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Denouncing Odious Debts

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Abstract

Economists have suggested it was optimal to signal the odious character of bonds when they were issued. However, since the odious debt doctrine has not been recognized by any court, one could argue that denouncing odious debts is useless. Exploiting a unique historical episode, this paper quantifies the impact of protests on odious debts. In 1906, the Russian government floated a bond in Paris to cover the costs of its war against Japan but also to raise money to crush the political movements wishing to reform Russia’s political system. Issued without parliamentary consent, this loan met with fierce opposition. Press campaigns in Great Britain, France and Germany denounced its odious character. If failure or success is determined solely by the ability to prevent a loan from being issued, then the campaign failed. We argue, however, that failure or success should be determined in light of the financial costs imposed on the issuer for future loans and even the ability to force a postponement of these loans. We show that these campaigns increased the yields of all Russian bonds traded in Paris, and thus Russia’s future borrowing cost. Yields on the 1906 loan, which was specially targeted by the campaigns, rose even more. However, once the press campaigns stopped, yields experienced a declining trend, highlighting the important role the press may have on odious debts.

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Notes

  1. On Alexander Nahum Sack, see Ludington and Gulati (2008).

  2. See for example Khalfan et al. (2003). This does not mean that these criteria have not been criticized. For example, King (2016, p. 57) considers these three criteria as too limited to reflect the diversity of odious debts which he classifies into four categories (war debts, illegal occupation debts, corruption debts and subjugation debts).

  3. King (2016, p. 190) qualifies this point by suggesting that when large sums are involved concealing the odious character of the debts may not be so easy. Gentile (2010) suggests including covenants in the agreements governing the bond. These covenants would specify the use of the proceeds and limit the dictators’ ability to use the funds for other purposes since any breach on the covenant could lead investors to ask for immediate reimbursement.

  4. See Hausmann (2017).

  5. Despite this, and as pointed out by Ludington et al. (2010), whereas economists tend to consider that it is optimal to label regimes as despotic ex ante, history has shown that the analysis of whether a debt is odious or not is usually conducted ex-post.

  6. As evidenced by the growing number of socially responsible (SR) funds (Peillex and Ureche-Rangau 2016) and by the limited costs associated with the choice of SR sovereign bonds (Drut 2010).

  7. In this respect, the 1906 loan offers a striking parallel with the case of bonds issued recently in Venezuela. On 30 July 2017, a new constituent assembly was elected in Venezuela. This election was convened following a decree issued by President Nicolas Maduro. The decision to hold these elections was heavily criticized both by the international community and by the opposition parties, which viewed the decision as a move to replace a National Assembly that refused to follow the president blindly. See Buchheit (2017). Following this election, the legality of the new assembly, and its ability to legally propose a debt swap, has been questioned (see Gulati 2017). As for opposition parties, they have announced they would repudiate the debts issued by the state oil company PDVSA should they come to power (Porzecanski et al. 2017). Press campaigns against the loans issued by the Maduro regime, now commonly referred to as “hunger bonds”, have gained momentum (Jenkins and Zerpa 2017).

  8. Protests did not stop the loan issue. They were, however, successful in forcing the Russian regime to postpone any future loans by several years. The French government imposed a 2-year moratorium for any new loan in France (Girault 1973, p. 445) and the next Russian loan would only be issued in 1909.

  9. Lysis was the pseudonym of the French journalist Eugène Letailleur, a staunch critic of the banking sector who denounced press corruption (Bignon 2011). Lysis’s articles led, from 1907 onwards, to a debate with Testis (the pseudonym of the French banker Alexis Rostand), see Ronzon-Bélot (2003).

  10. ACL, DAF 164/1.

  11. See for example La Revue Financière, 19 April 1906. Of course their position may well be due to bribes.

  12. Human Rights League.

  13. Gorky M. Pas un sou au gouvernement russe. L’Humanité, 9 April 1906.

  14. The loan was also discussed in the Inter Parliamentary Congress in July 1906. See for example Journal des Débats Politiques et Littéraires, 20 July 1906.

  15. This was not just the perception of the socialists. For William Lamsdorff, the Russian foreign minister, the funds would allow crushing the revolutionary movements (Poidevin 1970, p. 72).

  16. See the translation of an article by P. Milioukov published in 1936: Les “Libéraux” russes et l’emprunt de 1906. (Archives Crédit Lyonnais, DAF 164/1). According to Milioukov, some members of the party had issued a statement of repudiation in April 1905 but were later disavowed by the Kadets.

