Sovereign Debt Restructuring, Odious Debt, and the Politics of Debt Relief

Abstract

"Odious debt" is more of a literature rather than a doctrine. One can find numerous arguments dating back decades arguing that new regimes should be entitled to relief from "odious debts." The actual cases of relief, however, are few. Countries with obligations that could easily be classified as odious debt eschew reliance on the doctrine. The recent interest in the odious debt doctrine was precipitated by the ouster of Saddam Hussein. The new government of Iraq was able to pare down its debt without resting on the odious debt doctrine. Indeed, this resolution may portend that discussions of odious debt will recede from policy circles. There is a lesson here that should not be missed. Odious debt is a politically motivated concept. By tying debt relief to the character of the old regime, the doctrine seeks to achieve desired political results in two ways. While a disfavored regime is in place, it attempts to erode that regime by constricting available funds. After the regime falls, it encourages certain political outcomes by offering financial relief to acceptable regimes. What is too often overlooked is that odious debt is not unique on this score. All sovereign debt relief is political. Turkey is not treated as Honduras. The literature on sovereign debt restructuring exhibits unease with this situation. One can view the recent spate of proposed Sovereign Debt Restructuring Mechanisms as attempts to lessen the political nature of the process in much the way that American corporate reorganization law removes political considerations from restructuring activities. Rather than ignoring the tension between politics and law here, future work needs to embrace it. An optimal sovereign debt restructuring regime may be one that provides a minimum of relief available to all countries, but allows room for countries to use political levers to extract additional relief.