OT: Iraqi Debt

[QuikSand]

Iraq's Odious Debt?

As the rebuilding of the Iraqi nation looms, there is a good deal more to the story than just building bridges, roads, and schools (the sort of thing we tend to think about as “rebuilding”). Indeed, Iraq is a financial basketcase, having borrowed its way through much of the last decade, and now faces a potentially crushing weight of debt.

This raises, in my mind and many others, a very challenging public policy issue. Do the people who loaned Saddam’s Iraq deserve to be repaid? Or should we revisit an old pseudo-doctrine of Odious Debt and declare those debts incurred by a despotic regime to not have been in the interest of its people, and therefore not suitable to transfer to the succeeding government?

This is a somewhat more complex issue than Bono’s crusade for “debt forgiveness.” This is a wholesale policy shift to reassess the nature of “full faith and credit” of a nation’s government or leadership. The concept really has not been formally implemented anywhere, though some would argue that the practical effect of late 19th century policy toward Cuba would be a fair example (as the U.S. refused to recognize the debt incurred under Spanish rule to be binding on the newly liberated Cuba). I’d point out that in that particular case, it became a matter of debt reassignemnt, rather than simple abrogation (Spain ended up paying the debt, rather than Cuba). Big difference, if you’re the creditor.


A few things to consider, as this might be an issue some will raise with Iraq:

-Iraq currently faces a monstrous load of debt, including potential reparations to Kuwait – it may take generations for these debts to be paid off rightfully, even with IMF and/or World Bank assistance

-Among the most significant creditors to Iraq, even throughout the current/outgoing regime, are (surprise, surprise) France and Russia

-There’s more to consider than just this instance… if the “legitimacy” of a particular regime is going to be a subject of debate in terms of future repayments of debt, we have to imagine that international borrowing will be considered a riskier proposition – meaning that nations (particularly developing nations, the ones most in need of financial resources) will have a harder time getting financing for their important projects

-There might be an upside to that last argument, though – if it’s harder for tyrannical rulers and human rights abusers to gain capital, that could weaken their grip on power wherever they hold it


I think it’s an interesting issue… and thought it might be worth some discussion here.

There was an interesting (although brief) piece on this yesterday on the public radio show Marketplace, which you can hear from the links below:

Marketplace article audio is here

Marketplace commentary is here

And here is another article link, again from the two most widely-published advocates for reviving the decades-old concept of “odious debt.”

[Tarkus]

You raise some interesting points. I'm far from an expert in international law so I really can't give an educated opinion. Maybe others here know more about it. From my heart I'd say if you loaned money to a regime like Saddam's and that regime gets eliminated you're flat out of luck. I view it as a bad investment. Sorta like putting money into a bad stock. However, like I said earlier I don't know if there's international law that would govern this. It will be interesting to see how this plays out.

Tarkus

[Bee]

Well outside my area of knowledge, but my first instinct would be the "odious debt" route. I would guess each debt would have to be examined on a case by case basis? With all the destruction of government buildings, I wonder if that's even possible.

[Fritz]

Quik,

setting aside the morality of debt for a second, the question may be how much debt Iraq can assume before it starts to adversely inpact their ability to develop.

Democracy MUST provide more than Saddam to take root.

[Easy Mac]

I'd have to agree with Fritz and Bee here, it really depends on what kind of debt is owed. I'd say that if we expect to get the country on its feet with minimal occupation (which, although I don't like that idea, I think it would be best given I less than perfect Mid-East persona), we have to assume as much debt as possible. Of course, if you do that, you're dead here politically, as I don't think many people here have thought as much about financial implications of a war. Its a very fine line they have to straddle on this one.

[JPhillips]

I think world politics needs to play a large part in this. Do we really want to say to all of the world's debtor nations that they can write off their debt if they choose? Maybe we are ready to do that, but we need to realize that this decision will have an effect outside of Iraq.

From what I have read the largest amount is owed to Kuwait for war reps, something like 200 billion. I don't know if we can cut those out without giving the Kuwaitis something in return. They have been very close allies through this, and I don't think we should shaft them. Maybe we set up five billion a year for forty years plan. I wouldn't be surprised f the US pays a portion of the war reps.

[GrantDawg]

The war rep would be something that could be lightened/removed. That would be up to the will of Kuwait, but it seems something could be worked out there. The rest of the debt (specifically the debt to France and Russia) should be payed, but there probably are ways to reduce that politically. Of course, those two countries are going to have to become a little more reasonable (The demand for the US and Britian not having ANY role in the rebuilding of Iraq is just ridiculous). Increased roles in the rebuilding for lightening the debt maybe?

All of this falls to Colin Powell and I hope he can live up to his reputation.

[Fritz]

I was not saying that Iraq should not pay off debt. I am saying debt should be managed in a way that does not cripple an emerging democracy or sabatoge future stability.

[JonInMiddleGA]

There's not much doubt in my mind that the notion of Odious Debt is going to be applied to the great majority of Iraq's obligations, particularly any transactions that occurred in violation of trade sanctions against the nation.

In other words, France, Russia & Germany will find that playing with the devil is not a winning proposition.

[albionmoonlight]

Who decides if (France/Kuwait/etc.) gets to be repaid? I assume that it will be us, but just because we have the big guns. If not, let me know who gets to decide these things.

To me--who gets to decide what happens to debt changes my opinion on whether Odious Debt is a good concept.

I like it as a pure concept because people coming out from under the rule of a despotic regime need all of the help that they can get and because, as Q said, "if it’s harder for tyrannical rulers and human rights abusers to gain capital, that could weaken their grip on power wherever they hold it"

In Iraq's case, I think that most people could agree (dare I say that it is obvious) that the outgoing regime is despotic and that the new regime will not be connected to it. It will be easy to say that the debt is odious.

In future cases, however, the decision on whether an outgoing regime was despotic and whether the incoming regime is connected to it will be less clear. How will lenders know how to protect themselves, then?

The short answer, I think, is that they won't. Assuming that the United States decides what debt is odious and what should be done with that debt, I think that countries will be discouraged from lending money to countries that have the potential of falling out of favor with the U.S. I think that this discouragement might cause countries not to lend money in instances when they should.

Also--there is a difference between a country that chooses to lend a regime money and a country that is owed reparations. Do we treat those differently or not?

At the least, this concept will raise interest rates for international debt to compensate for the risks of non-repayment--maybe not a good idea for the U.S. going into a decade when our deficits will cause us to borrow like never before.

So--IMHO, a good idea in theory, but there is no way to put it into practice without some serious flaws.

Note--unlike others here who professed ignorance and cabined their comments appropriately, I just went ahead and said what I thought--please correct any and all factual assumptions and mis-statements that I have made.