Saturday, January 27, 2007

Odious Debt, Systemic Illegitimacy, and the Integrity of Global Financial Systems

In this short essay I will try to convince the reader that Fidel Castro of Cuba, Hugo Chavez of Venezuela, and Evo Morales of Bolivia, the current public standard bearers of fight against the current norms of economic globalization in general, and its systems of financial capital in particular, will be good for business—that is good for the business of modern so-called neo liberal global capital markets in general, and for the business of lending to sovereigns, in particular.

These ideas were presented at a marvelous conference held on January 26, 2007, at the Duke University Law School, where the Duke Journal of Law & Contemporary Problems hosted a conference on “Odious Debts and State Corruption.” That conference, conceived by Professor Mitu Gulati, one of the most authoritative writers in modern odious debt theory, brought together a remarkable group of scholars from a variety of disciplines to broaden and deepen the discourse on theories of odious debt in public and private municipal law, public and private international law and transnational law.


The Conference considered the policy context for thinking about the problem, the concept of odious debt as a developing doctrine of international law, its institutional context and the sovereign-populace relationship, the economics of odious debt and its specific application to the problem of despotic leaders and state corruption, private and domestic law analogies and solutions, and odious debt in the context of policing against state corruption, and finally odious debt and its relevance to transnational justice issues. Lee Buchheit, one of the great lawyers in the field of sovereign debt restructuring provided context in a luncheon address to the participants, in which he discussed Iraq, Ecuador, Liberia and the Relevance of odious debt in a contemporary context.

The ideas presented here were made as part of my contribution to the discourse at the conference and are more fully developed in Larry Catá Backer, Odious Debt Wears Two Faces: Problems and Opportunities in Traditional Odious Debt Conceptions in Globalized Economic Regimes, JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007).

Drawing on classical theories of odious debt as amplified by western theorists in the 20th century, current proponents of this new approach to odious debt argue that the theory or doctrine of odious debt, as classically applied, focuses on the wrong party to loan transactions. That classical model, by focusing on borrowers, and by focusing the analysis of odiousness on either the use of funds or the character of the regime that sought loans illegitimately on behalf of their states, serves to reinforce a system of global political subordination that maintains an exploitative neo colonialist global system of economic organization. The better approach, they argue is to focus on the creditors and the system through which the loans they make are possible. That focus would reveal that the current system of lending is illegitimate because it is maintained solely for the benefit of private lenders and creditor states. All lending, then, is designed to force the people of sovereign debtors to transfer wealth to sovereign creditors and their institutional financial creatures. This systemic illegitimacy can produce debt that is nothing less than odious as that term is classically understood, as a consequence of which debtor states ought to have no obligation to repay these odious loans forced on them through the operation of an illegitimate global economic system.

Echoes of this view are starting to be heard in official circles, from the tentative initial suggestion that the war debt of Saddam Hussein’s regime in Iraq ought to be repudiated without consequence, to threats by the President of Ecuador to repudiate the terms of repayment owed to the World Bank and others (Greg Palast, Ecuador Gets Chavezed, The Nation (May 30, 2005)); IMF, Ecuador Haven’t Held Debt Talks—IMF Spokesman, Reuters, Jan. 4, 2007.

But neither the developed world, nor their financial institutions, ought to worry much about this development. The expansion of the odious debt doctrine, and its focus on systemic illegitimacy can, in the long run, serve to strengthen the very system such a doctrine might appear to be poised to destroy. If global capital markets embrace rather than oppose such an expansion, it will be able to “capture” the doctrine and turn it to its own benefit. That benefit would take the form of the development of definitions, provisions and presumptions that will create a solid system of lending “safe harbors” that will provide greater protection to public and private sovereign lenders, regularize the lending system, and make it both harder for developing states to resist entry into the lending markets, and to repudiate loans obtained there from.

