FEATURE ARTICLE

Aloy Ejimakor, AttorneyMonday, March 14, 2005
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Washington, DC, USA

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NIGERIA'S EXTERNAL DEBT: WHICH IS MORE UNSUSTAINABLE
- THE DEBT OR THE REPUDIATION?


his commentary follows on the heels of the resolution recently passed by Nigeria's House of Representatives calling on the President to unilaterally "stop" or "halt" further payments or servicing of Nigeria's external debt. Parliamentary words of art like "stop" and "halt" may have been used in the news reporting of what our legislators expressed, but a plain reading of the entire legislative history, particularly the remarks made by individual lawmakers during and after the debate on the resolution indicate the true sense of the House is one of a desire for repudiation or willful default of the country's foreign debt, or at least an indefinite suspension of all further payments and servicing. Repudiation itself is a word of art used to describe any of the situations where a sovereign takes matters in hand and intentionally stops or stalls further servicing or repayments of its debts. Parallels were drawn with Brazil and to a greater extent, Argentina which either defaulted or came damn near close to it.


It is true that at some point Argentina failed to meet deadlines set for servicing and repayments and thus can be said to have done something that amounted to a default. But Argentina's default was not intentional or dressed in the garb of willful state action, and thus can hardly represent the clear repudiation called for by Nigeria's federal legislators That of Brazil is different in that in August 2002 when it nearly came to pass, the IMF, backed by the unalloyed support of the Bush Administration announced a hastily arranged loan of 30 billion dollars to shore up Brazil and brace against the imminent default. That says a lot about how jittery the epicenters of international financial system and order become at the specter of even something as watered down as a default in the ordinary course of a sovereign's good faith struggles with its external debt burden.

Most observers will agree that in calling for this drastic option, the House was no doubt primarily motivated by patriotic fervor fed by the increasingly great burden Nigeria's external debt has continued to impose on her citizens. This surely comports with the popular feelings of vast majority of Nigerians. And the other, and perhaps more appealing reason why such drastic measure would receive public support is the well- founded suspicion that a significant portion of the debt, especially the ones owed to the combine of private lenders called London and Paris Clubs, are questionable in varying ways. Yet another reason is the public's lack of appreciation of the long term consequences of repudiation or default, willful or otherwise, and how those consequences compare to the familiar burden of contractual compliance represented by repayment and servicing. This throws up the obvious question: Compared to the current levels of Nigeria's annual commitment to debt repayments and servicing and her debt to GDP ratio, what will Nigeria lose or gain were it to repudiate her external debts?

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First of all, it is not fiscally possible or sensible for Nigeria to repudiate her debts to the World Bank and the International Monetary Fund, or the African Development Bank because Nigeria is either a member nation in good standing or has substantial foreign exchange deposits, reserves, or special drawing rights in all or some of these international financial institutions. Nigeria's repudiation of these debts will almost be like repudiating her domestic debts to the Central Bank of Nigeria. It does not make any sense at all and will amount to yet unheard of act of state irresponsibility and irrationality to repudiate debts to Banks that a nation co-owns, or in which it has substantial deposits or reserves of foreign currency.

Any nation that pursues this option will not only be a laughing stock of the international community, but such attempt is most likely to be futile because that country's currency reserves and other funds at those institution will immediately become subject to seizure and the assets will be applied to the debts the country is repudiating anyway. So, right there is the triple whammy - laughing stock, ineffectual repudiation, and international pariah to boot. Just imagine Nigeria repudiating her debts to the central bank of Nigeria. How does that sound? Weird or very weird, if you will. This now leaves us with the other debt - that popular "whipping boy" of those who had held steadfast to the mantra of sovereign repudiation. That other debt is comprised mostly of the ones owed to the so-called London and Paris Clubs of private lenders.

Generally speaking, a sovereign, just like any private citizen in financial distress is not prevented by any "criminal" statute to take the self-help option by repudiating all her debts. But does it really help to repudiate? Yes, it does help plenty in the short run because you can enjoy the brief palliative of your new found power to say no to your creditors (read: tormentors), and literally tell them to "go to hell". It is more like getting the monkey of your back but only for a little while. For a sovereign, newly freed monies from the national budget usually follow the trail of repudiation to finance capital projects previously out of budgetary reach, but only to the extent of a marginal increase equal to the amount previously appropriated to debt servicing and repayment. But the temporary reprieve brought by repudiation quickly begins to wane as those whose debts you repudiated scramble to squeeze you with a myriad legal, diplomatic, trade, and even political pressures to backpedal or lose your sanity.

