Eric Tousaint’s study of the odious debt doctrine
by Eric Toussaint
Rarely do people, whether detractors or defenders of the doctrine elaborated by Alexander Sack, take the time to understand the international lawyer’s framework of analysis or his political leanings. Alexander Sack was not a humanist seeking to preserve peoples or nations from the nefarious actions of heads of State or creditors ready, through fraudulent or even criminal means, to plunge the collectivity into what was in fact odious debt. His principal aim was not to bring ethics or morality to international finance. Sack merely wanted to protect creditors’ rights, but he had to mention the important exception to the sacrosanct rule that debt repayment must continue at all costs, i.e. that in certain circumstances creditors have to accept the cancellation of debt owed them, if that debt can be shown to be odious.
Though disparaged by powerful detractors and despite its author’s obvious political limitations, the doctrine of odious debt inspired a series of movements looking to Sack’s work for a means of combating illegitimate, illegal, odious or unsustainable debt.
The two criteria that Sack picked to determine the existence of odious debt that a nation may refuse to repay are both functional and justified. They are: absence of benefit for the population and the complicity of the creditors. Our aim is to go beyond Sack’s doctrine, retaining what is functional, eliminating what is unacceptable from the outset, while integrating elements devolving from social and democratic victories which have found their way into international law since the Second World War. The rule whereby States remain under obligation to repay debts after a change of regime favours creditors and reinforces the dominant international order by trying to prevent States (and peoples) from shaking off the burden of debt. This rule has often been questioned, both in theory, by numerous 19th-century jurists and in practice, by States resorting to unilateral debt repudiation.
The most frequently-quoted part of Sack’s book, the section on odious debt, is sometimes misinterpreted. It runs as follows: “If a despotic regime incurs a debt, not for the needs and in the interests of the State, but to reinforce its tyranny and to put down any resistance on the part of the people, then this debt is deemed odious for the population of the entire State. It is not an obligation of the nation: it is the debt of a regime, a personal debt of the power that incurred it. Consequently, it falls when the power falls.” (p. 157) “The reason why such ‘odious’ debts cannot be considered as incumbent on the State is that they do not fulfil one of the prerequisites of State debts, namely that State debts must be contracted, and the funds that they provide utilised, for the needs and in the interests of the State. The State is not liable for ‘odious’ debts incurred and utilised, with the knowledge of the creditors, for ends which are contrary to the nation’s interests, should that State succeed in ridding itself of the government that had incurred them.” (…) “The creditors have committed a hostile act with regard to the people; they cannot therefore expect a nation freed from a despotic power to take on the ‘odious’ debts, which are personal debts of that power.” (p. 158).
The present study aims to clarify Sack’s position, place the doctrine of odious debt in its original context and see how that doctrine should be developed. As we shall see, the despotic nature of the regime is not a sine qua non condition to determine the odious nature of a debt, that would justify its repudiation. There are two criteria to be met: a debt is odious if it has been incurred against the interests of the population and the creditors were aware of this at the time.
Alexander Nahum Sack (Moscow 1890 – New York 1955), a Russian lawyer who taught in Saint Petersburg then in Paris, is considered to be one of the founders of the doctrine of odious debt. The doctrine, based on a series of precedents in jurisprudence, has come in for a lot of debate. Often disparaged and widely avoided or ignored in university courses, the doctrine of odious debt has nevertheless been the topic of hundreds of articles and dozens of specialized books. The United Nations International Law Commission, the IMF, the World Bank, the UN Conference on Trade and Development, the UN independent expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, Ecuador’s Commission for the full audit of public debt set up in 2007 by President Rafael Correa, the Committee for the Abolition of Third World Debt, now known as the Committee for the Abolition of Illegitimate Debt (CADTM) and the Greek Debt Truth Commission set up by the president of the Hellenic Parliament in 2015 have published documents, taken a stand and organized seminars on the topic, as debts whose legitimacy and validity may be questioned are constantly under discussion in the field of international relations.
There are also recent academic publications on the subject: Jeff King, The Doctrine of Odious Debt in International Law. A Restatement, University College London, 2016; Stephania Bonilla, Odious Debt: Law-and-Economics Perspectives, Gabler publishers, Wiesbaden, 2011; Michael Waibel, Sovereign Defaults before International Courts and Tribunals, University of Cambridge, 2013; Michael Waibel, Sovereign Defaults before International Courts and Tribunals, University of Cambridge, 2013. Odette Lienau, Rethinking Sovereign Debt: Politics, Reputation, and Legitimacy in Modern Finance, Harvard, 2014; Juan Pablo Bohoslavsky, Sabine Michalowski, “Ius Cogens, Transitional Justice and Other Trends of the Debate on Odious Debts: A Response to the World Bank Discussion Paper on Odious Debts” (2009-2010), Columbia Journal of Transnational Law, Vol. 48.
It has now been 30 years since I began studying the question, publishing research and taking part in commissions to identify illegitimate, illegal, unsustainable or odious debt. I realized that the arguments developed by Alexander Nahum Sack are little known. Whether among his detractors or those who base their actions on the doctrine elaborated by Sack, people often have inadequate or biased knowledge of the international jurist’s analytical framework or his political leanings. It is very useful to delve further, beyond a few quotes and an over-simplified presentation of his work, as the struggle to combat odious debt may well gain in finesse and strength from such study.
Alexander Sack was not a humanist interested in protecting peoples or nations from the nefarious actions of Heads of State or creditors prepared to plunge the community into debt using fraudulent or even criminal means. His main aim was not to bring ethics or morality to the world of international finance. His aim was to reinforce the international order in place, by ensuring the continuity of debt repayments so that creditors could recover the money they had lent.
Sack touches on the question of odious debt in a work published in Paris in French in 1927. His choice of title is significant: it translates as The Effects of the Transformation of States on their Public Debt and other Financial Obligations: a Legal and Financial Treatise. Sack began by asking himself what would become of debts a State had contracted in the case of a revolution, resulting in a change of regime. Sack states clearly in the first paragraph of the preface, “the Russian revolution of March 1917 incited me to examine the effects of the political transformation of a State on its public debt”. Among the main events that affected him and led him to conduct a close study, figure writ large October 1917 (which he calls a “Bolshevik coup d’état”) and the repudiation of the Tsarist debts by the Bolshevik government in January 1918. He then gradually widened the field of his research to examine various cases of State succession and how obligations which tied the new State or new regime to creditors were affected.
Nicolas Politis, a Greek lawyer and statesman who wrote the introduction to Sack’s work, stresses the breadth of the research undertaken: “It is no exaggeration to say that Mr. Sack has completed the task he set himself with full honours. He has brought together a collection of documents of rare value. (…) He has closely tracked the long list of annexation treaties and debt regulation agreements ratified over the last 150 years and analysed their clauses one by one; he has investigated the legislative, administrative and judicial measures taken to implement them; he has looked up and classified the opinions of all authors to have written on the subject. Finally, he demonstrates, through the use he makes of all this material, an extraordinary grasp of the practical necessities of the law. Thus he explains, down to the last detail, the juridical nature of the succession of debts, borrowers’ obligations and lenders’ rights, the relations between successor States, how they divided debts between them and how they established their shares.” (trans. CADTM)
Not until the end of the published book do we find about fifteen pages, in chapter 4, on odious debt. The preceding 157 pages deal with the transfer of public debt in different situations: conquest (or annexation) of one State by another; the separation of one State from another; the effects of a change of regime resulting from a revolution, etc. I will deal with Sack’s position regarding odious debt later in this article.
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