Explainer: could Greece's debt and bailout plan be illegal?

As Greece and its international creditors race to agree on a bailout deal, the issue of the legality of Greek debt has been raised. The Greek parliament’s Truth Commission on Public Debt has released a report that rejects the legitimacy of the large sovereign debt restructuring. It alleges that a substantial part of the country’s €320 billion debt is illegal and “odious”.

The Truth Commission was set up by the Greek parliament in April 2015 with a mandate to audit the legitimacy of the Greek debt in light of Greek, EU and international law. The report concludes that Greek foreign debt should not be legally enforceable. As yet, it has no legal standing, but may well fuel Greece’s objections to its bailout plan in the weeks to come.

When the Greek government was bailed out and its debt repayment restructured in 2010, the loans came with strict conditions, in line with the European Financial Stabilisation Mechanism (which has since been replaced by the European Stability Mechanism). The conditions included several austerity measures and structural reforms to the Greek economy.

These reforms have resulted in millions of Greeks facing poverty, unemployment and social exclusion. Meanwhile public services and infrastructure (including schools, hospitals and courts) were shut down or merged following cuts in public spending.

Legal controversy

Not surprisingly, the negotiation of the Greek bailout led to controversy about its nature and legality. Indeed, Greece’s debt has been challenged through different legal avenues. In particular, the legality of Law 3845/2010, which was adopted by the Greek government in May 2010 and agreed to the conditions of the bailout, was unsuccessfully challenged before Greece’s Supreme Court.

The Truth Commission on Public Debt that was set up this year is a non-judicial group. Comprised of Greek and international experts, it was established by the Greek parliament to determine the facts, causes and legality of human rights violations.

The preliminary conclusions highlight legal flaws in the process of Greek sovereign debt restructuring. The report does not hold back with its claims that Greek debt is odious, unsustainable, illegal and illegitimate, undermining various human rights, particularly economic and social rights. As a result, the debt infringes the rights of citizens residing in Greece enshrined in international human rights law.

“Odious” originates in a highly regarded international law theory coined by Alexander Nahum Sack. The idea proclaims that public debt contracted against democratic principles by a regime for purposes other than the best interests of the nation, should not be enforceable. This is the case of colonial debts or debts incurred during a dictatorship. It refers to the legitimacy of the debt, which is lacking among those who dealt out the loans in the first place.

Poverty levels in Greece have been likened to a humanitarian crisis.EPA/Simela Pantzartzi

If a foreign debt is considered as “odious” in these terms, it should not be paid – this is one of the main contentious issues of the report. According to the terms of reference for the Truth Commission, two elements define the odious character of the Greek debt.

1. The lender “knew or ought to have known [that the debt conditions violated] democratic principles (including consent, participation, transparency and accountability)”.
2. The debt is “used against the best interests of the population of the borrower state, or is unconscionable and whose effect is to deny people their fundamental civil, political, economic, social and cultural rights”.

The Truth Commission’s main finding is that Greek foreign debt is not only odious, but also illegal since it infringes Greek law, EU law and international law. They call it illegitimate because it conflicts with human rights obligations such as the respect for the right to work or the right to education. It is unsustainable due to the impossibility for Greece to pay it without seriously affecting its ability to fulfil its human rights obligations as a government. For all these reasons the report says that Greece should repudiate and not pay the debt.

The report does not, however, have any legally binding obligations. It is not strictly speaking a ruling, as those issued by national courts, it is merely the preliminary findings of a committee. As such, the recommendation to repudiate Greek debt as odious is not feasible.

Regardless, the report puts pressure on the governments involved in debt negotiations to negotiate less harsh terms for the bailout to address the concerns of Greek citizens. It also raises the issue of their transparency since it tries to investigate the causes of the debt in a highly public manner.

Belén Olmos Giupponi does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.