A sovereign State can refuse the transfer of debts that were contracted in times of subjection

23 June by Anaïs Carton


The CADTM has devoted a series of articles to the collective book Sovereign Debt Diplomacies. Rethinking Sovereign Debt from Colonial Empires to Hegemony, Edited by Pierre Pénet and Juan Flores Zendejas. [1] We provide here a summary of Chapter 9 entitled “Decolonisation and sovereign debt: a quagmire,” in which Michael Waibel, Professor of International Law at the University of Vienna, examines the debates around sovereign debt that States inherited in the context of decolonization.


Michael Waibel surveys over half a century of debates around this issue, from shortly after WWII to the early 21st century. He focuses his analysis on the discordant relationship between two approaches to the succession of States in terms of debt. A conservative approach insists that governments inherit the debts of their predecessors. So, universal succession posits “the automatic and complete assumption of all the predecessor State’s rights and obligations by the successor State(s)” (p. 214). The other, critical, approach claims that the new State is not bound by debts contracted by the former State since “the former colony’s obligations (including its debts) are extinguished upon the independence of the new State,” which results in a clean slate (p. 215).

Waibel focuses on the discordant relationship between two approaches to the succession of States in terms of debts. A conservative approach insists that governments inherit the debts of their predecessors. The other, critical, approach claims that the new State is not bound by debts contracted by the former State

The two approaches are respectively vindicated by two scholars on international law, namely Daniel Patrick O’Connell and Mohamed Bedjaoui. The former was one of the major researchers in the field of State succession in the second half of the 20th century. He taught International Law in Australia and in the United Kingdom, and passionately criticized the works of the International Law Commission, [2] while he was Rapporteur for the Association of International Law. Michael Waibel adds that Daniel Patrick O’Connell was socially conservative and a devoted Roman Catholic. Mohamed Bedjaoui was a judge at the International Court of Justice at The Hague for almost twenty years (1982-2001). He was also a member of the UN International Law Commission (1965-1982) and Special Rapporteur on “the succession of States in respect of matters other than treaties.”

It is significant that Bedjaoui used to be Legal Advisor to the Algerian Liberation Movement, then to the Provisional Government of the Algerian Republic (1956-1962), an expert with the Algerian delegation at the Évian and Lugrin negotiations for the independence of Algeria (1961-1962) and Cabinet Director of the president of the Constituent National Assembly in Algiers (1962). He was thus active within the Non-Aligned Movement, in favour of the clean slate approach that clearly prevailed during the decolonization period. For Mohamed Bedjaoui, a people’s right to self-determination cannot be curtailed by debt. Indeed, in his words, “political independence is meaningless without economic independence” (quoted on p. 216). Algeria advocated this approach in UN debates on self-determination and about the Declaration on Friendly Relations, arguing that political liberation rests on economic liberation. The ’clean slate’ is thus essential for new States to achieve independence, as developed in several studies within the UN International Law Commission on the succession of States.

The demonstration of the significance of those debates developed by Waibel recalls that the succession in terms of debt has been the object of controversy among jurists et between States for several centuries

Daniel Patrick O’Connell, on the other hand, tried to define an intermediary position between this clean-slate approach and that of universal succession, both of which he considers to be incompatible with political reality (p. 218). He turned down the universal approach because the obligations of the successor State disappear with the predecessor State. Yet, as Michael Waibel notes, he was also concerned with stability, continuity and as little disruption as possible to the global economy (p. 218). This was developed in the works produced by the Association of International Law on the succession of States, where O’Connell was Rapporteur. In this respect, the clean slate approach could damage the structure of international relations when the need for continuity and stability are more necessary than ever. As underlined by Waibel, “O’Connell’s contribution to this field was guided by pragmatic realities, [. . .] without recourse to romantic or political ideals or to dogmatic loyalty to grand theories of State succession” (p. 219). So, while criticizing the works of the International Law Commission on the succession of States, O’Connell considered that succession should be the rule and non-succession an exception in the context of decolonization.

