Illegitimate Debt: The Topicality of the Odious Debt Doctrine CADTM Position

7 August 2008 by CADTM

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Executive summary

The odious debt doctrine is regularly called upon in debates around the debt issue in countries of the South. Yet the argument is just as regularly ignored or discredited by creditors and their partisans. The latest attempt in this line came from 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.

when in its report Odious Debt: some considerations [1] it questioned the validity and applicability of the doctrine and tried to bring the debate to a close by suggesting that indebted countries ought to negotiate in order to make their debts sustainable. CADTM sees it as essential to keep the debate open and to move forward on this issue so as to bring out ways and means for governments and populations to stop paying undue debts.

The doctrine of odious debt: an international law argument at the service of peoples and states

Alexander Sack was one of the first theorists who stated this doctrine in 1927; since then other authors have taken his work further, and significant developments in international law and in state policies account for this updated approach.
Three conditions characterise an odious debt: the non democratic nature of the regime by whom it was incurred, its being incurred against the people’s better 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. or in the personal interest of the rulers, and creditors being in a position to know the odious nature of the loans. These conditions are also mentioned in the general definition provided by the Center for International Sustainable Development Law : “Odious debts are those that have been incurred against the interests of the population of a State, without its consent and with full awareness of the creditors.”
However the first two conditions must not be simultaneously met, nor should they be read in a restrictive way. Indeed free elections are not a sufficient guarantee for a government to be called democratic and to validate the debts it incurred. Any loan to a government, even if democratically elected, that violates the major principles of international law (i.e. those included in the Charter of the United Nations, the Universal Declaration of Human Rights, the 1966 covenants on civil and political rights and economic, social and cultural rights, and jus cogens [2]), must be called odious, whoever the beneficiary may be. Similarly, whatever the nature of the government, the way the money is used must be enough to decide that a loan is odious when it adds to the rulers’ personal wealth or is used for projects that go against the people’s interests such as 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).

The present interpretation relies on various texts, among which article 53 of the 1969 Vienna Convention on the Laws of Treaties, article 16 of the 1978 Vienna Convention, and article 38 of the 1983 Vienna Convention on Succession of States in respect of State Property, Archives and Debts.
We must also call odious all debts incurred in order to pay back odious debts.
However solid the legal foundation of the doctrine, it has still not systematically resulted in debt cancellation or repudiation. Yet it was never questioned as such: creditors merely exerted pressure on governments to dissuade them from using it, threatening them with international isolation and the closure of capital markets. States’ practices and international use still reflect a power relationship that is favourable to creditors, but this might significantly change if debtors decided to repudiate their odious debts as they are legally entitled to do.

There is no absolute obligation for a country to repay sovereign debts

Whether in international or national law the obligation to adhere to a contract is never absolute. It is framed and limited by several considerations, and there are many valid arguments for debt cancellation. For instance, as stipulated in the 1969 Vienna Convention corruption, threat, deceit, or the incompetence of the signatories are as many grounds on which debts can be called illegal.
Moreover a radical change in circumstances, force majeure, a state of necessity, or considerations related to the notion of equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. (fraud, bad faith, abuse of the law, etc.) can also account for a government not paying back debts.
So governments can rely on a wide range of legal arguments to question the payment of debts deemed illegitimate because of conditions imposed on loans, the way loans were used and their consequences, as well as the conditions in which they were incurred.
While there is no absolute obligation to pay, there are a number of higher obligations governments have to meet, such as obligations relating to human rights. Their implementation can never be subjected to the need to adhere to often illegitimate loan contracts.

Unilateral action of governments of both the South and the North based on national and international law

To solve the problems met by countries literally choked by their debts we must reject the “false solutions” set forward by creditors. Illegitimate debts must not be negotiated to become “sustainable.” Governments must have their say as to the illegitimate nature of debts and unilaterally repudiate those that do not meet the major principles of national and international law. The example of Paraguay, that repudiated an illegal debt in 2005, must be followed by other countries.
Governments can also ask their creditors to account for their illicit actions and demand reparations for the damage caused. Debt auditing by public authorities in the South and in the North in collaboration with civil society is the best way to bring out all irregularities in contracts and thus to lay the basis for debt cancellation or repudiation.
CADTM urges all governments in the North and in the South to practise such debt auditing, as was done by Norway and Ecuador [3]
. The solution to the debt issue must be a decisive stage for governments to improve the people’s welfare and to adhere to obligations related to human rights.


[2Jus cogens refers to peremptory norms of international law and includes prohibition of wars of aggression, prohibition of torture, prohibition to commit crimes against humanity and the right of peoples to self-determination.

[3In October 2006, Norway recognised its responsibility in the illegitimate debt of 5 countries and decided to cancel unilaterally a portion of its claims on these countries for a total of 62 million euros. In July 2006, Ecuador’s president, Rafael Correa, set up a commission for the audit of Ecuador’s external and internal public debt (CAIC).

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