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How to Challenge Illegitimate Debt

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How to Challenge Illegitimate Debt How to Challenge Illegitimate Debt Theory and Legal Case Studies Max Mader and André Rothenbühler, Editors Published by Aktion Finanzplatz Schweiz How to Challenge Illegitimate Debt Theory and Legal Case Studies Max Mader and André Rothenbühler, Editors Impressum Aktion Finanzplatz Schweiz (AFP) Drahtzugstrasse 28 CH-4057 Basel [email protected] www.aktionfinanzplatz.ch Tel. +41 61 693 17 00, Fax +41 61 683 98 96 IBAN CH54 0900 0000 8003 8012 4 | BIC POFICHBEXXX | PC 80-38012-4 Published by Aktion Finanzplatz Schweiz Editing: Alejandra Gochez, Jürgen Kaiser, Hugo Plowden, Gyan David Sharan, Fiona Smith Layout and graphic design: Lucio Giugni, Basel Print: bc medien ag, Arlesheim We tried to collect all the necessary copyrights for the photos. Please, notify us of rights that we weren’t able to collect. Internet links in this book last accessed in September/October 2009. How to Challenge Illegitimate Debt, Theory and Legal Case Studies Basel, November 2009 © Aktion Finanzplatz Schweiz-Dritte Welt, Basel Edition 8, Zürich, ISBN 978-3-85990-400-2 Table of Contents Introduction (Max Mader and André Rothenbühler) ............................................................................................. 5 Theory 1. Understanding the Concept of ‹Illegitimate Debt› (Charles Abrahams) .......................................................... 11 2. The Doctrine of Odious Debts in International Law (Sabine Michalowski) .................................................... 17 3. Using Private Law for the Repudiation of Odious Debts (Sabine Michalowski) .............................................. 23 4. Illicitness in Various Legal Instruments Relating to External Debt (Ramiro Chimuris Sosa) ........................... 27 5. Illegitimate Debt and Human Rights (Cephas Lumina) ................................................................................ 37 6. Juxtaposing Debt Relief And Arbitration (Charles Mutasa) ............................................................................ 43 7. Experiences from a Civil Society Campaign Against Odious Debt: The Example of German Claims on Indonesia from the Sale of Former GDR Warships (Jürgen Kaiser) ............................................................ 47 8. The Campaign for the “Jubilee Act” in the United States Congress (Mimi Lytje, Neil Watkins) ....................... 51 9. Legal case studies 9.1 The Austrian Medical Waste Project in the Philippines (Luke Espiritu) .......................................................... 55 9.2 The Case of Yacyretá (Maurizio De Martino) ................................................................................................. 59 9.3 The Inga Dam Debt in The Democratic Republic of the Congo (Eve Tessera and Renaud Vivien) ................... 67 9.4 Two Cases of Suspected Illegitimate Debt in Ecuador: The Drinking Water for Guayaquil Project and the Marcel Laniado de Wind Hydropower Plant (Maurizio De Martino) ................................................... 73 9.5 Sweden’s case of Illegitimate Debt: The Three Liberian Coast Guard Ships (Charles Abrahams) ................... 81 9.6 Oil-Backed Loans in Congo Brazzaville: Potential Legal Remedies Using the Odious Debt Concept in the French Legal System (Maud Perdriel-Vaissière) ................................................................................... 87 9.7 Financing the Crime of Apartheid: What Are the Legal Defenses? (Charles Abrahams) ................................. 93 9.8 Baby Doc’s Odious Debts and Haiti’s Legal Defences (Sandrine Giroud) ...................................................... 97 9.9 Repudiation of Debts with Several Banks by the State of Paraguay (Sabine Michalowski) ........................... 103 Conclusions by the editors (Max Mader and André Rothenbühler) ....................................................................... 110 Appendix Existing Arbitration Mechanisms .......................................................................................................................... 118 Binding Legal Instruments .................................................................................................................................... 120 List of Authors ..................................................................................................................................................... 