Odious, Not Debt

I INTRODUCTION REAL PROBLEMS AND ORPHAN DOCTRINES The U.S. invasion of Iraq in 2003 revived public and academic debate about a wobbly old doctrine of international law: the Doctrine of Odious Debt. (1) As formulated in 1927, Odious Debt allows governments to disavow debts incurred by their predecessors without the consent of or benefit for the people, provided creditors knew of the taint. The doctrine has roots in nineteenth century jostles over colonial possessions. Few countries have invoked Odious Debt as grounds for repudiation; (2) none has succeeded. To be sure, the problem of debt incurred by vile regimes to finance evil deeds precedes colonialism and has yet to be solved. But for the past eighty years, Odious Debt's rhetorical appeal has vastly outstripped its "legal vitality." (3) Bypassing the doctrine, countries and their creditors have addressed odiousness by proxy--using economic necessity, rather than fraud or political taint, as grounds for debt relief. Some explanations for Odious Debt's disuse criticize its vague, complex, and politically fraught criteria for repudiation and its unworkable institutional arrangements; (4) this author has suggested that readily available alternatives achieve a similar financial outcome faster. (5) This article raises a different concern. It argues that the Doctrine of Odious Debt frames the problem of odious debt in a way that excludes a large number, perhaps the majority, of problematic obligations incurred in the second half of the twentieth century. Advocacy and academic literature traditionally describe the odious debt problem as one of government contracts with private creditors. These turn odious when borrowing officials abuse the public trust by diverting the proceeds, abetted (and occasionally bribed) by their bankers. (6) Solving the problem thus defined requires both ridding the people of the debt and discouraging private creditors from financing evil going forward. But in the latest crop of cases, including Iraq, Liberia, and Nigeria, private creditors represent a small fraction of the old regime's debts. Most of the creditors are other governments and public institutions. In Iraq and Liberia, public (official) credits outnumbered private credits at least six to one before debt relief; in Nigeria official creditors held over seventy percent of all sovereign debt compared to six percent for foreign private creditors. (7) Many governments lent for the specific purpose of propping up odious but friendly regimes, not to make money off the coupons. Transfers took the form of loans rather than grants because loans were more palatable to donor country taxpayers. In such cases, the prospect of repudiation may not have dissuaded officials quite as readily as it might private bankers. The predominance of private creditors in the Odious Debt literature is a relic of the early twentieth century, when governments financed themselves almost entirely from private sources. The predominance of official creditors in the odious debt problem poses a distinct challenge. The most practical proposals to deal with odious debts to private creditors--using domestic contracts, agency, and corporate law doctrines--do not help with official debt. These doctrines may have moral sway but have no legal force against public creditors. (8) On the other hand, the law of state succession and sovereign-debt practice fail to address the diversity of sovereign obligations, including official debt, in a coherent and principled fashion. The result is a set of binary outcomes (repudiation or full succession), a convoluted web of restructuring fora, and ad hoc restructuring rules that use financial necessity to mask political accommodation. Meeting the challenge requires a better understanding of the difference between private and official debt. The two categories of debt share formal similarities (such as the promise to repay), but are far apart in substance. …