Contract, Priority, and Odious Debt

Abstract:     
This Article proposes that sovereign nations and their creditors adopt a contractual approach to the seemingly intractable problem of odious debt. Odious debt is generally defined as an obligation incurred by a despotic or illegitimate leader that provides no value to the population of the sovereign. In recent years, spurred primarily by the financial problems of post-Hussein Iraq, many writers and commentators have proposed doctrinal and institutional mechanisms that would provide odious debt relief. These proposals all face practical challenges, and they would likely involve significant risk of destabilizing financial markets. Under a contractual approach, a majority or supermajority of a sovereign's creditors would have the power to identify odious obligations of the sovereign. The sovereign would then be obligated to repudiate these debts. Creditors should have good incentives to employ this arrangement discriminately. More than any other relevant actors, creditors will internalize the costs and benefits of odious debt relief. Even if the private benefits of contractual odious debt arrangements are modest, they might create significant positive externalities. If so, academics, official actors, and policy advocates should encourage sovereigns and their creditors to adopt such arrangements.

Keywords: contracts, sovereign debt, odious debt

JEL Classifications: F35, H69, K13

Accepted Paper Series