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Joseph Hanlon

Lenders, not borrowers, are responsible for ‘illegitimate’ loans

by Joseph Hanlon

12 October 2005

Lenders should be held liable for improper or ‘illegitimate’ lending. Debt ‘relief’ has focused on the borrower - debt is cancelled if a country is too poor to repay and now has acceptable policies. Iraq shifted the focus to the lender - debt should be cancelled because creditors should never have lent money to the repressive regime. This paper uses domestic and international law to establish the concept of ‘illegitimate debt’, which should not be repaid independent of the status of the borrower. Banks and international financial institutions have made international loans which would not be acceptable under domestic law. The concept of ‘moral hazard’ is used to argue that non-payment of illegitimate debt is necessary to discipline lenders and prevent future lending to oppressive dictators.

John Hanlon
Senior Lecturer
Development Policy & Practice
Open University
Milton Keynes MK7 6AA

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