Denouncing Odious Debts Stephanie Collet & Kim Oosterlinck Journal of Business Ethics ISSN 0167-4544 Volume 160 Number 1 J Bus Ethics (2019) 160:205-223 DOI 10.1007/s10551-018-3865-7 1 23 Your article is protected by copyright and all rights are held exclusively by Springer Science+Business Media B.V., part of Springer Nature. This e-offprint is for personal use only and shall not be self-archived in electronic repositories. If you wish to self-archive your article, please use the accepted manuscript version for posting on your own website. You may further deposit the accepted manuscript version in any repository, provided it is only made publicly available 12 months after official publication or later and provided acknowledgement is given to the original source of publication and a link is inserted to the published article on Springer's website. The link must be accompanied by the following text: "The final publication is available at link.springer.com”. 1 23 Author's personal copy Journal of Business Ethics (2019) 160:205–223 https://doi.org/10.1007/s10551-018-3865-7 ORIGINAL PAPER Denouncing Odious Debts Stephanie Collet1 · Kim Oosterlinck2 Received: 25 October 2016 / Accepted: 26 March 2018 / Published online: 2 April 2018 © Springer Science+Business Media B.V., part of Springer Nature 2018 Abstract Economists have suggested it was optimal to signal the odious character of bonds when they were issued. However, since the odious debt doctrine has not been recognized by any court, one could argue that denouncing odious debts is useless. Exploiting a unique historical episode, this paper quantifes the impact of protests on odious debts. In 1906, the Russian government foated a bond in Paris to cover the costs of its war against Japan but also to raise money to crush the political movements wishing to reform Russia’s political system. Issued without parliamentary consent, this loan met with ferce opposition. Press campaigns in Great Britain, France and Germany denounced its odious character. If failure or success is determined solely by the ability to prevent a loan from being issued, then the campaign failed. We argue, however, that failure or success should be determined in light of the fnancial costs imposed on the issuer for future loans and even the ability to force a postponement of these loans. We show that these campaigns increased the yields of all Russian bonds traded in Paris, and thus Russia’s future borrowing cost. Yields on the 1906 loan, which was specially targeted by the campaigns, rose even more. However, once the press campaigns stopped, yields experienced a declining trend, highlighting the important role the press may have on odious debts. Keywords Ethics · Odious debt · Repudiation · Financial history · Sovereign debt · Russia JEL Classifcation F34 · G12 · G15 · N23 Introduction proposed by Sack1 (1927, p. 26) prevailed.2 In this work, Sack highlighted three criteria for defning odious debts. As a consequence of the Spanish–American War, the USA For a government to declare a debt odious, it would have to annexed Cuba. However, America refused to take over the prove that: (1) the debts had been issued without the popu- debts issued by Spain in the name of Cuba because the pro- lation’s consent, (2) the population would have received no ceeds had been used to crush the Cuban independence move- beneft from the debt issue, and (3) lenders knew that the ment. This precedent prompted legal scholars to establish a proceeds would not be used for the population and that the general framework for analyzing cases in which it was unfair population was opposed to the debt. to repay sovereign debts, or, to use the current terminol- In an ideal world, odious debts would be easy to identify. ogy, when debts could be considered as odious (Jèze 1922; In practice, Sack’s defnition is hard to rely upon. At the Sack 1927; Feilchenfeld 1931). Eventually, the defnition time the book was written (1927), the projected use of the funds raised by a loan was mentioned in the prospectus. It was therefore possible to determine whether the population Electronic supplementary material The online version of this article (https​://doi.org/10.1007/s1055​1-018-3865-7) contains would beneft from those funds (assuming they would be supplementary material, which is available to authorized users. used for the stated purposes). Nowadays the exact purpose of the borrowing is hardly ever mentioned and public funds * Kim Oosterlinck [email protected] 1 On Alexander Nahum Sack, see Ludington and Gulati (2008). 