A Book that brings odious debt back into the limelight

Critical review of the book “Sovereign Debt Diplomacies” (2nd part)

8 February 2022 by Eric Toussaint

 A significant error about the odious debt doctrine

In one of the extracts quoted in Part 1 we could read that the authors claim that “[d]ebts are odious and should not be repaid when they were incurred by irregular regimes and for improper uses” (p. 28). However, a debt incurred by a regular government can be considered to be odious if it obviously flouts the interests of the population. So Pierre Pénet and Juan Flores Zendejas are mistaken when they claim that for a debt to be odious it must have been incurred by an irregular regime. As I clearly show in The Debt System. A History of Sovereign Debts and Their Repudiation (2019) and in other publications, Alexander Nahum Sack (1890-1955) propounded a definitely different view. Indeed the following quotation leaves no room for doubt:

“Consequently, for a debt, regularly incurred by a regular government (see above, §§ 1 and 5) to be considered incontestably odious with all the consequences that follow, the following conditions must be fulfilled (see also above, § 6 in fine):
1. — The new government must prove and an international tribunal recognize that the following is established:
a) that the purpose which the former government wanted to cover by the debt in question was odious and clearly against the interests of the population of the whole or part of the territory, and
b) that the creditors, at the moment of the issuance of the loan, were aware of its odious purpose.
2. — Once these two points are established, the burden of proof that the funds were used for the general or special needs of the state and were not of an odious character would be upon the creditors (see also infra, p. 170).” [1]

It thus has to be highlighted that the doctrine of odious debt Odious Debt According to the doctrine, for a debt to be odious it must meet two conditions:
1) It must have been contracted against the interests of the Nation, or against the interests of the People, or against the interests of the State.
2) Creditors cannot prove they they were unaware of how the borrowed money would be used.

We must underline that according to the doctrine of odious debt, the nature of the borrowing regime or government does not signify, since what matters is what the debt is used for. If a democratic government gets into debt against the interests of its population, the contracted debt can be called odious if it also meets the second condition. Consequently, contrary to a misleading version of the doctrine, odious debt is not only about dictatorial regimes.

(See Éric Toussaint, The Doctrine of Odious Debt : from Alexander Sack to the CADTM).

The father of the odious debt doctrine, Alexander Nahum Sack, clearly says that odious debts can be contracted by any regular government. Sack considers that a debt that is regularly incurred by a regular government can be branded as odious if the two above-mentioned conditions are met.
He adds, “once these two points are established, the burden of proof that the funds were used for the general or special needs of the State and were not of an odious character, would be upon the creditors.”

Sack defines a regular government as follows: “By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.”

So clearly for Sack, all regular governments, whether despotic or democratic, in one guise or another, can incur odious debts.
does not deem that the nature of the regime or government that incurs it is in any way significant since what matters is the use of the borrowed money. If a democratic government incurs a debt against the interests of the population, this debt can be defined as odious and be repudiated, provided it also meets the second condition. Consequently, contrary to an erroneous version of this doctrine, odious debt is not only about dictatorial or irregular regimes.

Odious debt is not only about dictatorial or irregular regimes

Sack defines a regular government as follows:

“By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.”

There is thus no doubt as to Sack’s position, all regular governments, whether despotic or democratic, can incur odious debts.

Debts that are clearly incurred in the personal interests of government’s members are odious

Another quotation clearly confirms that Sack does not see the nature of the government as a condition to be met for a debt to be odious: “Applying other conditions than those we have established (p. 6–7) would, through arbitrary, differing and contradictory judgments, bring about the paralysis of the whole international public credit system and so (if such judgments were to have real weight on questions of recognizing or of not recognizing debts as State debts) would deprive the world of the advantages of public credits.” (p. 11).

In case some readers still harbour doubts on Sack’s logic concerning despotic regimes, here is one more quotation: “Even when a despotic power is overthrown by another despotic power that is no less despotic and no more reflective of the will of the people, the odious debts of the fallen power remain the personal debts of the regime and the new power is not liable for them.” (p. 158). For Sack the purpose of the funds and the creditors’ knowledge of that purpose are the only elements that matter.

