FAQs
If anyone takes a loan shouldn't they repay it? Why should these debts be cancelled?
How much would it cost to cancel the debts of the most severely indebted poor countries?
Canada has a huge debt to pay down. If we are paying ours back, shouldn't other countries?
What is the response of the international lending community to the global debt crisis?
What does the Köln Debt Initiative say about Structural Adjustment?
If debts are cancelled, will these countries ever be able to borrow again?
Should we cancel debts in countries in which the loans were not spent properly in the first place?
How can we help prevent the debt crisis from happening again?
Most people, most corporations and most countries have some debt. Debt becomes a problem when the borrower can no longer afford to service the debt while still meeting basic needs. When people speak of the debt crisis, people are usually referring to developing country debt, more specifically countries that are heavily indebted, in arrears on a large percentage of payments and have high levels of poverty. The problem of developing country debt gained international attention in 1982 when Mexico defaulted on its debt payments.
Governments of the poorest countries repay debts to international creditors at great cost to people who lack food, clean water, housing, health care and education. The debt crisis also exacts an enormous toll on the environment, as natural resources are pillaged in return for foreign exchange with which to pay back foreign creditors.
Developing countries are heavily indebted to creditors based in rich countries, such as private banks, export credit agencies and governments, but the poorest developing countries are especially indebted to multilateral institutions such as the International Monetary Fund and the World Bank.
What are the origins of the debt crisis?
The Third World debt crisis has been the ugly underside of the world economic system for years. The oil price hikes in the early 1970's resulted in large earnings of foreign currency for oil producers, and massive deficits for oil importers. Banks, awash in petro-dollars, sent out money salesmen who competed to pump out loans. More often than not, the funds were used for industrial mega-projects, "white elephants" with little benefit to anyone but the multinational corporations that got the contracts. Loans made their way back to northern bank accounts in more direct ways as well, through dictators who stole money and sent it north into their private accounts, with northern bank complicity.
The oil price hikes caused prices of many consumer goods to rise in industrial countries, increasing inflation. To curb inflation, industrial countries raised interest rates, which caused an enormous global recession. Poor countries' economies deteriorated rapidly as their debt payments staggered under interest rates that rose from an average of 0.5% on bank loans to governments to an average of 13.1%. Export earnings dropped as commodity prices crashed. Faced with falling commodity prices and soaring debt service costs, developing country governments tried to balance their books in part through new borrowing. Much of the new debt built up after 1980 went to refinance old debts instead of being invested in development.
The crisis peaked when Mexico defaulted on its debt payments in 1982. The crisis received serious attention as it threatened the solvency of the largest North American banks. The IMF was called on to provide a loan for balance-of-payments support and to orchestrate debt restructuring with the international banking community. International banks were bailed out, as countries consolidated their loans at the IMF.
In return for financing, the IMF required countries to submit to structural adjustment, eliminating budget deficits, increasing interest rates, eliminating capital controls, orienting economies towards exports, and privatizing assets etcetera. The World Bank also began to make structural adjustment loans.
Developing countries are trapped in the vicious cycle of debt. By the mid-1970's, Latin America owed $60 billion to external creditors. By 1980, the debt ballooned to $204 billion due to the increase in interest rates. By the end of 1999, due to interest rates, late payments and new debts incurred to service old one, Latin America's debt was $706 billion. However between 1982 and 1996, the region had paid $739 billion in debt servicing payments, an amount greater than its total accumulated debts.
If anyone takes a loan shouldn't they repay it? Why should these debts be cancelled?
Yes, debts should be paid. These debts, however, have been paid many times over. Between 1981 and 1997 the less developed countries paid over US$2.9 trillion in interest and principal payments. This is about US$1.5 trillion more or double what they received in new loans. For every $1 dollar that Northern countries provide in aid, over $3 comes back in the form of debt servicing.
We do not expect people who go bankrupt to sacrifice the health and education of their children to continue paying their debts. And yet, we continue to allow millions of children in the South to die each year of poverty-related causes while their governments are forced to make payments to rich countries and other creditors. Women are also forced to bear an unfair burden of the debt crisis since it is they who are expected to make up for the loss of government services in health and education through unpaid work.
Beyond this, circumstances have changed dramatically since the original loans were made. Borrowers had no control over the skyrocketing interest rates and plummeting commodity prices that have pushed many of them to the brink of collapse.
Responsibility for loans has traditionally rested with both borrowers and lenders. In the case of the poorest countries, lenders have reaped all of the benefits. The costs of paying the debt have been primarily borne by ordinary people who had very little say in either borrowing or spending the money. It is time for lenders to be made more accountable for some of the irresponsible loans made over the past three decades.
Which countries should be eligible for debt cancellation?
Countries would be eligible for debt cancellation if they have high levels of poverty and debt servicing. For the poorest countries of the world, debt should be immediately cancelled. For middle-income country debt, an international arbitration body, under the auspices of the United Nations, would be the most appropriate forum for creditors and borrowers to work out the principles of eligibility for debt cancellation.
