[DEBATE] : (Fwd) Odious debt back on the agenda

[Patrick Bond]

ODIOUS DEBTS ONLINE – November 2nd, 2007

NEWS AND ANALYSIS

Odious Debt: The Terms of the Debate
by Jeff King
North Carolina International Law and Commercial Regulation, Volume 
XXXII, 5/10/2007

Reviewed by Patricia Adams

This is Jeff King’s second major work on the doctrine of odious debts, 
the first being the landmark study he produced with Ashfaq Khalfan and 
Bryan Thomas on behalf of the Centre for International Sustainable 
Development Law at McGill University in 2001 (and finalized in 2003). 
Like the first, this one is full of important legal history and 
arguments that odious debt advocates will want to know.

Here are some of my favorites.

Critics of the doctrine often argue that since so many countries have 
repaid debts that might be classed as odious – for example, South Africa 
after apartheid and the Philippines’ repayment of the Bataan nuclear 
reactor – that this “state practice” in effect has established a rule of 
international customary law that all debts must be repaid. Not true, 
says King.

“At all times in the history of sovereign debt, there has been a set of 
overpowering incentives and threats associated with payment of sovereign 
debt to creditors in a position to punish defaulting sovereigns,” King 
says, including political recognition, institutional membership, access 
to military aid, trade markets, and drawing rights at the International 
Monetary Fund and World Bank, or fear of ostracization in capital 
markets. The fact that a debtor repays a debt for these reasons is not 
sufficient to establish a binding legal rule: it must be shown that they 
feel legally obliged to do so. Indeed, the absence of an established 
opinio juris undermines the argument that the repayment of such debts 
was accepted as law.

Critics also argue that the absence of an “odious debt” claim is 
evidence that the concept will not hold legal water. Again, King doesn’t 
buy it. States have not, nor need they declare that they are applying 
the odious debt doctrine when they use various sources of law to prove 
that the disputed debts were contracted in the absence of benefit, 
consent and with creditor awareness. “The term odious debt is merely a 
label provided by Sack” to identify such loans. King goes on to list 
examples of state practice where nations have refused to repay debts 
they considered odious without actually referring to them as “odious 
debt,” including the non-apportionment of Spanish debts relating to the 
repression of an independence struggle on the island of Cuba (1898), the 
Soviet repudiation of Tsarist debts (1918), and the non-apportionment of 
Prussian debts relating to the colonization of Poland (1919), among others.

King also points out that the argument that no tribunal has ever cited 
the “odious debt doctrine” as a reason for invalidating a sovereign debt 
– a favorite of critics – proves little. Bringing sovereigns before 
domestic courts is a relatively recent phenomena (thus explaining the 
absence of judicial precedents) and Article 38 (1)(d) of the Statute of 
the International Court of Justice makes clear that judicial decisions 
are a “subsidiary means” for the determination of rules of law.

Odious debts critics love to say that it is nearly impossible to define 
the doctrine of odious debts’ “absence of benefit” criteria. Not so, 
says King, “The law is rife with judicial interpretation of vague terms” 
(such as “reasonableness” in tort law, the “rationality” standard in 
English administrative law, and so on). Notions of “public purpose” and 
“public benefit,” he says, already play a role in public law and courts 
engage in review of them. “American public law, for instance, has 
recognized that the raising of taxes must be for public purposes, and 
that by extension, any public debt that will be financed out of public 
tax money must itself be for public purposes” – and has been litigated 
in various states, he adds. (This notion – that taxes must be used for 
public purposes – seems so obvious that one wonders how the development 
experts at the World Bank missed this fundamental rule of good 
governance when they let the estimated $100 billion of their loans – in 
effect deferred taxes – “leak” to corruption.)

King then explains that judiciaries usually defer on the definition of 
public benefit in cases where the decision-maker is democratically 
accountable. On the flip side, however, judiciaries may well expect a 
higher standard of due diligence by lenders considering loans to 
undemocratically accountable decision-makers.

As for stopping future odious debts, King pulls apart the most talked 
about proposal in circulation by Michael Kremer, Seema Jayachandran and 
Jonathan Shafter and proposes a different way for lenders to “odious 
debt proof” their loans.