A debt is odious if it is incurred against the interests of the population and if the creditors cannot given evidence that they did not know

As illustrations of odious debts, Sack mentions debts incurred to the personal profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. of government’s members and creditors’ dishonest operations: “We can also put into this category of debt, loans clearly incurred in the personal interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. of government members or persons and groups related to government for purposes that are not related to the government.” (p. 159) Sack says immediately after this that debts of this kind were repudiated by four states of the US (namely Mississippi, Arkansas, Florida and Michigan) in the 1830s: “Cf. the case of the repudiation of certain debts by several North American states. One of the main reasons justifying these repudiations was the squandering of the sums borrowed: they were usually borrowed to establish banks or build railways; but the banks failed and the railway lines were never built. These questionable operations were often the result of agreements between crooked members of the government and dishonest creditors” (p. 159). Repudiation was motivated by the ill use of the borrowed money and the dishonesty of both borrowers and lenders. There was no reference to the regime being anyhow despotic. [2]

For Sack the purpose of the funds and the creditors’ knowledge of that purpose are the only elements that matter

Conclusion: For Sack, the despotic or irregular nature of the regime is not a necessary condition to define a debt as odious and therefore susceptible to be repudiated. Two conditions must be met: a debt is odious if it is incurred against the interests of the population and if, at the time they granted a loan, creditors were aware of this or cannot provide evidence to the contrary.

 Who was Alexander Nahum Sack and what did he want?

Alexandre Nahum Sack (Moscow 1890 – New York 1955), a Russian lawyer who taught in Saint Petersburg then in Paris, is considered to be one of the founders of the doctrine of odious debt. The doctrine, based on a series of precedents in jurisprudence, has come in for much debate. Often disparaged and widely avoided or ignored in university courses, the doctrine of odious debt has nevertheless been the topic of hundreds of articles and dozens of specialized books. The United Nations International Law Commission, [3] the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

(IMF), [4] the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, [5] the United Nation Conference on Trade and Development, [6] the UN independent expert on the effects of foreign debt and other related international financial obligations of states on the full enjoyment of all human rights, [7] Ecuador’s Commission for the full audit of public debt, set up in 2007 by President Rafael Correa, [8] the Committee for the Abolition of Third World Debt, now known as the Committee for the Abolition of Illegitimate Debt (CADTM), [9] and the Greek Debt Truth Commission set up by the president of the Hellenic Parliament in 2015 [10] have published documents, taken a stand, and organized seminars on the topic, as debts whose legitimacy and validity may be questioned are constantly under discussion in the field of international relations. [11]

Very often neither detractors nor those who base their actions on the doctrine elaborated by Sack take sufficient stock of the international jurist’s analytical framework or his political leanings. Alexander Sack was not a humanist interested in protecting peoples or nations from the nefarious actions of heads of state or creditors prepared to plunge the community into debt using fraudulent or even criminal means. His main aim was not to bring ethics or morality to the world of international finance. His aim was to reinforce the international order in place, by ensuring the continuity of debt repayments so that creditors could recover the money they had lent. But he could not avoid acknowledging that there is an important exception to this sacrosanct rule: under certain circumstances, creditors must agree to the cancellation of their debt if it can be demonstrated that the debt is odious.

Sack wanted to defend the rights of creditors but he had to acknowledge that there is a significant exception

Sack touches upon the issue of odious debts in a book he published in French in 1927. [12] The title he chose is significant: Les effets des transformations des États sur leurs dettes publiques et autres obligations financières : traité juridique et financier, i.e. The Effects of the Transformation of States on their Public Debt and other Financial Obligations: a Legal and Financial Treatise. The question he started from can be summed up as follows: what happens with the debts incurred by a State after a change of régime?

Sack states clearly in the first paragraph of the preface that […] the Russian revolution of March 1917 incited me to examine the effects of the political transformation of a state on its public debt.” Indeed two of the main events that affected him and led him to conduct an in-depth enquiry are the revolution of October 1917 (which he calls a “Bolshevik coup d’état”) and the repudiation of the tsarist debts by the Bolshevik government in early 1918. [13] He then gradually widened the field of his research to examine various cases of state succession and how obligations which tied the new state or new regime to creditors were affected.

Sack was anti-bolshevik and anti-communist

Nicolas Politis, [14] a Greek lawyer and statesman who wrote the introduction to Sack’s work, stresses the breadth of the research undertaken: “It is no exaggeration to say that Mr. Sack has completed the task he set himself with full honors. He has brought together a collection of documents of rare value. […] He has closely tracked the long list of annexation treaties and debt regulation agreements ratified over the last 150 years and analyzed their clauses one by one; he has investigated the legislative, administrative and judicial measures taken to implement them; he has looked up and classified the opinions of all authors to have written on the subject. Finally, he demonstrates, through the use he makes of all this material, an extraordinary grasp of the practical necessities of the law. Thus he explains, down to the last detail, the juridical nature of the succession of debts, borrowers’ obligations, and lenders’ rights, the relations between successor states, how they divided debts between them, and how they established their shares.

 Is Sack’s theory on odious debt a doctrine ?