The demonstration of the significance of those debates developed by Waibel recalls that the succession in terms of debt has been the object of controversy among jurists and between States for several centuries. It usefully mitigates the assertions of Mitu Gulati and Ugo Panizza, two other contributors to this collective book, who present the principle of continuing obligations of States, notably in terms of debt, as an intangible principle that cannot be debated. [3] However, several points in Michael Waibel’s contribution can also be criticized.

 It is not just a debate of ideas, it is a political battle

Movements for independence and decolonization are opposed to the vindication of the colonial and postcolonial order supported by creditor States, opposed to the notion of a new international order

First, contrary to what is suggested by Michael Waibel, it is not just a debate of ideas between different schools of thought. Mohamed Bedjaoui led a true political action within the UN International Law Commission to further the struggle of newly independent States to emancipate themselves from the economic tutelage of Western powers and so build a new international economic order, aiming at providing States with the legal tools to achieve legitimacy using international law which gives them the right to act unilaterally, notably to repudiate debts. On one side, then, we have movements for independence and decolonization, heralded by revolutions such as those of China in 1949 and of Cuba in 1959, and by heads of States of newly independent States such as Ben Bella in Algeria, Soekarno in Indonesia, Nasser in Egypt or Nehru in India, who fought within UN bodies. On the other hand, we have the vindication of the colonial and postcolonial order supported by creditor States, opposed to the very idea of a new international order, who started to be on the winning side from the 1982 debt crisis.

While Daniel Patrick O’Connell was concerned with issues faced by the central powers, Mohamed Bedjaoui was geared to issues faced by newly decolonized countries. For Daniel Patrick O’Connell, decolonization was a short-lived, insignificant issue, while for Mohamed Bedjaoui it involved the right to self-determination. This is a truly political confrontation. In his chapter Michael Waibel could have gone one step further and acknowledged that if Mohamed Bedjaoui and Daniel Patrick O’Connell had two different visions of what the international law of succession should be, they essentially had two different understandings of decolonization [4].

 The codification of international law is therefore not a pointless task, but clearly a major political issue for the creditor States.

Le combat mené par Mohamed Bedjaoui a abouti à un traité multilatéral, la Convention de Vienne sur la succession des États de 1983

The fight led by Mohamed Bedjaoui resulted in a multilateral treaty, the 1983 Vienna Convention on the succession of States, which reflects the critical approach mentioned above. It is also present in Article 16 of the 1978 Convention that says that decolonized States are not automatically bound by a treaty concerning their territory at the date of succession. Article 38 of the 1983 Vienna Convention on the succession of States in respect of State Property, Archives and Debts (not yet applicable) is perfectly 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

Yet Bedjaoui and the Non-Aligned Movement did not manage to get the support of creditor States. Indeed the 1983 Vienna Convention on the succession of States in respect of State property, Archives and Debts is not yet applicable.

This is why Michael Waibel defines the project of codification by the International Law Commission as “unfortunate” and states that the Commission’s attempt to formulate general rules and principles failed (p. 226). His argument is based on the fact that the provisions of the ILC’s work have not impacted on State practice and have not been applied to certain contemporary crises, such as the break-up of the USSR and of Yugoslavia. He forgets to mention that a number of States that achieved independence after the USSR’s implosion in 1991 such as Ukraine, the three Baltic Republics and some others did not inherit the debts of the Soviet era. He concludes that negotiations are still the main way of managing litigations on succession and refers to Scotland’s proposed independence from the UK or Catalonia from Spain.

In this he subscribes to Daniel Patrick O’Connell’s view that “the law of State succession was altogether unsuited to the process of codification, let alone of progressive development — preferring to let it develop as common law” and because it was not supported by the practices of States (p. 221). According to O’Connell, as a rule, successor States have not contested their obligations regarding debts and have, on the contrary, made immense efforts to maintain the continuity of their domestic legal systems. He mentions some cases of succession as evidence, such as Belgium and the Congo or the UK and India, in which local debts were left for the newly independent State to pay. He considers the few instances when the former colonizing country shared the sovereign debt Sovereign debt Government debts or debts guaranteed by the government. with the newly independent State (Algeria, Israel and Guinea) to be exceptions to the rule of continuing obligations.

