Some argue that sovereign debt incurred without the consent of the people and not for their benefit, such as that of apartheid South Africa, should be considered odious and not transferable to successor governments. We argue that an institution that truthfully announced whether regimes are odious could create an equilibrium in which successor governments suffer no reputational loss from failure to repay odious debt and hence creditors curtail odious lending. Equilibria with odious lending could be eliminated by amending creditor country laws to prevent seizure of assets for failure to repay odious debt and restricting foreign assistance to countries not repaying odious debt. Shutting down the borrowing capacity of illegitimate regimes can be viewed as a form of economic sanction and has two advantages over most sanctions: it helps rather than hurts the population, and it does not create incentives for evasion by third parties. However, an institution empowered to assess regimes might falsely term debt odious if it favored debtors, and if creditors anticipate this, they would not make loans to legitimate governments. An institution empowered only to declare future lending to a particular government odious would have greater incentives to judge truthfully. A similar approach could be used to reduce moral hazard associated with World Bank and IMF loans.
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Article
Seema Jayachandran & Michael Kremer, 2006.
"Odious Debt,"
American Economic Review,
American Economic Association, vol. 96(1), pages 82-92, March.
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Find related papers by JEL classification: F34 - International Economics - - International Finance - - - International Lending and Debt Problems K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law
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Eaton, Jonathan & Fernandez, Raquel, 1995.
"Sovereign debt,"
Handbook of International Economics,
in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077
Elsevier.
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Eaton, J. & Fernandez, R., 1995.
"Sovereign Debt,"
Papers
37, Boston University - Department of Economics.
Jonathan Eaton & Raquel Fernandez, 1995.
"Sovereign Debt,"
NBER Working Papers
5131, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Michael Kremer & Seema Jayachandran, 2002.
"Odious Debt,"
NBER Working Papers
8953, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
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Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Michael Kremer & Seema Jayachandran, 2002.
"Odious Debt,"
NBER Working Papers
8953, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Seema Jayachandran & Michael Kremer, 2006.
"Odious Debt,"
American Economic Review,
American Economic Association, vol. 96(1), pages 82-92, March.
[Downloadable!]