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Demystifying Alexander Nahum Sack and the doctrine of odious debt

Eric Tousaint’s study of the odious debt doctrine

by Eric Toussaint

Part 9 - Conclusions related to the examples of Mexico and Peru

During the American Civil War, in 1861, Mexico had repudiated the odious debt whose repayment was demanded by French and British creditors. In retaliation France, supported by Britain and Spain, sent an expeditionary force which eventually amounted to 35,000 soldiers. Finally, Louis-Napoléon Bonaparte was forced to withdraw the French troops from Mexican territory in 1866 after the victorious counteroffensive by the Mexican progressive forces, and then faced another repudiation of debt in 1867 by the government of President Benito Juárez.

On 18 June 1883, the Mexican legislature adopted a law on debt repayment whose Article I, Section 5 states: “We cannot recognize, and consequently will not allow to be converted, the debts issued by the government which pretends to have existed in Mexico between 17 December 1857 and 24 December 1860 [the government of General Zuloaga] and from 1 June 1863 to 21 June 1867.” We should point out that Mexico decided not to resort to international arbitration.

Conversely, Peru agreed to bring its case – in which its adversary was France, which had given its support to its dishonest bankers – before the Court of Arbitration at The Hague. Peru was sentenced to repay the debt despite the fact that it met the criteria, as we shall see, that determine whether a debt is odious (absence of benefit for the population and knowledge of the creditors).

According to the Constitution of Peru of November 1860 (as well as the Constitution of 1839), Art. 10: “The acts of those who have usurped public functions and employment entrusted to them under the conditions set forth in the Constitution and the Laws shall be null and void.

In December 1879 the government of Peru was overthrown by Nicolás de Piérola, who took power and proclaimed himself Supreme Commander in Chief of the Republic. His government was recognized by England, France, Germany and Belgium.

Nicolás de Piérola was corrupted by French bankers, in particular the Dreyfus bank, to which Piérola, while Finance Minister (1868-1871), had granted a monopoly on the exportation of guano, a natural fertiliser which was highly valued in Europe at the time. The banker Dreyfus agreed to pay 365 million francs in exchange for two million tons of guano having a resale value of 625 million francs. The Dreyfus bank was also entrusted with managing Peru’s external debt! In other words, Dreyfus agreed to advance funds to the government in an amount of 75 million francs the first year and 67 million during the following years and to handle debt service for Peru. Under Article 32 of the contract the government provided all the nation’s revenues as collateral should guano not suffice to cover these advances. The agreement was ratified in Peru on 17 August 1869.

The Dreyfus bank decided to suspend repayment of Peru’s external debt in early 1876 on the grounds that the revenue it derived from guano was insufficient to continue repayment. It turned out that Piérola was in the pay of French and British bankers and of a part of the local oligarchy.

After the fall of the dictator and the return to constitutional order, Peru’s Law of 25 October 1886 declared all prior acts of his government null and void.

The case was brought before an international arbitral tribunal. This demonstrates the weakness of Sack’s contention that private creditors’ relations with States are governed by private law and not by public law. Since private creditors could not (yet) prosecute a State before a tribunal for breach of contract, they relied on “their” State (in this case France) to defend their interests against the debtor State. In the case in question, the French State took up the defence of French bankers before an international arbitral tribunal in order to obtain redress against the debtor State, Peru.

During arbitration between France and Chile, the arbitral tribunal, in its ruling of 5 July 1901, gave the following opinion regarding the government of Nicolás de Piérola: “The ability of a government to represent the State in its international relations in no wise depends on the legitimacy of its origin... The usurper who in fact holds power with the express or tacit assent of the nation acts and negotiates treaties legitimately in the name of the State, which the legitimate government, once restored, is bound to honour...

The Permanent Court of Arbitration at The Hague, during arbitration between France and Peru, ruled on 11 October 1921 that the law adopted by Peru on 25 October 1886 was of little import since it cannot be deemed to apply to foreign nationals who had negotiated in good faith. It is clear from this ruling that the Court was defending the interests of the French and British bankers.

The examples of Mexico and Peru demonstrate an important point: it is preferable for a new government facing litigation with creditors demanding repayment of an odious debt to unilaterally repudiate on the grounds of arguments of internal and international law rather than to seek international arbitration. That is because only in quite exceptional circumstances – if a superpower (from the North) defends the cause of the weak party out of personal interest – can the weaker party (a debtor country of the South) win against the powerful one (from the North) through arbitration. We will see that that is what happened with the arbitration in the conflict between Costa Rica and Britain in the 1920s. The number of arbitrations that have led to the indebted country losing against the creditor powers is much larger than those that have led to a favourable solution for the debtor country.

But first, in order to follow the chronology, let us deal with the USA’s repudiation of the debts claimed by Spain against Cuba following the Spanish-American War of 1898.

Source and references:


[1] [2] [3] [4] [5] [6] [7] [8] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20]

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