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.