The odious debt doctrine often cited and little applied after the 19th century, in its classical and current forms, is essentially Western, hegemonic and creditor oriented in scope and application. In particular, it has served to advance the interests of global capital and the creditor states. These states, comprising the core group of “civilized” nations who traditionally occupied the highest echelons of sovereign state authority under traditional systems of international law (WESTEL W. WILLOUGHBY. THE FUNDAMENTAL CONCEPTS OF PUBLIC LAW. New York: Macmillan, 1924. Pages 307-309), applied the doctrine as a mechanism for cementing their place within the hierarchy of states and the integrity of systems of capital that protected their interests, and the interests of their instrumentalities, as creditors. Paralleling pre-WWII notions of an international system consisting of a family of nations overseeing and civilizing a community of less civilized states to development sufficient to merit entry into the “family of nations,” odious debt served as a recognition of both the inability of lesser states and territories of order their affairs in a sufficiently civilized manner, and to permit a mechanism to bring these states to a more civilized level. Its principal focus was on the maintenance of a stable global capital system within this hierarchical, subordinating and hegemonic family of nations system in which unequal states were increasingly brought to a civilized state.

Though substantially broadened in the current literature, the odious debt doctrine remains focused on both of these projects: to protect the system of sovereign lending and to reinforce a particular culture of state governance norms and behavior. As reinvigorated at the end of the 20th century, this doctrine, at least within academic circles, appears to have the following characteristics:


1. A focus on the will of and benefits to territorial sovereigns—the people. “The problem is obviously a sensitive one, and there are requests to consider 'odious' any "debt that has been incurred by a government without the informed consent of its people, and one that is not used in the legitimate interest of the State," although this is by no means the present position of positive international law.” (Guido Acquaviva, The Dissolution Of Yugoslavia And The Fate Of Its Financial Obligations, 30 DENV. J. INT'L L. & POL'Y 173, 188 (2002) (quoting in part, JULIETTE MAJOT, THE DOCTRINE OF ODIOUS DEBTS, IN FIFTY YEARS IS ENOUGH: THE CASE AGAINST THE WORLD BANK AND THE INTERNATIONAL MONETARY FUND 35 (1994).)

2. An adherence to the basic contractual context of the transactions and consequential emphasis on lender and borrower due diligence. (Christoph G. Paulus, Odious Debts vs. Debt Trap: A Realistic Help?, 31 BROOK. J. INT'L L. 83, 90-91 (2005)).

3. A shift of responsibility to lender, with a move away from state (and borrower) obligation to lender responsibility, and a greater willingness to tolerate imposition of significant penalties for failures of lenders to monitor the use of their funds. (Robert K. Rasmussen, Integrating A Theory Of The State Into Sovereign Debt Restructuring, 53 EMORY L.J. 1159, 1177 (2004)).

4. A deepening notion of the passivity of the polity and a greater willingness to excuse a failure to act in the face of oppression or illegitimate conduct on the part of those in control of the state apparatus; the people of a jurisdiction are required to do nothing to evidence their disagreement with the practices later used as the basis for repudiation. (Larry Catá Backer, The Führer Principle of International Law: Individual Responsibility and Collective Punishment, 21 PENN STATE INTERNATIONAL LAW REVIEW 509 (2003)).

5. An embrace of the idea, now rationalized, that odiousness is universal and not contextual; in some circumstances, even the populace may not legitimately undertake obligations to engage in certain activities funded by debt to which the state is later bound to repay.

6. A sharpening the autonomy of and distinctions between the legal personalities of state (the popular political collective), the government (the apparatus of state), and functionaries (individual government officials), and a simultaneous openness to the possibilities that public and private persons have the power to engage in acts tinged with both public and private characteristics, the character of which will depend on the context in which individual decisions are made; and

7. An extension of the applicability of the doctrine of odious debt to all public obligations, even those of sitting regimes. (Patrick Bolton and David Skeel, Odious Debts or Odious Regimes, 70 Law & Contemporary Problems – (forthcoming 12007)).

