Towards a Solution to Odious Debts and Looking at Creditors' Incentives

Abstract

Rather than propose a solution to the problem of odious debts, this paper seeks to analyze the causes of odious incentives in international finance. It first disentagles the incentives which guide different types of creditors to lend to sovereigns. It argues that the problem of odious debts is intrinsically political and that the non-transparent, political interests of official creditors sustain the status quo of irresponsible borrowing and lending in international finance, thereby leaving many developing countries in a trap of odious poverty. Their dependence on official creditors fosters inefficient incentives as well as leads them to lose policy capacity and autonomy. Odious debt is most dangerous and harmful in the poorest countries who lack access to private credit and the efficient incentives that are provided by the market. Consequently, it is important to ask what is preventing many developing countries from acquiring access to private credit. This paper lays the basic groundwork for future research into the impacts of political instruments used and developed by the Paris Club in its renegotiation procedures to undermine the interests of private creditors. Specifically, two ad-hoc political instruments are looked at, one old and one new. The first is the Comparability of Treatment Clause in Paris Club Agreements. The second is the stay on creditors rights which followed the fall of the Saddam Regime and which led to the adoption of the Evian Approach by the Paris Club. It is probable that such instruments may have an effect on the dynamics of international finance and the access that different levels of developing countries have to the private market for credit.