If we consider that a “doctrine” designates the totality of the opinions expressed by legal experts as the result of their reflection on a given rule or situation; if elaborating a doctrine means “a legal framework, defining it, placing it within the context of the law, defining its limits, its practical application, the social effects and at the same time making a systematic, analytical, critical and comparative examination” [15] it is justified to consider that Sack has elaborated an odious debt doctrine.

To develop his doctrine he referred to an ample quantity of international treaties pertaining to arbitrations on questions of debt repayments concluded between the end of the 18th century and the 1920s; he analyzed the way disputes over debt had been treated and the legal, administrative, and judicial measures taken; he collected and classified the opinions of numerous authors (though actually only Europeans and Americans) who had studied the question. He presented his vision of the nature of debts, the obligations of the debtors and the rights of the creditors, the relations between successor states, the way debts and the effects of regime changes were shared, and defined the criteria for odious debts.

His doctrine is open to criticism, has weaknesses, gives priority to creditors, and does not consider human rights, but it does have consistency. It must also be said that, although disparaged by influential detractors (the mainstream media, the World Bank, and numerous governments), it has inspired numerous movements who look to Sack’s work for solutions to cases of nefarious debt. Sack’s two criteria for determining the existence of an odious debt that a nation may decide not to pay are applicable and justified: lack of benefit for the population and creditor complicity.

In an opinion piece published in 2002 in the IMF journal Finance & Development, Michael Kremer and Seema Jayachandran define the doctrine of odious debt as follows: The legal doctrine of odious debt [claims] that sovereign debt Sovereign debt Government debts or debts guaranteed by the government. incurred without the consent of the people and not benefiting the people is odious and should not be transferable to a successor government, especially if creditors are aware of these facts in advance.” [16]

The IMF, the WB and other creditors want to prevent the doctrine of odious debt from being correctly interpreted and implemented

This definition may seem convincing at first sight and does not mention the despotic nature of the regime as a necessary condition. However, a closer scrutiny shows that one of the conditions mentioned by the authors is not mentioned by Sack, namely that it should be “incurred without the consent of the people.” The fact that Sack does not mention this condition is quite coherent with his position that the nature of the government is of no importance in this matter. [17]

The IMF and the WB as well as other creditors want to prevent the odious debt doctrine from being correctly interpreted and implemented. They cannot deny its existence but they strive to give it a definition that strongly limits its field of application.

 The alleged principle according to which “governments inherit their predecessors’ debts, whatever the political differences between the governments”

Let us new return to Sovereign Debt Diplomacies : Rethinking sovereign debt from colonial empires to hegemony, the book edited by Pierre Pénet and Juan Flores Zendejas. In their chapter Mitu Gulati and Ugo Panizza give a distorted and unilateral version of a key principle in international law and an incorrect reading of the odious debt doctrine.

They write, “The general rule of governmental succession in international law is strict. Governments inherit the debts of their predecessors, regardless of political differences between the governments” with a reference to a text by Gulati himself, along with, a. o., Lee C. Buchheit, a lawyer who worked for Cleary Gottlieb Steen & Hamilton LLP, a major law firm specializing in the defense of the interests of large private companies; it participated in the restructuring of the Greek debt in 2012, which clearly favoured large private creditors (Buchheit, Gulati & Thompson, 2007 [18]). In 2022, Buchheit took a clear stand against a suspension of debt payments by Sri Lanka despite the fact that the country is facing a very serious situation as a result of the coronavirus pandemic.

Several examples, including in the history of the US show that a change of government can result in debt repudiation

What they claim is an unquestioned principle (Governments inherit their predecessors’ debts) happens to have been a controversial issue among jurists and between States for many centuries.

Several examples, including in the history of the US show that a change of government can result in debt repudiation. In the 19th century there were at least two debt repudiations after a change of government. As mentioned above, in the 1830s, Mississippi, Arkansas, Florida and Michigan repudiated their debts after a citizens’ uprising and a change of government.

A second wave of debt repudiations occurred in the US after 1877. Eight States of the South [19] repudiated their debts claiming that the debts accumulated from the end of the Civil War to 1877 resulted from illegitimate loans by crooked politicians supported by Northern States.

Actually those two examples I just mentioned were studied by Mitu Gulati and two other authors in a mist interesting paper published un 2009 (Sarah Ludington, G. Mitu Gulati, Alfred L. Brophy, “Applied Legal History : Demystifying the Doctrine of Odious Debts).

