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What It Would Take To Rule Greece’s Debt Void

By Stratfor Global Intelligence

Greece, Euro - Pixabay - Public DomainThe Greek Audit Committee on Public Debt released its preliminary findings June 18, concluding that Greece’s public debt is “illegal, illegitimate and odious.” The report emerges at a fraught time in Greece’s negotiations with its creditors: Athens is pushing for debt relief that the Europeans are unwilling to grant, though the International Monetary Fund is more receptive to the idea. If the report did have a basis in international law, it might put pressure on Greece’s creditors to accede to Athens’ demands, so it is worth exploring the case. While the ensuing debate will nurture Greece’s sense of victimhood, the forced relief of debt on the basis of its odiousness is improbable. The concept of “odious debt” extends back to the 1920s — and lawyers have already invoked the argument in several cases, including in Zaire and Ecuador — but there has never been an accepted ruling overriding such debt.

Greece already has a problem; the claim it is making actually fails the test of odiousness as articulated in the original legal doctrine. The Mediterranean country is struggling under public debt levels of 177 percent of gross domestic product, while private domestic debt stands at about 122 percent. In 1980, those two figures were 22.6 percent and 37.4 percent respectively, and these differences are made even starker by the knowledge that the Greek economy has grown 20 percent in the intervening years. In fact, in 2008 it was 56 percent larger than in 1980, but has since shrunk back.

So what caused the country’s debt burden to grow so extremely, and when did this happen? The answer is divided into two parts, focusing on public debt and private domestic debt. Greek public debt has grown consistently since 1980. In the wake of the oil crises of the 1970s, which hurt all oil-importing countries, the Greek Socialist government turned to public debt markets as a solution to its woes. By the 1990s Greek public debt stood at 100 percent of GDP. It remained there until the turn of the century, when Greece took the decisive step of entering the eurozone. Private debt, meanwhile, was fairly stable: In 1980, it was 37.4 percent of GDP, and in 1999 the figure was still just 38.8 percent.


Entry into the eurozone in January 2001 changed Greece’s position completely. The common currency caused Greek interest rates to fall from 10-18 percent in the 1990s to just 2-3 percent, as Greece benefitted from the market perception that being tied to the powerful German economy guaranteed Greek solvency. As tends to happen when credit flows easily, borrowers took advantage of it, and the Greek government’s deficit grew as the administration pursued expensive projects like the 2004 Olympic Games. These projects drove public debt upward, though it was disguised by the GDP growth of the period. Private debt grew even faster, as the private sector embarked on a spending spree that took debt up from 39.8 percent of GDP in 1999 to 93.8 percent in 2008. Considering that GDP had grown by about 40 percent in the same period, it was a momentous credit boom.

After Boom Comes Bust

But all good things come to an end, and the global financial crisis brought Greece’s flimsy house of cards crashing down. As in several economies in Europe, the slowdown led to a massive increase in public debt as the government stepped in to keep the economy alive through public spending. Government deficits rose to 10 percent in 2009 and then to 15 percent in 2010. Government debt likewise ballooned, with the burden increased by the fact that GDP was also shrinking swiftly. Even though the Greek case is an extreme example, the same story — private indebtedness soaring through the eurozone’s first decade and ultimately being transferred into giant public debts — was a direct result of the creation of the monetary union. Similar examples can be found across the Continent, in places such as Spain, Portugal, Ireland, and Italy. Any claim, therefore, that the Greek government had subjected its people to unreasonable debt could theoretically also be taken up by all of those countries. According to the argument, joining the eurozone would be a governmental dereliction of duty. It is a legal precedent that would be very hard to set, and it would make a successful ruling unlikely.

There is also the fact that Greece’s experience does not seem to fit with the definitions of odious debt. The origins of the legal doctrine trace back to a paper written in 1927 by a Russian lawyer named Alexander Nahum Sack. In it, he lays out three requirements that must be met before a debt can be labeled odious: 1) the government that incurred the debt was despotic 2) the debt provided no benefit for the populace and 3) the creditors knew about the likely misuse of the funds they were advancing.

