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Odious Debt

Written by: Ankita Manav - I am a Fifth Year student (14th Trimester) at the National Law Institute University, Bhopal
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Since the last century or so there have been numerous political transformations as a result of the end of colonialism, the two world wars, cold war, formation of power blocs and rise of a uni-polar world that have made this concept more pertinent. Such transitional notions or stages pervasively raise issues of the continuity of legal obligations from the old political regime to the new, including the disposition of debt obligations that had been acquired by the previous regime. Therefore it may be safe to presume that the conception of “odious debts” has risen to new levels of prominence in the legal and political field with the advent of the 21st century.

Although the doctrine of “odious debts” dates back little more than one hundred years because of its sporadic use over this period, it is unclear whether or not it already has the precision or “marginal sharpness” that would be necessary if it were to be used as a legal instrument. This uncertainty, in turn, makes the term “odious debts” appear very versatile in the ways it can be used and instrumental zed by the international community in relation to its scope of application.

In a sense, all debts are odious; that is, to use the dictionary definitions, “hateful, horrible, abhorrent and/or obnoxious.” Yet insofar as international economic law today is concerned, only a certain few debts can be considered “odious debts” in order to contest and perhaps eventually to repudiate them. In its very essence the concept seeks to provide a moral and legal basis for severing, in whole or in part, the continuity of legal obligations where the debt in question was contracted by a prior “odious” regime and was used in ways that were not beneficial or were harmful to the interests of the population.

The relevance of the odious debt concept to political transitions is both distinct from and related to the debate on whether, as a matter of law or policy, international financial institutions or other potential creditors should ex ante be prevented or deterred from lending to existing regimes that are declared “odious”. It becomes even more important to consider this point in relation to the issue of lending conditionality. In this paper an effort is made to understand the evolution of the concept along with its importance in the present day context. While analyzing the underlying conceptions an attempt has been made to understand the historical as well as normative sources that have played a major role in the moulding of the structure.

Definition of the odious debt concept
The modern concept of odious debts was first expressed in the post-World War I context, by the jurist Alexander Nahun Sack, in his 1927 book The Effects of State Transformations on their Public Debts and Other Financial Obligations. For Sack, odious debts included within their ambit debts that were contracted and spent against the interests of the population of a State, without its consent, and with full awareness of the creditor. Sack wrote as follows:

“…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 its population that fights against it, etc., this debt is odious for the population of the State. The debt is not an obligation for the nation; it is a regime’s debt, a personal debt of the power that has incurred it, consequently it falls within this power….The reason these ‘odious’ debts cannot be considered to encumber the territory of the State, is that such debts do not fulfill one of the conditions that determines the legality of the debts of the State, that is: the debts of the State must be incurred and the funds from it employed for the needs and in the interest of the State. ‘Odious’ debts, incurred and used for ends which, to the knowledge of the creditors, are contrary to the interests of the nation, do not compromise the latter – in the case that the nation succeeds in getting rid of the Government which incurs them – except to the extent that real advantages were obtained from these debts.”

Therefore according to Sack, a successor state is only bound to repay the debts of its predecessor if the funds thus obtained were used to meet the needs of the state and were obtained in the best interests of the state. If, however,
(1) the funds were not used to meet the needs of the state and were not obtained in the best interests of the state, and
(2) the creditors were aware of this fact, then the granting of the loan represents a hostile act against the people of the debtor state, which renders the debt “odious” and thus invalid.

Sack believed that state practice was such that the doctrine of odious debts could be said to be part of positive international law – a generally accepted rule of law. However, to avoid opportunistic use of the doctrine in inappropriate situations, he proposed a process for the practical application of the doctrine that would be fair to all parties:

“(1) The new Government would have to prove and an international tribunal would have to ascertain the following:
“(a) That the needs which the former Government claimed in order to contract the debt in question, were odious and clearly in contradiction to the interests of the people of the entirety of the former State or a part thereof, and
“(b) That the creditors, at the moment of paying out the loan, were aware of its odious purpose.