The principle of continued obligation in terms of debt repayment in case of a change of government has been at the heart of strong debates about sovereign debts, and history shows it is anything but intangible.
The principle of continued obligation in terms of debt repayment in case of a change of government has been at the heart of strong debates about sovereign debts

Moreover in chapter 9, “Decolonization and Sovereign Debt: A Quagmire,” Michael Waibel shows the extent of the debates on the principle of continued obligations of the States, notably concerning debts, and the vital implications of the issue.

International law says colonial debts are not transferable to the newly independent States, according to article 16 of the 1978 Vienna Convention: ‘A newly independent State is not bound to maintain in force, or to become a party to, any treaty by reason only of the fact that at the date of the succession of States the treaty was in force in respect of the territory to which the succession of States relates.’ Article 38 of the 1983 Vienna Convention on Succession of States in respect of State Property, Archives and Debts (not yet implemented) is quite explicit in this respect:

‘1. When the successor State is a newly independent State, no State debt of the predecessor State shall pass to the newly independent State, unless an agreement between them provides otherwise in view of the link between the State debt of the predecessor State connected with its activity in the territory to which the succession of States relates and the property, rights and interests which pass to the newly independent State.
2. The agreement referred to in paragraph 1 shall not infringe the principle of the permanent sovereignty of every people over its wealth and natural resources, nor shall its implementation endanger the fundamental economic equilibria of the newly independent State.’

No public debt of the predecessor State is passed on to the newly independent State

Here are some historical examples:

One of the major principles asserted by the French Revolution in 1789 is that a free and sovereign people cannot be forced to abode by treaties and obligations contracted by tyrants and in 1792 the French National Convention repudiated two thirds of the debt contracted by the Ancien régime. The 1776 American revolution also resulted in unilateral repudiations of various treaties.

The German jurist Gustav Hugo (1764-1844), [20] often called the father of the historical school in law, wrote: “A national bankruptcy is by no means illegal, and whether it is immoral or unwise depends altogether on circumstances. One can hardly ask of the present generation that it alone shall suffer from the folly and waste of its predecessors, for otherwise in the end a country could hardly be inhabited because of the mass of its public debts.” [21]

In 1867, after the overthrow of Maximilian of Austria, a puppet emperor set up in power in Mexico by Napoleon III, Mexico repudiated the debt contracted in Paris. This move was acknowledged by most other States, including by France, eventually.

In 1918, after a change of regime, Costa Rica repudiated the debt contracted by the former regime. [22]

In February 1918, the Soviet government repudiated all debts contracted by the Tsarist regime. [23]

The odious debt doctrine developed in 1927 on the basis of one century and a half of disputes about sovereign debts states specifically that the principle of continued obligations of States does not apply in case of odious debts or of a change of government.

The principle of continued obligations of States in terms of debt repayment in spite of a change of regime is in favour of creditors and reinforces the dominant international order as it attempts to prevent States (and peoples) from throwing away the burden of their debt. It has often been questioned both in theory by numerous jurists as soon as the 19th century and in practice when States unilaterally repudiated their debts.

The principle of continued obligations of States does not apply in case of odious debts

The World Bank and the IMF have systematically tried to restore the States’ continued obligations in terms of debt repayment in spite of a change of regime.

As I explain at length in the book The Debt System. A History of Sovereign Debts and Their Repudiation from the 19th century to the Second World War, a succession of governments in Latin American former Spanish colonies suspended payment or repudiated debts because they considered them to odious, illegal and/or illegitimate. This was the case in Mexico in 1861, 1867 and 1883, in Guatemala in 1829, in Peru in 1886, in Costa Rica in 1922, in Cuba in 1909 and 1934, in Brazil from 1932. The United States also repudiated debts they considered to be odious and illegitimate in the 1830s, in 1865, in the 1870s and in 1898. In 1918 Soviet Russia repudiated the debt incurred by the Tsarist regime. Next to the cancellation of debts incurred by Germany to colonize Polish and African territories, which was imposed by the Versailles Treaty in June 1919, we must mention the cancellation by the Bolshevik government in 1920-1921 of the debts owed by the three Baltic States that had been part of the Tsarist empire as well as that owed by Poland, Persia and Turkey. Those several cancellations, suspensions and repudiations resulted in many disputes, arbitrations and unilateral decisions.

Note that we define debt cancellation as creditors renouncing their claim on repayment. A debt suspension or moratorium refers to a temporary suspension of repayment. Repudiation refers to debtors’ unilateral decisions no longer to repay either the stock of the interests of their debts.

When the doctrine of odious debt emerged, the WB and the IMF tried to restore the power of creditors and to persuade the indebted States that it belonged to the past.