  17. Crisp (1961) reprints a memorandum written by two important members of the party, Prince Dolgorukov and V.A. Maklakov, which clearly shows their opposition to the loan in April 1906.

  18. Opposition was also substantial abroad. For example, L’Humanité mentions protests against the listing of the bond in Vienna. La révolution russe. L’Humanité, 25 April 1906.

  19. Nouvelles du jour. Le Temps,9 December, 1906.

  20. Minutes of the Syndicate Meeting held on 28 April 1906, ACL, DAF 164/1. This success was also present in Russia, as shown by letters from the same archive.

  21. Minutes of the Syndicate Meeting held on 23 April 1906, ACL, DAF 164/1.

  22. ACL, DAF 164/1. Letter dated 27 June 1906 from Banque de Paris et des Pays-Bas to the Russian finance minister.

  23. As pointed out by an anonymous referee, whom we wish to thank, the main focus of this paper, markets’ reactions following the denunciation of the 1906 loan as odious, is not the only aspect related to ethics as the underwriters and the Russian government’s attempt to manipulate prices may also be questioned on ethical grounds.

  24. Crédit Lyonnais refused, however, to engage in the buybacks, which, from then on, were conducted mostly by Banque de Paris et des Pays-Bas and the Russian government. Minutes from the issuing syndicate on 24 July 1906 (PV reunion Comité français du syndicat de l’emprunt russe 5% 1906, 24 July 1906. ACL, DAF 164/1).

  25. Telegram from Russian Minister of Finance Vladimir Kokovtsov dated 29 September 1906, ACL DAF 164/2..

  26. Paul Philippe was a French journalist who, jointly with Eugène Letailleur, another journalist writing under the pseudonym of Lysis, fiercely attacked Crédit Lyonnais and the Russian loans between 1906 and 1908 (Eveno 2003, p. 64).

  27. "On commence à regretter ici qu'on n'ait pas laissé, livré à lui-même, le marché des fonds russes à un moment où la faiblesse était déjà justifiée". Le Temps, 5 December 1906. Translation: We are beginning to regret that we have not left the market for Russian funds at a time when its weakness was already justified.

  28. This raises an additional ethical question, whether it was inherently fair for the Russian government to exploit the bad reputation of the 1906 loan to buy it back cheaply. The figures pointed out by the Russian finance minister are fare from market prices suggesting either a private block sale or an attempt by the Minister to paint himself as a shrewd finance minister (we thank an anonymous referee for this observation, which we had failed to make).

  29. "en janvier 1906, un gros emprunt… pour combler le déficit considérable que la guerre de Mandchourie et les événements révolutionnaires de 1905 ont creusé dans son budget, et pour assurer, selon les termes employés par Lamsdorff, la "compression définitive du mouvement révolutionnaire". Translation: in January 1906, a large loan… to make up for the considerable deficit that the Manchurian invasion and the revolutionary events of 1905 have made in its budget, and to ensure, in the words of Lamsdorff, the "definitive compression of the revolutionary movement”.

  30. This point is clearly stressed in the Dolgorukov-Maklakov memorandum. “En contractant un emprunt (…) quelques jours avant l’ouverture de la Douma, le Gouvernement montre qu’il veut soustraire cette opération au contrôle des élus parce qu’il l’a fait dans un but que les élus ne pourraient approuver”. Translation: By contracting a loan (…) a few days before the opening of the Duma, the Government shows that it wants to remove this deal from the control of the elected members of the Duma because it did so for a reason that elected members of the Duma could not approve.

  31. ] “Cet argent aidera seulement à accomplir des massacres. Ne donnez pas un sou aux bourreaux du peuple russe, bourreaux de corps et bourreaux d'esprits! II m'est pénible de penser que l'Europe i civilisée, témoin de la façon dont un pouvoir barbare, par crainte de perdre sa position dans le pays, opprime, torture, tue des milliers d'hommes, que cette Europe aide précisément ce pouvoir dans son crime.” in Gorky M. Pas un sou au gouvernement russe. L’Humanité, 9 April 1906. Translation: This money will only help to carry out massacres. Do not give a penny to the executioners of the Russian people, executioners of bodies and executioners of minds! It is painful for me to think that a civilized Europe, which is witnessing the way in which a barbarous power, for fear of losing its position in the country, oppresses, tortures, and kills thousands of men, that this Europe is helping precisely the political power in its crime.