“(2) Upon establishment of these two points, the creditors must then prove that the funds for this loan were not utilized forodious purposes – harming the people of the entire State or part of it – but for general or specific purposes of the state which do not have the character of being odious.[1]

The above formulation does not appear to require that the creditors be aware of how in fact the funds were actually spent. Nevertheless, subsequent jurists, treat this aspect as implicit in Sack’s formulation. Sack divided his conception of odious debts into several categories:war debts, subjugated or imposed debts, and regime debts. Other jurists have used slightly different nomenclature although the basic underlying understanding essentially remains the same. The most common classical types of odious debts are hostile debts and war debts. “Hostile debts” can be defined as debts incurred to suppress secessionist movements, to conquer peoples and so forth. “War debts” are debts contracted by the State for the purpose of funding a war which the State eventually loses and whereby the victor is not obliged to repay the debt.

As an academic Sack is often considered as one who has dealt most in-depth with the issue of what happens to national debts after a regime change. He is still in some respects considered the “crowned prince” of advocates of this legal principle. Recently, however, his proposal has been taken one step further in a Canadian study[2]. The authors of the Canadian study propose that the “odiousness” of a national debt should be determined not only on the basis of the two criteria advanced by Sack (i.e., use of the funds to the benefit of and in the best interests of the state, and the knowledge on the part of the lender that this is not the case). They argue that a third, objective criterion should be added—that the debts must have been taken without the consent of the population.

Efforts at International Law

In the context of the negotiation of the Vienna Convention on the Succession of States in Respect of Matters other than Treaties (still to be ratified) Mohammed Bedjaoui[3], Special Rapporteur of the International Law Commission, concluded that “odious debt” is an umbrella term covering a range of specific debts – war debts and subjugated or imposed debts being but two examples. He clarified the situation as follows:

(a) From the standpoint of the successor State, an odious debt can be taken to mean a state debt contracted by the predecessor State to serve purposes contrary to the major interests of either the successor State or the territory that is transferred to it;

(b) From the standpoint of the international community, an odious debt could be taken to mean any debt contracted for purposes that are not in conformity with contemporary international law and, in particular, the principles of international law embodied in the Charter of the United Nations.[4]

The significant aspect to note in this regard is the fact that the debt in order to qualify as an odious debt for a succeeding State must have been taken by it and it should have been used to serve purposes or interests that are detrimental to its major interests. However a different understanding develops from the perspective of the international community according to which any debt contracted against the contemporary international law prevailing at that time and in particular against the principles of international law embodied in the UN Charter would qualify as an odious debt.

The International Law Commission, while dealing with the question of “odious debts”, adopted the approach that it would first “examine each particular type of succession of States, because the rule to be formulated might well settle the issue and dispose of the need to draft general provisions on the matter”. It may be presumed that it was clearly intended that the question of odious debt be addressed in the context of the rules relating to the succession of newly independent States. This approach in international law makes it clear that as mentioned above while deciding on whether a debt is an odious one the approach should be to judge it on a case-to-case basis depending on the context or the facts. However the pertinent fact is that the abovementioned definition never came into force for the Convention is yet to receive the requisite number of minimum ratifications required for it to come into force.

UNCTAD: "The Concept of Odious Debt in Public International Law"

UNCTAD’s paper, written by University of Michigan Law professor Robert Howse, finds that “the international law obligation to re pay debt has never been accepted as absolute, and has been frequently limited or qualified by a range of equitable considerations, some of which may be regrouped under the concept of ‘odiousness.”[5]

Howse finds solid legal grounds for the concept of odious debt in scholarly literature and treaties, as well as in general principles drawn from the world’s legal systems, all sources of international law recognized in Article 38 of the Statute of the International Court of Justice. Howse identifies twelve instances in which the concept of odious debt has been used in international case law. In all of these cases, the legal issue involved proving that the debt in question was odious or ensuring that the claimant was not assuming an overly broad definition of odiousness. In none of the cases was a claim rejected on the grounds that no such concept as odious debt exists under international law. In the following paragraphs an effort has been made to analyze the three most compelling cases that provide an insight into the gradual evolution and transformation of the doctrine:

• 1923: Costa Rica refused to honor debt to the Royal Bank of Canada resulting from money that was lent to the dictator Federico Tinoco.
Facts: In 1917, Federico Tinoco overthrew the Government of Costa Rica and later held an election to ratify the “revolution”. During the summer of 1919, the Banco Internacional de Costa Rica issued several “bills” of credit to the Royal Bank of Canada, in respect of which the Royal Bank paid several cheques drawn by the Tinoco Government. The money was used personally by Tinoco and his brother and for no public purpose. By August 1919, Tinoco and his brother had left the country and the Government fell in September. The restored Government of Costa Rica enacted a law which invalidated all transactions between the State and the holders of the “bills” issued by the Banco Internacional