As Julia Juruna wrote in Le Monde diplomatique back in 1977 when a member state first requested a loan from the IMF and the WB, those two institutions set two preliminary conditions: that formerly contracted international debts be paid and that an ‘adequate’ compensation be provided for nationalized foreign goods. [24] According to Mason and Asher, the Bank’s historians, the demand that old debts be paid rekindled century-old disputes between a number of Latin-American governments and their Western creditors, some of those disputes going back to the 19th century. [25] Relying on their work, Julia Juruna suggests that “The most striking case was no doubt Guatemala, where the World Bank revived the issue of paying securities that had been floated in 1829: the country could only receive a loan from the WB after local courts ruled in favour of the holders of these more than 100-year-old bonds.”

Attempts at restoring creditors’ power were often successful, as Pénet and Zendejas claim, yet this did not prevent major debt cancellations and repudiations in the second half of the 20th century and in the early 21st century. Here is a non exhaustive list: debt repudiation by revolutionary China in 1949-1952; repudiation of debts owed to the Netherlands by Indonesia in 1956; debt repudiation by Cuba in 1959-1960; repudiation of colonial debts by Algeria in 1962; repudiation by Iran in 1979 of debts contracted by the Shah to buy weapons; repudiation by the three Baltic republics of debts inherited from the USSR in 1991; cancellation by Nelson Mandela’s government in 1994 of the debt owed by Namibia to South Africa; cancellation of East-Timor’s colonial debt in 1999-2000; cancellation of 80% of Iraq’s debt in 2004; repudiation by Paraguay $f debts owed to Swiss banks in 2005; cancellation by Norway in 2006 of its claims on five countries: Ecuador, Peru, Sierra Leone, Egypt and Jamaica. [26]

The debt crisis that struck in the early 1980s and the neoliberal offensive that gradually set in at a global level reinforced the coercive power of institutions such as the World Bank and the OMF, and of creditors in general.

This is also stated in Pénet and Zendejas’s introduction, which is summed up in the first part.

The authors underline that “UNCTAD UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

, the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

, the World Bank, regional development banks, and bilateral organizations also use conditionality frameworks in their country financing operations.” (p. 25) Those multilateral institutions serve the interests of powerful States such as the US or the EU, that often use them to “help private creditors recover their loans” (p. 26). Nowadays, however, “[d]ebt repayment mobilizes multilateral organizations like the IMF, the World Bank, and the Paris Club, whose practices of conditionality are hard to resist, even by Western countries, such as Greece recently” (p. 27). Pénet and Zendejas also explain that private creditors more and more often succeed in having States sentenced to repaying their debts. This is perfectly true. Yet there are still gaps in the system as shown by real victories won by countries such as Ecuador [27] or Iceland [28] in 2008-2009. In some cases courts also find fault with private creditors. Granted, those cases are few and far between, but they do exist, as testified by a judgment of the General Court of the European Union on 23 May 2019 (see next section).

Even without a change of government, an indebted State can force debts on its creditors, as confirmed by a judgment of the General Court of the European Union

As shown above, it is wrong to claim, as do Gulati and Paniza, that a change of government does not affect the obligation to repay debts. We should add that even without a change of government or regime, a State can enforce a debt reduction on its creditors. This is in fact what has been claimed for years by the Committee for the Abolition of Illegitimate Debt (CADTM). According to international law, a government can force losses on creditors through a unilateral decision to help its population.

A recent judgment by the General Court of the European Union confirmed that a State can unilaterally change its obligations in terms of debt repayment. In a judgment on 23 May 2019, European judges ruled against the applicants, German creditors (three individuals and two companies) of the Greek debt, who demanded financial compensation totaling around €4 million. The German creditors considered that the act voted by Greece in 2012, which imposed an exchange of debt securities against new securities with a cut of over 50%, violated Greece’s obligations. The applicants said this was a violation of the pacta sunt servanda principle, which means that contrasts must be respected. [29]

The Court replied that this general principle did not apply to them and that in any case States were entitled not to implement the pacta sunt servanda principle if they rightfully called upon the rebus sic stantibus principle. The Court dismissed them and ordered them to pay the legal costs.

The principle of law known as pacta sunt servanda according to which States must honour contracted obligations is not absolute

The principle of law known as pacta sunt servanda according to which States must honour contracted obligations is not absolute. In some circumstances, a State is allowed not to implement the terms of the contract. It can even change those terms. Indeed, the Pacta sunt servanda principle, which means that parties are bound by an agreed contract and cannot therefore eschew the consequent obligations, is qualified by another principle called clausula rebus sic stantibus (thing thus standing) which implies that the provisions of the treaty or contract remain applicable only to the extent that the circumstances which justified the conclusion of these acts remain unchanged and their change does not radically alter the obligations originally accepted. Or, in plain language, if the circumstances in which a contract was signed have significantly changed, one of the parties is allowed not to implement the terms of the contract.