The junior members of the family of nations, those who were the objects of unequal treaties and trusteeships, all suffered within the parameters of a system of international law that before 1945 systematically rationalized and legitimated such actions and subordinations, have embraced the expanded scope of odious debt doctrine. But they have refocused the analysis, conflating classic odious debt doctrine with current notions of illegitimacy and illegality as legitimate bases for debt repudiation in both a private (corruption) and public (violation of human rights norms) context. These new participants in the debate over the scope and application of odious debt notions to sovereign debt have developed another basis for applying the doctrine that turns current doctrinal developments on their heads. Rather than focus on the objects of lending, they focus first on the source of loans, and then on the system that rationalizes the rules under which those loans are made. Applying traditional doctrine in this other direction, they attempt to make the case that the loan system itself is odious. It is odious as an integral part of a larger economic system designed to perpetuate the subordination of developing states to the economic and political instrumentalities of developed states.

In earlier work, I identified the four principal characteristics of this systemic hypercycle producing an unavoidable need for developing states to borrow and their perpetual inability to repay those loans (Larry Catá Backer, Ideologies of Globalization and Sovereign Debt: Cuba and the IMF, 24 PENN STATE INTERNATIONAL LAW REVIEW 497 (2006)).

First, labor specialization shifts the most skilled and highest paying jobs to the developed states and away from developing states. . . . Second, overproduction shifts the benefits of misallocation of resources from the developing to the developed states. Overproduction depresses the price of these goods, making them more affordable in the developed world, where the highest paying jobs tend to be found, but remain unaffordable in the states where they are for the most part produced by workers whose wages are too low to pay for them. Third, the incentives to move capital freely tends to make it more difficult for developing states to tax consumption or income of the entities producing goods for the global market because wealth, like goods, tends to flow toward developed states and away from developing states. . . . Fourth, the propaganda of consumerism keeps the wheels of overproduction going and fuels a constant aspirational hope among those in developing states. The constant lack of satisfaction adds a level of need to the population – they want what individuals in the developed states appear to have, but they can neither afford it, nor their own basic needs....

States, without wealth to tax and with critical needs to meet, must borrow. Developing states borrow directly, in the debt markets, and indirectly, through the IMF, from developing states. In effect, developing states acquire as a debt obligation a portion of the wealth that represents the required subsidy of global production at the heart of the neo-liberal system. Thus the spiral deepens. Sovereign debt tends to be acquired under conditions designed to perpetuate the system – the conditions imposed on the debt contribute to an increasing inability of states to generate the wealth they need to repay, or loans are made to states whose leaders are satisfied to act as agents of the developing states and contribute to the subordination of their nations within the global economic system. Eventually, the loan framework within this system cannot be repaid. States must borrow additional sums of money to pay the portion of prior loans which are unpaid while meeting continuing need, or sell their wealth (in the form of natural resources or other wealth) in an effort to pay their loans. (Backer, Ideologies of Globalization, supra).
The modern system of private orderings, of global capital in the service of undefined global markets, it is argued, serves to benefit those states to the ruin of borrower states. It manages to reinforce the old international law system that sought to legitimate colonialism, and the unequal treatment of states without invoking such doctrines directly. Fidel Castro nicely distilled this insight in the 1980s: “With the aid of mathematics, we have analyzed all of the variations suggested to resolve the problem of state debt: with actual interest rates or reduced interest rates, with new credits or without new credits, with limited payments associated to export levels or without such limits, with moratoria or without moratoria, and even on the assumption of a sustained accelerated rate of development that is itself utopian, the result of all of these analyses is that sovereign debt, like an enormous and monstrous cancer, whose malignant cells reproduce at an accelerating rate, tends to reproduce itself and grow without limit.” (Fidel Castro Ruz, Discurso pronunciado por el Comandante en Jefe Fidel Castro Ruz, Primer Secretario del Comite Central del Partido Comunista de Cuba y Presidente de los Consejos de Estado y de Ministros, en la VIII Conferencia Cumbre del Movimiento de Países No Alineados, celebrada en Harare, Zimbabwe, Sept. 2, 1986).

In a world that had supposedly abandoned systems of hierarchy, subordination and hegemony after 1945 in favor of a system of horizontal equality among all states, the system of freely moving capital and its borrowing imperatives on developing states tends to impose again that system of hierarchy in fact. The nature of dependency is varied. Castro explains: “There is a bit of everything: depression in some countries, inflation in others, formulas and measures for destabilizing governments. Everyone on earth now understands that the IMF, for all the states it seeks to help, for all the states that it pretends to help, actually drowns those states economically and destabilizes them politically. There is no better way to put it than that the aid of the IMF is the devil’s kiss.” (Fidel Castro Ruz, Una revolucion solo puede ser hija de la cultura y sus ideas, Discurso pronunciado por el Presidente del Consejo de Estado de la Républica de Cuba, Fidel Castro Ruz, en la Aula Magna de la Universidad Central de Venezuela, 3 Feb. 1999, at 24).