Reasoning: U.S. Chief Justice William Howard Taft was the arbiter in the dispute. The evidence established that the funds were used for the personal enrichment of the Tinoco brothers and that the bank was aware of this, since the transactions “were made at a time when the popularity of the Tinoco Government had disappeared, and when the political and military movement aiming at the overthrow of that Government was gaining strength”. Taft required the Royal Bank to discharge the burden of proving that the Costa Rican Governments had used the money for legitimate purposes, something which it could not do. He determined that because the debt was not incurred in the public interest and because the Royal Bank of Canada could not show that the money had been used for legitimate purposes, Costa Rican legislation invalidating the transactions should be upheld.

• 1985-2002: South African debt incurred under the Apartheid regime is a classic example of odious debt. Facts: The United Nations called apartheid a crime against humanity and the struggle of the South African people was recognized as a struggle for national liberation. In 1977, the United Nations imposed a mandatory arms embargo and in 1985 the United Nations Security Council imposed trade sanctions on the apartheid regime. Despite this, the regime continued to borrow from private banks throughout the 1980s. In July 1985, the Government declared a state of emergency and on 1 September South Africa defaulted and stopped paying its creditors. Nevertheless, a settlement was reached in 1987 with 14 major banks from Germany, Switzerland, the United Kingdom, the United States and France. After being elected president of South Africa, Nelson Mandela and the African National Congress came under heavy pressure not to renounce apartheid debt[6]. The new Government distanced itself from calls to nullify its apartheid-era debts.

Reasoning: It was considered important not to default on debts in order to attract critical foreign investment. The Government of South Africa continues to distance itself from the popular movement to cancel the apartheid debt. For example, its top ministers denounced the lawsuit seeking reparations from banks that loaned to the apartheid regime because “we are talking to those very companies named on the lawsuits about investing in post-apartheid South Africa.”[7] This is primarily because of fears that South Africa’s access to credit and foreign investment would be limited as a result of legal action or debt repudiation, putting its nascent economy on a backtrack.

• 2003: The U.S. Congress introduced an initiative to cancel Iraq’s odious debt after the overthrow of the Hussein regime.
Facts: Prior to the overthrow of the Government of Saddam Hussein, Iraq accumulated over $125 billion of unpaid debts. A United States congressional initiative was introduced, following the overthrow of the Iraqi regime in 2003 to eliminate this Iraqi odious debt. The bill was based on the notion that such debt not only impedes a successful rebuilding of post- authoritarian States, but that the debts were never legitimate inheritances of the new Government due to the doctrine of odious debts.

Reasoning: The then Treasury Secretary John Snow referred to the notion that “the people of Iraq should not be saddled with those debts incurred through the regime of a dictator who has now gone.”[8] On a similar the then Undersecretary of Defense Paul Wolfowitz emphasized in testimony before the Senate Armed Services Committee that much of the money borrowed by the Iraqi regime had been used “to buy weapons and to build palaces and to build instruments of oppression.”[9] Debt relief was granted, though in the end it was justified on the grounds of debt sustainability rather than odiousness.

In the last segment of the UNCTAD paper, Howse concludes that while there is no obvious legal forum for the adjudication or settle ment of claims of odiousness, such claims might appropriately be raised in bilateral or multilateral negotiations on debt relief, or ad judicated in the context of arbitration or domestic litigation. Howse recognizes the utility of special transitional tribunals to handle claims related to a particular political transition and rule on the validity of claims of odiousness.

The World Bank: The Concept of Odious Debts: Some Considerations

In contrast to the UNCTAD analysis, the World Bank paper claims that international law does not generally provide for the repudia tion of debts on the grounds of their being odious, while calling on lenders and borrowers to ensure that loans are used for the benefit of borrowing states and not to subjugate their populations or enrich the corrupt.

The authors dismiss an applicable odious debt doctrine in international law for two reasons- first, they claim that a broad range of contradictory definitions have been proposed, making the official legal definition of odious debt unclear. Second, they claim that none of the common sources of international law — treaties, state practice and international custom — has produced a coherent odious debt ‘doctrine’ in the proper sense of the word. However International civil society organizations note that the World Bank paper was not produced through a transparent process, finding the paper “incomplete, selective and misleading in its treatment of existing literature.”