The Court replied to the creditors that they could not call upon the principle of the Greek State’s continued obligations towards them. First, it stated that the Vienna Convention on which the applicants relied does not apply to inter-state relationships. In its paragraph 78 the Judgment says: “In the case in point, the applicants’ subscription to the disputed bonds which were issued and guaranteed by the Hellenic Republic created a contractual relationship between them and the Hellenic Republic. That contractual relationship is not governed by the principle of pacta sunt servanda under Article 26 of the Vienna Convention on the Law of Treaties. Pursuant to Article 1 thereof, the Convention applies only to treaties between States. Consequently, Article 26 of the Vienna Convention on the Law of Treaties is not a rule of law conferring rights on the applicants.” [30]

Investing in state debt securities was not without a risk of damage to assets

Second, the judges of the Court stated that Greece could rely on the rebus sic stantibus principle, i.e. a significant change in circumstances, not to honour its contracted obligations. Greece used that principle to vote act n° 4050/2012 that forced a 50% cut on holders of Greek debt securities.

Here is paragraph 84 of the judgment: “Furthermore and in any event, it has not been shown that the adoption of Law No 4050/2012 entailed a breach of the principle of pacta sunt servanda. Investing in State bonds was not free from risk of economic loss, even though the law governing such bonds did not provide for the possibility, before their maturity, of renegotiating certain terms such as the face value, accrued interest or maturity. As pointed out by the Symvoulio tis Epikrateias (Council of State, Greece), that risk is notably due to the long length of time that elapses from the issuance of the bonds, during which unforeseen events may substantially curtail or even wipe out the financial capacities of the State, issuer or guarantor of those bonds. As the European Court of Human Rights (‘the ECtHR’) has held, if unforeseen events of that kind occur, such as the Greek public debt crisis in this case, the issuing State is entitled to attempt a renegotiation based on the principle of rebus sic stantibus.”

This is a most significant decision for two main reasons:

  1. Private creditors (individuals or private companies including banks, investment funds Investment fund
    Investment funds
    Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
    , vulture funds Vulture funds
    Vulture fund
    Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
    ) cannot call on the Vienna convention to turn against a State that forces losses on them.
  2. A State may not apply the terms agreed with creditors and can change the agreement and enforce losses. This means that it can completely cancel a debt or drastically reduce it if circumstances allow. [31]

In some circumstances a State may not apply the terms agreed with creditors

Conclusion: Several States facing a complete change of circumstances as a result of the pandemic and of the international economic crisis should call on the principle of rebus sic stantibus to radically reduce fiscal resources dedicated to their creditors and reallocate them towards expenses that help people.

To round up this second part, I will discuss another question relating to the doctrine of odious debt.

 Are all debts contracted by a despotic regime odious?

For Sack, some of the debts incurred by despotic regimes can be useful to the population, for instance, the construction of roads or other infrastructures of public utility. Consequently they are not odious and in case of a change of regime they have to be repaid. This is consistent with his general position.

The CADTM’s view is different. With some notorious dictatorships creditors cannot claim ignorance and demand repayment. In this case, the use of the loans is not essential to define debts. Indeed, any financial support to a criminal regime, even to finance hospitals or schools, means helping to keep it in power. For one thing, some useful investments such as roads or hospitals can be used to odious ends, for instance supporting a war effort. For another, the fungible nature of money implies that a government which borrows for purposes that are useful to the population or to State, - which is officially almost always the case – can make funds available for other, less acceptable, purposes.

With some notorious dictatorships creditors cannot claim ignorance and demand repayment

Here are some illustrations. The Nazi regime had a huge motorway network built. It maintained and developed hospitals. This was necessary, both to win the support of part of the population and to be able to perpetrate a war of aggression and a genocidal policy.

The apartheid regime in South Africa carried out major infrastructure investments thanks to external financing. Those loans made it possible for the racist regime to stay in power for decades whereas the UN called for a boycott and asked the WB to put an end to its financial support, which the WB refused for many years. [32] Major international private banks systematically financed the Pretoria government.

The Rwanda dictatorship that prepared and perpetrated a genocide in 1994 was financed by France, Belgium, the WB and the IMF. As shown by various authors relying on WB files, this institution further financed the Rwanda regime that claimed it was buying ambulances and increasing expenses in health care while it was buying weapons and preparing the genocide. [33]

Loans granted to dictatorships are necessarily odious and creditors are accomplices of the crimes perpetrated by the regimes they finance

We could add many more illustrations. The conclusion is clear: loans granted to dictatorships are necessarily odious and creditors are accomplices of the crimes perpetrated by the regimes they finance. A people that overthrows such a regime and adopts new institutions does not have to repay those loans and creditors must be sued on the charge of aiding and abetting.