122 Introduction Despite multilateral initiatives such as the Heav- Ecuador launched the world’s first debt audit com- ily Indebted Poor Countries (HIPC) initiative and mission to have the full support and involvement the Multilateral Debt Relief Initiative (MDRI), in of its government. In its final report, published in 2007 the world’s developing countries still spent November 2008, the audit commission concluded a combined total of approximately USD 1.5 billion that much of Ecuador’s foreign debt was both il- every day on external debt servicing. Amongst their legitimate and illegal.3 In December 2008, Presi- number are the poorest countries in the world; dent Rafael Correa followed the recommendations these low income countries spent around USD of his government’s commission and announced 34 million every day on external debt servicing.1 that Ecuador would default on the debt service for In the current global financial crisis, many of the its bonds. Civil society groups all over the world countries which have benefited from debt relief in hope that this first official debt audit will encour- 5 recent years now face substantial risk of new debt age other countries to follow Ecuador’s example. distress.2 Even so, the results of the Ecuadorian audit have To date, only a very few measures have been not found unanimous approval, notably among the taken to address the origins of this problem and to legal profession, as we will see in this publication. promote both more responsible lending and bor- The Norwegian Government supports the con- rowing in order to further reduce the debt burden cept of illegitimate or odious debt but criticises and to prevent new debt crises. A major weakness the lack of distinct criteria. It therefore decided to of the current debt relief initiatives is their fail- finance a three year long UNCTAD project for Pro- ure to assess and address the legitimacy of debts. moting Responsible Sovereign Lending and Bor- In the past, many loans have been given to un- rowing which began in November 2008. One of democratic and corrupt regimes, to irresponsible the goals of this project is to develop a set of guide- projects, on fraudulent terms and without appro- lines and criteria for assessing the legitimacy of priate due diligence, but there has been no attempt sovereign debt. to cancel these illegitimate or odious debts within the current debt relief mechanisms. Intensified academic debate The doctrine of odious debt was formulated in Political campaigns and initiatives 1927 by Alexander Sack, former minister of Tsar- ‘Aktion Finanzplatz Schweiz’, together with many ist Russia and professor of law in Paris and it has other civil society organisations in the South-North become the starting point for modern discussion International Campaign on Illegitimate Debt, is on the issue.4 His three criteria for the definition committed to securing the implementation of new of a debt as odious are: first, that the debt must mechanisms for both the assessment and cancel- have been contracted by a despotic regime; second, lation of illegitimate or odious debts within the that the money must not have been used in the in- broader context of a transparent and fair debt work- terest of the state and third, that the lender must out procedure. have known this. Since then, the theory on odious It is clear that the affected countries in the South debt has developed and widened much further, have not only the moral, but also the legal right to especially in recent years, as many new contribu- repudiate illegitimate or odious debts. We support tions by different scholars have been published their demands for both compensation and repara- and given a new dynamic to the debate. tion for the social, ecological and historical damage Sack’s original definition is now viewed by many done to them by Northern countries. Moreover, we scholars as being both very limited and difficult to support initiatives for more equitable international implement. They have suggested other definitions relationships and for a new global financial system and other legal avenues as alternatives. An over- which respects the sovereignty of the countries in view of those authors who have shaped the recent the South and gives them greater independence debate is laid out below: from the North, the Northern creditors and the ex- Joseph Hanlon5 defines illegitimate debts as be- isting International Financial Institutions. ing against the law, not sanctioned by law, unfair, In recent years, the international campaign on improper, objectionable or in contradiction to pub- illegitimate or odious debt has contributed to a new lic policy. This definition has found considerable political dynamic resulting in a more intensive recognition within civil society but it has also been academic debate, new political initiatives in some criticised as being too broad, inasmuch as it makes countries and greater interest from international almost all debts illegitimate. organisations. In 2006, Norway acknowledged Michael Kremer and Seema Jayachandran6 intro- its responsibility for a development policy failure duce a new form of economic sanction by suggest- and cancelled debts
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