Indian Position
Although the conception of odious debt has been in the academic domain for almost eighty years, there have been no instances wherein it has been invoked specifically in relation to the Indian scenario. Although there have been numerous instances wherein there was a clear cut case for the application of the concept, it has till date eluded practical implementation in India. As India cements its place as a global powerhouse with an enviable GDP rate the question that arises is what would be the fate of the huge debt that it has contracted during its time as a third world country. In the pre-liberalization era the Indian economy was under tremendous stress to open its shores because of its inflated fiscal deficit (a direct result of over-borrowing to finance the development of its nascent economic structure) As a direct result of this huge debt, the Indian policy makers were in a way forced to usher in a new stage of liberalizing norms in 1991 (under the then Finance Minister, Mr. Manmohan Singh) which have since then fructified into creating a vibrant and dynamic economic sphere.

However since at that stage the debts were contracted for developmental projects (from various international financing organizations), there was no issue of them being used for purposes which were detrimental to the interests of the people. As this essential and fundamental characteristic for characterizing a debt as an odious debt was not fulfilled, the debts contracted at that stage could not be qualified as odious debt. Moreover it would have been difficult to show the existence of a transition in terms of the political structure because barring the Emergency phase, we were by and large following the democratic mode of governance. Therefore there were no grounds on which the concept could have been invoked.

The problem arises when we come to the issue of corruption that has infiltrated all the spheres of life in India and in fact has become a part of our lives. The rampant corruption in the usage of aid from Multi Lateral Funding Institutions like the IMF, World Bank, Asian Development Bank etc has given rise to the question as to whether the Government should be liable for paying back these loans or it should be exempt on the ground that it qualifies as an odious debt. The money that flows in as long term loans ensues an obligation on the State to use them in the interests of the people and to pay back the same as and when possible. However when more than 50% of the aid is siphoned off by corrupt agents of the State and used for their personal enrichment can the Government be held liable to pay back the obligations. The question is can we not consider it as a case of odious debt wherein the state would be exempt from honouring its obligations. Is not a case wherein the creditors/financial institutions may be held liable for following loose lending policies neglecting the credit worthiness of the borrower.

One of the most glaring examples is the Enron case wherein the contracts that were entered into were against the interests of the Indian populace in general and were meant to serve the interests of the certain corrupt individuals. In such a case is it correct to impose the liability solely on the taxpayer or the correct approach is to qualify the debts contracted as odious. In the absence of any literature on the subject or of any practical examples it is difficult to contemplate the application of the concept in the unique socio-cultural milieu that exists in India. Despite this as India steps into bigger shoes there is a need to examine the practicality of the odious debt doctrine in ensuring a lessening of the debt burden. This along with effective and urgent steps to reduce the prevailing corruption would go a long way in developing a global powerhouse that our founding fathers always dreamt off.

Endnotes
[1] See Generally Alexander Nahum Sack, Les Effets Des Transformations Des Etats Sur Leurs Dettes Publiques Et Autres Obligations Financiéres: Traité Juridique Et Financier (1927) [Hereinafter Sack, Les Effets Des Transformations]; Alexander Nahum Sack, La Succession Aux Dettes Publiques D’état 70 (1929).
[2] Ashfaq Khalfan, Jeff King & Bryan Thomas, Advancing the Odious Debt Doctrine (Mar. 11, 2003) (unpublished working paper), available at http://www.odiousdebts
[3] Currently a member of the International Court of Justice
[4] Ninth Report on the Succession of States in Respect of Matters other than Treaties, 1977 Yearbook of the International Law Commission, Vol. 2 (Part 1): 68 and 70.
[5] Robert Howse. “The Concept of Odious Debt in Public International Law.” UNCTAD, July 2007.
[6] Hanlon- 2002
[7] “South Africa Shuns Apartheid Lawsuits”, Guardian, November 27, 2002
[8] Quoted in Joshua Craze, “Jubilee Iraq,” the LIP Magazine, available online at: http://www.thelip.org/?p=93
[9] Quoted in Nile Gardiner and Mark Miles, “Forgive the Iraqi Debt,” Executive Memorandum #871, Heritage Foundation, April 30 2003, available at: http://www.heritage.org/Research/TradeandForeignAid/em871.cfm

The author can be reached at: ankitamanav@legalserviceindia.com / Print This Article

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