Odious Debt, Odious Credit, Economic Development, and Democratization

Abstract:     
The problem of odious debt typically arises when a despotic regime has incurred substantial sovereign debt and is then succeeded by a less-despotic, possibly democratic, regime that seeks to repudiate that debt. There is no agreed-upon method for dealing with attempts to repudiate odious debt. We examine the shortcomings of three proposed methods of dealing with odious debt—doing nothing and letting the international community deal with instances on a case-by-case basis, establishing an international committee to identify sovereign debt ex ante as odious, and establishing an international tribunal to adjudicate ex post claims for repudiation. We find both principled and practical difficulties with each of these methods.

We also identify the associated but little-remarked problem of the odious creditor, one who will lend to the most heinous regime, typically for reasons of national expediency.

We propose that the decision to allow repudiation should take into account the realities of international relations and the broad goals of the international community and the international financial institutions to foster economic development and democratization. We suggest that the IFIs establish a well-crafted fund and insurance scheme to which creditors and nations seeking to repudiate odious debt can appeal for assistance. We recognize that there are moral hazard and adverse selection problems, as with any insurance scheme. Nonetheless, we believe that this scheme offers more flexibility and is far more practicable and acceptable to the international community than any other corrective heretofore proposed.

Working Paper Series