The force of this system might be nicely exemplified, from the perspective of this approach to odious debt, by the difficulties Ecuador experienced in the early 21st century with respect to the loss of control of its natural resources, in particular its petroleum, to the global capital markets that required the use of those resources to service Ecuador’s external debt. As a consequence, Ecuador is considering action in the face of public revelations that the World Bank extracted from Ecuador a series of secret terms that could be characterized as oppressive. These included an obligation that Ecuador pay its bondholders 70%of any spike in oil prices and that Ecuador set aside another 20% of such oil spike revenue as a reserve against contingencies—effectively preventing Ecuador from using the funds for other purposes. (Palast, id.). The Ecuadorian president was quoted as suggesting “’If we pay that amount of debt. . . we’re dead. We have to survive.’” (Palast, id.). There is already the echo of an argument based on the notion of systemic illegitimacy in general and the opporesiveness of the specific terms imposed by the World Bank in particular, to support Ecuador’s determination to repudiate its debt obligations.

For capital markets in general, and public and private lenders specifically, the reorientation of odious debt doctrine to focus first on illegitimacy as the touchstone of the doctrine, and second on creditors and the creditor market system as a source of illegitimacy, provides both a challenge and an opportunity. The challenge, of course, follows from the “nuclear” threat in the modern indictment of the system as illegitimate. That threat would see the system itself dismantled and replaced with something else. The shape of the “something else” is already being developed in regional organizations like ALBA (a trade and mutual support organization among Cuba, Venezuela, Bolivia and Nicaragua). It may be further developed by Hugo Chavez to the extent he takes a role in the Ecuadorian debt repudiation “crisis” of 2007.

The opportunity may be lost in the visceral reactions of Westerners to doctrine dripping in old fashioned Marxist Leninist rhetoric (a rhetorical stance that indeed does not tend to serve it well among some sectors of the Western elites). But it is not lost on everyone. That opportunity comes form the possibilities of blending the foundational normative bases of modern form odious debt notions—coercion, legitimacy, corruption, popular benefit, transparency and monitoring—to fashion a system of safe harbor terms and obligations, presumptions and accepted forms of diligence and reporting, that can effectively insulate sovereign loans form challenge even on systemic illegitimacy grounds (either from the creditor or debtor side). As Thucydidies suggested in the context of the international relations among Greek states during the Peloponnesian War, “right, as the world goes, is only in question between equals in power, while the strong do what they can and the weak suffer what they must.” (THUCYDIDES, THE PELOPONNESIAN WAR, Bk. V, ch. XVII (Crawley trans., New York: Random House, 1951 (c400 B.C.) at 331). So too, systemic illegitimacy claims arising from out of a new application of odious or illegitimate debt notions, will be met by solutions devised by creditor states that serve to appear to meet the criticisms without affecting the system through which such debts are generated, and money is made for the developed states and their instrumentalities.

Let us look more closely at the ways in which the components of systemic illegitimacy notions of odious debts might be turned ot make such debts more difficult to repudiate. The object here is neither to indict or support such a move, but to suggest that rhetorical or normative stances in this emnerging area of policy discourse does not, of itself, inevitably yield a particular result. “Of the gods we believe, and of men we know, that bya necessary law of their nature they rule wherever they can. And it is not as if we were the first to make this law, or to act upon it when made; we found it existing before us, and shall leave it to exist for ever after us.” (Thucydides, supra, at 334).

