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New Economics Foundation (NEF)

Odious lending: Debt relief as if morals mattered

Stephen Mandel, Senior economist, New Global Economy Programme, NEF

New Economics Foundation (NEF)


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nef (the new economics foundation) believes that as the question of foreign debt incurred illegitimately – so called ‘odious debt’ – rises up the agenda once more, the time has come to use a better description. We believe these debts result from ‘odious lending’ and that more focus should now fall on the role of irresponsible lenders.1

The case for debt cancellation on the grounds that vast loans were made to odious regimes, and should not be enforceable under international law, is gaining momentum. But until now, less attention has been given to how the repercussions of odious debt reverberate for many decades after an oppressive and corrupt borrower regime may have left the scene. Not only are successor governments saddled with paying off the loans, but because the borrowed money was often not put to productive use, there are inadequate funds to repay interest and capital. The result is a vicious circle of debt in which new loans have to be taken out by successive governments to service the odious ones, effectively ’laundering‘ the original loans. This defensive lending can give a legitimate cloak to debts that were originally the result of odious lending.

This nef research paper demonstrates the impact of odious debt, and how the impact continues to grow until the loan is cancelled. We also outline a proposal to address the problem of the original odious lending.

Long after odious debts are technically off the books, subsequent generations are still effectively paying for them. This nef research paper examines 13 clear cases that present a picture of the extent and impact of odious lending. These include:

  • Indonesia, where in the region of US$151 billion relating to odious debts has already been ‘overpaid’ - twice the level of recorded debt. This means that Indonesia has made a cumulative net transfer to the North of US$138 billion to date - or 90 per cent of Indonesia’s GDP.
  • Argentina, where in the region of US$77 billion relating to odious debts has already been ‘overpaid’ - 75 per cent of the country’s recorded debt.
  • Nicaragua, where the odious debt is over five times the country’s total GDP.
The net loss to these countries economies’ often exceeds the total outstanding debt. This means that people in these – often desperately poor – countries end up paying three times for loans ostensibly taken out in their name: first they are oppressed by the regimes propped up and enriched by these loans; secondly they are impoverished by the cost of servicing the loans; and thirdly they are oppressed again by the penalties imposed if the odious regimes default.

Also, if debt cancellation only comes through the procedures of the Paris Club and the Heavily Indebted Poor Countries (HIPC) initiative, they pay a fourth time when IMF conditionality imposes the often disastrous policies of trade and capital account liberalisation, privatisation, and restrictions on social expenditure.

For the ten countries identified by nef as having 100 per cent odious debt, we believe that all debt servicing is inappropriate. This means that they have been ’overpaying‘ their debt service and are due not just the cancellation of all their debts but are, in fact, owed a substantial repayment by the creditors, currently amounting to US$383 billion. This is considerably more than their nominal debt that is still outstanding on paper.

nef is proposing a new process for dealing with the problem. We are calling for a new independent body that would assess the track record of regimes that incurred the debts and declare whether it was odious or legitimate. Loan contracts entered into by ‘odious’ regimes would then be deemed unenforceable.

With regard to the backlog of the past, debtor countries would be able to apply to an independent arbitration panel for a debt work-out. A moratorium would be declared on all debt service while the case was examined. Odious debts would be declared null and void before debt service could be considered on the rest. The key components of this system are:
  • an internationally recognised independent body to decide on the odious nature, or otherwise of regimes
  • on a country by country basis, arbitration panels consisting of representatives of: creditors to odious regimes (the ‘odious lenders’ of our title), legitimate creditors, present government and civil society with a mutually agreed chair to decide on debt work-out, designed to leave ANY country no worse off than they would have been if there were no odious loans.
As well as relieving legitimate governments of the burden imposed on them by undemocratic predecessors, this would make it much more difficult for future dictators and other corrupt regimes to raise loan finance, thus greatly strengthening the forces of democracy and justice.

We believe it is time for a new kind of debt relief for debts that have resulted from odious lending: debt relief as if morals mattered.

  1. Odious debt arises from loans which should never have been extended in the first place because of the oppressive, tyrannous or corrupt nature of the regime to which they were granted. nef believes that such ‘odious debts’ would be better defined as ‘odious lending’.

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