits of real advantages that these debts
might have afforded. The lenders have committed a hostile act against
the people, they cannot expect a nation which has freed itself of a
despotic regime to assume these odious debts, which are the personal
debts of the ruler.[1]

Modern impacts

Patricia Adams, executive director of Probe International (an environmental and public policy advocacy organisation in Canada), and author of Odious Debts: Loose Lending, Corruption, and the Third World's Environmental Legacy, has stated that:

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 Policy Analysis for the Cato Institute, Patricia Adams suggested
that the debts incurred by the Iraqi state during the rule of Saddam Hussein are odious as the money borrowed was spent on weapons, instruments of repression and palaces.[2]

A recent article by economists Seema Jayachandran and Michael Kremer
has 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.[3] Jayachandran proposed her new recommendations recently at the 10th anniversary of the Jubilee movement held at the Center for Global Development in Washington, D.C.