Odious Debts and Nation Building: When the Incubus Departs

Abstract:     
Few events in the life of a society are as heady as the ouster of a long-standing dictatorial or corrupt regime. In the euphoria that typically follows this kind of nation building, the new government will want to expunge all vestiges of the old regime - personnel, laws, decrees and offensive policies.

But there is one souvenir of the ancien régime that may not be so easy to sweep away, the debts incurred by the former regime in the name of the state. Even when it can be shown that the proceeds of those borrowings were wasted or stolen, public international law demands that the new government recognize and accept a legal obligation to repay those debts. Many successor regimes, in many countries, have searched for a way to avoid this result; a result that they often regard as morally reprehensible.

Ethical arguments alone rarely melt creditor hearts. Successor governments have therefore been strongly encouraged by campaigners for third world debt cancellation to shift their ground, particularly after the ouster of the Saddam regime in 2003, toward legal arguments. The front-runner in this regard is the argument that international law permits successor governments to repudiate "odious" debts.

In practice, however, successor regimes like the Aquino administration in the Philippines, the Alfonsin regime in Argentina and the post-Saddam government in Iraq have not tried to justify their requests for debt relief based on a doctrine of odious debts. That said, the nature of the regime that incurred such debts, and the occasionally distasteful uses to which the proceeds of the loans were put, have formed part of the unspoken background - the atmospherics - of the ensuing negotiations with creditors. But it has remained principally a debate about finance, economics and debt sustainability, not morality, religion or law.

Number of Pages in PDF File: 13

working papers series