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Could Ex Ante Loan Sanctions against the De Facto Honduran Regime Prevent Illegitimate Debt?
October 9, 2009
This is a joint posting with Cindy Prieto.
Since the coup ousting Honduran president Manuel Zelaya last June, the international community has responded with strong words and a mix of mostly mild actions. The Organization of American States (OAS) unanimously voted to suspend Honduras when the de facto regime ignored its demand for the immediate reinstatement of Zelaya, and the UN General Assembly has also adopted a resolution denouncing the coup. The United States and European Union have halted some forms of non-humanitarian aid. But despite some calls for action , the United States and other major trade partners have yet to adopt trade sanctions or to freeze the coup leaders’ assets.
Multilateral institutions, including the World Bank and the Inter-American Development Bank, have halted lending to the nation, declaring a pause in action until there is “greater clarity on the legal status of the government.” The IMF recently polled its members about whether to recognize the de facto regime: the results are in and the IMF will only recognize the government of ousted President Zelaya. Consequently, the de facto regime will not have access to $163 million worth of Special Drawing Rights (SDRs) recently allocated to Honduras as part of the global economic stimulus. The underlying implication is clear: groups that launch coups against democratically elected governments do not have a legitimate right to represent the population.
These decisions raise an interesting question: can a regime that has come to power through non-democratic means legally bind the state and its people to financial commitments such as sovereign loans? Would it be possible to discourage or even stop such lending, thus increasing pressure on the de facto regime while also sparing the people of Honduras the future burden of illegitimate debt?
That such a step would be justified in the case of Honduras becomes more clear with each passing day. Despite strong domestic and international disapproval, the de facto regime has dragged its feet in lifting a September 27th decree curtailing civil liberties, raising questions about whether the restoration of these rights will also be delayed. As daily reports show evidence of increased violence toward citizens and human rights violations, one wonders whether resources obtained by the de facto government will be used to benefit the Honduran population or simply to finance more repression.
Having taken the first step by halting IMF funding for Honduras, the OAS and the international community now have an opportunity to increase pressure on the de facto regime, whose sources of funding appear to be dwindling, without creating undue hardship either for countries applying the pressure or for the people of Honduras. How? The international community can declare that future loan obligations made by the de facto regime would not transfer to any legitimate successor government. Potential creditors, realizing that the likelihood of repayment was greatly reduced, would refrain from lending, and the debt burden that the regime would pass to a successor government would be minimized.
Such ex ante loan sanctions have two advantages over more traditional trade sanctions.
- First, unlike trade sanctions, where countries that evade the sanctions can reap a windfall profit, loan sanctions would be self-enforcing: potential creditors would refrain from lending for fear of not being able to collect on these debts. Indeed, it seems likely that if the OAS, including the United States, voted to impose such ex ante sanctions, that banks in countries outside the Americas would also refrain from making such loans, since future Honduran governments would argue that they are not obliged to repay—and any creditor would have difficulty trying to collect in U.S. courts.
- Second, trade sanctions have been criticized for hurting people in the targeted countries, with no evident benefit beyond putting pressure on the regime. With loan sanctions, while the populace may indeed face near-term hardship, citizens also benefit in the long run, by avoiding the burden of future debt repayment. And loan sanctions may bring pressure more directly on the target regime than trade sanctions. Regimes can get by without imports more easily than they can get by without cash.
Ex ante loan sanctions would not be irreversible—if a target regime goes ahead with promised elections, the international community could withdraw the sanction and lending would resume. Even a single instance of such sanctions—for example, in Honduras—could send a signal to potential coup plotters in other countries, discouraging them from overthrowing legitimate governments.
CGD’s new Working Group on the Prevention of Odious Debt has begun exploring how such sanctions could be added to the foreign policy toolkit. But the OAS, the U.S. government, and other influential groups and organizations need not wait for the group’s report, due out next year, to give this intriguing new idea a try.
7 Responses to “Could Ex Ante Loan Sanctions against the De Facto Honduran Regime Prevent Illegitimate Debt?”
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October 14th, 2009 at 11:20 am
Please note that not all agree that there was a coup in Honduras. The Honduran Supreme Court, appointed at the beginning of this year, and the US Congressional Research Service, among others, hold that it was a constitutional succession rather than a coup. Is the country’s highest court to be second-guessed by the international community?
In addition, Honduran public debt comes exclusively from multilateral and bilateral organizations. They have suspended, not only new lending, but disbursements of existing loans. The proposal advanced here is totally irrelevant, therefore. Even if this were not so, elections are only a month and a half away, which would make the proposal irrelevant, again.
Please keep in mind that social projects financed, and supervised, by the multilateral and bilateral institutions are directed to the poor. Suspending disbursements of these loans can only hurt the poor.
