The concepts of odious debt and illegitimate debt: how useful are they in the framework of international responsible lending?

This paper discusses the dynamics involved in inter-country ‘borrowing’ and the 'exploitative' direction the lending countries have taken in the post world war II era. The paper says that, the present debate on types of sovereign debts and the legal quality of claims may be interpreted as re-visiting the past. Before World War II basic legal principles had been observed in the case of Southern Countries (SCs), which the present “debt management” has refused to respect. SCs were once treated much better. Generally recognized legal principles were readily observed vis-à-vis SCs. Even debtor protection and debtor rights were generally accepted. The paper points out that, during the 19th century international tribunals held that states were not bound by contracts made by someone without proper authority, so-called ultra vires contracts. The paper gives examples from several countries where the borrower had taken the money and spent on a personal basis with the knowledge of the creditor and so the countries as such were not liable to pay it back. If the lender had been able to prove the use of its funds for legitimate government purposes, its claim would have been upheld.

After 1970 legal considerations lost importance. Northern governments slowly started to establish the present legal double standard denying basic rights to SCs. Shifting all responsibilities onto sovereign debtors encouraged economically and ethically wrong behaviour. Over the past decades there has been a concerted effort to eliminate any lender responsibility, unduly burdening SC-debtors and eliminating market mechanisms in sovereign lending. As a solution to these dynamics which have become a burden for the Southern Countries the paper concludes that:

• exploration of legal titles of creditors is necessary
  
• assertiveness of debtors is seen as a positive change and should be encouraged
  
• the discussion of illegitimacy must focus on obviously unjustified double standards, in particular on damages inflicted illegally and illegitimately by IFIs, which make payments obtained by hold-outs pale in comparison
  
• since elaborating and establishing odiousness or illegitimacy as juridical terms will take time, a quicker solution must be envisaged
  
• in addition to this quick solution long term perspectives of ethical debt management should be instituted
  
• these changes will bring about a legal framework of international financial relations and refined concepts such as odiousness or illegitimacy.