A private citizen in a country like the United States will testify to the psychological pressure immediately brought to bear on him if he dares "repudiate" his credit card debts, car notes, or mortgage. Well, barring the protections offered by the United States under her federal laws, your creditors are likely to unleash and inundate you with telephonic and postal harassment, a sort of modern day equivalence of the Mafiosi tactics commonly associated with the Chicago and New York of the post-Depression era. If it is your car note you repudiated, then kiss the car goodbye because you will be trailed to your job or the grocery lot until they find the car and repossess it. If it is your mortgage, you might as well prepare to apply for America's infamous "Section 8" public housing real fast or you will find yourself and your chattels on the hostile sidewalk, and save what American jurisprudence calls "equity of redemption", your house is a goner forever, and you might still owe plenty after the foreclosure and sale. And in addition to all these troubles, you will not sleep well, enjoy a moment's peace and every telephone call or mail to your home or any other contact number or forwarding known to your "tormentors", otherwise known in common parlance as "collectors", will give you a start and a mild blood pressure. And above all these, you will be deemed a very bad credit risk, and your credit reputation will be ruined for a whole seven years. Anywhere you go to apply for even the most infinitesimal amount of credit, your bad reputation already preceded you and your Social Security Number becomes the drag that warns an entire nation that you must not be trusted to honor your obligations. Ditto for Nigeria, except that the creditors will find a way of criminalizing the repudiation and getting the police to take you into custody on account of it.

More terrible things might be brought upon you and most of them will be extrajudicial without the protections offered by a well-ordered legal system. But in both societies, legal protections exist for any debtor who suddenly falls on hard times and becomes unable to pay up. There are several protections, many of them industry-managed, but the "mother" of all protections is the one offered under the bankruptcy statute. In the United States, depending on the type of debt in question, and except for child support arrears, a private citizen can wipe out his entire debt in a bankruptcy proceedings brought before a federal court. There may be other nuances here and there, but in the main, you can expect to get a clean slate and begin afresh after scaling through the lengthy and forms required and surviving the harrowing experience of having to sit through the proceedings and admit that you have failed to live up to your word.

The Nigerian bankruptcy regime is less clear but one is wont to assume that it must have some of the nuances and fine points of British common law from which both American and Nigerian legal systems derived. So, on the whole, human society is smart and compassionate enough to offer succor to its members who for any reason, suddenly become unable to pay their debt. It is an across the board pious obligation that has origins in the Judeo-Christian, and even Islamic traditions which teaches us to show forgiveness and compassion to those who become truly destitute out of no fault their own. But there is a quid pro quo, a price to pay for being let off. In the United States, your insolvency becomes public record and the entire nation is put on notice for ten years that you have been excused and set free from all your debts. But what does that get you? Nothing and then some more hard times ahead when every potential new creditor runs for cover each time you apply for credit and their computer terminals lit up with shouting imagery of your severely damaged credit record. Now you have it, the Hobson's choice: The debt or the repudiation, pick one and still be damned.

But what about a sovereign? What becomes of this vast mass of legal fiction, an incorporeal political entity that has no blood and veins but with plenty of humans with blood and veins? Under the rules of private international law, and the customs and conventions of civilized nations, a sovereign has no clear legal right to willfully repudiate her foreign debts. It is not like expropriation of foreign property which has clearer rules of engagement where a sovereign can, for limited reasons, such as brought by revolution, war or diplomatic retaliation, nationalize, expropriate, or forcibly take over foreign property. Even then, it is generally disfavored and it often provokes some very terrible consequences such as economic sanctions, diplomatic isolation, seizure, and extra-territorial litigations. Even the defense of force major or fundamental change of circumstances is not complete to prevailing against the avalanche of international condemnation that follows expropriation of foreign holdings. This illustration is germane because expropriation compares well with repudiation in the sense that both actions constitute a unilateral sovereign action to suddenly disregard settled rules of law to breach contractual and legal obligations owed to foreigners.

However, some commentators, who conservative creditors have dismissed as "apologists" have argued strongly for some form of recognition of complete or even limited defenses to foreign debt. Force major or Act of God, and its close second, fundamental change in circumstances have been bandied as possible defenses. If such defenses should become tenable, then a sovereign can only repudiate by asserting one or all of these defenses, at least colorably before the repudiation can receive any consideration of sympathy and grudging support. The rationale is simple. And that is: a foreign debt is but a basic contract that carries the usual obligation to perform represented by repayment or servicing of the debt. A rationale that no doubt powers the engine of transnational relations and helps to preserve world peace and commercial intercourse between nations.

