Under Saddam Hussein's rule, Iraq amassed an estimated Dollars 100bn in debt, or over three times its gross domestic product. In all likelihood postwar Iraq will refuse to repay the debt in full. The country can make a strong case that Mr Hussein borrowed without the consent of the Iraqi people and then spent much of the money to finance violence and repression. Hence, Iraq might argue, the debt is illegitimate. An individual is not responsible for repaying debt that someone fraudulently incurs in his or her name. Why should a citizenry be?
The US may welcome an Iraqi decision to repudiate its debt, just as after the 1898 Spanish-American War it encouraged Cuba to repudiate the debt that Spanish rulers had run up in Cuba's name. Indeed, John Snow, the treasury secretary, and Paul Wolfowitz, the deputy defence secretary, have suggested as much. Regardless of Washington's stance on the moral or legal right to repudiate illegitimate debt - or "odious debt", as early 20th-century legal scholars who advocated its nullification termed it - the US knows that an Iraq burdened with debt would be more dependent on American aid. Moreover, there is no love lost between the US and two of Iraq's biggest creditors, Russia and France.
An Iraqi move to renounce its debt would have important consequences for international lending generally. Creditors would think twice before lending to repressive or rapacious governments if they did not expect to be repaid. In turn, such regimes might behave better to avoid losing their borrowing privileges.
However, Iraq's repudiation of its debt would also have an unwelcome side effect. Creditors might be more reluctant to lend to a legitimate government out of fear that opinion might later turn against it. Creditors that feared loan nullification would lend at very high interest rates or not at all, so legitimate governments might not be able to borrow to finance worthwhile infrastructure or education projects.
Clearly, the world needs a system to determine which loans should be considered legitimate. The way to prevent lending to illegitimate regimes without jeopardising legitimate borrowing is to make clear in advance which loans will be considered odious rather than nullifying them after the fact. Retroactively, there is a temptation to apply the odious label liberally and nullify legitimate loans as a way of transferring money from the rich to the poor.
A declaration that a particular government is odious and that future lending to it will be considered illegitimate would constitute a new and better form of sanction - a "loan embargo" that cuts off the flow of funds to targeted countries. Profiteers have strong incentives to evade trade embargoes, but creditors would not want to flout a loan embargo because they would risk not being repaid. Creditors would stop issuing loans to odious regimes, not because such loans are illegal or immoral but because they would be more likely to be unprofitable.
For example, suppose the UN Security Council declared that any future borrowing by another dictatorship - be it Syria, Zimbabwe or Burma - would be the regime's responsibility, and not that of the citizens or any future government of the country. When the regime went to the debt market to borrow, this sanction would discourage creditors from lending to it. Even if the US imposed the sanction on its own, creditors in other countries would abide by it. The US would need only to vow that it would give political and financial backing to any successor government that repudiated new loans issued to the current regime.
If the international community added a loan embargo to its tool kit of economic sanctions, creditors would know the rules of the game in advance and would not risk nullification of their loans. Accordingly, legitimate governments would be able to borrow at lower interest rates. Most importantly, governments deemed illegitimate would find it much harder to borrow in world markets and use the funds to finance repression; and it would become impossible for them to saddle their ill-treated people with debt.
A decision by the postwar Iraqi government to renounce Mr Hussein's debt would be greeted with dismay in some quarters; but that might also spur the creation of a system that prevents lending to such repressive rulers in the first place.