The starting point are the normative components of that expanded odious debt doctrine iteself. I have grouped them into six categories, each of which focuses on a different aspect of the problem of odious debt and the objective to which the application of the doctrine is aimed:

First, popular benefit. The ideal of popular benefit, central to the traditonal notion of odious debt as developed in the early part of the last century focuses on the use of funds, popular ratification, and presumptions of popular ratifications in democratic states. In this aspect, the doctrine of odious debt carries with it an implicit condemnation of non-democratic (authoritarian or dictatorial) regimes. The doctrine is thus to be used to further civilize states whose governance systems do not yet embrace universally accepted values for the construction of the apparatus of states—a set of universal values now being fashioned within the international community through its various organs. (Patrick Bolton & David Skeel, Odious Debts or Odious Regimes?, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)).

Second, corruption. Corrupton combines moral, ethical, political and aspirational norms. It focuses on distinctions between the state, its apparatus and the individuals who serve within that apparatus. Proceeding from a refined notion of the autonomy of the state from its apparatus, and the autonomy of the apparatus from the individuals who serve it, corruption notions serve as a proxy for the need of individuals to serve the apparatus above their own personal interests, and for the apparatus of state to serve the state above its own institutional interests. (Deborah A. Demott, Agency by Analogy: A Comment on Odious Debt, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)). Diversions of benefit from state to apparatus or from apparatus to individual, are corrupt because they indicate abreakdown of this basic rule of behavior. Corruption is a form of theft, the use of a power or position meant to benefit one entity for the benefit of another. Again, the doctrine is to be used to discipline developing or debtor states—it rationalizes a series of behavior norms under the rubric “corrupton” that is meant to create a stronger culture of policing the behavior of instiutions and individuals acting in arepresentative capacity, as well as trengthening the legitimacy of systems based on actions in representative capacities.

Third, coercion. Like corruption, coercion focuses on unfairness. It targets the function or effect of lending. It condems an abuse of process or of power to unfairly derive benfit form another in a way that, like corruption, van appear, in effect, to amount to theft. Implicit in this limitation is notion is the attempt to reduce the legitimacy of assertions of power to enable bad conduct on the part of debtors or to repudiate such enabled loand by successor regimes. (Tai-Heng Cheng, Renegotiating the Odious Debt Doctrine, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)) The object here is to prevent a threat to the system from the actions of creditors; loans must be made to be repaid and debtors must be subject to terms which they will, however reluctantly, be willing to pay. Moreover, in the long term, the system must be capable of regenerating loans. A system based on the constant streams of making, paying and remaking loans, cannot afford debtords who are unable or unwilling to borrow, or to repay. It is a method by which, though appearing to limit the logic of traditional notions of subordination, actually strengthens subordination by softening its hardest edges.

Fourth, complicity. Complicity values focus on the relationships between lenders and the state, its apparatus and the individuals who serve within that apparatus. In this aspect, the odious debt doctrine carries with it an implicit condemnation of loans that the lender knew or should have known were to be used for personal, rather than state, benefit. (David C. Gray, Devilry, Complicity, and Greed: Transitional Justice and dious Debt, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)). The object, in part, perhaps, is focused on enlisting creditor states, and their instrumentalities, in a more positive role in policing the behavior of debtor states and their apparatus. (Tom Ginsburg and Thomas S. Ulen, Odious Derbt, Odious Credit, Economic Development and Democratization, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)). But the object is also to maintain the hierarchy of power inherent in the state system. Creditor states or their instrumentalities that become complicit in the actions of the debtor state apparatrus or of that state’s functionaries, threaten the order of power by causing such creditors be appear to be acting like the partners of such apparatus or individual. It suggests weakness on the part of creditor states and creates the potential for weakening framework within which payment compulsion is maintained.

