Make odious debt too risky to issue

(...) An Iraqi move to renounce its debt would have important consequences for international lending generally. Creditors would think twice before lending to repressive or rapacious governments if they did not expect to be repaid. In turn, such regimes might behave better to avoid losing their borrowing privileges.
However, Iraq's repudiation of its debt would also have an unwelcome side effect. Creditors might be more reluctant to lend to a legitimate government out of fear that opinion might later turn against it. Creditors that feared loan nullification would lend at very high interest rates or not at all, so legitimate governments might not be able to borrow to finance worthwhile infrastructure or education projects.
Clearly, the world needs a system to determine which loans should be considered legitimate. The way to prevent lending to illegitimate regimes without jeopardising legitimate borrowing is to make clear in advance which loans will be considered odious rather than nullifying them after the fact. Retroactively, there is a temptation to apply the odious label liberally and nullify legitimate loans as a way of transferring money from the rich to the poor.
A declaration that a particular government is odious and that future lending to it will be considered illegitimate would constitute a new and better form of sanction - a "loan embargo" that cuts off the flow of funds to targeted countries. Profiteers have strong incentives to evade trade embargoes, but creditors would not want to flout a loan embargo because they would risk not being repaid. Creditors would stop issuing loans to odious regimes, not because such loans are illegal or immoral but because they would be more likely to be unprofitable.
If the international community added a loan embargo to its tool kit of economic sanctions, creditors would know the rules of the game in advance and would not risk nullification of their loans. Accordingly, legitimate governments would be able to borrow at lower interest rates. Most importantly, governments deemed illegitimate would find it much harder to borrow in world markets and use the funds to finance repression; and it would become impossible for them to saddle their ill-treated people with debt.
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