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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 19 - Can we really talk of “Sack’s odious debt doctrine”?

If we consider that a “doctrine” designates the totality of the opinions expressed by legal experts as the result of their reflection on a given rule or situation; if elaborating a doctrine means “A legal framework, defining it, placing it within the context of the law, defining its limits, its practical application, the social effects and at the same time making a systematic, analytical, critical and comparative examination”, it is justified to consider that Sack has elaborated an odious debt doctrine.

To elaborate his doctrine he referred to an ample quantity of international treaties pertaining to arbitrations on questions of debt repayments concluded between the end of the 18th century and the 1920s; he analysed the way disputes over debt had been treated and the legal, administrative and judicial measures taken; he collected and classified the opinions of numerous authors (in fact, only Europeans and Americans) who had studied the question. He presented his vision of the nature of debts, the obligations of the debtors and the rights of the creditors, the relations between successor States, the way debts and the effects of regime changes were shared, and defined the criteria for odious debts.

The doctrine is open to criticism, has weaknesses, gives priority to creditors and does not consider human rights, but it does have a certain coherence. It must also be said that, although disparaged by influential detractors (the mainstream media, the World Bank and numerous governments), it inspires numerous movements who look to Sack’s work for solutions to debt problems. Sack’s two criteria for determining that a debt is odious and a nation may decide not to pay, are applicable and justified.

Henceforth, we must now go beyond Sack’s doctrine using that which is applicable and rejecting that which is unacceptable and adding elements related to the social and democratic advances that have been made in international law since the Second World War.

What must also be added straight to the odious debt doctrine is the liability of the creditors; they regularly violate the established treaties and other international instruments for the protection of rights. The IMF and the World Bank have continually and deliberately imposed policies on debtor counties that violate many fundamental human rights. The Troika that was established in 2010 to impose brutal austerity policies on Greece dictated laws that contravene several National and International conventions on rights. The creditors are more than just accomplices to illegal and sometimes frankly criminal acts committed by governments. They are in some cases the instigators of the acts.

The experience that has been accumulated since Sack made his studies indicates that several of Sack’s positions may now be updated. A fundamental point that must now be rejected is the continuity of a State’s liabilities, even in the case of a change in the regime. Of course Sack is in favour of recognising an exception – odious debt. But that is insufficient. Another point to reject is Sack’s support for the current international financial system. Finally, Sack considers that a sovereign State may not unilaterally repudiate debts it has identified as odious without a ruling by a competent international court (See above passage: “The new government must prove and an international tribunal recognise that the following is established:
a) that the purpose which the former government wanted to cover by the debt in question was odious and clearly against the interests of the population of the whole or part of the territory, and
b) that the creditors, at the moment of the issuance of the loan, were aware of its odious purpose.”) Since Sack made this proposal, no international court of the sort has been created. Numerous proposals have been made, but none have been brought to fruition. Experience shows that another way must be chosen: a sovereign State that discovers that it has an odious debt can and should repudiate it unilaterally. The first steps towards this goal would be to suspend payments and to conduct an audit with the participation of the citizens.

A new doctrine of illegitimate, illegal, odious and unsustainable debt needs to be elaborated. Movements such as the CADTM have taken on the task in collaboration with many other associations, and in bringing together a wide variety of competences. The following is a large extract of the position adopted by CADTM in 2008 and which still remains pertinent:

Several authors have further sought to develop the works of Sack and to adapt this doctrine to the present context. For example, the Centre for International Sustainable Development Law (CISDL) of McGill University in Canada, has proposed this general definition: “Odious debts are those that have been incurred against the interests of the population of a State, without its consent and with full awareness of the creditors.” Jeff King based his analysis on these three criteria (absence of consent, absence of benefit, awareness of creditors), and cumulative calculation, to propose a method to categorise these odious debts.

While King’s analysis is interesting in many respects, we argue that it is deficient, since it does not allow for the inclusion of all debts that should be qualified as odious. In fact, according to King, the mere establishment of a government by free elections is enough to disqualify its debts from being categorised as odious. However, history shows, through Hitler in Germany, Marcos in the Philippines or Fujimori in Peru, that “democratically” elected governments can be violent dictatorships and commit crimes against humanity.