Fifth, monitoring. Monitoring serves a civilizing function. It is based ona presumption that actors will behave badly, and that such an inclination to bad behavior can be reduced by exposing their conduct to the observation of others. These ideas are well known in the United States. (Larry Catá Backer, Surveillance and Control: Internal, External and Governmental Monitoring of Corporate Insiders After Sarbanes-Oxley, 2004 MICHIGAN STATE DCL LAW REVIEW 327 (2004)). In a sense monitoring transfers governance and accountability functions from the polity to those states, groups or instrumentalities on which the monitoring function is placed. But this transfer is in accord with a normative value set that simultaneously views polirical communiies as essentially passive, the the principal beneficiaries of actions undertaken by a state apparatus and as the ultimate source of all political power. That power, usually vested in the government, is now to be shared among the state, its apparatus, and a host of non-state actors increasingly responsible for ensuring that the state is run appropriately. The sovereignty of creditor states is thus ensured by reducing its sovereignty to those outsiders more capable of serving the interests of the state. “[T]here is nothing alien, or even novel, in proposing to use private law concepts to articulate limits on the legitimate powers of states.” Jedediah Purdy and Kimberly Fielding, Sovereigns, Trustees, Guardians: Parivate –Law Concepts and the Limits of Legitimate State Power, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007) draft at 42). Monitoring also serves to deepen the structures of such subordination to non-state and transnational actors. In particular, it serves to transfer public functions to lenders as a principal stakeholder in the functioning of the state and the use of borrowed funds.

Sixth, transparency. Transparency is related to but not the same set of values as monitoring. Transparency is an anti-subordination device, meant to function as a means of inclusion by making exposing the action taken by decision makers and the information used to arrive at such decisions. It makes popular response more efficient. It is thus tied to popular determinations of public benefit, as well as to efficiency issues in policing against corruption, complicity and coercion. It thus disciplines markets and advancing ideals of anti-subordination in state to state relations within global capital markets. (Omri Ben-Shahar and Mitu Gulati, Partially Odious Debts?: A Framework for an Optimal Liability Regime, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)). But it does so within the parameters of values and behavior norms which serve to reinforce the legitimacy of those markets. It has great value, whether or not transfers to debtor states are made as private “loans” or state to state “transfers”, however denominated. (Anna Gelpern, Odious, Not Debt, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007).

Implementation. These components and the values each represents, might be used as the foundations for specific changes in the approaches of global capital markets to the origination, maintenance and monitoring of sovereign loans. Indeed, many of the contributions to this symposium have done just that—providing the conceptual framework for the sort of technical changes that will continue to insulate lenders from the risk of repudiation, even as it recognizes the possibility of illegitimacy in the sovereign lending system in general, and in the conduct of any individual lender, from time to time. “[I]llegitimate debt is not yet a well defined and generally accepted term. Differences between illegitimate and other types of debts, such as odious or legal debts, must be clarified” (Kunibert Raffer, Odious Debt, Illegitimate Debt, Illegal or Legal Debts—What Difference Does it Make for International Chapter 9 Debt Arbitration?, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007). I highlight four categories of specific changes which might be made to insulate loans from attack on illegitimacy grounds—(1) mandatory terms, (2) presumptions of benefits and burden of proof shifting, (3)responsibility shifting versus repudiation, and (4) complicity limits.

Mandatory Terms and Safe Harbors. Academic discourse, at least, as well as the discourse of the political leaders of the developing world, have advanced the notion that sovereign debt, as a class, may be odious or illegitimate (and thus subject to repudiation by the state, but not by the individuals who entered into the agreements) because the terms of such debt are inherently coercive or occasionally so. Consequently, such loans serve to provide no benefit to the people of the state upon which liability for the debt is sought to be imposed. Just as the Cubans were not required to pay Spanish war debts that benefitted Spain (but not Cuba), so any state may repudiate an obligation to pay debts that benefitted some one other than the debtor state itself.

But the systemic illegitimacy of public benefit can be managed sufficiently in a number of ways that can serve to deepen the legitimacy of the current system, at least in this respect. Drawing on analogies from commonly understood usury notions and unconscionability doctrine, but both grounded in principles of international human rights norms, it is possible to craft a series of “universal” rules and principles of construction of sovereign loans that effectively insulate such loans against characterization as not benefiting the people of debtor countries thus preserving such loans, as a class from effective repudiation on these grounds. (e.g., Mechele Dickerson, Insolvency Principles and the Doctrine of Odious Debts: The Missing Link in the International Human Rights Debate, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)). Such mandatory terms could include mechanisms for limiting interest and repayment terms, distinguishing between permissible and impermissible covenants and other loan conditions, and creating safe harbors protecting certain lender actions against charges of meddling or control claims. Omri Ben Shahar and Mitu Gulati make a stab in this direction (Omri Ben-Shahar and Mitu Gulati, Partially Odious Debnts?: A Framework for an Optimal Libaility Regime, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)). Contract, then, can create a system of “trade practices,” “trade expectations,” common terms and definitions that would provide a basis for lenders to more effectively insulate individual loans from attacks on grounds of coercion or lack of public benefit. Most importantly, perhaps, such an approach could effectively generate a system of something like “jus cogens” principles of legitimate debt terms and practices. Proceeding from general principles to application is not unfamiliar to civil law practitioners.