How much would it cost to cancel the debts of the most severely indebted poor countries?
The cost of canceling the debt of the poorest nations is relatively small. There are three kinds of debt which must be considered: commercial debt which is owed to banks and other private lenders, bilateral debt which is debt owed to countries and multilateral debt which is debt owed to international financial institutions such as the World Bank and International Monetary Fund.
Given the huge profits accumulated by private banks over the past years, the commercial debt owed to them could easily be absorbed with little effect on their balance sheets.
Canada is currently owed about CDN$1.2 billion by the poorest nations. The actual cost of writing off this debt would be considerably lower and it could be written off over a number of years. Canada has already written off debts for some countries at similar costs in recent years.
Finally, the World Bank and International Monetary Fund could easily write off outstanding loans to the poorest by drawing on their vast reserves, and in the case of the IMF, by selling some of its gold. While these institutions have announced plans to reduce the debt obligations of some of the poorest countries their initiative falls far short of what these countries need in order to make a fresh start. Their plan, known as the HIPC (Heavily Indebted Poor Countries) Initiative will only ensure that these countries keep on paying as much debt service while forced to adopt measures that continue to erode health care, education and the environment.
Canada has a huge debt to pay down. If we are paying ours back, shouldn't other countries?
Canada can service its debt while providing an adequate standard of living to the majority. Canada could eradicate poverty, protect the environment and equitably redistribute wealth while at the same time servicing debt – with different policy choices.
There are some important parallels between Canada's debt and that of the poorest countries especially in terms of the impact of government cutbacks on the poor. Both are largely the result of high interest policies that Canada had some control over. While Canadian revenues remained relatively stable, they fell dramatically for the poorest countries due to plummeting commodity prices. As a result, the debt of the poorest countries has become unpayable, rendering them virtually bankrupt, thus robbing ordinary people of the most basic necessities of life.
What is the response of the international lending community to the global debt crisis?
In October 1996, the International Monetary Fund (IMF) and the World Bank, responding to years of advocacy efforts, approved a program of debt relief for poor countries. The program is called the Heavily Indebted Poor Country Initiative (HIPC). It was “Enhanced” in 1999 following the G7/8 meeting, which announced the Köln Debt Initiative.
How does the Heavily Indebted Poor Country Initiative work?
During a minimum three-year period, a country agrees to implement a World Bank/IMF supported Structural Adjustment Program (SAP). At the end of the first three years, at a time called the "decision point," creditors analyze the country's debt problem. They determine whether it can do without further assistance or how much debt relief is needed to reach a "sustainable" debt level by the "completion point" in three more years.
What is sustainable debt relief as defined by HIPC?
"Sustainability" is defined as the level at which a country is able to meet current and future debt repayment obligations without compromising economic growth, rescheduling its debt or failing to pay. HIPC does not take into account the effects of the debt burden on the population or the environment, or quality of life issues in a given country.
Will HIPC resolve the debt crisis?
Despite recognition through the implementation of this program that the debt is a serious problem for poor countries, the program will take few if any steps towards resolving the debt crisis. The weaknesses of this project are numerous:
The goal of HIPC is debt "sustainability," which is to say ensuring that a country can continue to meet its debt obligations. Many, if not all, of poor country debts were incurred within an unjust framework. Given their appalling social conditions, few, if any, poor countries can afford large amounts of debt servicing costs. The measure for debt cancellation efforts should be whether they address the injustices that created debts in the first place and whether they meet urgent human priorities, not the ability of countries to continue to pay debt-servicing costs.
As of September, 2002, only 26 countries had qualified for the “enhanced” debt relief promised at Köln. Seven years after its birth, the HIPC Initiative is projected to deliver US$40.7 billion worth of nominal debt relief for these 26 countries once they all reach their “completion point” some time in the future. This amount is equivalent to only about one fifth of the 41 countries’ total debts and just 8.6% of all low-income countries’ long-term debts.
Of these 26 countries only 6 had reached the “completion point” under HIPC when they are supposed to have achieved a lasting exit from “unsustainable” debt burdens. But 3 of these 6 countries – Uganda, Mauritania and Burkina Faso - still had “unsustainable” debt burdens even after receiving the full HIPC treatment. The other 20 countries were still in an “interim” period having qualified for some debt relief but are still under the supervision of IMF and World Bank structural adjustment programs. However, 13 of these 20 countries have had their HIPC debt relief delayed because they had fallen “off track”, that is not in compliance with some of the stiff austerity and structural adjustment conditions laid down by the Bank and the Fund. After a country falls off track its deadline for “graduating” from HIPC gets pushed off into the future.
According to IMF projections even after these countries get back “on track”, only about half of them will have “sustainable” debt burdens at their completion points. In other words HIPC will have been a failure, even on its own terms, for half of the countries it was supposed to benefit. One reason for this failure is the unrealistic projections of economic growth and of commodity export earnings the IMF and the World Bank use to calculate how much debt relief would be needed to achieve “sustainability”.