2 See for example Khalfan et al. (2003). This does not mean that 1 Research Center SAFE, Goethe University, Frankfurt, these criteria have not been criticized. For example, King (2016, p. Germany 57) considers these three criteria as too limited to refect the diversity 2 Université Libre de Bruxelles, SBS‑EM, 50 Av. Roosevelt, of odious debts which he classifes into four categories (war debts, CP 114/03, 1050 Brussels, Belgium illegal occupation debts, corruption debts and subjugation debts). Vol.:(0123456789)1 3 Author's personal copy 206 S. Collet, K. Oosterlinck are fungible, making the defnition difcult to apply (Bolton Although the literature suggests odious debts should be and Skeel 2007).3 In some instances, furthermore, only part denounced before being issued, no paper has yet analyzed of the proceeds of the loan may have been squandered by how markets react when debts are denounced as unfair to the country’s ruler, raising the question of the treatment of repay. Empirical evidence is also missing on the efective- these partially odious debts (Ben-Shahar and Gulati 2007). ness of press campaigns and organized protests against odi- Dictatorships or governments who hurt their population may ous debts. This paper relies on a historical episode to address also borrow indirectly, making odious debts even harder to these questions. In 1906, the Russian government foated a identify. According to Hausmann,4 investors buying the JP bond in Paris to cover the costs of its war against Japan, but Morgan Emerging Bond Market Index (EMBI +) are in fact also to raise money to crush the political movements wish- gaining high returns mostly because the fund invests in Ven- ing to reform Russia’s political system (Girault 1973, pp. ezuelan debt. Indeed, even if the bonds issued by Venezuela 394, 401 and 413). Issued without parliamentary consent, represent only 5% of the index, they account for 20% of its the loan met with ferce opposition. Several Russian political yield. Hausmann has therefore suggested that investing in parties pledged they would repudiate it should they come to EMBI + is similar to rooting “for Venezuelan debt, which power.7 In parallel, press campaigns in Britain, France and means wishing for really bad things to happen to Venezue- Germany stressed the loan’s odious character, which led to la’s people”. In view of the existence of partially odious attempts to prevent its issue.8 Organized protests against the debts, Shafter (2007) suggests lenders should exercise due 1906 loan were such that for many years Russian loans were diligence. Determining the consent of the population is even a topic of debate in French politics. In France, the most vocal harder, since this leads to a judgment on the government newspaper against this loan was L’Humanité. This was due that may be more political than legal. In the absence of a to its far-left political leaning but also to the fact that almost referendum on each loan, it is in fact impossible to prove all other French newspapers had been bribed to silence by that the population agrees to an issue. As a result, the debate the Russian government. has gradually shifted from odious debts to odious regimes Did L’Humanité and the organized protests infuence mar- (Bolton and Skeel 2007; Buchheit et al. 2006). But proving kets by stressing the unethical character of the loan? Accord- that a regime is odious is only marginally easier than prov- ing to Long (1972b, p. 39), one of the frst scholars to focus ing that a debt is. on the 1906 loan, “the anti-loan campaign failed” but “it The literature has also attempted to assess whether debts revealed the continued close cooperation between Russian should be labelled as odious before they are issued. Econo- revolutionary émigrés and French socialists, united in their mists consider it optimal to signal the odious character ex eforts to expose the fnancial and political bankruptcy of ante (Jayachandran and Kremer 2006). Doing so would cre- Tsarist autocracy”. We argue that the usefulness of denounc- ate an incentive for potential lenders not to extend loans ing debts as odious should not be judged only on the ability to odious regimes, decreasing both the likelihood that such to prevent bonds from being issued or on their repudiation regimes emerge and the survival times of those that do.5 but also on the fnancial costs imposed on the issuer. More Demand could also decline because ethical agents would precisely, one should assess whether the yields of Russian refrain from lending to dictators. Empirical evidence shows that ethics play a role in investment decisions, suggesting that denouncing odious debts would infuence markets. In 7 this case, an odious debt label would send a clear signal to In this respect, the 1906 loan ofers a striking parallel with the case 6 of bonds issued recently in Venezuela. On 30 July 2017, a new con- the market. stituent assembly was elected in Venezuela. This election was con- vened following a decree issued by President Nicolas Maduro. The decision to hold these elections was heavily criticized both by the 3 King (2016, p.