29 November 2019

Odious Debt and Transitional Justice

Newly democratic states virtually always repay the debts incurred by previous non-democratic regimes even though it seems morally problematic to hold them responsible for debts raised without the input of the population. In her PhD thesis in International Law Kushini Sugathapala shows how states in transition could use transitional justice tools to find alternatives to continued debt repayment. Interview.

How did you come to choose your research topic?

In the summer of 2013, I did an internship at the UN Office of the High Commissioner for Human Rights in Geneva while I was a Master’s student at the Graduate Institute and as part of my work there I did some research on the Greek debt crisis. I then wanted to look at how sovereign debt crises generally might be better managed in my PhD research, but after Professor Marc Flandreau, who taught International History at the Graduate Institute at the time, introduced me to the work of Professor Odette Lienau, I got interested in how new democratic governments automatically “inherited” the debts of their non-democratic predecessors, which are sometimes referred to as “odious debts”, and why this is the case. 

How did you formulate your thesis questions and what was your methodology?

My research was really driven by the idea that there seemed to be a gap between what currently happens to the debts of non-democratic regimes after transition to democracy and what should ideally happen to them – continued debt repayment in all circumstances seemed like an overly simplistic answer to complex political change. I wanted then to look at why these debts are almost always repaid and assess repayment against other possibilities for dealing with these debts, like partial repayment and non-payment. These inquiries helped me to think about what should happen to the debts of states in transition and about how we can practically get there. When thinking through these questions, I drew on literature from political theory and economics as well as theories and practices from transitional justice. 

So, why do states nearly always pay their inherited debts and what would be alternative, less unfair practices?

States repay their debts despite transition to democracy for a combination of legal and economic reasons, namely state continuity – the idea that a state remains the same legal entity despite even dramatic changes in government and that its legal obligations also then continue to exist unchanged –, the sanctity of contract as well as the fear that non-payment will cause economic harm of some kind. Although these reasons for repayment seem powerful, at least at first glance, I question them and consider that there are strong reasons for states in transition to exercise more control over their “inherited” debt burdens.

Specifically, I put forward the idea in my thesis that states in transition should not only try to address the traumas of the past as part of their transitional justice efforts but that they should review the political decisions made by previous non-democratic regimes that remain in force, including borrowing decisions, in order to improve their own political legitimacy. I also draw on transitional justice practices to suggest that states in transition could create a particular kind of transitional justice mechanism, a political or parliamentary truth commission, to deal with this very specific task of reviewing political decisions and proposing to the legislature what parts of the “inherited” legal legacy to keep and what to jettison. A parliament could not actually change or dissolve contracts it does not approve of, at least not those governed by foreign law, but it could advise the executive to carry out its decisions on debt by negotiating with creditors or possibly repudiating the debt, for example. 

Can you give an example of an inherited debt on which your thesis might help shed a new light? 

Yes, though I wish this were not the case. At my thesis defence, I drew the audience’s attention to how Venezuela lost around USD 1.4 billion worth of gold to Deutsche Bank and Citibank in June 2019 because it defaulted on what are known as “gold swap” agreements: the banks essentially lent Venezuela money and in exchange Venezuela paid interest and put up many tons of gold as security. As per these agreements, after Venezuela defaulted, the banks would have had to pay Venezuela millions in compensation when taking control of the gold because gold has appreciated considerably since they entered into these deals. 

There was some discussion at the time about what should happen to this compensation. The transitional government suggested that it should go to an account not controlled by the Maduro government because of legitimacy concerns. I suggest, though, that we should also have looked at the ability of these banks to seize the gold in the first place. The banks lent to a regime that was already in grave trouble and widely recognised as repressive. They also collected the collateral at a time when its democratic deficiencies were even more apparent and its authority and legitimacy were contested by a parallel transitional government.

The alternative options you suggest in your thesis all involve empowering democratic institutions. What would be their social implications?

The main social implication of my thesis is that the populations of states in transition should not only gain the ability to make political decisions going forward, but that they or their representatives should be able to exercise an active choice over legal obligations made in the past. This might also mean that they choose not to repay all pretransition debts and can put this money towards more beneficial public spending. Non-payment, though, might also dry up access to credit or have other negative economic consequences in the short term, so it is not likely to be a clear-cut decision. My point is simply that the citizens of states in transition should be able to exercise real choice over these debts through their representatives and not automatically “inherit” old debts.

What could be the political implications of your thesis?

In my thesis I found it important to focus on what states in transition can do themselves and by cooperating with others to address their “inherited” debt burdens like renegotiating and repudiating, but I also think that they and other international actors should work towards changing the relevant legal rules of the international order that saddled states in transition with these debts in the first place.

*  *  *

Kushini Sugathapala defended her PhD thesis in International Law in September 2019. Professor Andrea Bianchi presided the committee, which included Nico Krisch, thesis director, and Professor Odette Lienau from Cornell Law School, Ithaca, USA.

Full citation of the PhD thesis:
Sugathapala, Kushini. “Odious Debt and Transitional Justice.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2019.

Good to know: members of the Graduate Institute can download Dr Sugathapala’s PhD thesis via this page of the Institute’s repository.

*  *  *

Edited by Nathalie Tanner, Research Office.
Banner image: excerpt from a picture by Mikhail Leonov/