Commentary

Canceling Iraqi Debt

By Patricia Adams
National Post, November 26, 2004.>

The leaders of the western world, through their Paris Club, agreed to an act of charity in the middle of November: They agreed to forgive 80 percent of their portion of Iraq’s $120-billion debt.

The Interim Iraqi National Assembly responded on November 22 with a standing ovation — in opposition to the Paris Club resolution. “We don’t want your charity,” the members of the assembly in effect declared at the meeting, which was broadcast live on Al Irakia and Al Sharkia TV. “We want our rights, and the rule of law. Saddam’s debts are odious debts. They are not the debts of the Iraqi people.”

The standing ovation followed the tabling of a recommendation — based on a doctrine in international law known as the Doctrine of Odious Debts — that the assembly’s Economic and Financial Committee had been crafting for weeks. It laid out the approach the Interim government will take toward debt-repayment and it did more, too: It resonated with the Iraqi populace, which discovered in that live broadcast that the repugnance they feel at repaying Saddam’s debts is grounded in law. As one Iraqi said in a survey conducted last year by Jubilee Iraq, a debt-relief organization, “When Saddam executed people, he used to charge their families for the bullets used — this is precisely what the creditor countries who financed Saddam are asking of Iraqis today.”

The document tabled before the assembly stated: “There is a strong basis in international legal principle and precedent to define these debts as being ‘odious’ and thus not legally enforceable. This legal doctrine of odious debt was formulated in the 1920s by Alexander Sack, a former Russian Minister working as a legal professor in the Sorbonne University in Paris. He published the most extensive and important works on the treatment of state debts in the event of regime change. He defined an odious debt this way: ‘If a despotic regime contracts a debt not for the needs or in the interest of the state, but rather to strengthen itself, to repress the population that fights against it, etc., this debt is odious for the population of the state,’ and he continues: ‘The creditors have committed a hostile act against the people. They can’t therefore expect that a nation freed from a despotic power will assume these ‘odious’ debts… the debt consequently… falls with the fall of this regime.”

The document presented to the Iraqi assembly described numerous examples of past odious debt repudiations, including by the U.S. on behalf of Cuba after the Spanish-American war in 1898 and by Britain after the Boer War. “The clearest examples of legal precedent are firstly the Versailles Treaty of 1919, which ruled that Poland was not liable to repay German loans which financed the purchase of land in Poland by German colonialists. Secondly, Costa Rica passed a law repudiating the debts of the previous tyrant Federico Tinoco to the Royal Bank of Canada. Britain requested an arbitration by a U.S. Supreme Court judge.” His judgment found that the new government cannot be held responsible for the funds spent by the tyrant for his personal purposes.

The Iraqi National Assembly estimates that 95 percent of the debts accumulated by the Saddam regime are odious, and proposes a blanket settlement on that basis, largely as an expedient. If, however, creditors insist on repayment, Iraq’s assembly would use the UN’s existing arbitration procedures, under which both sides appoint a portion of the arbitrators on an arbitration panel, and the appointed arbitrators then select the balance of the panel. The onus would then be on the creditors to show that the monies lent to Saddam were, in fact, used for the benefit of Iraqis and not for Saddam’s personal purposes.

The Iraqi approach to debt repayment, if carried through, has profound implications for international finance. Currently, debt restructuring issues are resolved informally and behind closed doors at the Paris Club, a grouping of the West’s government lenders. Here the lenders treat all loans as legitimate and enforceable and then decide among themselves the loans to be written off and those to be rescheduled. Unlike the formal arbitration process that Iraq wants, at which the legitimacy of debts could be examined, in the Paris Club process the debtors have no right to refute claims made by lenders. This cozy process suits governments and government agencies that make questionable loans to the likes of a Saddam, a Marcos, and a Castro, allowing them to remain in power, but they don’t suit the captive populations of these dictators’ regimes.

To head off the Iraqi assembly’s declaration on odious debts, and avoid a challenge to their ability to lend to questionable governments, the Paris Club members rushed through their debt forgiveness program prior to the establishment of a democratic Iraqi government following elections in January. This tactic did not work.

The document that the Iraqi assembly endorsed was clear: “This National Assembly has a responsibility to the Iraqi People to protect their current and future interests…. These interests are threatened by the Paris Club cartel of creditors which refuses to accept that any of the debts are illegitimate, and is attempting to get Iraq to sign, before the end of the year, an agreement to repay a significant portion of the odious debt. There is a strong basis in international legal principle and precedent to define these debts as being ‘odious’ and thus not legally enforceable.”

Patricia Adams is executive director of Probe International and author of the Cato study, “Iraq’s Odious Debts.