October 14th, 2009 at 12:52 pm
I would expect to find that in a postmortem of this event that the actual leverage that international loans have on the decision making of the Honduran (let’s call them) authorities is minimal. Much international direct lending is related to sustaining a local government bureaucracy that, in itself, is inherently inefficient and incompetent, and is not missed on a day to day basis. U.S and Honduran companies are more concerned with their access to markets and perhaps trade finance, and they will have a huge political weight in the final solution.
Whether the U.S. is entirely comfortable with its own explicit association with Chavez, Ortega, and friends in cornering the de facto government, given the Chavez and friends’ patterns of undermining rule-of-law, human rights and democratic processes in their countries, is yet to be seen. There are more than a few people who see the role of the U.S., OAS and international agencies as bullying a small country that itself was resisting an effort by Zelaya to undermine democracy (although following indefensible means themselves). I think that the international community should not try to bring the de facto regime to its knees, but to help it get democracy back on track, irrespective of what happens to Zelaya.
October 14th, 2009 at 1:06 pm
What is the financial world to do with Venezuela?
In Venezuela, as in most other countries, Congress is supposed to exercise control over the executive branch. For instance, its Constitution establishes that ‘No contract in the municipal, state or national public interest shall be entered into with foreign states or official entities, or with companies not domiciled in Venezuela, or transferred to any of the same, without the approval of the National Assembly.’
Now, even though Venezuela is currently known as a very polarized nation, the fact is that after the elections of December 4, 2005, its Congress includes 167 members who are in favor of and obedient to him who wishes to be called ‘Commander’, and 0 representation for those many who are not in the least in agreement with chávez´s confused ramblings of his vision of a twenty-first-century socialism. This indeed poses some serious questions about its legitimacy and therefore some serious challenges for those who issue opinions.
For instance, what are legal counselors or credit-rating agencies to do after they might receive a letter from a Venezuelan citizen (or perhaps even by reading this) informing them that sooner or later the debts now contracted by Venezuela might be questioned as ‘odious debt’, as they are not duly approved by a legitimate congress (167-0), nor are they needed, as can be evidenced by the many donations Venezuela, with its own so many very poor, has recently made, among them, to the relatively few somewhat poor of Massachusetts.
If a company like Nike has to worry about the labor conditions in the factories to which they outsource their production, why should the financial world be allowed to ignore civil representation issues in those countries it helps to finance?
October 14th, 2009 at 1:09 pm
You ask the question: “can a regime that has come to power through non-democratic means legally bind the state and its people to financial commitments such as sovereign loans?”
Actually, according to a report of the Congressional Research Service, the legal process arresting Pres. Zelaya followed the procedures set out in the Honduran Constitution:
“The Chief Prosecutor filed a complaint (requerimiento fiscal) against President Zelaya before the Supreme Court on June 26, 2009. The complaint: (1) accused the President of acting against the established form of government, treason against the country, abuse of authority, and
usurpation of functions; (2) requested that the Court order the arrest of the President; (3) requested that the Court notify the President of the facts alleged against him; (4) requested that the President’s testimony be heard; and (5) requested that the President be suspended from office. The Supreme Court, based on its constitutional and statutory powers, appointed one of its Justices to hear the process in the preparatory and intermediate stages. Following the procedure, the Justice admitted the complaint and issued an arrest and raid warrant.”
“Available sources indicate that the judicial and legislative branches applied constitutional and statutory law in the case against President Zelaya in a manner that was judged by the Honduran authorities from both branches of the government to be in accordance with the
Honduran legal system.
However, removal of President Zelaya from the country by the military is in direct violation of the Article 102 of the Constitution, and apparently this action is currently under investigation by the Honduran authorities.”
In other words, he should have been arrested and perhaps encarcerated pending trial on the charges which the Chief Procesutor had filed, rather than being arrested and deported deported.
The full CRS report can be accessed at the following site:
http://schock.house.gov/Upload....._FINAL.pdf
Perhaps you should review the facts before you make knee-jerk reactions about “non-democratic means” which you might read in the popular press.
October 14th, 2009 at 7:33 pm
Just a brief note. Be very careful not reading too much into what OAS says. OAS is an association of presidents with the mission of defending presidents. In OAS citizens, supreme courts and congresses have no voice at all.
October 16th, 2009 at 5:40 pm
Steve McGaughey makes a good point. The situation in Honduras is complicated. Still, I like Michael and Cindy’s explication of the odious debt issue — whether appropriate in this specific instance or not.
October 21st, 2009 at 10:46 pm
Gosh, Nancy — no need to worry about the accuracy or applicability of Michael and Cindy’s “explication” in the Honduras case, as long as we give vent to our prejudices!
Actually, one of the “market-based” means of addressing the “odious” debt issue is to encourage the “vulture funds” to buy it up and then try to collect on it at something closer to face value. This process is under way in the case of at least one Subsaharan African country, whose ruler’s family apparently ran up some large charge card debts in Paris. If this approach had been tried in the Bank/Fund’s HIPC exercises, it might have saved a lot of money for the Developed Countries’ taxpayers. (But might have been a — well-deserved — hit for the Bank and Fund balance sheets!)