The Odious Debt Doctrine: Moving from Theory to Practice with an Ex-Ante Perspective

Odious debt[1] can be understood as illegitimate debts accrued from international lenders by despotic rulers subject to repudiation by successive governments.[2] Odious debt is generally: (1) accrued by despotic regimes, (2) used for illegitimate purposes against the interests of the people and for the benefit of the regime, (3) without their consent, and (4) with the awareness of the creditor.[3] A notable historical reference is the 1923 international arbitral decision by U.S. Chief Justice and former President William Howard Taft.[4] He argued Costa Rica’s debt to the United Kingdom, under the regime of the former ruler Federico Tinoco, could be repudiated if the funds borrowed were used for illegitimate purposes, such as personal benefits to the ruler and regime.[5] Taft’s methodology suggests that identifying regimes that misuse funds for personal benefit at the expense of the people is a crucial factor in identifying odious debt. However, the application of odious debt faces significant challenges. 

The odious debt doctrine is not universally accepted. It is a matter of principle that governments inherit the debts of their predecessors.[6] For example, the South African people still bear the debts of their oppressors from the apartheid regime.[7] Odious debt is an equitable exception to this principle that protects people from the illegitimate debts of former regimes by repudiating that debt.[8] Scholars debate whether the concept is merely a theoretical construct or a practical legal doctrine. I contend that an ex-ante approach could more effectively realize the doctrine’s underlying principles and elevate the odious debt doctrine beyond theory. 

The ex-ante approach would incorporate preexisting theories such as: (1) having a neutral third-party organization or committee entrusted to identify corrupt regimes that exploit funds for personal gain at the expense of their people;[9] and (2) implementing financing conditions imposed by nations that disincentivize domestic lenders from financing these regimes, such as loan sanctions and measures preventing asset seizures for debts incurred after the sanctions.[10] This framework would proactively apply the principles of odious debt, deterring foreign lending to self-serving dictators, rather than merely repudiating the debt after the fact.  

An ex-ante approach would deter lending to oppressive regimes and protect successive governments from the consequences of defaulting on the debt illegitimately accrued by prior despotic rulers, such as by protection against asset seizure. If debt is found to be legitimate, protection from asset seizure will, at least, give incoming governments negotiating leverage to restructure, which will stimulate their country’s financial health. In certain instances, the traditional application of odious debt could be more objective: if a debtor country was identified as a self-serving regime at the time of the loan, international lenders would have to overcome the rebuttal presumption that the debt was used for illegitimate purposes.

An ex-ante deterrent informs lenders about the risks associated with lending to despotic regimes, potentially reducing their willingness to provide funds. This proactive approach clarifies the traditional application of the odious debt doctrine and enhances its effectiveness in protecting citizens from assuming the illegitimate debt of former regimes.

Jalen Wright is a staff member of Fordham International Law Journal Volume XLVIII.

[1] Alexander Nahun Sack, The Effects of State Transformations on their Public Debts and Other Financial Obligations, (1927) (“…if a despotic power incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime, to repress its population that fights against it, etc., this debt is odious for the population of the State…The debt is not an obligation for the nation; it is a regime’s debt, a personal debt of the power that has incurred it, consequently it falls within this power….”); Professor Robert Howse, The Concept of Odious Debt in Public International Law, UNCTAD, UNCTAD/OSG/DP/2007/4 (2007) https://unctad.org/system/files/official-document/osgdp20074_en.pdf.

[2] Id.

[3] Id.

[4] Odette Lienau, Who is the “Sovereign” in Sovereign Debt?: Reinterpreting a Rule-of-Law Framework from the Early Twentieth Century, 33 Yale J. Int’l L., 63 (2008).

[5] Id.; Eric Toussaint, What other countries can learn from Costa Rica’s debt repudiation, CADTM, (Nov. 1, 2016) https://www.cadtm.org/What-other-countries-can-learn#:~:text=The%20debts%20were%20not%20contracted,right%20to%20repudiate%20illegitimate%20debts.

[6] Halil Rahman Basaran, Odious Debt, 44 Liverpool L. Rev. 137 (2023).

[7]  Michael Kremer & Seema Jayachandran, Odious Debt: When Dictators Borrow, Who Repays the Loan?, Brookings Inst. (2003).

[8] Basaran, supra note 6.

[9] Michael Kremer and Seema Jayachandran, Odious Debt, Brookings Inst. (2005) (“Suppose, for example, that the United Nations Security Council unanimously declared that any future debt incurred by a particular dictator would be considered illegitimate and nontransferable to successor regimes…We argue that this would create incentives for lenders in third countries to avoid lending to the dictator, and could potentially eliminate equilibria with illegitimate lending”).

[10] Michael Kremer and Seema Jayachandran, Loan Sanctions and Odious Debt, Brookings Inst. (2005).

This is a student blog post and in no way represents the views of the Fordham International Law Journal.