The U.S “Odious Debts” used to Finance Illegal Wars

Refuse to Pay Government Debt Incurred for Unlawful and Oppressive Purposes ...

In international law, odious debt is a legal theory which holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation, such as wars of aggression, should not be enforceable. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state. In some respects, the concept is analogous to the invalidity of contracts signed under coercion.

The doctrine was formalized in a 1927 treatise by Alexander Nahum Sack, a Russian émigré legal theorist, based upon 19th Century precedents including Mexico’s repudiation of debts incurred by Emperor Maximilian’s regime, and the denial by the United States of Cuban liability for debts incurred by the Spanish colonial regime. According to Sack:

When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc, this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently it falls with the demise of the regime. The reason why these odious debts cannot attach to the territory of the state is that they do not fulfil one of the conditions determining the lawfulness of State debts, namely that State debts must be incurred, and the proceeds used, for the needs and in the interests of the State. Odious debts, contracted and utilised for purposes which, to the lenders’ knowledge, are contrary to the needs and the interests of the nation, are not binding on the nation – when it succeeds in overthrowing the government that contracted them – unless the debt is within the limits of real advantages that these debts might have afforded. The lenders have committed a hostile act against the people, they cannot expect a nation which has freed itself of a despotic regime to assume these odious debts, which are the personal debts of the ruler.

Patricia Adams, executive director of Probe International (an environmental and public policy advocacy organisation in Canada), and author of Odious Debts: Loose Lending, Corruption, and the Third World’s Environmental Legacy, has stated that:

by giving creditors an incentive to lend only for purposes that are transparent and of public benefit, future tyrants will lose their ability to finance their armies, and thus the war on terror and the cause of world peace will be better served.

A recent article by economists Seema Jayachandran and Michael Kremer has renewed interest in this topic. They propose that the idea can be used to create a new type of economic sanction to block further borrowing by dictators.

Odious debt is an established legal principle. Legally, debt is to be considered odious if the government used the money for personal purposes or to oppress the people. Moreover, in cases where borrowed money was used in ways contrary to the people’s interest, with the knowledge of the creditors, the creditors may be said to have committed a hostile act against the people. Creditors cannot legitimately expect repayment of such debts.

The United States set the first precedent of odious debt when it seized control of Cuba from Spain. Spain insisted that Cuba repay the loans made to them by Spain. The U.S. repudiated (refused to pay) that debt, arguing that the debt was imposed on Cuba by force of arms and served Spain’s interest rather than Cuba’s, and that the debt therefore ought not be repaid. This precedent was upheld by international law in Great Britain v. Costa Rica (1923) when money was put to use for illegitimate purposes with full knowledge of the lending institution; the resulting debt was annulled.