It is thus necessary to analyse the democratic character of a debtor State beyond its appellation: any loan must be considered odious, if a regime, democratically elected or not, does not respect the fundamental principles of international law such as fundamental human rights, the sovereignty of States, or the absence of the use of force. The creditors, in the case of notorious dictators, cannot plead their innocence and demand to be repaid. In this case, the purpose of the loans is not fundamental for the categorisation of the debt. In fact, financially supporting a criminal regime, even for hospitals and schools, is tantamount to helping the regime’s consolidation and self-preservation. Firstly, some useful investments (roads, hospitals…) can later be used to odious ends, for example, to sustain war efforts. Secondly, the fungibility of funds makes it possible for a government that borrows to serve the population or the State – which, officially, is always the case – to generate other funds for less noble goals.

The nature of regimes aside, the purpose of funds should suffice to qualify debts as odious, that is, whenever these funds are used against the populations’ major interests or when they directly enrich the regime’s cohorts. In this case, the debts become personal debts, and not those of the State which is represented by its people and its representatives. Let’s recall one of the conditions of debt regulation, according to Sack: “the debts of State have to be incurred and the funds that are derived must be used for the needs and in the interests of the State.” Thus, multilateral debts incurred within the framework of structural adjustments fall into the category of odious debts, since the destructive character of these debts has been clearly shown, namely by UN agencies.

In fact, considering the development of international law since the first theorisation of odious debt in 1927, odious debts can be defined as those incurred by governments which violate the major principles of international law such as those included in the Charter of the United Nations, the Universal Declaration of Human Rights, and the two complementing covenants on civil and political rights and economic, social and cultural rights of 1966, as well the peremptory norms of international law (jus cogens). This affirmation is confirmed by the 1969 Vienna Convention on the Laws of Treaties, whose article 53 allows for the cancellation of acts which conflict with jus cogens and which also accounts for the following norms: prohibition of wars of aggression, prohibition of torture, prohibition to commit crimes against humanity and the right of peoples to self-determination.

This spirit infuses the definition proposed by the Special Rapporteur Mohammed Bedjaoui in the report on the succession of State debts to the 1983 Vienna Convention: “From the point of view of the international community, odious debt is understood as any debt incurred for purposes that contradict contemporary international law, particularly the principles of international law incorporated in the UN Charter.

Thus, the debts incurred by the apartheid regime in South Africa are odious, since this regime violated the UN Charter, which defines the legal framework of international relations. In a resolution adopted in 1964, the UN had asked its specialised agencies, including the World Bank, to cease financial support of South Africa. In contempt of international law, the World Bank ignored this resolution and continued to lend to the Apartheid regime.

International law also stipulates that debts resulting from colonisation are not transferable to newly independent states, in conformity with Article 16 of the 1978 Vienna Convention that says “A newly independent State is not bound to maintain in force, or to become a party to, any treaty by reason only of the fact that at the date of the succession of States the treaty was in force in respect of the territory to which the succession of States relates”. Article 38 of the 1983 Vienna Convention on the succession of states in respect of States Property, Archives and Debts (not yet applicable) is quite explicit in this respect:

1. “When the successor State is a newly independent State, no State debt of the predecessor State shall pass to the newly independent State, unless an agreement between them provides otherwise in view of the link between the State debt of the predecessor State connected with its activity in the territory to which the succession of States relates and the property, rights and interests which pass to the newly independent State”.

2. “The agreement referred to in paragraph 1 shall not infringe the principle of the permanent sovereignty of every people over its wealth and natural resources, nor shall its implementation endanger the fundamental economic equilibrium of the newly independent State”.

It should be kept in mind that the World Bank is directly involved in some colonial debts since in the 1950s and 1960s it generously loaned money to colonial countries for them to maximise the profits they derived from colonial exploitation. It must also be noted that the debts granted by the World Bank to the Belgian, French and English authorities within their colonial policies were later transferred to the newly independent states without their consent.

Moreover it did not comply with a 1965 UN resolution demanding that it stop its support to Portugal as long as this country maintains its colonial policy.

We must also define as odious all debts incurred in order to pay back odious debts. The New Economic Foundation rightly considers that loans contracted in order to pay back odious loans are similar to a laundering operation. Auditing debts will determine which loans are legitimate.

While there are dissensions on the definition of odious debts, the legal debate takes nothing away from its relevance and cogency. On the contrary, such debate reflects just what is at stake for both the creditors and the debtors and is simply the transfer of conflicting interests onto a legal level. Several cases have shown that the notion of odious debt is a legally valid argument not to pay debts.

Source and references:


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [20]

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