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10 April, 2017

Demystifying Alexander Nahum Sack and the doctrine of odious debt

Eric Tousaint’s study of the odious debt doctrine

by Eric Toussaint

Part 17 - Sack’s conception of odious debt

Now we can look at the conditions for what Sack would call odious debt.

The excerpt from Sack’s book on the subject that is the most referred to can be confusing. “If a despotic power contracts debt, not for the needs and interest of the State, but to strengthen its despotic regime, to oppress the population that combats it, that debt is odious for the whole State. The debt need not be recognised by the Nation: it is a debt of the regime, a personal debt of the power that contracted it and consequently falls along with the power that contracted it.” (p. 157) “These ‘odious’ debts cannot be considered to be a liability of the State’s territory because one of the necessary conditions that determine the regularity of State debt is missing; a State’s debts must be incurred and the funds thus made available used for the needs and in the interests of the State. ‘Odious’ debts incurred and used, with creditors’ foreknowledge, for purposes that are not in the interests of the Nation do not engage the Nation, should the Nation rid itself of the government that incurred them (…). The creditors have committed a hostile act towards the people; they cannot therefore hold the people responsible for the debts that a despotic power incurred against the people’s interest and are the personal debts of the despotic regime.” (p. 158)

Many of the remarks on this excerpt conclude that Sack pretends that for a debt to be “odious” it has to be contracted by a despotic regime. This is not Sack’s position. In fact, as a lawyer he considered that several circumstances could give rise to debt of an odious character. The above quote mentions only one possible circumstance.

There are others. Five pages further on Sack gives more general criteria for defining an odious debt. In this wider definition, he does not mention despotic regimes: “Consequently, for a debt, regularly incurred by a regular government to be considered incontestably odious with all the consequences that follow, the following conditions must be fulfilled:
1. — The new government must prove and an international tribunal recognise that the following is established:
a) that the purpose which the former government wanted to cover by the debt in question was odious and clearly against the interests of the population of the whole or part of the territory, and
b) that the creditors, at the moment of the issuance of the loan, were aware of its odious purpose.
2. — once these two points are established, the burden of proof that the funds were used for the general or special needs of the State and were not of an odious character, would be upon the creditors .

Here, Sack very clearly says that a regular government’s debts may also be odious: “for a debt, regularly incurred by a regular government to be considered incontestably odious with all the consequences that follow,…

Sack defines a regular government as follows: “By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.” (p. 6)

So, in fact, there is no doubt about Sack’s position: that a regime be despotic is not a sine qua non condition that makes debts odious and susceptible to repudiation. According to Sack, all regular governments, whether despotic or democratic of some kind, may be accused of having agreed to odious debts.

What are the two criteria that establish a debt as odious? Looking again at Sack’s remarks we see: — The new government must prove and an international tribunal recognise that the following is established:
a) that the purpose which the former government wanted to cover by the debt in question was odious and clearly against the interests of the population of the whole or part of the territory, and
b) that the creditors, at the moment of the issuance of the loan, were aware of its odious purpose.

We can summarise as: 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.

In an opinion published in 2002 by the IMF review Finance & Development Michael Kremer and Seema Jayachandran define the odious debt doctrine as: “The legal doctrine of odious debt makes an analogous argument that sovereign debt incurred without the consent of the people and not benefiting the people is odious and should not be transferable to a successor government, especially if creditors are aware of these facts in advance.

This summary is at first sight convincing and does not mention, as an obligatory condition, the despotic nature of a regime. However, closer scrutiny shows that one of the conditions mentioned by the authors is not mentioned by Sack. Namely: “it is incurred without the consent of the people.” The fact that Sack does not mention this condition is quite coherent with his position that the nature of the government is of no importance in this matter.

If some readers still have doubts about Sack’s position concerning despotic regimes, here is another quote: “Even when a despotic power is overthrown by another despotic power that is no less despotic and no more reflective of the will of the people, the odious debts of the fallen power remain the personal debts of the regime and the new power is not liable for them” (p. 158). For Sack only the purpose of the funds and the creditors’ knowledge of that purpose are the important elements.

Source and references:


[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [18] [19] [20]

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