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From Jubilee Iraq more information about Odious Debt.
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Debts are "odious" when they are contracted without the consent of the people and not spent in their interests and when the creditor is aware of this.
The doctrine of odious debts was formalised in 1927 by Alexander Sack, a Russian international law scholar working in Paris.
"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."
In many cases countries have taken on the odious debt of former dictatorships as a result of political pressure or fear of being penalised by creditors in the future. There are, however, some clear precedents for odious debt being repudiated, such as Mexico (1867), Cuba (1898) and Poland (1919). Jubilee Iraq is not proposing immediate repudiation, although Iraq may choose to do this if any creditors refuse arbitration. Instead we are working to set up an arbitration tribunal where creditors who wish to ask repayment from the Iraqi people for debts which they lent to Saddam's regime can attempt to demonstrate that their loans were not odious. There was a similar arbitration process between Costa Rica and Britain in 1923. In the case of Iraq the tribunal will be much more complicated since there are dozens of creditors. Moreover it may choose to handle reparation claims as well as debts resulting from standard loans.
Precedents
1867 - Mexican Repudiation of Austrian Debts
Between 1863 and 1867, the Habsburg Emperor Maximilian contracted debts at onerous rates of interest to maintain his sovereignty over Mexico and suppress an uprising there. In 1883, 16 years after the fall of Maximilian, the Mexican government under President Juarez repudiated the entirety of the alleged debt against them. J.N.Pomeroy, an international legal scholar of the time, mentions that “…a large part of those debts has been created to maintain that usurper in his place against the legitimate authority and all of them were most scandalously usurious.”
1898 - US Repudiation of the Cuban Debt after Spanish-American War
The Cuban Loans negotiations at the Paris Conference of 1898 that followed the Spanish-American War is generally regarded as the first direct application of a doctrine of odious debts. The Cuban debts consisted of various loans issued by the Spanish Government after 1880 and secured on the revenue from the island.The Spanish asserted a principle of international law: that state obligations belong to a land and its people, not to a regime.
The Americans replied that the debt was "imposed upon the people of Cuba without their consent and by force of arms, was one of the principal wrongs for the termination of which the struggles for Cuban independence were undertaken." Furthermore, the Americans added, much of the borrowing was designed to crush attempts by the Cuban population to revolt against Spanish domination, and so was expended in a manner contrary to Cuba's interest. "From no point of view can the debts above described be considered as local debts of Cuba or debts incurred for the benefit of Cuba. In no sense are they obligations properly chargeable to that island. They are debts created by the government of Spain, for its own purposes and through its own agents, in whose creation Cuba had no voice, from the moral point of view, the proposal to impose them upon Cuba is equally untenable." As such, the Americans argued, these debts could not be considered Cuban debts, nor could they be binding on a successor state. As for the lenders, the Americans replied that "the creditors, from the beginning, took the chances of the investment."
1899--1902 - Boer War in South Africa
The Boer Republic borrowed money in order to try to repel the British in South Africa. After the end of the Boer War, the Supreme Court of the Transvaal declared that the debts had devolved upon Britain as the new sovereign. However Britain refused all legal responsibility, denying that the Boer Republic could validly issue debt.
1919 - Treaty of Versailles repudiates Polish Debts
The German government (and its Prussian predecessor) operated a fund to enable ethnic Germans to buy estates in Poland in order to colonize the country. Since few Poles were prepared to sell, the government enacted a compulsory purchase law in 1908 and issue bonds to finance the purchases. At Versailles, the Reparation Commission refused to charge these bonds to the newly liberated state of Poland as a just reversal of “…one of the greatest wrongs of which history has record.”
1923 - Arbitration of Costa Rican dictators' debt to Great Britain
After the fall of Federico Tinoco, dictator from 1917-19, the new Costa Rican government passed the Law of Nullities to repudiate debts lent to Tinoco by the Royal Bank of Canada. Great Britain challenged this and Chief Justice Taft of the U.S. Supreme Court arbitrated between the countries. Justice Taft's ruling that decided: The loans did not constitute transactions of an ordinary nature and which were "full of irregularities," 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. The $200,000 in loans were made by the bank to Federico Tinoco himself "for expenses of representation of the Chief of the State in his approaching trip abroad," and as "four years salary and expenses" for his brother whom Tinoco had appointed ambassador to Italy. "The Royal Bank... must make out its case of actual furnishing of money to the government for its legitimate use. It has not done so. The bank knew that this money was to be used by the retiring president, Federico Tinoco, for his personal support after he had taken refuge in a foreign country. It could not hold his own government for the money paid to him for this purpose." [fuller text]
Present Day - Former Yugoslavia
The International Conference on Former Yugoslavia (Working Group on Succession Issues) has yet to agree on apportioning debts and assets. Indications are however that the new Republics will not be required to assume any of the debts contracted by the former Federal government for the purpose of waging war against the seceding republics.
International Law
The moral case for the non-assumption of a dictator's odious debts by the people is very clear. Translating a clear moral case into a technically sound case in international law is a complex process. The sources of international law which we can draw on include: treaties, customary law (examples of past practice as listed above), judicial decisions and writing of legal experts, general legal principles recognised by most nations.
Jeff King of McGill University argues that tactically "one should not claim that odious debts are illegal [but]... rather that they are unenforceable under international law. That is, the doctrine of odious debts carves out a qualification to the generally accepted rule of repayment." The debt relief granted by the Paris Club on many occasions can be seen to weaken of the rule of repayment.
The 1983 Vienna Convention on Succession of States in Respect of State Property, Archives and Debts stipulates (Article 38) that by default "no State debt of the predecessor State shall pass to the newly independent State." However the Vienna Convention has not yet received enough signatures to enter into force and probably never will. The original draft for the treaty even contained a direct reference to odious debts which shows some juristic acceptance of the doctrine. Jeff King argues that "had the Convention been codified today, a greater opinio juris may have emerged with respect to the issue of odious debt."
Unjust enrichment is a generally recognised principle of law. It is violated when a country repays odious debt because the creditor is unjustly enriched through payment from the people of the debtor state who received no correlative benefit for the debt payments that are now being made. Though perhaps insufficient on its own, the doctrine of unjust enrichment supports state practice and judicial decisions concerning odious debt.
Another argument from a general legal principle is that when a creditor contracts an odious debt with a dictator, and enforces repayment, it commits an abuse of rights against the population. Abuse of rights is a principle which holds that the exercise of apparently lawful rights can be unlawful when to do so would allow the right holder to intentionally harm another, or when such an action is execessively harmful, unjust, or unreasonable. Though a broad and by no means unchallenged principle, it is useful as supplementary argument.
The domestic law of agency is another generally recognised principle of law. It imposes mandatory duties upon one person, the agent, who acts to create binding legal relations for another person, the principal. Those duties require the agent to act for the benefit of the principal. When third parties such as creditors assist agents in violating those duties, they may be held liable in damages to the principal. These principles are supported by a well developed international body of jurisprudence and legislation. One may apply the argument analogically to Saddam Hussein (the agent), the Iraqi people (the principal) and the creditors (the third parties) to invalidate their odious debt contracts. The law of agency has well develop standards to determine whether the third party should have been aware of the breach of duty but was, for example, "willfully blind". These standards are useful in applying the odious debt doctrine.
Credits: This page draws heavily on the paper "Advancing the Odious Debt Doctrine" (CISDL) and the book Odious Debts (Patricia Adams). These are good sources for more information as is Probe International's Odious Debts website. See Resources page for more links.
