College of Social Sciences

Paper: Patrick Shea (SPS), “The Price of the Past: Examining the Consequences of Odious Debt”

Discussant: Dania Thomas (ASBS)

 

Wed. 2 October 2024 ‖  3:00-4:30pm  ‖  ARC 225  ‖  Global Political Economy cluster

 

Abstract: Abstract: Why do leaders rarely invoke odious debt claims despite their apparent domestic and moral appeal? Blaming past dictators or colonial powers for debt burdens could garner popular support and potentially alleviate financial pressures. Yet, despite their potential for political popularity, such claims are rarely made in practice. This study explores this puzzle, arguing that the international financial consequences of odious debt claims deter leaders from employing this strategy. We argue that these claims not only cast doubt on a country's commitment to its current debt obligations but also signal potential issues with future borrowing, leading to adverse reactions in credit markets. To overcome the empirical challenge posed by leaders' strategic avoidance of these claims, we examine Norway's unique 2006 debt relief action. Norway unilaterally forgave the debts of five countries, explicitly labeling the original loans as ``illegitimate." This action effectively imposed an odious debt claim on these states, bypassing the usual leader-driven process. By comparing these countries to others receiving conventional Norwegian debt relief, we isolate the impact of the ``illegitimate debt" framing. While Norway’s intentions were ostensibly well-intentioned, our analysis reveals that this program restricted the forgiven states’ credit access and increased their bond yield spreads by 300 basis points. This study contributes to understanding sovereign debt politics and the implications of challenging established international political norms.