Presumptions of Benefit. Sovereign debt is presumptively illegitimate within the discourse of systemic illegitimacy because it provides no benefit to the people on whom the burden of repayment is placed. But drawing on analogies of democratic theory in the construction of loans can substantially reduce the efficacy of arguments of systemic illegitimacy by appearing to meet the popular benefit, monitoring, complicity and transparency. For example, it would be possible to construct a series of presumptions of legitimacy that would shift burdens of proving illegitimacy. Debt undertakings by democratically elected governments would be presumed to serve a substantial public benefit, unless the state itself could show no benefit. In addition, in such circumstances, the state would have to show that the lender, rather than it, ought to have the burden of seeking compensation or payment from those (individuals within its apparatus) who diverted funds away from publicly beneficial functions. On the other hand, debts to undemocratic governments might give rise to a presumption that such loans do not benefit the public. Such debts would shift the burden of showing public benefit to the lender, who then would bear the burden of recovery from those individuals with whom it dealt in placing the loan. In addition, it would be possible to construct systems of safe harbors against repudiation for lenders who are responsible for a certain well defined quantum of monitoring and tracing of funds. (Seema Jayachandran. Michael Kremer and Jonathan Shafter, Applying the Odious Debt Doctrine While Preserving Legitimate Lending, Dec. 2005). Such systems would require the generation of universally accepted lists of uses with a public benefit, and transparency enhancing systems. For a step in that direction consider Omri Ben-Shahar and Mitu Gulati, Partially Odious Debts?: A Framework for an Optimal Liability Regime, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007).

From Repudiation to Responsibility Shifting. The “nuclear option” of systemic illegitimacy theory is the call for wholesale debt repudiation from out of which a new system of wealth transfers to developing states might be created (perhaps along the lines of the now abandoned U.N.’s New Economic Policy). But the increasing focus on the consequences of a more acute recognition of the autonomy of the actors who have a hand in the acquisition of sovereign debt might well provide a basis for ameliorating this option in favor of systemic changes that enhance the power of the current system at little cost to it. Thus, the current development of global systems of monitoring and enhanced transparency in connection with financial crime and anti-terrorism campaigns can be easily deployed to the odious debt context. The problem of odious debt, reconceived as a matter of criminal activity on the part of individuals, thus lends itself to easy control within the current systems of global sovereign lending. The focus thus shifts from systemic illegitimacy to personal responsibility for actions and obligations that cannot be ascribed to the state as an autonomous actor. For this purpose, the developing global systems of chasing and retrieving illicitly diverted funds can be useful as a basis for diverting attention from system to actor. And indeed, most financial instiutons are already devoting a certain amount of effort to reorienting their operations to this new reality of transnational operation. For these purposes, private law doctrines like equitable subordination mght prove useful. (Adam Feibelman, Equitable Subordination and Sovereign Debt, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)). They might also apply in the context of state-to-state transactions, which might be characterized as either debt or “something else” as well. (Anna Gelpern, Odious, Not Debt, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007). The discursive parameters thus shift from a simple binary—pay/no pay—to a more complex analysis involving issues of who pays, when and in what order.