In the case of Nigeria, the national legislators who passed the resolution calling for repudiation sought to offer legal justification for doing so. One is that servicing and repayment of Nigeria's external debts require up to 20% set aside from the federal budget with the result that expenditure for capital projects suffer. Another is the notion that some of the debts, mostly the private ones are either bogus or incurred under circumstances that raise some doubts about their validity. Yet another is the great burden that has become the lot of Nigerians because of the escalating costs of debt servicing and repayment. In other words, infrastructure and social services like education and health have suffered largely on account of these debts. And the catch all, that the debts have become unsustainable. The proponents have even resorted to "legal precedents" by citing some countries which have "repudiated" their debt in the past. But what remains unsaid, or at least said sotto voce is the murmurings that a significant portion of these debts were incurred by some of the military (read: illegal) regimes Nigerians initially embraced and then abhorred with hindsight.

So, the real question is whether any of the reasons bandied by the legislators meets the definition of force major or changed circumstances or even some inherent illegality that can sustain a unilateral declaration by a democratically elected government of Nigeria to dare international community and repudiate Nigeria's foreign debts. It is not that these defenses have attained any clear-cut universal recognition as basis that can justify sovereign repudiation. But since they are legal doctrines issuing from jurists of world renown, whose opinions are generally respected as legal treatise, an assumption may have been made by those who passed the resolution that the defenses are indeed theoretically assertable either in an international or municipal judicial proceeding or in a lone declaration of repudiation by a state. Yet, intellectual honesty requires that we look to real world situations to consider whether the argument for repudiation can hold water.

Both in the United States and Nigeria, a private citizen who is spending 20% of his income on "debt servicing and repayments" can hardly be deemed to be undergoing a fundamental change in circumstances that can justify repudiation of his debt. If he as much contemplates repudiation merely because 20% of his income is going to his debts, he will be dismissed as either unserious or unreasonable, and treated with levity. And no bankruptcy court can let you off on a case that comes with such income to debt scenario. After all, a lot of people can carry or sustain a 50% debt to income ratio and still live well and not raise a whimper. That said, but is there any special characteristic a sovereign possesses that distinguishes it from an individual in similar circumstance and makes it harder for the sovereign to make do on 80% of her "income" or unsustainable to spend 20% on debt servicing and repayments? There is none, especially since the sovereign, in territorial terms, is an aggregation of the individual human units living within its geographical boundaries. In other words, the sovereign's 20% burden is an "aggregate" version of the individual's 20% "per capita" burden. So, if this defense must fail if propagated as a changed circumstance, whither the force major? 20% debt burden on the national "cake" is to force major what square pegs are to round holes. And that Nigerians are suffering is hardly on account of the 20% of their national budget that is set aside for foreign debt servicing and repayments.

There is more diagnosis to it when that suffering is glanced off the 80% left over in the national purse. Again, most people, even the most ardent supporters of total debt cancellation will not subscribe to the notion that a private citizen is "suffering" merely because he is spending 20% of his income on debt servicing and repayments. If he is still suffering atop the heap of the 80% left in his kitty, then his pockets must have developed some covert holes that he cannot as yet fathom. Anybody who cares to listen to his lamentations will tell him straight to his face to examine his pockets first, and look to himself, not his creditors as the architects of his suffering. And any suffering not brought by factors beyond our control will make a very hard sell as force major. Without intending any insensitivity, it is not as if the Nigeria suddenly got hit by the Tsunami or Hurricane Gilbert.

This brings us to the point least made by the legislators as an additional basis for calling for repudiation, and that is the questionable legality of some of the debts issuing from the suspicion that the books were cooked to burden Nigeria with debts which were never disbursed to the country's coffers. An ancillary ground is that the debts were either contracted without proper legal documentation and paper trail required for bestowing validity or that the Nigerian head of the government of the day, for reasons of unjust enrichment of self, succumbed to usurious terms rammed down his throat by conniving lenders. These arguments gain strength when the debts at issue were contracted by military regimes that Nigerians continue to see as legally incapable of binding them to any international agreements. So, while it is widely acknowledged that an "illegitimate" government cannot, in legal theory, bind a country it is ruling by force to international agreements, practical considerations and ordinary comity between nations dictate otherwise, especially in a situation where such illegitimate government has gained diplomatic footing and assumed the character of a de facto regime. This is why some of the arguments seeking to offer "regime illegality" as a complete defense to repudiation is at worst dismissed as simplistic and fringe, and at best may be considered only as a mitigating or persuasive factor when time comes for renegotiation or rescheduling. But that the amount borrowed was immediately diverted to the secret private accounts of a dictator is even a better argument but still universally deemed an inadequate defense, except to the extent that the succeeding government can expect to get some temporary reprieve while it pursues and tries to recover the loot from foreign bank vaults. The Marcos and Abacha loot recovery cases come to mind.