Making loans to dictatorships illegal would be a breakthrough

Although challenged by creditors, the doctrine of odious debt regularly surfaces for the issue of illegitimate sovereign debts recurrently prompts governments to take measures for their cancellation or their repudiation.

Translated by CADTM


[1Alexander Sack, Les effets des transformations des États sur leurs dettes publiques et autres obligations financières : traité juridique et financier, Recueil Sirey, Paris, 1927. See the almost complete French version of the document freely accessible on the CADTM’s website. The English translations are mostly from Toussaint’s book The Debt System.

[2See Éric Toussaint, “Three waves of public-debt repudiations in the USA during the 19th century,” https://www.cadtm.org/Three-Waves-of-Public-Debt

[3Yearbook of the International Law Commission 1977 Volume II Part One - ilc_1977_v2_p1.pdf, http://legal.un.org/ilc/publications/yearbooks/english/ilc_1977_v2_p1.pdf , see also the 1979 report, http://legal.un.org/ilc/publications/yearbooks/english/ilc_1979_v2_p2.pdf

[4IMF, Michael Kremer and Seema Jayachandran, “Odious Debt”, Presented at the Conference on Macroeconomic Policies and Poverty Reduction, April 2002, https://www.imf.org/external/np/res/seminars/2002/poverty/mksj.pdf
and another IMF document, https://www.imf.org/external/pubs/ft/fandd/2004/12/pdf/straight.pdf

[5Vikram Nehru and Mark Thomas, 2008, “Odious Debt : Some Considerations” at : https://documents1.worldbank.org/curated/en/542021468150313836/pdf/WPS4676.pdf
The panel on odious debt organized by the World Bank on 14 April 2008 brought up debates that are echoed in Part III of Carlos A.Primo Braga & Dörte Dömeland (eds), Debt Relief and Beyond : Lessons Learned and Challenges ahead, 2009, https://openknowledge.worldbank.org/handle/10986/2681

[6Robert Howse, The Concept of Odious Debt in Public International Law, UNCTAD, 2007 http://unctad.org/en/Docs/osgdp20074_en.pdf

[7United Nations, Cephas Lumina, Report of the independent expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights, 2009 http://www2.ohchr.org/english/bodies/hrcouncil/docs/11session/A.HRC.11.10_en.pdf

[8See the final report of this committee in which I took part as spokesperson for the CADTM. See https://www.cadtm.org/Final-Report-of-the-Integral

[9See CADTM – Topicality of the odious debt, https://www.cadtm.org/Topicality-of-the-odious-debt

[10See the final report of this committee in which I took part as scientific coordinator and spokesperson for the CADTM Truth Committee on Greek Debt, Preliminary Report, particularly chapters 8 and 9, https://www.cadtm.org/Preliminary-Report-of-the-Truth
See also Truth Committee on Greek Debt, “Illegitimacy, Illegality, Odiousness and Unsustainability of the August 2015 MoU and Loan Agreements,” https://www.cadtm.org/Illegitimacy-Illegality-Odiousness

[11We can also mention the recent publication if academic books on the topic: Stephania Bonilla, Odious Debt : Law-and-Economics Perspectives, Gabler publisher, Wiesbaden, 2011; Michael Waibel, Sovereign Defaults before International Courts and Tribunals, University of Cambridge, 2013; Jeff King, The Doctrine of Odious Debt in International Law. A Restatement, University College London, 2016; Odette Lienau, Rethinking Sovereign Debt : Politics, Reputation, and Legitimacy in Modern Finance, Harvard University, 2014.

[12See note 1.

[13The list of the books he published show that he only took an interest in the issue of public debts after the Russian revolution.

