Debtor-creditor relations are undergoing fundamental changes, a fact most clearly characterised by Ecuador’s Debt Audit Commission. However, change started earlier. After Argentina had to declare default in 2001, she unilaterally proposed a substantial haircut to private bondholders. Most accepted. Disagreeing creditors have tried to seize assets since then without much luck. Brazil and Argentina started the wave of repayment to the IMF that shook its economic foundation. In 2005 Nigeria received (in the words of the Paris Club) an "exceptional treatment", after a parliamentary resolution to repudiate debts as odious and illegitimate.

Ecuador’s present government had decided to have all claims vetted by a debt audit commission whose final document has been presented recently. For the first time, the point is clearly not whether a debtor can pay but whether a debtor should pay. Checking loans as such is not new. Over two decades ago, Costa Rica saved almost 10% of interest in arrears by verifying past-due interest claimed by banks loan-by-loan. But then, it was checked whether calculations were correct, now legal titles are checked. This is a quantum leap. At present other countries consider following Ecuador’s example. After decades of unsuccessful creditor dominated debt management damaging debtor economies, violating the Rule of Law, causing misery, such as by increasing infant mortality, the South start their own initiatives.

Northern governments seem comparatively unconcerned about the failure of their “debt management”. The one exception is Norway, one creditor government acting, very much against resistance and pressure by other creditor governments in the Paris Club. The Norwegian government has adopted a highly pro-active role in efforts to reduce the debt burden of poor countries, and to check the legal quality of claims. Norway’s unilateral cancellation of ship export debts on the grounds of creditor co-responsibility was heavily criticized by those Northern governments always preaching the sanctity of property, which in the case of claims includes the right to forego payments or to burn IOUs with or without reason. Apparently even property rights are not sacred when used in favour of Southern Countries (SCs) – a sad example of dishonest double standards. For too long, it was not considered necessary to verify the legality of claims against sovereigns. Even claims known to have no legal basis were treated as perfectly legal and legitimate debts.

Present SC-reactions are the result of decades of unsuccessful creditor dominated “debt management” ridiculing any perception of fairness or the Rule of Law, and failing to bring sustainable solutions. These initiatives would not have taken place if a viable and fair solution had been implemented early on, if SCs had been treated according to the main principles of law, just like any other debtor. In a way, they are substitutes to fair sovereign insolvency procedures; they attempt to re-introduce basic legal principles recognised by any legal system into North-South relations where such minimum standards are still sadly lacking. Economically, sovereign debts are not different from other debts. Economic facts assert themselves. What cannot be paid must go unpaid. The only question how to distribute losses. In this respect, discussing the legal base of claims is helpful. It protects debtors and bona fide creditors. In a way, these evolutions may be interpreted as a homecoming. Before WWII, basic legal principles had been observed, which present “debt management” has refused to respect in the case of SCs. The occasional military intervention not withstanding, SCs were once treated much better, as a party with rights, not as objects of creditor arbitrariness unprotected by any law. Even debtor protection and debtor rights were generally accepted. Thus, Chief Justice Taft of the US Supreme Court, held as sole arbitrator that the Royal Bank of Canada “knew” or had to know that the loan would be pocketed by the dictator. Thus, Costa Rica could not be expected to repay. He simply applied the general rules of contract law, a behaviour then obviously considered as normal, as it has always been in any jurisdiction nowadays, though unthinkable for official creditors when it comes to SCs. Before 1945, SCs were not bound by contracts made by someone without proper authority, so-called ultra vires contracts, while Northern governments and the multilateral institutions they control have made SCs also “honour” such “debts”, including already defaulted private debts “retroactively guaranteed” by governments under pressure. The Paris Club and International Financial Institutions (IFIs) destroyed the Rule of Law, and abolished the respect of human rights, creating a new and specific class of debtors – SCs and their peoples – for whom the most basic legal, economic, and humane principles were annulled.