Nonetheless, the point is often missed, but since the beginning of modern transactional law, you can literally ignore a creditor who lacks legally sufficient proof of the debt he claims. And this is true under the rules of private international law, and domestic rules of contract both for the individual debtor, a corporation, and even a sovereign. In the United States, if your creditor sues you to enforce the debt you owe him, he bears the burden of proof, and once he carries that burden, the only complete defenses you have are either that you have paid, and you must prove it, or that the debt never existed at law, assuming you are in possession of evidentiary materials that can successfully rebut the creditor's case-in-chief. In other words, and for purposes of this discourse, you are not obligated to repay any debt which remains unproven, and you might even get lucky and walk away with a collateral judgment for your costs of defending such a "frivolous" action.

Alternatively, you can repudiate a legal debt by resorting to bankruptcy, but make sure that it is not a ruse and can pass the muster of closer legal scrutiny. Nothing prevents a corporation from successfully asserting the same defenses. And even when the creditor is a sovereign, legions of legal treatise exist to support the proposition that a sovereign is not legally obligated to service or repay a debt that does not exist at law or one that has no legal proof of coming into being. It is that simple. Just refuse to pay, and dare your creditor to commence collection, legal or other proceedings to compel payment. But sovereign bankruptcy? No way, because it is a legal concept that is not yet accorded universal recognition as a complete defense to sovereign debt, even when that sovereign is really broke for the entire world to see.

Another way of looking at is to contemplate a judicial proceeding that lies before a Nigerian federal high to enforce Nigeria's domestic or even foreign debts and Nigerian government's statement of defense includes an averment that the country is bankrupt. Surely, an argument of first impression but one would expect their Lordships to be troubled and puzzled. So, if that argument cannot fly in your domestic courts, why should you expect foreign courts or some international court, like the one at The Hague to consider it?

The closest the world has come to foisting a universal sovereign bankruptcy regime is the largely failed proposal by the IMF to design a comprehensive one that is comparable to common law corporate bankruptcy statute. And even if passed as presently proposed, the measure is riddled with so many unsettled issues that will create more teething problems for nations rushing to take advantage of it as a way out its external debt logjam. So, despite its clout and credibility with creditors, IMF's spirited effort to codify a universal system of sovereign bankruptcy merely remains a common roadmap that guides borrowers and flexible creditors mired in the unclear process of sovereign debt rescheduling. This is hardly comforting to proponents of outright repudiation.

But if the Nigerian government has any reasonable basis to doubt the veracity of any of the country's external debt, then its options are clear and unassailable: Stonewall the creditor until it offers legally sufficient proof thereof. At this time, I doubt that the federal government of Nigeria is still in any doubt after the many verifications exercises that were carried out in the past. So, unless we distrust those who verified that Nigeria owes the odd 35 billion dollars to her external creditors, we must assume that no part of the country's debt portfolio is sufficiently questionable to warrant a sustainable repudiation or default. That being so, what will happen if Nigeria, a bonafide member of comity of nations and a favored beneficiary of the international financial order suddenly makes bold and repudiates the larger chunk of her debts to international private lenders? The reactions will be swift and predictable, and it can range from initial disbelief to one of a scramble by the nation's lenders to examine their options in what must become an epic collection action of global proportions.


As in the case of the individual creditor, you can expect that the President of Nigeria has murdered his own sleep and that of his fellow country men women. Aso Rock, the dizzying seat of Nigeria's very powerful presidential government will be a beehive of activities, most of them unpleasant and disruptive. Aside from the customary "solidarity" visits by the traditional rulers and perhaps some of the legislators who had passed the resolution, Obasanjo can expect to be isolated by Nigeria's intelligentsia, financial moguls, leaders of industry, informed governors, and indeed almost the entire international community. In the disruptions that ensued, the attention of the President and the country will begin to be diverted from almost every other important business of government as the nation becomes consumed in managing a crisis in which it does not have the benefit of prior experience. You cannot invite Argentina or any other country with a "prior experience" to manage it for you because the creditors to whom these other nations are still beholden despite their so-called "repudiation" will see to it that none of them becomes handy to assist Nigeria. That leaves the country with "mercenary repudiation crisis managers", who can be expected to be as shadowy and conniving as their military counterparts. These are the initial fallouts, and as the days become weeks, you begin to hear of aggressive lawsuits and tall claims in far-flung courts in America, Britain, France, and other countries.