[14Nicolas Politis (also Nikólaos Polítīs, Νικόλαος Πολίτης, Corfu 1872- Paris 1942), jurist specializing in international law; diplomat and statesman. Doctor in law and political sciences (1894); Professor of Public International Law at the Law Faculties of the Universities of Aix-en-Provence (1898-1903), Poitiers (1903- 1910) and Paris (1910-1914). Member of Institut de France; founding member of the Academy of Athns (1926). Greek Minister of Foreign Affairs several times (from 1916 to 1920, in 1922, and in 1936); delegate for Greece at the Peace Conference in 1919; Greek ambassador to France (from 1924 to 1925 and from 1927 to 1940). Member and vice-president of the Institute of International Law, vice-president of the Academy of International Law at the Hague, member of the Permanent Court of Arbitration at the Hague, representing Greece. Delegate at the League of Nations (in 1923), then president of the assembly of the same (in 1932). Source: http://data.bnf.fr/13092602/nicolas_politis/ (trans. CADTM). One is struck by the fact that Nicolas Politis, despite three terms of office as Greek Minister of Foreign Affairs, should make no mention, in his introduction to Sack’s book, of Greece as an emblematic example of odious debt. He says not a word on the topic of odious debt. Clearly, he did not consider it a central element of Sack’s book. On the odious debt of Greece from its independence in 1829-1830, see Éric Toussaint, “Newly independent Greece had an odious debt round her neck,” https://cadtm.org/Newly-Independent-Greece-had-an and Éric Toussaint, “Greece: Continued debt slavery from the late 19th century to the second world war,” https://cadtm.org/Greece-Continued-debt-slavery-from

[15Serge Braudo, Dictionnaire du droit privé, http://www.dictionnaire-juridique.com/definition/doctrine.php

[16IMF, Michael Kremer and Seema Jayachandran, op. cit.

[17Obviously Michael Kremer and Seema Jayachandran are entitled to add this condition. But clearly consent can be manufactured through the manipulation of public opinion. Situations can also occur in which fanatized majority give their consent to odious and criminal policies, as was the case under the Nazi regime.

[18Buchheit, L. C., Gulati, M. & Thompson, R. (2007). ‘The Dilemma of Odious Debts’. Duke Law Journal, 56, 1201–62.

[19The States concerned were Alabama, Arkansas, Florida, Georgia, Louisiana, North Carolina, South Carolina and Tennessee.

[21Lehrbuch des Naturrechts, 2nd edition, Berlin, 1819, quoted in Edwin Borchard, State Insolvency and Foreign Bondholders, Vol. I. General Principles. Yale University Press, New haven, 1951.

[22Éric Toussaint, “What other countries can learn from Costa Rica’s debt repudiation” https://www.cadtm.org/What-other-countries-can-learn

[23Éric Toussaint, “Russia: origin and consequences of the debt repudiation of February 10 1918,” https://www.cadtm.org/Russia-Origin-and-consequences-of-the-debt-repudiation-of-February-10-1918

[24Julia Juruna, « Le Fonds monétaire et les banques privées. Le ‘gendarme’ du grand capital », Le Monde diplomatique, October 1977, pp. 1, 20 et 21.

[25Edward S. Mason and Robert E. Asher, The World Bank since Bretton Woods, The Brookings Institution, Washington, D.C., 1973.

[26This list is provided in a chapter by Christina Laskaridis, Nathan Legrand and Éric Toussaint, “Historical Perspectives on Current Struggles against Illegitimate Debt” in The Routledge International Handbook of Financialization - 1st Edition, 2020, https://www.routledge.com/The-Routledge-International-Handbook-of-Financialization/Mader-Mertens-Zwan/p/book/9781032174631

[27Éric Toussaint, “Ecuador: Resistance against the policies imposed by the World Bank, the IMF and other creditors between 2007 and 2011,” 15 April 2021, https://www.cadtm.org/Ecuador-Resistance-against-the-policies-imposed-by-the-World-Bank-the-IMF-and

[28CADTM, “EFTA court dismisses ’Icesave’ claims against Iceland and its people”, 28 January 2013, https://www.cadtm.org/EFTA-court-dismisses-Icesave and Renaud Vivien, Eva Joly, “Iceland refuses its accused bankers ’Out of Court’ settlements,” 2 March 2016, https://www.cadtm.org/Iceland-refuses-its-accused

[29Article 26 (pacta sunt servanda) of the 1969 Vienna Convention on the law of treaties reads as follows: “Every treaty in force is binding upon the parties to it and must be performed by them in good faith.” The Vienna Convention entered into force in 1980. Its text is electronically available at

[31See a. o. Renaud Vivien, « Quel type de lois peuvent prendre les États membres de l’UE pour restructurer unilatéralement leurs dettes ? », 31 May 2019, https://www.cadtm.org/Quel-type-de-lois-peuvent-prendre-les-Etats-membres-de-l-UE-pour-restructurer (in French only)

[32See Patrick Bond & Éric Toussaint, “South Africa: The support of the World Bank and the IMF to the Apartheid regime,” 29 April 2019, https://www.cadtm.org/South-Africa-The-support-of-the-World-Bank-and-the-IMF-to-the-Apartheid-regime

[33See Éric Toussaint, Rwanda. “A Look back at the 1994 genocide,” 6 April 2021 https://www.cadtm.org/Rwanda-A-look-back-at-the-1994-genocide

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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