Does Argentina have a viable case under the odious debt doctrine? A brief look at its debt history may be helpful.
Argentina’s Minister of Economy Axel Kicillof recently insisted that his country had not defaulted on its international bonds for the eighth time in its history, but instead had suffered a “freak occurrence.”
On Aug. 7, 2014, Argentina filed a suit at the International Court of Justice against the US, arguing that American courts infringed on Argentine sovereignty by blocking the South American country’s settlement with the bulk of its creditors.
The issue underscores the need for a more coherent international mechanism for when nations go bankrupt. Better yet would be the creation of a sustainable global monetary scheme that avoids the need for sovereign bankruptcy. But until those reforms are implemented, what countries have to work with is the odious debt doctrine.
The odious debt doctrine and state response
Christoph G. Paulus writes in the Max Planck Encyclopedia of International Law that, under the odious debt doctrine,
“successor regimes are not responsible for paying the debts of prior regimes if three conditions are met. First, a ‘despotic ruler’ incurs a debt which is not in the interest of the state. Second, the debt produces no benefit for the populace. Third, the creditor knows about the odious purpose of the funds they are advancing.”
While this doctrine remains controversial, it is beginning to have real impacts on the way states and lenders behave.
In December 2008, Ecuadorean President Rafael Correa declared that his country’s debt had been contracted by corrupt and despotic prior regimes. The threat of wholesale debt repudiation based on the odious debt doctrine helped Ecuador negotiate a 70 percent reduction in the sum owed. This raises the question of whether other countries with legitimate claims of odious debt will be able to strategically leverage the odious debt doctrine in order to reduce their debt payments. If the answer is yes, we should expect countries with more legitimate claims to also be more successful at reducing or eliminating debt.
Argentina’s debt history
Does Argentina have a viable case under the odious debt doctrine? A brief look at its debt history may be helpful.
Adrian Salbuchi traced the country’s problems back to 1976 when Argentina’s foreign debt was just under US$6 billion and represented only a small portion of the country’s GDP. In that year, an illegal and de facto military-civilian regime ousted the constitutionally elected government of president María Isabel Martínez de Perón [and] named as economy minister, José Martinez de Hoz, who had close ties with—and the respect of—powerful international private banking interests. Public debt increased almost eightfold to US$46 billion in a few short years. Salbuchi detailed Argentina’s fall from there into what became a $200 billion debt trap. Large tranches of this debt, he maintained, were “odious debt” and should not have to be paid.
Now, Argentine President Cristina Fernández appeals to nationalist sentiment by casting the creditors who refuse to restructure Argentina’s debts as external enemies. This move has been compared in the Argentine media with the way the military dictatorship seized power in Argentina in 1976 and sought to use the 1982 Falklands War as a distraction from a severe economic crisis. It is not lost on the Argentine media that the regime collapsed a year after the Falkland’s debacle.
The truth is that defaulting has helped no one: none of the bondholders will now be paid, Argentina looks like a pariah again, and its economy will remain starved of loans and investment. Martin Wolf, the chief economics commentator at The Financial Times, is correct in saying that “Argentina’s creditors should make every effort to protect themselves from the vagaries of American judges.” But Dan Rosenheck, former Argentina correspondent for The Economist, is even more astute by observing that, “it is Washington, not Buenos Aires, that is most capable of resolving the latest financial impasse.” Forcing a determination on the legitimacy of a possible odious debt claim by Argentina may have far-reaching consequences. It may make more sense for the players to negotiate a settlement before it comes to that eventuality.
Antonio C. Hsiang, Ph.D., is Professor & Director of the Center for Latin American Economy and Trade Studies, Chihlee Institute of Technology, Taiwan. Read other articles by Antonio.