The codification of international law is therefore not a pointless task, but clearly a major political issue for the creditor States

But where he sees exceptions, Mohamed Bedjaoui sees those instances as emblematic of the application of the ’clean slate’ theory in that these States have refused to take on debts from the predecessor States (p. 224). Moreover, we should recall that one of the obstacles to the ratification of the 1983 Convention was the Convention’s affirmation of the principle of permanent sovereignty over natural resources (as a superior principle to that of private property) as well as the articles of the Convention that open the door to reparations by former colonizing countries. [5] The codification of international law is therefore not a pointless task, but clearly a major political issue for the creditor States.

While a convention is necessarily informed by the concerns of the time when it was drafted, which may no longer be felt when its provisions are called upon, it does not prevent the 1978 Convention (Article 16 in particular) and the 1983 Convention from being useful barometers of the concerns at a given time. [6]. Nor does it prevent these tools from being used for territories that still have to achieve autonomy. As underlined by some jurists, it cannot be ruled out that Article 16 be extended beyond the field of decolonization. [7].

 Odious debt is not a “peripheral question”

When their African colonies achieved independence, several European countries including Belgium, France and the UK sought to charge the newly independent States with all or part of the debts incurred in colonizing them. All such debts are null and void.

To conclude his chapter, Michael Waibel argues that Daniel Patrick O’Connell’s thesis (which claims that negotiation is the main approach to the settlement of succession disputes) is central in contemporary debates. In this he supports the notion that odious debt is a “peripheral question” as claimed by O’Connell (p. 221).

What Waibel fails to recall is the significance of the doctrine of odious debt as developed in 1927 on the basis of a century and a half of litigations about sovereign debts. This doctrine often questions the principle of States’ continuing obligations, both in theory by several jurists as early as the 19th century and in practice when States unilaterally repudiate debts. Debts contracted by former colonial governments which result in severe violations of civil, political, economic, social and cultural rights of the populations can be defined as odious. When their African colonies achieved independence, several European countries including Belgium, France and the UK sought to charge the newly independent States with all or part of the debts incurred in colonizing them. All such debts are null and void.

It is useful to recall, as indicated above, that Ukraine, now in the limelight after Russia’s invasion, had not inherited any debt from the Soviet Union in 1991

As Éric Toussaint analyzed in detail in his book [The Debt System. A History of Sovereign Debts and of their Repudiation] (2019), in the course of the 19th century and down to the Second World War, a number of governments of former Spanish colonies in Latin America suspended payment or repudiated debts because they saw them as odious, illegal and/or illegitimate. [8] He clearly shows that there were significant acts of debt cancellation or repudiation 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 of Namibia’s debt to South Africa by Nelson Mandela’s government in 1994; cancellation of Timor-Leste’s colonial debt in 1999-2000; cancellation of 80% of Iraq’s debt in 2004; repudiation by Paraguay of debts owed to Swiss banks in 2005; cancellation by Norway in 2006 of the debts owed to it by five countries (Ecuador, Peru, Sierra Leone, Egypt and Jamaica); cancellation in 2009 of part of Ecuador’s debt that had been identified as illegitimate by the audit committee in 2007-2008.

Those are all unilateral acts of debt repudiation or cancellation that should be used as examples, for instance to cancel Ukraine’s debt, the major part of which is illegal. In this respect it is useful to recall, as indicated above, that Ukraine, now in the limelight after Russia’s invasion, had not inherited any debt from the Soviet Union in 1991.

