CandleFocus Glossary Editor
Odious debt is a term used to refer to a debt contracted on behalf of a nation by its predecessors, which the present ruling government decides is not an obligation they are required to pay. Generally, this decision is made on moral grounds, as the debt went to cover illegitimate activities or projects. Though odious debt has not been established as a set principle of international law, governments who have won in wars or conflicts have used this as a justification for not repaying their defeated opponents’ debts.
Since odious debt is not legally defined, its practical application has been left to individual countries. Typically, it is assumed that if the loan was provided for an illegitimate use, it could be considered odious, and the successor government does not need to pay it back. Common examples of illegitimate activities are those undertaken by a de facto government, a despotic regime, or a group responsible for carrying out a genocide.
Odious debt claims have, however, been challenged on several occasions, potentially limiting their power in the future. Not surprisingly, creditors might challenge a refusal to pay as they have a financial interest in the outcome of the negotiation. A higher court might deem the debt non-odious if it was contracted in good faith and is considered a general obligation of the government. The UN Commission of Inquiry on Reparations recognized major obstacles associated with trying to prove the illegitimate nature of foreign debt and ended a report saying that "the proof of intent to use resources for illegitimate purposes is a difficult legal and factual hurdle.”
The successful application of odious debt has presented a significant and worrisome risk for investors in sovereign debt as countries wishing to repudiate odious debt might tend to have higher borrowing costs due to risk associated with the political transformation. This has a severe impact on developing countries in particular, as private investors consider this volatility before investing in a nation’s economy.
The concept of odious debt has been embraced and discarded by some countries, as it presents both a useful tool and a difficult challenge. It can be a useful tool for governments looking to discontinue payment on a debt they consider illegitimate, while being a difficult challenge to creditors fighting to protect their interests. It is clear that while the intentions behind odious debt are noble, it is not an easy concept to implement.
Ultimately, odious debt remains a significant risk associated with already-volatile international markets and is sure to remain a source of discussion for years to come.
Since odious debt is not legally defined, its practical application has been left to individual countries. Typically, it is assumed that if the loan was provided for an illegitimate use, it could be considered odious, and the successor government does not need to pay it back. Common examples of illegitimate activities are those undertaken by a de facto government, a despotic regime, or a group responsible for carrying out a genocide.
Odious debt claims have, however, been challenged on several occasions, potentially limiting their power in the future. Not surprisingly, creditors might challenge a refusal to pay as they have a financial interest in the outcome of the negotiation. A higher court might deem the debt non-odious if it was contracted in good faith and is considered a general obligation of the government. The UN Commission of Inquiry on Reparations recognized major obstacles associated with trying to prove the illegitimate nature of foreign debt and ended a report saying that "the proof of intent to use resources for illegitimate purposes is a difficult legal and factual hurdle.”
The successful application of odious debt has presented a significant and worrisome risk for investors in sovereign debt as countries wishing to repudiate odious debt might tend to have higher borrowing costs due to risk associated with the political transformation. This has a severe impact on developing countries in particular, as private investors consider this volatility before investing in a nation’s economy.
The concept of odious debt has been embraced and discarded by some countries, as it presents both a useful tool and a difficult challenge. It can be a useful tool for governments looking to discontinue payment on a debt they consider illegitimate, while being a difficult challenge to creditors fighting to protect their interests. It is clear that while the intentions behind odious debt are noble, it is not an easy concept to implement.
Ultimately, odious debt remains a significant risk associated with already-volatile international markets and is sure to remain a source of discussion for years to come.