Odious debts are debts that have incurred so that the lent money has not served the needs of the local population, or so that the money has been used for purposes harmful to the population. The concept refers to a precedent in international law, according to which loans accumulated in such conditions are “null and void.” Thus the debtor government is under no obligation to repay such debts, given that the current government is democratic and legitimate. As several poor countries suffer from debts accumulated under suspect conditions and pay up to a third of their public revenues in loan service, the issue of odious debts is highly important in current discussions of global justice.
According to a study by McGill University, legal scholars relying on precedents, general principles of law, and judicial decisions, there are three necessary conditions for a loan to be declared odious. These are: (1) The debt must not have received the consent of the nation, (2) The funds borrowed must have been contracted and spent in a manner that is contrary to the interests of the nation, and (3) The creditor must have been aware of these facts.
Often quoted examples of debts which ought to be declared odious, but are being demanded from the current governments, include debts acquired by: Mobutu Sese Seko (of Zaire, presently Democratic Republic of the Congo), Suharto (Indonesia), and Marcos (Philippines). Along with these cases, there are a large number of developing countries with debts with similar but less clear inconsistencies.
The legal precedent of odious debts is the case of Cuba in 1907, when the country's debts to the former colonial ruler Spain were declared by a US court to be of such nature that they need not be repaid. Later, in 1923, the US Supreme Court decided on a case of Costa Rican debts to the Royal Bank of Canada, a commercial bank. The court ruled that as the loan was granted to the outgoing dictator Tinoco and had clearly only benefited the Tinoco family, the country was under no obligation to repay.
The fact that the financial liabilities of countries related typically to international debt are passed on to succeeding governments has been seen a disincentive for achieving democracy. In recent political philosophy, Thomas Pogge has called for attention to what he calls the borrowing privilege, meaning the fact that the international system acknowledges any despotic government as the legitimate party to lend in the country's name. According to Pogge, this leads to increased possibilities for despotic leaders to retain power, along with incentives to attempt a coup d’état in poor but resourceful countries. Accordingly, if such debts would be routinely declared odious, this would deter lenders from funding despotic leaders. Pogge has suggested mechanisms such as an international democracy panel for making the distinction between democratic and undemocratic regimes.
The implementation of the doctrine of odious debts is not only a political and moral problem but a problem for the study of social ontology. Thus the problem regards the continuation of the country as an entity. In other words, applications of the doctrine rest on the assumption that the country with its succeeding democratic government is an ontologically different entity from the borrower. Thus the borrower can be seen as a different national entity (albeit with same location), or the loan can be seen as taken by an illegitimate representative of the country, or a person merely claiming to represent the country.
Most often, the concept of odious debts has been used by activists campaigning for some foreign debt(s) to be declared odious. For example, postapartheid South Africa saw a strong campaign for declaring debts accumulated in the apartheid era odious. The campaigners went as far as calling for compensation from rather than repayment to the parties that loaned to the apartheid government.
Governments in poor countries, in general, have been hesitant of using the concept, and have rather chosen to call for partial cancellation of their foreign debts, along with increased official development assistance (ODA). In the South African case, the campaigners lost their court case both in Pretoria and New York, due mainly to the position of the ANC government in South Africa.
Typically, creditors have avoided using the concept of odious debts, even in cases in which the argumentation for debt cancellation has resembled the logic of odious debts. A recent example of such a case is the US-backed cancellation of Iraqi national debt which had accumulated under the rule of Saddam Hussein. Earlier examples of such debt cancellations include the cancellation of the Polish national debt under new Solidarity government and the national debt of the post-World War II Germany.
The CSO Jubilee research estimates the level of odious debts to be internationally $500 million out of a total developing country (low-income and lower middle-income) international debt stock of $2,200 million. This number is significantly larger than, for instance, the debt cancellations granted via the World Bank HIPC (Heavily Indebted Poor Countries) scheme, which stand at $200 million, although applying only to some of the countries with arguably odious debts.
Currently, there is no international body for solving the disputes over whether a particular debt is odious. This lack of international mechanism has been argued to lead to arbitrariness in deciding whether a loan ought to be seen as legally binding or not. For this reason, scholars such as Kunibert Raffer have proposed setting up an international body to take over the impartial assessment of the possible odiousness of debts. In Raffer's model, this body would be modeled on the US Chapter 11, which stipulates the conditions of the bankruptcy of a public entity such as a municipality. The arbitration would function as an independent international body, or within a UN institution such as ECOSOC.
According to Raffer, only such an independent body would guarantee impartiality, as trusting arbitration on debts on the International Financial Institutions would lead to conflict of interest, as they are also major creditors of the governments in poor countries. Nevertheless, for example, the IMF has suggested models for somewhat similar arbitration procedures.
Disregarding the mechanism making such decisions, applying the doctrine of odious debts in individual cases remains necessarily complicated. While the existence of dictatorship remains easy to show, the level of democracy in a country, the definition of “national interest” and showing creditor's awareness of spending of the loan funds continue to be judicial and philosophical problems in their own right.
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