The Washington Times lead editorial this morning has an interesting article on Iraq's foreign debt and its implications for reconstruction. The Times comes to the reasonable conclusion that there should be a great effort made to help Iraq restructure its debts (no outright forgiveness) to enable it to meet the costs of recontruction while still servicing its debt.

While I am one of the last people who would want to interfere with contractual relations our do anything else that would destabilize world financial market, I am currently of two minds regarding Iraqi debt and would invite comment from the other blog participants. On the one hand, debts must be repaid as a matter of practicality to ensure the future ability of countries to receive loans. The Williamson Doctrine at the State Department during the first Bush administration(incidentally named after a guy who works down the hall from me) mainatined that the Eastern European governments and Russia should be held to account for the debts of the toppled communist regimes that preceded them. That doctrine is largely credited with helping maintain access to world capital markets by these countries and sending a signal that a change of regimes would not do away with debt obligations.

All well and good. But, as we all know there are risk premiums in investments. Is it really all that bad to tell lenders that one of the things they should consider when making loans to governments is the viability of that government over the long term? Particularly when that government is engaged in the systematic plunder of the country and people over which it rules. Does it serve the stability of the world political system to remove a risk factor that the government (in the case of vile dictatorships) could be toppled and the new regime would disavow the former regime's obligations? Think about the incentives. Many financial institution were willing to lend to Iraq and many companies willing to enter into contracts with the old regime. If they knew that their investments were seriously at risk due to the collapse of the government perhaps they would not have been willing to prop up such a regime for so long.

For investments/loans made prior to 1991 I am more sympathetic to the financial institutions. After 1991, however, Iraq was an outlaw regime. For that reason it seems to me there is even better argument for telling those institutions who dealt with the regime after 1991 they are simply out of luck -- one of the risks they should have considered has come to be -- better luck next time. I suppose this is somewhat like an application of the unconcsionability doctrine, which we all know tends to make the kind of contracts to which it applies impossible to enter. My question is, would it be such a bad thing if brutal dictators found it difficult to enter contracts for money from European banks or for delivery of weapon systems from France and Russia while under sanctions from the rest of the world.



- posted by Anonymous @ 8:11 AM