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World Bank breaks silence on odious debt

5 October 2007

The World Bank released a paper on ‘odious debt’ in September, following months of silence, confusion and denial about who was responsible for it and when it would become available. It adds to a growing number of initiatives examining the concept. ‘Odious debt’ is usually defined as that knowingly given to a despotic power to repress and not benefit its people. The broader term of ‘illegitimate debt’ describes all debts that have arisen from irresponsible, self-interested, reckless or unfair lending.

The Bank paper was prepared by the economic policy and debt department with inputs from the legal department. The main message seems to be an attempt by the Bank to knock back the progress that has been made in bringing the issue to light. The authors claim that international law does not provide for the repudiation of debts on the grounds of their being odious, but then concedes that this should not deter efforts to ensure that loans are used for the benefit of citizens. UK-based NGO Jubilee Debt Campaign has said the paper “misses the point in several ways”, failing to address the key issues of what is responsible lending and who should suffer the consequences of irresponsible lending.

In a paper published by the UNCTAD in July, Robert Howse, law professor at the University of Michigan, explains how the concept of odious debt has arisen and how it fits into structures of international law. He analyses examples where the concept has been successfully invoked, and suggests solutions to some of the difficulties in application. The paper concludes that although there is “no single obvious legal forum for the adjudication or settlement of claims of odiousness” such claims “might appropriately be raised in bilateral or multilateral negotiations on debt relief”. However this risks inconsistent decisions arising from different fora, so an “attractive solution” might be consideration of odiousness by a single tribunal agreed upon by the debtor and creditor.

first government-backed debt audit commission

Both papers were funded by the Norwegian government, which raised the stakes in the debate in October 2006 by cancelling five developing countries’ debts originating from loans used to prop up the Norwegian shipping industry (see Update 53). The other government recently to engage with the concept of illegitimate debt is Ecuador. The first government-backed debt audit commission was launched in Ecuador in July, and will spend a year investigating the legal, financial, social and environmental impacts of the loan agreements that lie at the root of Ecuador’s $10.6 billion debt burden.

The G8 summit in Germany in June referred to the development of a charter of responsible lending, understood to be an attempt to reign in lenders such as China and Venezuela. Attempts to take the development of the charter forward through the G20 have stalled.

In an effort to better understand ‘responsible lending’, over 100 parliamentarians have signed a declaration on shared responsibility in sovereign lending. They are committing themselves to support further research into illegitimate debt, initiate parliamentary audits of existing debts, and agree that principles of shared responsibility must be included in sovereign loan agreements.

A forthcoming paper by Brussels-based network Eurodad looks more closely at what responsible lending standards should include. Debt Relief International is compiling a compendium of donor best practices that looks at both policies and procedures. These standards, once established, can then be used to reflect back on lending in the past, and help ascertain which debts are illegitimate and should be cancelled.

NGOs Jubilee Debt Campaign, Oxfam and others are continuing their efforts to find solutions to the problem of so-called ‘vulture funds’ buying up poor countries’ debt at a discount, and then suing them for the full amount. Campaigners are calling for the IDA debt reduction facility – which enables countries going through HIPC to buy-back their commercial debts at a discount – to be increased and made accessible to any low income country that is threatened with litigation by its commercial creditors.