An obvious example, which satisfies these conditions, is the case of the Democratic Republic of the Congo (then Zaire) under President Mobutu Sese Seko. For 32 years the president enriched himself with foreign loans, while the Congolese populace sunk ever more deeply into poverty, all of which took place under the watchful eye of Western media. Ultimately the IMF and World Bank granted the Democratic Republic of the Congo debt relief in exchange for policy measures adopted by the government, in line with IMF policy. But because Greek governments have been democratically elected since 1974, it would be hard to argue despotic leadership incurred its debt. Moreover, because Greece’s minimum wage almost doubled between 2001 and 2010, it is hard to claim that the populace did not derive benefits from the situation, even if there has since been a rebalancing.

The History of Odious Debt: 

1844: Annexation of the Republic of Texas

  • The U.S. government refuses to pay pre-annexation debts — but pays the majority of its obligation on a pro-rata basis in 1855.

1868: The 14th Amendment of the U.S. Constitution

  • Following the American Civil War, the outstanding debts of the Confederacy were considered null and void, a move to punish those who had helped the Confederacy.

1898: United States Refusal to Assume Cuban debt

  • After the Spanish-American War, Spain gave up Cuba, the Philippines and Puerto Rico among other territories. In arguably the first direct application of the doctrine of odious debt, the U.S. refused to assume debts owed by Spain.

1918: Soviet Repudiation of Tsarist debts

  • In the aftermath of the 1917 Russian Revolution, the Provisional Government initially agreed to repay outstanding debts from the Tsarist government. However, by 1918, the Soviet government had repudiated the claim.

1919: Treaty of Versailles and Polish Debts

  • Article 254 of the Treaty of Versailles exempted Poland from the apportionment of debts that were attributed to the actions taken by the Germans and Prussians in World War I.

1923: The Tinoco Arbitration

  • Although Costa Rica had refused to honor loans made by the Royal Bank of Canada to the former dictator Federico Tinoco, U.S. Chief Justice William Howard Taft arbitrated that Tinoco had a government capable of binding the state to international obligations. Despite this, he ruled that the debt in question did not create a valid public debt, nor was it in the public interest: Therefore, the legislation invalidating the transactions in question did not constitute an international wrong.

1938: German Repudiation of Austrian Debts

  • The Austrian government was heavily indebted to foreign creditors at the time of its annexation by Germany. Berlin repudiated the debt, arguing that it was contracted against the interests of the Austrian people.

1982: Arbitrations Concerning Iranian Debts Owed to the United States

  • The United States claimed it was owed substantial monies from a 1948 contract relating to the purchase of World War II surplus military equipment by Tehran. The Islamic Republic of Iran denied any liability, claiming that the debts were odious.

1994: Apartheid Debt

  • After being elected president of South Africa, Nelson Mandela and the African National Congress came under pressure not to renounce apartheid debt. The new government distanced itself from calls to nullify apartheid-era debts because it feared that a default might scare away critical foreign investors.

2003: Iraqi debt

  • Prior to the exit of Saddam Hussein, Iraq accumulated over $125 billion of unpaid debts. A U.S. congressional initiative was introduced to eliminate Iraqi odious debt following the toppling of Baghdad in 2003.

2006: Norway’s Ship Export Debt

  • The Norwegian government determined that obligations arising out of lending to certain developing countries as part of the Ship Export Campaign of 1976-1980 should be cancelled on grounds that Norway ought to share responsibility with the debtor countries for the failure of the program as a development policy. Though not an example of odious or illegitimate debt, it established the notion of co-responsibility, exemplified by the unilateral and unconditional cancellation of debts. This reflects the idea that repayment may be subject to broader considerations regarding the equities of the debtor-creditor relationship.

