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Becky Bowers
By Becky Bowers January 16, 2013

White House has yet to implement new type of loan sanction

As they campaigned for office in 2008, Barack Obama and Joe Biden promised to lead an effort to look into a novel use of loan sanctions to help prevent "odious debt."

But four years later, the tool has yet to emerge in cases where it might have been applied, such as against the Ivory Coast and Syria.

"Odious debt," while it doesn't have settled legal meaning, is an idea with U.S. roots in the Spanish-American War. The United States argued that a newly independent Cuba shouldn't have to pay off debts run up by the Spanish government to squash Cuban uprisings.

Today, the phrase often refers to debt piled on by an illegitimate, repressive government for spending that's not for the benefit of its people. Should a newly empowered democratic government have to pay up?

That's not an easy question. If new governments can simply label past debt as "odious" and refuse to pay, lenders might get spooked, damaging the country's credit-worthiness and driving up the cost of borrowing for everyone.

In the early 2000s, as Iraq faced debt amassed under Saddam Hussein, scholars suggested a new tool. The international community could declare a government "odious" upfront. Loans made after that declaration could then be ignored by a legitimate successor government. That could keep interest rates down for governments without the "odious" label while freeing nations of debts created by former dictators.

"Creditors would know the rules of the game in advance," scholars Michael Kremer and Seema Jayachandran argued in the Financial Times in 2003. If the creditors chose to lend to an "odious" government, they risked losing their money — a self-enforcing sanction.

It might cut off funds for dictators, and prevent odious debt in the first place.

Of course, it would require at least some international consensus around which governments were "odious" while they were still in power — no small task.

In 2007, Kremer, a Harvard economist, and Jayachandran, now at Northwestern, proposed in the Washington Post that such "loan sanctions" could be used against nations such as Iran "as part of the toolkit of international diplomacy."

The idea made it into Obama and Biden"s campaign proposals. They promised to "lead a multilateral effort to address the issue of 'odious debt' by investigating ways in which 'loan sanctions' might be employed to create disincentives for private creditors to lend money to repressive, authoritarian regimes."

In 2009, a think tank that advocates for policies to reduce global poverty launched a working group, including Kremer and Jayachandran, to help develop the concept.

The Center for Global Development published a report, "Preventing Odious Obligations: A New Tool for Protecting Citizens from Illegitimate Regimes," with funding from the Norwegian government, and reached out to the White House.

"There clearly was a lot of interest in this idea in parts of the administration," said Kimberly Elliott, a senior fellow at CGD and part of the working group.

But in specific cases where CGD advocated the tool might be used, such as in the case of Syria, the administration opted "not to implement it," she said.

When PolitiFact asked the Treasury Department and White House for evidence that the administration looked into using such sanctions, they instead pointed us to related efforts — such as cutting off banks that do business with certain regimes from the U.S. financial system, fining banks that use the U.S. financial system to aid "troubling regimes," voting against loans to such regimes from international financial institutions and helping new governments find assets hidden by previous dictators.

"The Obama administration is committed to investigating, developing and implementing techniques to assist states as they rebuild following the end of an authoritarian regime," said Bernadette Meehan, spokeswoman for the White House National Security Staff. "Financial tools, including new types of sanctions, and robust asset recovery efforts have been key elements of this effort."

"We are also advocating for judicious use of sovereign debt forgiveness in certain cases, so that new governments are not struggling under the obligations of the previous authoritarian regime," she said.

But while those efforts limit regimes' access to funds or help a country deal with debt after the fact, it's less clear that they're designed to prevent odious debt. Instead, they tend to target specific issues such as choking off funding for terrorism or for nuclear weapons.

In 2008, Obama and Biden promised to "lead a multilateral effort to address the issue of 'odious debt' by investigating ways in which 'loan sanctions' might be employed to create disincentives for private creditors to lend money to repressive, authoritarian regimes." Scholars who advocate for such sanctions told us the White House showed some interest, but hasn't yet followed through. Meanwhile, the White House and Treasury Department offered no evidence of a "multilateral effort" specific to odious debt. But some related financial sanctions do have the effect of limiting lending to repressive regimes. We rate this promise a Compromise.