Limiting the Bite of Complicity While Managing its Occurrence. Complicity concerns tend toward issues of self regulation within an industry whose long term best interests are maximized by an avoidance of appearing to run an amoral system geared to exploit the weak by leveraging the power of the powerful developed states from which they operate to subordinate the people of debtor states by effectively contributing to the governmental lawlessness of debtor states. This self monitoring, once confined perhaps to the realm of state to state relations now appears more and more able to reach private entities as well. (Anita Ramasastry and Robert Thompson, Commerce, Crime and Conflict, (FAFO Report No. 536; FAFO New Security Programme - Economic Agendas in Civil Wars/International Peace Academy 2006)). And international organizations are attempting to use private entities and individuals to discipline state and other international actors. (Larry Catá Backer, Multinational Corporations, Transnational Law: The United Nation’s Norms on the Responsibilities of Transnational Corporations as a Harbinger of Corporate Social Responsibility as International Law, 37 COLUMBIA HUMAN RIGHTS LAW REVIEW 287 (2006)). There is an economics to this program as well—one which seeks to impose of the parties that take fewest steps to avoid loss to bear it. (Omri Ben-Shahar and Mitu Gulati, Partially Odious Debts?: A Framework for an Optimal Liability Regime, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007) at 20).

Lenders can avoid charges of systemic illegitimacy as well as powerful arguments for repudiation by applying, for example, principles of joint tortfeasor or conspiracy rules from private law to fashion a series of limiting principles and norms that define, with sufficient particularity, conduct that avoids and conduct that embraces complicity (and its resulting obligations vis a vis sovereign debt). Transparency and monitoring efforts can de defined in a way to produce a sufficient effective system of behavioral safe harbors. Complicity thus defined can include a substantive element (what conduct constitutes complicity) and a process component (what systems must be created and efforts made to avoid characterization of conduct as complicit). Necessarily defining complicity narrowly affords the last bit of protection to lenders and the lending system.

Normalizing Systems of Management of Global Debt in Global Institutions. One of the great ironies of the odious debt doctrine—among both its defenders and critics—is the consensus that debate on this topic appears to generate with respect to the solution of the “problem” however conceived. And that solution has changed little in general form from that proposed by Sack in the 1920s. Few theorists are willing to leave matters to the private market, though many are satisfied to import private law principles to whatever mechanism they advocate. Even fewer are willing to leave resolution to the current disordered system of territorially bounded states, split between creditors and debtors. What most propose are some form or another of international or supranational organization for the resolution of disputes about debt, and more precisely, for its enforcement as against states otherwise unwilling to pay. Thus, along with Anne Krueger of the IMF (Anne O. Krueger, A New Approach to Sovereign Debt Restructuring, International Monetary Fund, Apr. 30, 2002). there are many proposals for a supra national system of insolvency to which all sovereign states would be bound. These systems have been characterized as efforts to reduce political considerations from sovereign debt relief (for the reasons such reduction is necessary in American corporate law restructuring) (Robert Rasmussen, Odious Debt and the Essential Political Character of Sovereign Debt Restructuring, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007). They might incorporate human rights values in discussion of debt payment obligations (Mechele Dickerson, Insolvency Principles and the Doctrine of Odious Debts: The Missing Link in the International Human Rights Debate, 70 JOURNAL OF LAW & CONTEMPORARY PROBLEMS – (forthcoming 2007)). Such systems might reduce systemic incentives toward bad behavior among the individuals clothed with public power in debtor states (Kunibert Raffer, What’s Good for the United States Must be Good for the World: Advocating an International Chapter 9 Insolvency, in FROM CANCÚN TO VIENNA, INTERNATIONAL DEVELOPMENT IN A NEW WORLD 68 (Bruno Kreisky Forum for International Dialogue ed., 1993). Whatever the system chosen, the result will be the same, the production of an autonomous transnational system for the disciplining of states through the leverage of its indebtedness, into conformity with globally coercive behavior norms. Odious debts doctrine, and the systems its spawns, are in this sense, a means to a greater end.

By now one gets the essential point. Odious debt is a horse with many saddles. It serves to illuminate a great problem of the state system as it interacts with emerging global capital markets. It pits older hierarchical notions of the state system with the rising network of multiple public and private global but functionally differentiated systems of governance. Odiousness Debt doctrine exposes creditor as well as debtor. Its broad application, at least in theory, will not likely do much to destabilize the rising system of global capital. But it may produce a series of structural adjustments in the way that system operates that might be of value to debtor states even as it strengthens that system and provides a mechanism by which it can emerge autonomous from the state system which it services.

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