Should Egypt repay its $30 billion debt?

Since Mubarak’s fall, steps are being taken to address the widespread corruption that occurred during his 30-year rule. The Illicit Gains Authority established for this purpose is working to recover assets owned by the Mubarak family and their associates. Last week the authority froze the family’s assets after Switzerland revealed Mubarak’s sons held US$340 million in Swiss banks. Estimates of the family’s wealth are as high as US$70 billion.

Corruption trials of former regime figures are ongoing. To date, Mubarak’s closest advisor Hussein Salem and his family, worth over US$4 billion, were convicted in absentia of corruption and money laundering. Billionaire Ahmed Ezz was convicted of corruption last month and is facing trial for profiteering on 2 November.

In addition to this enormous theft, the Mubarak regime leaves Egypt with about US$30 billion of debt to foreign creditors. As with other dictatorships, international creditors knowingly loaned enormous amounts to Mubarak’s oppressive and corrupt regime. Today the amount that Egypt pays in interest on its loans is greater than its expenditures on education, healthcare and housing combined. As Saifedean Ammous points out in a recent syndicated column, Egypt’s debt-service costs alone account for 22 percent of the government’s total expenditures.

There has been some commentary after Mubarak’s ouster on whether Egyptians should be required to pay back this debt. Repayment of these exorbitant amounts would prolong the poverty and hardship Egyptians have endured for decades. They clearly did not benefit from loan proceeds that disappeared into the pockets of Egypt’s political and business elite or from amounts used for instruments of repression that helped keep the dictatorial regime in power.

Is there a legal basis to argue that Egyptians are not bound by debts from which they did not benefit – that were stolen or used to oppress them? Possibly. As a general rule, international law requires successor governments to service loans incurred by previous regimes, no matter how corrupt or foolish, or how irresponsible the creditors were in issuing the debt. Creditors deny responsibility for financing dictatorial regimes and in almost all cases they are not penalized for doing so, while the population is stuck with the bill. The people end up paying three times: first, when the loans prolong the life of the dictatorial regime; second, when they are impoverished by the cost of servicing the loans; and third, by penalties imposed by lenders if the regime defaults. They may also pay again – as Egypt has – through the harsh effects of an IMF program that imposes the disastrous policies of de-regulation, privatization, and restrictions on social expenditures.

In a handful of cases, however, exceptions have been made to the strict rule requiring repayment of the debts on the grounds that the loans were not used to advance the interests of the state. In several of these cases, successor governments repudiated debts that were made to oppressive and corrupt regimes – known as “odious debts.” According to the legal doctrine of odious debts, loans contracted and spent against the interests of the population of a state, without its consent, and with full awareness of the creditor, are not legally enforceable, except to the extent that real advantages were obtained from these debts. Most of the precedents applying this rule in practice and in legal cases are not recent.

However, in November 2004, bilateral creditors cancelled US$30 billion of Iraqi debt. After his capture, Saddam admitted that he seized around US$40 billion in state assets held in foreign bank accounts. While the cancellation of Iraq’s debt had much to do with political pressure exerted on the creditor nations by the United States, which stood to gain from repudiation of the debt, US officials argued the debt should be cancelled because the proceeds were used to “buy weapons, build palaces and build instruments of repression,” to quote former Deputy Secretary of Defense, Paul Wolfowitz. They backed away from these statements after others began to argue they deserved the same treatment. The Iraq debt cancellation revived discussion of the legal doctrine of odious debts, and it has been used in recent years by civil society organizations to campaign for debt forgiveness for countries where dictators have incurred massive amounts of debt.