How Iraq Pulled Off One Of The Biggest Sovereign Debt Restructurings Of All Time

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:17)

Joe, we like to talk about debt, don't we?

Joe Weisenthal (0:20)

We do. Remember we did, last fall, we had our Odd Lots live performance, I guess, or live episode, and we had a whole section all about the nature of debt, sovereign debt, sovereign debt restructuring, things like that.

Definitely one of our go-to topics.

Tracy Alloway (0:41)

Yes, and one of the reasons why I find debt quite fascinating, and you sort of touched on it just there, is because there's almost a moral veneer on debt. The issue of who owes what and to whom is almost a moral one.

Joe Weisenthal (1:00)

I've totally noticed this, and I totally agree. I mean, there was this story that I tweeted out from Bloomberg a couple of weeks ago about how, you know, StubHub, it's where you can buy tickets for like concerts and stuff?

And they had this thing on there, they were like partnering with some companies so that if tickets were too expensive for you, you could borrow money to buy them. And people just have such a visceral reaction. They're like, oh, this is terrible, this is outrageous. And like, I guess, kind of, but it's so interesting, like nothing makes people more upset in the financial sphere than the perception that someone is taking out debt in an unsustainable way or for a reason that doesn't make total sense, like maybe like buying a house or something. You just get people have such strong views on debt.

Tracy Alloway (1:47)

Totally. It's a hot button topic. And this is one of the reasons why debt restructurings are so fascinating because it's just one giant argument over how to work out the debt and whether the country that assumed all that debt deserves to get away with it, as a lot of people think.

But there is one particular notion of debt that is even more interesting from a moral perspective than all others. Do you know what it is?

Joe Weisenthal (2:15)

Tell me what it is.

Tracy Alloway (2:17)

Odious debt.

Joe Weisenthal (2:18)

Ah, so this is, well, define odious debt because I've seen this for a long time, but I'm not sure if I actually know the proper definition.

Tracy Alloway (2:26)

Okay, well, it's something that has been mentioned on our podcast, I think a couple times before now, but we've never really gone into it in detail. But the first thing to know about odious debt is it's a concept that really only exists in the minds of lawyers and academics. It doesn't really exist in the real world.

But what it is as a concept is the notion that if a government issued a bunch of debt and the government did that without the consent of the people and did it without actually benefiting the people, then the new government shouldn't necessarily be responsible for that debt. And you can imagine that the scenario where that would most likely apply is something like where you have a dictator or a despot that takes a bunch of debt and uses it to terrorize his or her population. And then eventually, they get overthrown. There's a new government. Should the people that suffered under the previous regime have to pay back the debt that the dictator actually borrowed?

Joe Weisenthal (3:30)

Right. It's a great question and, of course, incredibly complicated and automatically. You could imagine that the question of whether debt is odious or not would be very subjective and open to interpretation. But fundamentally, paying off a past debt involves an imposition on real resources of a country that's less money that can go to domestic needs, social services, rebuilding after a war, things like that.

So while on the one hand, you might say a nation's debt is a nation's debt, the question about what is realistic to impose on the new population, on the new government, in terms of damages and obligation to pay, there's a major moral dimension.

Tracy Alloway (4:16)

Absolutely. And I mentioned at the beginning of that definition that odious debt is really just an idea. It doesn't exist in the real world. But what we're going to talk about today is the closest we ever got to odious debt actually being enacted as some sort of legal precedent.

The world did get very close to it, and we're going to find out exactly how close and why it didn't really materialize as a concept. And we're going to do it through what was really one of the most interesting debt restructurings of all time.