The Kremer-Jayachandran-Shafter proposal would create an international 
institution to designate certain regimes as odious in order to stop 
future egregious odious debts and to provide stability in international 
financial markets. This would thereby put lenders on high alert that, in 
the absence of super due diligence, they might lose their claim to 
repayment. Bad idea, says King. Such an institution, consisting of 
states acting in their own self-interest and never on the basis of 
impartial assessments (much as the World Bank and IMF now does), would 
designate very few regimes as odious. Secondly, King says, declaring a 
regime, rather than a set of actions, to be “odious” would be “a rather 
‘nuclear’ type of option and … unlikely to be deployed until the regime 
reaches pariah status.” Thirdly, and here King makes a point long argued 
by Probe International , if a regime is not designated “odious,” a 
creditor can rely on this when lending to it and justify their actions 
as “due diligence” when, in fact, “it would eliminate the need for any 
diligence at all.” (Probe International has gone further and argued that 
receiving the Good Housekeeping Seal of approval from the proposed 
odious regime designator would protect creditors from odious debt 
actions by aggrieved citizens and encourage moral hazard on the part of 
lenders – perpetuating, and even entrenching, the current situation.)

Instead, King proposes a three-step, predictable, and cost-effective 
procedure for lenders to odious debt proof their loans.

Firstly, leaders should ensure consent of the borrowing public by 
establishing whether governments were elected by free and fair elections 
– for example, by reviewing evaluations of specially appointed UN 
monitors, U.S. Department of State human rights reports, international 
media coverage, the Economist Intelligence Unit, etc.

Secondly, when dealing with non-democratic regimes, lenders should stay 
away from loans for general, unspecified purposes, military purchases, 
or loans that can in any way be linked to forms of subjugation. 
Meanwhile, lend to purposes that are part of an integrated development 
plan. (I would add a note of caution here that apparently worthy 
projects in integrated development programs, such as roads, bridges and 
dams, are often chosen, not because they are the best investment for 
development, but because of the corruption opportunities they provide 
the public decision-makers: Chinese citizens have captured the essence 
of this problem in their reference to “silver roads, golden bridges, and 
diamond dams.”) To this King suggests a solution in the form of an 
accountability regime that segregates funds and audits them regularly.

Thirdly, and here is where King’s experience in Wall Street corporate 
law helps: lenders should conduct bona fide prenegotiations assessment 
of the borrower, demonstrate good faith in determining the purpose of 
the loan by explicitly identifying the use of funds and incorporating 
into the agreement any needed representations and warranties about not 
applying funds towards dubious circumstances, and record such 
commitments in minutes. “None of this is beyond the powers or competency 
of any corporate law firm now involved in sovereign lending. The added 
costs would be marginal.”

“It must be recalled,” King says, “that these additional requirements 
arise only where creditors deal with non-democratic regimes. Is this too 
high a transaction cost when lending money to dictators? Hardly.”

Given the extraordinarily high costs of repudiation, King says, “and the 
relatively easy procedural scheme presented here, there is no reason to 
think that creditors could not take this step and increase the security 
of their credit arrangements without prompting any greater market 
instability.” Most banks or domestic corporate lenders conduct much the 
same type of diligence in day-to-day lending, he says, as do private 
companies doing business in foreign countries where there are 
significant investment risks. “In short, it makes business sense," King 
adds. “More importantly, perhaps, creditors may well live up to a moral 
responsibility that no one publicly doubts: to ensure that they do not 
lend support to non-democratic regimes that are harming or defrauding 
their own populations.”

Case closed.

HAPPENINGS
UNCTAD's 6th biennial debt management conference takes place this month 
in Geneva from (Nov 19-21st). The objective is to explore and debate 
topical issues in debt policy and management by bringing together 
governments, international organizations and academia, among others.

The theory of odious debt receives top billing on this year's agenda and 
the questions proposed are "what is odious debt and how does it relate 
to national and international law?" The official conference brief states 
that "there is a wide disagreement on what "odious" debt really is," and 
focuses on the controversy surrounding the meaning and subsequent legal 
use of the term.

UNCTAD's presentation seems to be downplaying the fact that odious debts 
challenges are already a legal reality - the conclusion made by 
Professor Robert Howse in his recently released UNCTAD-sponsored paper .

Other issues to be debated include the future of concessional lending 
and whether or not 'vulture funds' are normal.