The report highlights cases of illegitimate debts being claimed by Canada, France, Germany, Japan, Italy, UK and USA. These loans were the result of irresponsible lending. Money was lent to regimes G7 governments knew to be corrupt or repressive to buy political allegiance, or they were loans designed to help rich country companies do business abroad in unviable projects.

The report argues that some debts should not be paid. This is because creditors bear a large part of the responsibility for having extended loans irresponsibly and negligently.

Gail Hurley, Policy Officer at EURODAD said, “creditors need to be held accountable for the bad decisions they have made and share responsibility for mistakes. Northern politicians are obsessed about corruption and ensuring that taxpayers’ money is well-spent and not wasted by corrupt elites. These are valid concerns. But our governments have no credibility unless they apply these principles to the past. It is not acceptable for the G7 to preach good governance to developing nations while at the same time collecting debts that were corruptly made”.

Dubious debts: the cases

Germany exported warships to Indonesia during the Suharto regime despite concerns over how the vessels would be misused in internal conflicts.

Japan supported the development of an aluminium project in Indonesia designed to serve the interests of Japan’s aluminium exporters and did not benefit Indonesians.

Italy sold three hydroelectric turbines to Ecuador when only two were needed and despite evidence that the hydropower plant was unviable and had devastated the local environment and communities.

France was complicit in the stripping of Congo-Brazzaville’s oil wealth by French banks and failed to stop it. ElfCongo benefited from loans from France’s development agency despite widespread concern that oil was disappearing.

The United States supported the development of a nuclear power station on an earthquake faultline in the Philippines.

The UK government guaranteed a commercial bank loan for a UK company which was providing consultancy services to Kenya at over five times the price these services should have cost.

Canada supported the construction of the Yacyretá dam in Argentina and Paraguay despite widespread allegations that the military dictatorships were siphoning off billions of dollars from the project.

Each case-study argues that these debts are illegitimate and should be investigated immediately via public and impartial audit processes. The report urges the G7 to follow Norway’s bold lead and accept shared responsibility for the debts.

Full report: Skeletons in the Cupboard

Skeletons in the Cupboard: Illegitimate debt Claims of the G7

Editor’s notes:

In October 2006, Norway cancelled US$80mn worth of debt owed by five developing countries (Ecuador, Egypt, Jamaica, Peru and Sierra Leone) acknowledging that it “shared responsibility” for these debts. Norway had exported ships to these countries that they didn’t really need and which were not suitable for their needs. Norway’s motivation had been to support a domestic ship-building industry in crisis.

There are precedents in international and national law which show that in some cases debts should not be repaid:

In 1923, Chief Justice Taft of the US Supreme Court ruled that the new Costa Rican Government was not liable for debts incurred by the former dictator Frederico Tinoco with the Royal Bank of Canada because at the time of the transaction the bank should have known that the loan was not for “legitimate use” of the government but was intended instead for the dictator’s personal support after he had taken refuge in a foreign country.

In national law, there are rules and protections in place for debtors and creditors. It is the responsibility of the creditor to exercise “due diligence” when he/she extends a loan to an individual (for example a bank must ensure that the client has a sound business plan or an income with which to repay the loan). There are guarantees against usurious interest rates and penalty charges. In July 2005 in the UK, a couple who feared losing their home after a loan of less than £6.000 (US$11.000) spiralled to more than £380.000 (US$700.000) had their debts cancelled by a judge who ruled that interest and penalty charges were “extortionate” and “unfair”.

The doctrine of “odious” debt is gaining ground. The doctrine was developed by Russian legal scholar Alexander Nahum Sack in 1927. He argued that a debt can be called “odious” (and therefore unenforceable) when it fulfils three criteria: a/ the debts were not incurred in the interests of the state; b/ the people of the state did not agree to the loan; and c/ the creditor was aware that the loan was unlikely to be used in the general interests of the state.