In the complicated business of international lending, every lender will insist and obtain a contract of adhesion requiring all disputes concerning the debt to be adjudicated before a foreign court of law applying laws other than that of the borrower. These clauses are called "choice of law" and "choice of forum"; and they are often nonnegotiable not only because they have come to represent somewhat of a standard contract but also for the reason that a nation in dire financial straits is in no position to call the shots when negotiating its way out of the mess with a tough and largely distrustful foreign lender. So what do you get? Avalanche of lawsuits filed against Nigeria in foreign courts that can easily assert either inherent or long arm jurisdiction. Once such legal actions commence, Nigeria must defend against all of them or risk the entry of default judgments.

Assuming that the country obeys the summons and begins to defend against, say 20 billion dollars part of the debts in American courts, you can expect that the legal fees will be enormous, perhaps running into hundreds of millions of dollars. And because of her damaged credit, none of her American lawyers can be expected to take the case on "contingency fee" arrangement. So the legal fees will have to be paid upfront or no dice. Thus, it quickly assumes the nature of defend and lose billions or do not defend and still lose billions more. Talk about the devil and deep blue sea. And arraying the best legal eagles in America to defend against the suit does not guarantee a verdict or judgment in your favor if you cannot successfully assert one of the few defenses enumerated in the foregoing paragraphs. The best you can hope to get is some kind of judicially imposed "debt rescheduling" which you already have anyway as a legal option before the repudiation. So what is the final legal picture? Nigeria will still be stuck with the debt in addition to more billions in legal fees, debt acceleration costs, attorneys and other costs incurred by her lenders, court costs, and other costs incidental to defending an international suit of attrition in a foreign land. And then, the sanctions, this time-tested non-judicial alternative that has brought great but recalcitrant nations to their knees.

Nigeria will immediately become an international pariah as the door of every nation even the most sympathetic ones are shut on its face. The country's assets in foreign and international financial institutions will be frozen and become subject to immediate seizure. The country might have to sell its oil for "cash" because foreign banks can no longer be trusted to remit any new monies deposited by Nigeria's customers. Letters of Credit from Nigerian banks will become dud and as such, Nigeria's importers will have to also resort to cumbersome "cash" payments for the nation's imports. And then the host governments of the lenders hurt and burnt by Nigeria's action will begin to tighten the noose of sanctions as they deploy their enormous clout to levy a barrage of economic, diplomatic, and even cultural isolation of Nigeria. With these many darts thrown at Nigeria from all directions, the country's economy will begin to suffer, domestic financial market will virtually come to a halt, and the value of Naira will plummet dangerously since the foreign reserve that shores up its value has been frozen.

The "end game" is social and even political unrest as Nigerians from the grassroots levels to the ivory towers begin to feel the effects of the economic and financial crisis coursing through their nation. Social critics, pundits, students, labor, and leaders of thought will bare their fangs and blame the President for taking such a "dangerous" decision. Politicians, including even the ones who sponsored the resolution will abandon ship and begin damage control to save face with the electorate as they join in what may blossom to a national call for the resignation or impeachment of the President. Many others may even postulate that the President was motivated by "hidden" agenda that includes intentionally causing social unrest as subterfuge to suspend or amend the constitution to serve a third term. As the nation boils, security forces, represented by Nigeria's highly politicized Army will become restive. Coup rumors will become the order of the day as the nation braces itself for what may become the first coup that is likely to receive the instant support and recognition of nations that have long abhorred forcible change in government.

America and other ardent democracies with long standing aversion to military coups can be expected to suddenly change tune and offer their support to the new government, which naturally will reverse the repudiation as its first order of business, if only to prove to the world that it is a "responsible" government. Although, it is quite possible that all these may not happen but why should Nigeria willfully court such risk when it is already on track with debt rescheduling and cancellation talks?

The technical details of rescheduling, restructuring, renegotiation, and cancellation are beyond the scope of this discourse, but you do not have to be a rocket scientist to reckon that these alternatives carry almost no risk at all in comparism to a unilateral action that repudiation represents. The process may be tedious, but without any universally promulgated bankruptcy defense to sovereign debt, these other third measures are the only options open to any responsible nation which desires some debt relief. And as Nigerians ponder the nation's debt dilemma, three very important questions need to be considered to boot.

First, is whether it is really true that the nation's infrastructural decay is attributable to the 20% earmarked from Nigeria's national budget for external debt servicing and repayments? Second, is to what extent has Nigeria's high debt profile discouraged over-borrowing and debt-based capital expenditure? And the third relates to the title and theme of this discourse, and that is: after reading this essay and many more like it, do you still subscribe to the notion that repudiation or willful default is more sustainable than the current level of debt servicing and repayment?