  32. La révolution russe. L’Humanité, 14 April 1906.

  33. The Economist, 23 June 1906, p. 1050. The authors thank an anonymous referee for pointing out this element.

  34. Manuel du Porteur de Fonds Russes. Emprunts émis ou garantis par l’état et côtés à l’étranger. 1903. Published in St. Petersburg by the Russian Ministry of Finance. For the 1906 loan we rely on the prospectus as our main source pre-dates the issue of the loan.

  35. Lawyers are often presented as another class of gatekeepers. Bradley et al. (2014) show, however, that they played a minor role before WWII and were almost never mentioned in the prospectus. Our source does not mention them either.

  36. This clause was mostly inserted for convenience. Since at the time all countries considered here adhered to the gold standard exchange rates were de facto fixed. Before the outbreak of war, prices on both exchanges were extremely close. Because of the war, arbitrage was forbidden and, after the repudiation, prices began to diverge as French bondholders were hoping to be bailed out by their government (Bernal et al. 2010).

  37. “L'emprunt sera sérié de façon que l'une de ces places ne puisse vendre sa part sur les autres avant deux ans.” La révolution russe. L’Humanité, 16 April 1906. Translation: The loan will be issued in series so that one of these places will not be able to sell its share on the others before 2 years.

  38. “L’emprunt pourra être remboursé en 1916 à 100%. Vu le taux à 5% cette possibilité n’est pas à exclure.” in La révolution russe. L’Humanité, 16 April 1906. Translation: The loan may be repaid in 1916 at 100%. Given the 5% rate, this possibility cannot be excluded. Of course one could argue that, in view of its political leaning, L’Humanité, would attempt to discredit the new loan by all means. But concern that the loan could be converted was raised by others and became seriously debated once Russian yields began to decline.

  39. Using yields to call would have been another approach but the bonds pay different coupons and hence were not as likely to be called, an important element which the use of yields to call does not allow addressing. Since the 1906 loan had one of the highest coupons, bondholders would have expected the Russian government to convert this issue before any other. This intuition is confirmed by the contemporaneous press. For example, in December 1910 there were rumours on the Paris stock exchange that the 5% Russian bonds would be converted to 4.5% ones (Semaine Financière. Le Temps, 26 September 1910). This would have left the 4% 1891 bond out of the conversion and the use of yields to call would therefore have biased our results. More fundamentally, and as pointed out by an anonymous referee, in view of its size, calling the 1906 loan would have entailed a strong stress on Russian public finances in order to finance the conversion.

  40. The authors thank an anonymous referee for pointing this out.

  41. Tomz and Wright (2007, p. 352) find “a negative but surprisingly weak relationship between economic output in the borrowing country and default on loans from private foreign creditor”. It is, however, standard to control for these macroeconomic variables.

  42. The rates of the Rentes are retrieved from Vaslin (1999).

  43. The descriptive statistics of the different variables may be found in Appendix 1.

  44. A large literature in law and finance assesses the interplay between legal conditions and bond prices and lending. This literature is, however, seldom dealing with sovereign debts (Chamon et al. 2015). Recent papers on this topic include Bradley et al. (2010) who analyze the impact of the pari pasu provisions clause on the pricing of bonds following the Elliott versus Peru ruling. It is in general hard to assess whether markets price properly specific legal features of sovereign bonds. For example, the impact of Collective Actions Clause on the price of sovereign debts is ambiguous (Bradley and Gulati 2013).

  45. One notable recent exception is Ecuador, but this of course is well after the case analyzed here (King 2016). Markets reacted, however, when the odious character of sovereign debts was debated. This was the case, for example when the USA refused after the Spanish-American war to recognize any responsibility for the debts issued in the name of Cuba (see Collet 2013).

  46. Note, however, that according to King (2016, pp. 96–100), even if the expression “odious debt” has seldom been used in the past, subjugation debts (debts hostile or contrary to the major interest of the population) are flagrantly breaching international law and should therefore not be enforceable. Their perception would have been strengthened by the fact that, at the time, sovereigns were still subject to the rule of absolute immunity and not the restrictive rule which has nowadays become more and more accepted (Weidemaier 2014; Verdier and Voeten 2015; Weidemaier and Gulati 2018).

  47. The Stock Market. Financial Times, 21 July 1906.

  48. See for example The Crisis in Russia. Financial Times, 21 July 1906.

  49. See for example Willard et al. (1996), Weidenmier (2002), Brown and Burdekin (2002), Zussman et al. (2008) or Flandreau and Oosterlinck (2012).

  50. The procedure also requires setting a value for a trimming parameter h which depends on the maximum number of breaks. In our case the trimming parameter h is equal to 0.1.

