The Due Diligence Model: A New Approach to the Problem of Odious Debts

| March 8, 2007
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Odious debts are debts incurred by a government without either popular consent or a legitimate public purpose. There is a debate within academic circles as to whether the successor government to a regime that incurred odious debts has the right to repudiate repayment. In the real world, however, repudiation is not currently an option granted legitimacy by either global capital markets or the legal systems of creditor states. There are, thus, compelling reasons to reform the law of odious debts to allow for such repudiation in strictly limited circumstances. Beyond the moral problem of requiring the formerly captive citizens of a tyrant to repay their oppressor’s personal debts, the burden of odious-debt servicing can perpetuate the cycle of state failure, which has direct national security consequences.

In addition, a properly designed odious debt reform could function as an alternative punitive mechanism to trade sanctions with fewer harmful implications for the general population of the targeted state. Classical proponents of odious debt reform advocate for recognition of a legal rule under which successor governments could challenge the validity of debts incurred by prior regimes against the odious debt legal standard in a judicial-style forum. I make the case for an alternative “Due Diligence Model” of reform that provides far greater ex ante certainty for lenders, both as to which debts might be classified as odious debts and what steps the lender must take to protect its investments from subsequent invalidation. The Due Diligence Model also solves certain time-consistency problems inherent to the Classical Model.

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Category: Article, Issue 21.1, Special Issue: On the Ethics of Sovereign Debt

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