Wednesday, March 19, 2014

Odious war debt

I think the last time the notion of "odius war debt" came up was during the Iraq War where the question was, should the newly liberated Govt of Iraq be on the hook for debt incurred by the previous regime?

Please note, the only reason this was an issue was because the debt was denominated in a currency other than the Iraqi dinar, if it had been in Iraq's sovereign currency, then it would be easy for the Govt to keep it's obligation. Also note that, as an oil exporter, Iraq is better positioned than other countries to service US$ debt.

A similar situation seems to be in play in the Ukraine. From Felix Salmon:
Now that Russia seems to have formally annexed Crimea, no one can possibly expect Ukraine to repay Russia the $3 billion it borrowed back in December. The money was given directly to kleptocratic Ukrainian president Viktor Yanukovych in order to buy his fealty; now that Yanukovych is an international pariah and Russia has seized Crimea instead, in what you might call the geopolitical equivalent of a debt-for-equity swap, Ukraine has no legitimate reason to make its payments on the loan.
But there’s a problem here: the loan was not, technically, a bilateral loan from Russia to Ukraine. Instead, it was structured as a private-sector eurobond.
My understanding of this is that Ukraine borrowed in euros on the private market in a deal where Russia supplied the euros and now holds the receivable, and it seems that this debt is senior to other Ukrainian debt.

Ukraine cannot create euros, it is a currency user not a currency issuer, and so it either needs to trade for euros to settle the debt, or renege. If it reneges, it may not end up stiffing Russia, as Russia may sell the euros to a third party.

The ECB may print the euros Ukraine needs so it can settle the debt without taking on the burden itself, but then Russia gets paid. Salmon ends:
Gelpern adds — quite rightly — that now is also the perfect time to implement a general ban on countries selling their bilateral debt into the private markets. I’m unclear on what form such a ban would take, or how it would ever be enforced, but as a principle it’s a really good idea.
I would go further. First, a country, if it can avoid it, should not issue debt in a currency it cannot issue. Second, as a generate rule, debt should be held on the books of the party that made the original credit extension, and not traded.


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