  51. Note that using other clusters provides similar results.

  52. One could of course argue that because the amount of the 1906 loan was so high, the results for the other bonds might not be representative because of non-linearity. Unfortunately, not much can be done to address this concern.

  53. The archives from the French bondholders association (Association Nationale des Porteurs Français de Valeurs Mobilières) as well as pamphlets from the British Union of Russian Bondholders show bondholders’ diversity in terms of social classes. Oosterlinck and Landon-Lane (2006) mention that, in 1919, 1.6 million of French investors filed claims related to Russian securities.

  54. Crédit Lyonnais archives, DAF 162, Undated internal memo but in all likelihood issued in 1906, Note pour Monsieur le Président.

  55. At the time, buying advertising space was a very common way to bribe newspapers.

  56. The methodology is not exempt from criticism. For example, if two important events (one increasing the spread, the other decreasing it) occur on the same date, the methodology will in all likelihood fail to capture them as they will cancel each other out [see for example Frey and Waldenström (2007) and Oosterlinck and Ureche-Rangau 2012]. Furthermore, when looking at the press, the researcher may only consider events which fit with his theory. In our case, the events likely to move the spread are well circumscribed and this bias is therefore less likely to occur.

  57. The fall in Russian securities. The Economist, 23 June 1906 p. 1047. See also Foreign government securities. The Economist, 23 February 1907 p. 347 and The stock market. The Economist, 23 March 1907 p. 507 on the link between the Second Duma election and the prices of Russian bonds.

  58. Bulletin de l’étranger. Le Temps, 11 January 1907.

  59. The Octobrist Party was a liberal group favoring moderate political reform (Figes 1997, pp. 194–195).

  60. In June 1907, Stolypin, who was known mostly for the repressions conducted under his supervision, dissolved the Duma and changed the electoral laws to get a parliament more to his taste.

  61. "D'ailleurs, que n'a-t-on pas dit au cours de cette discussion, qui rappelle par bien des côtés un conte des Mille et une Nuits? On a révélé que M. Noetzlin, le négociateur du dernier emprunt russe, avait touché 1 0/0, puis 20/0 sur le montant de cet emprunt, ce qui ferait, dans l'un ou l'autre cas, 12 ou 24 millions. C'est beaucoup pour un seul homme. Que c’est beau l’imagination!" Translation: Besides, what has not been said during this discussion, which recalls in many ways a tale of the Thousand and One Nights? It has been revealed that M. Noetzlin, the negotiator of the last Russian loan, had received 1 per cent, and then 2 per cent, on the amount of this loan, which would, in one or the other case, be 12 or 24 million. That’s a lot for one man. How beautiful imagination is!.

  62. We thank an anonymous referee for this comment. The Financial Times (4 January 1907, p.5, Dalziels Telegrams.), citing an article in Le Matin of the previous day, states that 'an investigation made on the spot by a high and competent French personage shows that the Russian financial year will close under the best of conditions, and that the financial situation generally is much more satisfactory than could have been expected…There is consequently no danger of a deficit, neither will there be any need to have recourse to a new loan'.

  63. Document from Crédit Lyonnais dated 19 April 1906 (Crédit lyonnais archives ACL DAF 164/1.

  64. This finding holds if, instead of looking at the last trading day only, one considers the whole month before the instalment.

  65. La question finlandaise. Le Temps, 18 November 1909.

  66. E. Roubanovitch, La lutte contre la réaction russe, L’Humanité, 1 December 1909.

  67. La question finlandaise. Le Temps, 20 November 1909.

  68. E. Roubanovitch, La lutte contre la réaction russe. L’Humanité, 1 December 1909.

  69. Finland and Russia. The Economist, 30 October 1909, p. 859.

  70. See for example l’Aurore 15 June 1912 or Le Temps 16 June 1912.

  71. Jim Hoagland Iraq's Bigger Picture. Washington Post, 10 October 2004.

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Archival Sources

  • Crédit Lyonnais archives, Paris, France: ACL DAF 162, ACL DAF 163, ACL DAF 164/1, ACL DAF 164/2, ACL DAF 00104/1, ACL 21 AH 57, ACL 98 AH 86.

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  1. Research Center SAFE, Goethe University, Frankfurt, Germany

    Stephanie Collet

  2. Université Libre de Bruxelles, SBS-EM, 50 Av. Roosevelt, CP 114/03, 1050, Brussels, Belgium

    Kim Oosterlinck

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Collet, S., Oosterlinck, K. Denouncing Odious Debts. J Bus Ethics 160, 205–223 (2019). https://doi.org/10.1007/s10551-018-3865-7

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