The main reason the Greek Audit Committee report is unlikely to cause a ripple outside of the country is that odious debts are an issue upon which international law has yet to come to a strong conclusion. When the idea was first put forward, its progenitor, Sack, suggested that an international tribunal be established that could pass judgment on whether or not a debt was odious. The tribunal has never been formed, possibly because there would be so many complexities involved in making such a judgment. The existence of an international body that could declare debts to be invalid would surely add a new layer of risk to investors buying debt, reducing their willingness to do so and driving up interest rates — particularly in some of the poorer countries that would be most hurt by them. Thus, there is still no clear example of debts being forcibly forgiven by a public entity following the independent judgment of an external group.

This is not to say, however, that odious debts have not been relevant in the past. In 1898, the United States took control of Cuba from Spain in the Spanish-American War and it refused to honor the island’s debts because they had been run up by the Spanish and were thus deemed illegitimate. The situation was resolved when the Spanish agreed to take responsibility for the debts as part of the Treaty of Paris, which ended the war. In 2003, following the overthrow of the Iraqi government by coalition forces, the U.S. Congress produced an initiative to judge whether or not the debt incurred by Saddam Hussein should be considered odious. Rather than set a legal precedent for odious debts, the United States decided to grant Iraq debt relief for reasons of debt unsustainability as opposed to odiousness. There are many other instances in which odiousness was used as an excuse for a default — such as in the case of Austria’s debts after the Anschluss with Germany, or the repudiation of Tsarist debts by the Soviets after the Russian Revolution. There have also been examples where a country might have claimed odiousness and chose not to default — such as the post-apartheid government of Nelson Mandela, which honored its debts for fear of burning bridges with foreign investors it would need in the future.

Is Greece the Next Ecuador?

A more recent example has fired the imaginations of the odious-debt-forgiveness advocates: the case of Ecuador over the last decade. In 2006, Rafael Correa ran for president on the promise that he would repudiate chunks of Ecuador’s debt, on the grounds that they were illegitimate and odious — though the qualification was not as clear as the example of the Democratic Republic of the Congo. Under Correa, Ecuador defaulted on its debts to mainly private creditors in 2008, in the thick of the financial crisis. As a result the default appeared less prominent, thanks to all the other defaults going on at the time. Ecuador then proceeded to buy back the same bonds the following year, managing through a Dutch auction to pick up 91 percent of the issuance at 35 percent of its face value, slashing its repayment bills. Ecuador then successfully returned to the bond markets in 2014.

In Ecuador this is considered a resounding success, but it should not be seen as model that Greece could replicate. Any Ecuadorean success was a result of its relative security at the time. Revenue from oil meant that the debt should have been payable, but Ecuador chose not to pay it. In addition, Ecuador’s creditors were mainly in the private sector and could be out-maneuvered with blind auctions. Greece, by contrast, is facing a much larger quantity of debt with the majority held by a relatively small number of public institutions, limiting the opportunities for market cunning. Finally, Greece has the added danger of being evicted from Europe’s currency union against the wishes of its populace if it defaults. In sum, Greece finds itself considerably more constrained than its Ecuadorian counterparts were in 2008.

Therefore the report defining Greece’s debt as odious is unlikely to gain any traction outside the country. But perhaps the targets of the report were always meant to be more domestic than international. Over the last five years, Greece has been on a downward spiral, and with every revolution it has come closer to leaving the eurozone. Although Stratfor does not believe that recent events will necessarily lead to a Grexit, future events certainly could. Should Greece finally leave the eurozone, there will be dissenters in the country who will have preferred to remain. In that scenario, it would be useful for the government to have a narrative that blames the exit upon external irrationality. The more effective the bluster and dissemination of such arguments in advance of the fact, the easier it will be to manage the political fallout a Grexit would inevitably have in the country.

Courtesy of Stratfor Global Intelligence, © 2015 Stratfor
Stratfor is a geopolitical intelligence firm that provides strategic analysis and forecasting to individuals and organizations around the world.  For more information, please visit Stratfor Global Intelligence


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