 What is at stake with sovereign debt requires a radically critical approach

Michael Waibel fails to emphasize the fact that the World Bank World Bank
WB
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.

and the IMF 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.

http://imf.org
have systematically influenced States towards the continuity of obligations, in spite of a change of regime. A neo-liberal offensive has gradually affected the globe and reinforced the power of coercion of institutions such as the WB or the IMF et des créanciers en général

Michael Waibel fails to emphasize the fact that the World Bank and the IMF have systematically influenced States towards the continuity of obligations, in spite of a change of regime. So the continuity of obligations is not just a principle enacted by States. A neo-liberal offensive has gradually affected the globe and reinforced the power of coercion of institutions such as the WB or the IMF, and of creditors in general. Clearly the structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
policies (i.e. programmes of economic reform) implemented by the IMF, the WB and in Europe by the European Commission violate the right of people to self-determination as well as texts that aim at protecting human rights.

In this respect it is necessary to recall that, whatever the context (colonial or not), human rights have to prevail over repaying debts. This is sanctioned by the UN Charter, the 1948 Universal Declaration of Human Rights, the Charter of Economic Rights and Duties of States (1974), the Declaration on the Right to Development (1986) or the International Covenant on Economic, Social and Cultural Rights (1966). It was confirmed by a judgment of the Court of Justice of the European Union on 23 May 2019, which states that under international law a State may unilaterally modify its debt obligations in order to assist its population. [9] The Court told the creditors that they could not call upon the principle of continuing obligations of the Greek State. Those German creditors considered that the law voted in Greece in 2012, which imposed an exchange of debt securities for new securities with a reduction of value of over 50%, represented a violation of Greece’s obligations. The applicants claimed a violation of the pacta sunt servanda principle, which implies that a contract must be respected. The Court replied that this general principle did not apply to them and that, in any event, a State could fail to respect the pacta sunt servanda principle if it rightly invoked the rebus sic stantibus principle. The Court dismissed the case and ordered them to pay the legal costs. [10]

Il est à ce propos indispensable de rappeler que, quel que soit le contexte (colonial ou non), les droits humains prévalent sur le remboursement de la dette

Finally, the political question raised by this tension around the principle of succession of obligations does not only involve debts contracted in colonial times, but more widely, debts contracted in times of subjection, whatever the historical context, at the risk of violating human rights.

To learn more about the book Sovereign Debt Diplomacies. Rethinking Sovereign Debt from Colonial Empires to Hegemony, edited by Pierre Pénet and Juan Flores Zendejas, see:

  1. Two centuries of sovereign debt conflicts
  2. A Book that brings odious debt back into the limelight
  3. La CNUCED, de l’activisme technocratique à l’assistance technique(so far in French only)



Translated by Vicki Briault and Christine Pagnoulle

Footnotes

[1Sovereign Debt Diplomacies. Rethinking Sovereign Debt from Colonial Empires to Hegemony, Edited by Pierre Pénet and Juan Flores Zendejas, Oxford University Press, 2021.

[2UN body established in 1947 and whose mission was to “initiate studies and make recommendations for the purpose of … encouraging the progressive development of international law and its codification”.

[3See chapter 12 of Sovereign Debt Diplomacies. Rethinking Sovereign Debt from Colonial Empires to Hegemony, edited by Pierre Pénet and Juan Flores Zendejas, Oxford University Press, 2021.

[4Matthew Craven, The Decolonization of International Law: State Succession and the Law of Treaties, Oxford University Press, 2010.

[5To date, the convention has been ratified by 7 states: Croatia, Estonia, Georgia, Liberia, Northern Macedonia, Slovenia and Ukraine.

[6See also Matthew Craven, op. cit.

[7See Jean d’Aspremont, Etienne Henry in G. Distefano, G. Gaggioli, A. Hêche (eds), La convention de Vienne de 1978 sur la succession d’États en matière de traités. Commentaires article par article et études thématiques, Bruxelles, Bruylant, 2016.

[8See also Éric Toussaint’s article, “A Book the Brings Odious Debt Back into the Limelight” https://www.cadtm.org/A-Book-that-brings-odious-debt-back-into-the-limelight

[10See Éric Toussaint’s article “Exceptional Circumstances Can Help Indebted States”, 14 January 2021 https://www.cadtm.org/Exceptional-circumstances-can-help-indebted-States

Anaïs Carton

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