Our Sources

Interview with Kimberly Ann Elliott, senior fellow, Center for Global Development, Jan. 15, 2013

Interview with John Sullivan, spokesperson, Treasury Department, Jan. 15, 2013

Email interview with John Williamson, formerly of the Peterson Institute for International Economics, Jan. 15, 2013

Email interview with Seema Jayachandran, associate professor of economics, Northwestern University, Nov. 28, 2012

Financial Times, "Make Odious Debt Too Risky To Issue," May 9, 2003

Washington Post, "Loan Sanctions: A New Tool for Diplomacy?" Feb. 7, 2007

Christoph Paulus, "The Concept of 'Odious Debts': A Historical Survey," December 2007

Center for Global Development, "Preventing Odious Obligations: A New Tool for Protecting Citizens from Illegitimate Regimes," Nov. 22, 2010

Center for Global Development, Views from the Center blog, "Prevention of Odious Obligations: A New Tool to Help Stem the Violence in Syria," March 9, 2012

Center for Global Development, "Preventing Odious Obligations: A New Tool to Pressure Syria"s Bashar Assad," March 2012

World Bank, "Stolen Asset Recovery Initiative," accessed Jan. 16, 2012

Treasury Department, "Office of Foreign Assets Control - Sanctions Programs and Information," accessed Jan. 16, 2013

Louis Jacobson
By Louis Jacobson January 12, 2010

U.S. is acting case-by-case so far, not systematically

During the presidential campaign, Barack Obama promised to "lead a multilateral effort to address the issue of 'odious debt' by investigating ways in which 'loan sanctions' might be employed to create disincentives for private creditors to lend money to repressive, authoritarian regimes."

In 2009, the administration and Congress made moves to rein in loans and investments in particular countries, but there's no public sign of any multilateral effort to produce a unified approach on "odious debt."

Odious debts are at the center of a decades-old legal theory of international law. The argument is that when debts are incurred by a despotic regime to further its own power and repress its people, a democratic successor government is not obligated to honor those debts.

It's not clear from the text of Obama's promise that the administration intends to implement this broader theory of odious debt. Instead, it appears to be using the legal theory's terminology as a shorthand way of describing financial activities by governments that the United States considers to be bad actors on the international stage.

The administration has targeted loans in cracking down on at least one foreign country: North Korea.

In June, the United Nations Security Council, at U.S. urging, voted unanimously to tighten sanctions on North Korea after a nuclear test on May 25 as well as missile tests.

"U.N. Resolution 1874 includes a number of measures aimed at stopping North Korea"s nuclear proliferation, including tougher inspections of cargo, an expanded arms embargo, and new financial restrictions on North Korea, curbing loans and money transfers that serve as funding for their nuclear program," the White House said in a blog posting.

In the meantime, the House of Representatives passed a bill -- now awaiting consideration in the Senate -- that targeted investment in Iran, where the government is pursuing nuclear-weapons technology in violation of the Nuclear Non-Proliferation Treaty.

H.R. 2194, which passed the House in an overwhelming 412-12 vote, would, among other things, require sanctions against any foreign person, business or government entity that "has knowingly made an investment of $20 million or more ... that directly and significantly contributed to Iran's ability to develop its petroleum resources." (The current thresholds triggering such sanctions are higher.)

But the legislation is not guaranteed of passing the Senate. Some worry that the bill's unilateral approach could alienate other countries with whom the United States wants to collaborate on a strategy to isolate Iran, while others say the bill gives Congress too much say over powers ordinarily exercised by the executive branch.

Ultimately, though, both the developments with North Korea and Iran are country-specific, rather than the broader, multilateral efforts seemingly envisioned by the promise. We undertook searches using Google, and Nexis but found no public evidence that the administration has taken any concrete actions to advance this promise. So we're rating it Stalled.

Our Sources

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