Interestingly, while pointing at the grave fault of present debt management that creditors act as judges, not as parties, Ecuador’s audit commission did not take up this point seriously. The pillar of injustice and global double standards (people more critical than I might speak of global apartheid) remains miraculously untouched. While many proposals considered stupidly “utopian” when I made them in the 1980s have meanwhile become plain vanilla, this cornerstone of lawlessness remains basically unchallenged. HIPC II took up the idea of debtor protection. Transparency and open discussion of debt reduction strategies has become normal, in fact, according to an IBRD-publication, NGOs shifted the battle from the corridors of power into the political arena. The affected have meanwhile a voice, a de facto right to be heard, arguably going beyond what I had imagined in my wildest dreams in 1987 when demanding it. In 2003 the Operations Evaluation Department recognised “the key role played by the international NGO community” in enhancing the HIPC framework, and that NGOs' "suggestions and inputs have helped to formulate new ideas—from process issues, to the introduction of the participatory poverty reduction strategy concept, to technical issues such as retro-fitting the sustainability thresholds". In other words, debt reductions and renegotiations have become public exercises, no longer hidden under the cloak of secrecy behind closed doors.

In spite of the discussion on illegitimacy and odiousness, and numerous proposals to reform the Bretton Woods Institutions, one clear case of perfectly illegal and indefensible debts seems to have largely escaped NGO-attention: grave, routine breaches by IFIs of their own statutes inflicting considerable damages on SCs. It is impossible to say why debts originating from obvious, illegitimate, and illegal abuse are practically not discussed. Damage is done to SC-members by open breach of statutory duties and grave negligence (occasionally one would even be tempted to speak of willfully inflicted damage). Compared with these damages, sums obtained by so-called “vultures” that attract so much attention are not even peanuts. It remains one of the riddles of debt campaigning why IFIs and OECD governments controlling them are let off the hook so easily.

Initiatives such as Ecuador’s show that the days are over when any claim was simply to be serviced without asking questions, when debts were just debts without any further qualification. This is a highly positive, welcome and necessary evolution. But it does not go far enough. As long as creditors are allowed to remain judges in their own cause, as long as IFIs are allowed to continue violating their own statutes when it comes to the rights of SC-members, and allowed to pretend falsely to be preferred creditors, no proper and decent debt order is possible. The basic tenets of any creditor-debtor relation must finally also be applied to the South. Until then, real change will not occur. Double standards will continue, and the poorest will pay the price.

The necessary and sufficient change in North-South debt relations remains the application of an insolvency framework. Any other debtor has the right to get debt relief whenever incapable of servicing all claims or only capable of doing so at the cost of great human distress and of violating human dignity. No debtors but SCs can be forced and have been forced to starve their children or to cut down primary health care in order to pay (more to) creditors. This contempt of human dignity must be stopped.

If clearly illegal debts no longer unduly harassed debtors, and the principles of tort law were applied, reducing multilateral debts in particular, if my sovereign insolvency model were used as the solution to sovereign debt-overhangs, both debtors and bona fide creditors would be perceptibly better off than presently. Identifying improper claims and dealing with them properly would make solutions much easier. Abolishing unjustified de facto privileges of those official creditors that substantially contributed to making crises worse must be part and parcel of an acceptable and sustainable outcome. Those multilateral claims, whose very existence violates basic legal principles, must go. After abolishing the undue discrimination of developing countries and bona fide creditors, reinstalled economic mechanisms would again be allowed to play their useful and welcome role.

One has to redress the real problem, not its symptoms. The discussion of illegitimacy must focus on obviously unjustified double standards, in particular on damages inflicted illegally and illegitimately by IFIs, which make payments obtained by hold-outs pale in comparison. Since elaborating and establishing odiousness or illegitimacy as juridical terms will take time, a quicker solution must be envisaged. This is equal treatment of all debtors irrespective of geographical location and enforcing IFI-statutes. Advocating this quick solution does not mean that long term perspectives need be disregarded. Quite on the contrary, once these changes are brought about, it will be easier to work on codifying a legal framework of international financial relations as proposed by Acosta and Ugarteche, and to refine concepts such as odiousness or illegitimacy, briefly to re-install the Rule of Law into North-South relations.