WHAT IS 'Odious Debt'

Odious debt, also known as illegitimate debt, is when a country's government misappropriates money it has borrowed from another country. 

A nation's debt is considered odious debt when government leaders use borrowed funds in ways that do not benefit its citizens, and to the contrary, often oppress them. Some legal scholars argue that, for moral reasons, these debts should not have to be repaid. Many believe countries doing the lending must have known, or should have known, of the oppressive conditions upon offering the credit.

Some academics also have held that successor governments should not be liable for odious debt that earlier regimes passed down to them. However, international law is at odds with this concept, and holds governments accountable for the debts of regimes that preceded them.

BREAKING DOWN 'Odious Debt'

Odious debt has occurred in past regimes in Nicaragua, the Philippines, Haiti, South Africa, Congo, Niger, Croatia and other countries whose rulers have either looted national funds for their personal accounts or used the money to restrict liberties and inflict violence on their own citizens.

The idea behind odious debt first gained notoriety after the Spanish-American War. The U.S. government argued that Cuba should not be held liable for debts incurred by the Spanish colonial regime, the colonial rulers of Cuba. While Spain disagreed, Spain, not Cuba, ultimately was left with the post-war debt.

Application of Odious Debt

There is no single set of rules or guidelines for odious debt, and sometimes, successor governments have repaid seemingly odious debt out of necessity. For example, the apartheid-era government of South Africa spent heavily to repress the African majority in that country. While many considered the vast debts incurred by the apartheid government odious, the successor government, led by President Nelson Mandela, ended up paying those debts, partly in an effort to show the new government’s willingness to pay, as not to scare off badly needed foreign investment.

One potential moral hazard in labeling debt odious is that successor governments, some that may have a lot in common with the ones that preceded them, may use odious debt as an excuse to wriggle out of obligations they should pay.

A potential solution to determining which debt is truly odious, forwarded by economists Michael Kremer and Seema Jayachandran is that the international community could announce that all future contracts with a particular regime are odious. Therefore, lending to that regime following such a decree would be at the lender’s peril, as they would not be repaid if the regime is later toppled.

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