GiveMeLeverage
& I will remove the world
On July 26, 2005, Iraq announced the terms for its commercial debt renegotiation. For small
creditors (less than $35 million), Iraq would settle claims through a cash buyback and
cancellation. For larger claims, Iraq would seek a debt-for-debt swap. According to Iraqi Central
Bank officials, $21 billion in Saddam-era commercial claims have been settled.
Future of Multilateral Debt Relief
In light of Iraq’s experience, three new precedents appear to have taken shape:
(1) a willingness by the international community to grant a stay on the enforcement of creditor rights to collect
unpaid sovereign debt;
(2) an increased flexibility in Paris Club debt relief decisions; and
(3) an unwillingness by successor regimes to claim that their debt is odious and repudiate it.
Granting a Stay on the Enforcement of Creditor Rights
In the Iraq case, implementing a stay on the enforcement of creditor rights to use litigation to
collect unpaid sovereign debt was a major priority and was implemented by U.N. Security
Council Resolution 1483 shortly after the collapse of the Saddam regime. Implementation of this
stay occurred with very little debate over whether such a comprehensive debt shield should be
used.
In fact, a debate over the general advisability of debt shield mechanisms for countries facing
economic crisis did occur between 2001 and 2003 at the IMF. At the time, there was concern that
several South American countries, including Argentina and Brazil, would default on their
international debts. During this debate, the U.S. Administration led the opposition to a
comprehensive debt shield mechanism and the proposal was eventually withdrawn. It appears that
after Iraq, however, such a debt shield mechanism is feasible if it is introduced in a political
forum such as the United Nations rather than an economic/financial one like the IMF, and that it
is an ad-hoc process, not attached to any formal mechanism for debt resolution.
However, only a few months after these meetings, the United Nations Security Council Iraq
resolutions were passed, providing essentially the exact protections to Iraq that were rejected at
the IMF. Financial analysts note that immunizing Iraq’s debts from foreign claims through a U.N.
Security Council Resolution is a radical move in the history of sovereign debt negotiations. In the
past, the U.S. government has taken a rather hands-off stance that let the financial markets resolve
debt disputes. This approach, known as the “restrictive approach to state immunity,” and codified
through the Foreign Sovereign Immunities Act of 1976 (P.L. 94-583), established that foreign
states are not immune from jurisdiction regarding, among other things, commercial activity
including foreign debt.20 Thus, the U.S. government typically allowed creditors to sue foreign
governments regarding debt claims, and remained uninvolved in matters between U.S. creditors
and foreign governments.21
The Iraq case thus illustrates that the United States and the international community are willing to
shield a debtor from its creditors on an ad-hoc basis, case-by-case without a formal international
bankruptcy regime. This can be accomplished multilaterally through U.N. Security Council
Resolutions or bilaterally through executive orders. Since these measures were not taken in other
recent financial crisis-afflicted countries, such as Argentina or Brazil, it appears that policymakers
are only willing to use such measures selectively, and for countries that exhibit a perceived or
potential threat to U.S. and international security. This understanding is made more explicit by
implementing the stay on debt repayment through the United Nations, a political institution seen
principally as focused on international security, rather than the International Monetary Fund,
which is primarily a financial institution.
creditors (less than $35 million), Iraq would settle claims through a cash buyback and
cancellation. For larger claims, Iraq would seek a debt-for-debt swap. According to Iraqi Central
Bank officials, $21 billion in Saddam-era commercial claims have been settled.
Future of Multilateral Debt Relief
In light of Iraq’s experience, three new precedents appear to have taken shape:
(1) a willingness by the international community to grant a stay on the enforcement of creditor rights to collect
unpaid sovereign debt;
(2) an increased flexibility in Paris Club debt relief decisions; and
(3) an unwillingness by successor regimes to claim that their debt is odious and repudiate it.
Granting a Stay on the Enforcement of Creditor Rights
In the Iraq case, implementing a stay on the enforcement of creditor rights to use litigation to
collect unpaid sovereign debt was a major priority and was implemented by U.N. Security
Council Resolution 1483 shortly after the collapse of the Saddam regime. Implementation of this
stay occurred with very little debate over whether such a comprehensive debt shield should be
used.
In fact, a debate over the general advisability of debt shield mechanisms for countries facing
economic crisis did occur between 2001 and 2003 at the IMF. At the time, there was concern that
several South American countries, including Argentina and Brazil, would default on their
international debts. During this debate, the U.S. Administration led the opposition to a
comprehensive debt shield mechanism and the proposal was eventually withdrawn. It appears that
after Iraq, however, such a debt shield mechanism is feasible if it is introduced in a political
forum such as the United Nations rather than an economic/financial one like the IMF, and that it
is an ad-hoc process, not attached to any formal mechanism for debt resolution.
However, only a few months after these meetings, the United Nations Security Council Iraq
resolutions were passed, providing essentially the exact protections to Iraq that were rejected at
the IMF. Financial analysts note that immunizing Iraq’s debts from foreign claims through a U.N.
Security Council Resolution is a radical move in the history of sovereign debt negotiations. In the
past, the U.S. government has taken a rather hands-off stance that let the financial markets resolve
debt disputes. This approach, known as the “restrictive approach to state immunity,” and codified
through the Foreign Sovereign Immunities Act of 1976 (P.L. 94-583), established that foreign
states are not immune from jurisdiction regarding, among other things, commercial activity
including foreign debt.20 Thus, the U.S. government typically allowed creditors to sue foreign
governments regarding debt claims, and remained uninvolved in matters between U.S. creditors
and foreign governments.21
The Iraq case thus illustrates that the United States and the international community are willing to
shield a debtor from its creditors on an ad-hoc basis, case-by-case without a formal international
bankruptcy regime. This can be accomplished multilaterally through U.N. Security Council
Resolutions or bilaterally through executive orders. Since these measures were not taken in other
recent financial crisis-afflicted countries, such as Argentina or Brazil, it appears that policymakers
are only willing to use such measures selectively, and for countries that exhibit a perceived or
potential threat to U.S. and international security. This understanding is made more explicit by
implementing the stay on debt repayment through the United Nations, a political institution seen
principally as focused on international security, rather than the International Monetary Fund,
which is primarily a financial institution.
