‘Illegitimate’ loans: lenders, not borrowers, are responsible

Abstract

Debt relief has focused on the borrower—debt is cancelled if a country is too poor to repay and now has acceptable policies. Iraq shifted the focus to the lender—debt should be cancelled because creditors should never have lent money to the repressive regime. This paper uses domestic and international law to establish the concept of ‘illegitimate debt’, which should not be repaid independent of the status of the borrower. The concept of ‘moral hazard’ is used to argue that non-payment of illegitimate debt is necessary to discipline lenders and to prevent future lending to oppressive dictators.

Notes

1 J Snow, interviewed on ‘Your world with Neill Cavuto’, Fox News, 11 April 2003, at http://www.foxnews.com/printer_friendly_story/0,3566,83939,00.htm.

2 P Adams, Odious Debts: Loose Lending, Corruption, and the Third World's Environmental Legacy, London: Earthscan, 1991, p 164.

3 PD O'Connell, State Succession in Municipal Law and International Law, Cambridge: Cambridge University Press, 1967, p 460.

4 World Bank, ‘hipc history’, at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTDEBTDEPT/0,contentMDK:20263277∼menuPK:528655∼pagePK:64166689∼piPK:64166646∼theSitePK:469043,00.html, accessed 28 April 2005.

5 T Addison, H Hansen & F Tarp, Debt Relief for Poor Countries, Basingstroke: Palgrave Macmillan, 2004; N Hertz, iou: The Debt Threat and Why We Must Defuse It, London: Fourth Estate, 2004; and JT Teunissen & A Akkerman, hipc Debt Relief—Myths and Reality, The Hague: Forum on Debt and Development (Fondad), 2004.

6 J Hanlon, ‘How much debt must be cancelled?’, Journal of International Development, 12, 2000, pp 877–901.

7 M Moore, ‘Forgiveness of debt would help rid poverty’, National Business Review (Auckland), 4 November 2004.

8 Human Rights Watch, Human Rights Overview: Uzbekistan, January 2004, New York: Human Rights Watch, at http://hrw.org.english/docs/2003/12/31/uzbeki7024.htm.

9 World Bank, Uzbekistan Country Brief, at http://www.worldbank.org.uz. Despite a massacre of hundreds of protestors on 13 May 2005 and widespread press coverage of human rights violations, the World Bank had not amended its country brief when it was last accessed on 1 October 2005 and it still made no mention of human rights issues. The World Bank committed $75 million in new loans in 2002, when human rights violations were well known, followed by $60 million in 2003, $75 million in 2004, and $40 million in 2005.

10 International Monetary Fund, World Economic Outlook 1998, Washington, DC: imf, 1998.

11 O'Connell, State Succession in Municipal Law and International Law, p 369ff.

12 Ibid, pp 378, 460, 462.

13 Adams Odious Debts, p 168.

14 AN Sack, Les effets de transformations des États sur leur dettes publiques et autres obligations financières, Paris: Recueil Soirey, 1927, translated from the French by P Adams and quoted by her in Odious Debts, p 165.

15 House of Commons International Development Committee, Debt Relief, 3rd Report 1997–1998, London: House of Commons, 1998, paras 11, 57.

16 On 28 October 2004 a British court cancelled a £384 000 debt and stopped the confiscation of a house on the grounds that the debt was ‘extortionate’, both on grounds of high interest rates and also because the borrowers were forced to take unacceptable conditions. Guardian and Independent, 29 October 2004.

17 A Guest & M Lloyd, Encyclopedia of Consumer Credit Law, London: Sweet & Maxwell, 1975 but including supplements up to May 2000.

18 G Harding, Consumer Credit and Consumer Hire Law: A Practical Guide, London: Sweet & Maxwell, 1995.

19 K Lissakers, Banks, Borrowers and the Establishment, New York: Basic Books, 1992. The bracketed phrase is in the original.

20 World Bank, Global Development Finance 2000, Washington DC: World Bank, 2000.

21 The chairman of the Presidential Commission on Good Government estimated the stolen money at $5–10 billion. Later former Solicitor General Francisco Chavez published a full-page ad in three Manila newspapers claiming that Marcos had $13 billion deposited in Switzerland. See, for example, http://www.filipinasmag.com/magazine/archive/marcos.html; and http://www.marcosbillions.com.

22 Adams, Odious Debts, pp 157–127; S George, A Fate Worse Than Debt, London: Penguin, 1988, pp 18–19; Guardian, 7 September 1999; and Philippine Daily Inquirer, 21 September 2004.

23 K Ovenden & T Cole, Apartheid and International Finance, London: Penguin, 1989; and Commonwealth Intergovernmental Group of Officials, Banking on Apartheid, London: James Currey, 1989.

24 The Vanished Gallery (no date or author identified) at http://www.yendor.com/vanished/, accessed 11 November 2004.

25 A Olmos, Todo lo que usted quiso saber sobre la deuda externa y siempre se lo ocultaron, Buenos Aires: Editorial de los Argentinos, 1995; and A Pettifor, L Cisneros & A Olmos Gaona, It takes Two to Tango, London: New Economics Foundation, 2001.

