Eric
Tousaint’s study of the odious debt doctrine
by
Eric Toussaint
Part
9 - Conclusions related to the examples of Mexico and Peru
During the
American Civil War, in 1861, Mexico had repudiated the odious debt
whose repayment was demanded by French and British creditors. In
retaliation France, supported by Britain and Spain, sent an
expeditionary force which eventually amounted to 35,000 soldiers.
Finally, Louis-Napoléon Bonaparte was forced to withdraw the French
troops from Mexican territory in 1866 after the victorious
counteroffensive by the Mexican progressive forces, and then faced
another repudiation of debt in 1867 by the government of President
Benito Juárez.
On 18 June
1883, the Mexican legislature adopted a law on debt repayment whose
Article I, Section 5 states: “We cannot recognize, and
consequently will not allow to be converted, the debts issued by the
government which pretends to have existed in Mexico between 17
December 1857 and 24 December 1860 [the government of General
Zuloaga] and from 1 June 1863 to 21 June 1867.” We should point
out that Mexico decided not to resort to international arbitration.
Conversely,
Peru agreed to bring its case – in which its adversary was France,
which had given its support to its dishonest bankers – before the
Court of Arbitration at The Hague. Peru was sentenced to repay the
debt despite the fact that it met the criteria, as we shall see, that
determine whether a debt is odious (absence of benefit for the
population and knowledge of the creditors).
According to
the Constitution of Peru of November 1860 (as well as the
Constitution of 1839), Art. 10: “The acts of those who have
usurped public functions and employment entrusted to them under the
conditions set forth in the Constitution and the Laws shall be null
and void.”
In December
1879 the government of Peru was overthrown by Nicolás de Piérola,
who took power and proclaimed himself Supreme Commander in Chief of
the Republic. His government was recognized by England, France,
Germany and Belgium.
Nicolás de
Piérola was corrupted by French bankers, in particular the Dreyfus
bank, to which Piérola, while Finance Minister (1868-1871), had
granted a monopoly on the exportation of guano, a natural fertiliser
which was highly valued in Europe at the time. The banker Dreyfus
agreed to pay 365 million francs in exchange for two million tons of
guano having a resale value of 625 million francs. The Dreyfus bank
was also entrusted with managing Peru’s external debt! In other
words, Dreyfus agreed to advance funds to the government in an amount
of 75 million francs the first year and 67 million during the
following years and to handle debt service for Peru. Under Article 32
of the contract the government provided all the nation’s revenues
as collateral should guano not suffice to cover these advances. The
agreement was ratified in Peru on 17 August 1869.
The Dreyfus
bank decided to suspend repayment of Peru’s external debt in early
1876 on the grounds that the revenue it derived from guano was
insufficient to continue repayment. It turned out that Piérola was
in the pay of French and British bankers and of a part of the local
oligarchy.
After the
fall of the dictator and the return to constitutional order, Peru’s
Law of 25 October 1886 declared all prior acts of his government null
and void.
The case was
brought before an international arbitral tribunal. This demonstrates
the weakness of Sack’s contention that private creditors’
relations with States are governed by private law and not by public
law. Since private creditors could not (yet) prosecute a State before
a tribunal for breach of contract, they relied on “their” State
(in this case France) to defend their interests against the debtor
State. In the case in question, the French State took up the defence
of French bankers before an international arbitral tribunal in order
to obtain redress against the debtor State, Peru.
During
arbitration between France and Chile, the arbitral tribunal, in its
ruling of 5 July 1901, gave the following opinion regarding the
government of Nicolás de Piérola: “The ability of a government
to represent the State in its international relations in no wise
depends on the legitimacy of its origin... The usurper who in fact
holds power with the express or tacit assent of the nation acts and
negotiates treaties legitimately in the name of the State, which the
legitimate government, once restored, is bound to honour...”
The
Permanent Court of Arbitration at The Hague, during arbitration
between France and Peru, ruled on 11 October 1921 that the law
adopted by Peru on 25 October 1886 was of little import since it
cannot be deemed to apply to foreign nationals who had negotiated in
good faith. It is clear from this ruling that the Court was defending
the interests of the French and British bankers.
The examples
of Mexico and Peru demonstrate an important point: it is preferable
for a new government facing litigation with creditors demanding
repayment of an odious debt to unilaterally repudiate on the grounds
of arguments of internal and international law rather than to seek
international arbitration. That is because only in quite exceptional
circumstances – if a superpower (from the North) defends the cause
of the weak party out of personal interest – can the weaker party
(a debtor country of the South) win against the powerful one (from
the North) through arbitration. We will see that that is what
happened with the arbitration in the conflict between Costa Rica and
Britain in the 1920s. The number of arbitrations that have led to the
indebted country losing against the creditor powers is much larger
than those that have led to a favourable solution for the debtor
country.
But first,
in order to follow the chronology, let us deal with the USA’s
repudiation of the debts claimed by Spain against Cuba following the
Spanish-American War of 1898.
Source
and references:
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