Academic journal article Law and Contemporary Problems

The Institutionalist Implications of an Odious Debt Doctrine

Academic journal article Law and Contemporary Problems

The Institutionalist Implications of an Odious Debt Doctrine

Article excerpt

I

INTRODUCTION

Sovereigns incur debts, and creditors look to the law to hold sovereigns to their obligations. The odious debt doctrine intrudes on this settled pattern when (1) a despotic regime incurs a debt (2) for purposes that are inimical to the general welfare of the population, and (3) the creditor knows of the loan's illegitimate purpose. The doctrine purports to provide a successor regime with a full legal defense to the creditor's claim for repayment when these three requirements are met/But this begs the question of its legal status.

The United States originated the concept of odious debt over a century ago, but since World War II, it has regularly upheld the position of creditors in negotiations with defaulting sovereign debtors. At present no treaty or legislation specifically provides for this defense, and no domestic court in any country or any modern arbitral tribunal has embraced it. Yet several prominent persons, including at least one Nobel laureate in economics, have endorsed the concept, and the doctrine enjoys a certain following among persons who think about international debt. (2) The regime change in Iraq has whetted interest in the issue.

The status quo, it seems clear, is one where the doctrine does not have any "legal effect," in the sense of modifying the legal relations between debtors and creditors. Should the status quo be changed? In legal terms, the question is whether to recognize and define an odious debt defense through a treaty or national legislative acts, on the one hand, or through the decisions of authoritative dispute-settlement bodies, whether international arbitral organs or domestic courts. As

a matter of convention, the latter route would involve a decision by such bodies to treat the doctrine as part of customary international law.

Others may think about the odious debt doctrine as a means to optimize the social welfare generated by sovereign-debt contracts. This article also looks at social welfare in the economic sense but attacks the problem from a different direction. If the doctrine has legal effect only because it is part of customary international law, what does its invocation imply about the source of the rules that determine the content and enforcement of sovereign debt contracts? Are the capabilities of the institutions that develop and apply the doctrine as significant as the content of the doctrine itself? Any debate about the doctrine must consider the process that produces the doctrine.

This article concludes that no satisfactory mechanism exists for instituting an odious debt doctrine. Granting the authority to void sovereign debts to an international organization--the solution favored by several prominent commentators--would present severe, and probably insoluble, agency problems. The alternative approach of adopting the doctrine as a matter of customary international law has even greater difficulties. At the end of the day, establishment of the doctrine through the medium of "international law" cannot offer a global solution to the problem of despotic debtor regimes and conniving creditors.

Underlying this argument is a larger point. The institutional issue of odious debt is a microcosm of the problems posed by customary international law. Does the capacity of an authoritative adjudicator with real enforcement power to base its decisions, and therefore its disbursement of enforcement resources, on claims about international custom present any problems? Who wins and who loses when an authoritative adjudicator looks to international custom rather than to another source of law? Does the assertion of a capacity to base enforcement decisions on international custom augment or diminish welfare? By looking at how the odious debt doctrine might work, one may arrive at a better understanding of how to think about these questions.

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CUSTOMARY INTERNATIONAL LAW

It is not hard to offer a doctrinal account of customary international law, but this step raises many questions and answers none. …

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