26 J Ballesteros, ‘Alejandro Olmos/Denuncia De La Deuda Externa’, 14 July 2000, ruling of the Federal Court of Argentina.

27 M Kremer & S Jayachandran, ‘Odious debt’, paper presented to the Conference on Macroeconomic Polices and Poverty Reduction, imf, Washington, 14 March 2002, at http://www.imf.org/external/NP/Res/seminars/2002/poverty/index.htm.

28 There have been three serious attempts within the Jubilee debt cancellation movement to define ‘illegitimate debt’—by Latin American and Caribbean Jubilee 2000 in the Tegucigalpa Declaration agreed on 27 January 1999 (http://www.ceji-iocj.org/English/international/TegucigalpaDeclaration(Ja99).htm), by the Canadian Ecumenical Jubilee Initiative at the ‘Illegitimate Debt: Definitions and Strategies for Repudiation and Cancellation’ policy forum, Toronto, 15–16 November 2000 (http://www.ceji-iocj.org/English/debt/IlligitimateFull(Dec00).htm), and by afrodad, the Zimbabwe-based African Forum and Network on Debt and Development, Fair and Transparent Arbitration Mechanism on Debt, Policy Brief No 1/2002, Harare, at [email protected].

29 UN Institute for Training and Research, Debt and Financial Management (Legal Aspects) Training Package, Geneva: unitar, at http://www.unitar.org/dfm/Resource_Center/TrainingPackage/LegalAspect.htm, accessed 2 May 2005.

30 Post Express (Nigeria), 25 November 1999.

31 In the mid-1970s world inflation averaged 11.4%, while Libor, the London Interbank Offer Rate, was only 8%, meaning that real interest rates were – 3.4%. By contrast, real interest rates for 1981–84 exceeded 12%. E Cardoso & R Dornbusch, “Brazilian Debt Crises: Past & Present” in B Eicherngreen & P Lindert, The International Debt Crisis in Historical Perspective, Cambridge, MA: MIT Press, 1989, pp 126.

32 M Kremer & S Jayachandran, ‘Odious debt’.

33 J Hanlon, Defining Illegitimate Debt and Linking Cancellation to Economic Justice, Oslo: Norwegian Church Aid, 2002, at http://www.kirkensnodhjelp.no/article/articleview/2381/1/277/; and Hanlon, ‘Defining “illegitimate debt”: when should creditors be liable for improper loans?’, in C Jochnick & F Preston (eds), Sovereign Debt at the Crossroads, Oxford: Oxford University Press, 2005.

34 imf, ‘imf approves US$750 million prgf arrangement for the Democratic Republic of the Congo’, Press Release 02/07, 13 June 2002, at http://www.imf.org/external/np/sec/pr/2002/pr0227.htm.

35 Something is ‘fungible’ if it is interchangeable. Electricity is fungible, and you have no idea if the electricity powering your computer was generated by windmills, nuclear power, coal or gas, because in the wire it is all the same.

36 R Rajan, ‘Odious or just malodorous?’, Finance & Development, imf, December 2004, pp 54–55.

37 M Samson, K Macquene, I Niekerk & T Ngqungwana, South Africa's Apartheid Debt, Capetown: South African Institute for Financial Policy Options, 1997.

38 K Raffer, ‘Applying Chapter 9 Insolvency to international debts: an economically efficient solution with a human face’, World Development, 18 (2) 1990, pp 301–311; and UN Conference on Trade and Development, Trade and Development Report, 1998, p 91 and Trade and Development Report, 2001, p 134, New York: United Nations.

39 Kremer & Jayachandran, ‘Odious debt’.

40 P Adams, ‘Iraq's odious debts’, Policy Analysis, 526, Washington, DC: Cato Institute, 2004.

41 Quoted in L Elliot & C Denny, ‘World Bank seizes on Iraq debt deal’, Guardian, 20 April 2004.

42 I Hadar, ‘“Beyond the moratorium” is “Beyond the Paris Club”’, International ngo Forum on Indonesian Development, Jakarta, January 2005.

43 V Cabreza, ‘Stop paying nuke plant debt, SC justice urges gov't’, Philippine Daily Inquirer, 21 April 2005.

44 T Blair, Our Common Interest, report of the Commission for Africa, London, March 2005, pp 27–28.

45 The Paris Club cancelled 80% of Iraqi debt, $29.7 billion of $37.2 billion owed (http://www.clubdeparis.org/en/countries/countries.php) and about 58% of Nigerian debt, $18 billion of about $31 billion owed. See http://news.bbc.co.uk/2/hi/business/4637395.stm. Speaking at the Open University, Milton Keynes, 26 September 2005, Miles Wickstead, who had been head of the secretariat for the Commission for Africa, said that the Nigerian debt cancellation clearly reflected an understanding that ‘the loans were never used for productive purposes and that it would unfair to ask Nigeria to repay’.

46 G Soros, speaking at the Center for Strategic and International Studies in Washington, quoted by Reuters, 13 May 2003, at http://onebusiness.nzoom.com/onebusiness_detail/0,1245,189671-3-168,00.html.

47 R Rajan, ‘Odious or just malodorous?’.