A study by the North-South Institute demonstrates the total inadequacy of the HIPC Initiative in social as well as economic terms. The actual amount of debt service payments freed up for the countries surveyed is equivalent to only 12.4% of their already meagre annual social spending. In other words these countries can increase their grossly inadequate spending on education, health and other social services by only one eighth, due to the paltry amount of debt relief they will receive over the years 2001-2015.
What’s worse is that some countries, Mali, Sierra Leone, Zambia and Niger, will actually have to make higher annual debt payments after passing through the HIPC process than they did before.
What did the G7 offer as debt relief?
The Köln Debt Initiative (KDI) proposed "faster, deeper, and broader" debt relief by promising, at best, $25 billion in relief of multilateral debt and $20 billion in bilateral official development assistance (ODA) relief on top of a current $30 billion in debt relief through the Paris Club of creditors and $25 billion through the existing Highly Indebted Poor Countries (HIPC) Initiative. In all, there is potentially $100 billion on the table for debt relief. In addition, the KDI expands the number of countries eligible for the HIPC Initiative from 29 to 36, and it may reduce the waiting period for debt relief from 6 years to as little as 3 years.
Does the Köln Debt Initiative cancel the debt?
No. The offer is less auspicious than it initially appears. To begin with, it does not offer cancellation, and in fact the relief, which it does offer, is extremely limited. The $100 billion on the table at the end of Köln represents only half of the debt held by the HIPCs, an amount which they were unable to service before Köln. Thus, the only debts cancelled as a result of Köln are those that were not being paid in any case. While 16 of the 36 eligible countries will see some reductions in their debt payments, the remaining 20 will see either no change or an increase in the payments they are required to make.
What does the Köln Debt Initiative say about Structural Adjustment?
Structural Adjustment Programs continue to be an element of debt relief under the KDI. SAPs are designed to divert as much of a country's income as possible into debt repayment through reductions in government spending and reorientation of the economy to export production. For example, governments are told to cut their spending, and this frequently results in cuts to essential sectors such as education and healthcare. Sweatshops are established to produce cheap consumer goods for export, and family farmland is converted into plantations for cash crops such as coffee and sugar. In both these cases, livelihood and quality of life are compromised. The KDI says that it is concerned with human development and poverty reduction in indebted countries, but the continued reliance on Structural Adjustment makes this a dubious claim.
The global Jubilee movement has universally rejected the Köln Debt Initiative as an inappropriate response to the debt crisis. Yet the G7 has shown little movement forward, offering no new funds for debt cancellation at the World Bank and IMF Annual Meetings in September 1999. The IMF continues to premise debt relief on Structural Adjustment, and indeed it seems that poverty reduction targets will become an additional layer of conditionality under the auspices of the IMF's "Poverty Reduction and Growth Facility" (formerly ESAF).
There has been some movement on bilateral debt cancellation. After the Annual Meetings, U.S. President Bill Clinton acknowledged what the Jubilee movement has been saying for years—debt is not just an economic crisis; it is also a moral crisis. He also called for 100% cancellation of the debt owed to the United States by all the HIPC countries — a step forward from both Köln and the principle of limited 100% cancellation first raised by the Canadian government in March 1999
How much would it actually cost to cancel debts owed to Canada?
Canada is owed approximately C$1.2 billion by the most indebted poor countries. Most of these debts are owed to Export Development Canada (EDC) or the Canadian Wheat Board. It is estimated, though, that the actual cost of canceling these debts would be lower-between C$700 to C$850 million. EDC has loan loss reserves for debts that are uncollectable; therefore debts could be cancelled with minimal to zero impact on Canada's budget.
If debts are cancelled, will these countries ever be able to borrow again?
Debt cancellation is seen as a first step to establish fairer financial dealings between countries of the North and countries of the South. It can be argued that debt cancellation and a better sharing of the risks of loans would make these countries more attractive places to invest. Past experience indicates that debt cancellation is not necessarily a barrier to future investment. After World War II, Germany received considerable debt relief, yet now has one of the world's strongest economies. Japan also had certain "debts" foregone when it was given generous terms for reparations after World War II.
We can see that creditors were prepared to invest in or sell goods to these countries on credit before, when they were clearly unable to pay and their economic situation was unstable-so, why would they not want to invest or make sales once countries are on firmer footing after debt cancellation?
Should we cancel debts in countries in which the loans were not spent properly in the first place?
Certainly, corruption and wasteful spending have been a problem in some of the countries proposed for debt cancellation. But we in creditor countries, as well as the international financial institutions, need to share some responsibility for wasteful spending. The World Bank and various northern countries were involved in many of the spending schemes, which are of concern. In many cases, creditor countries were willing to lend to countries and leaders where corruption was known to exist, so this should not be used as a reason to deny debt cancellation. As well, creditor countries have also played a role in some of the spending which was wasted on unsuccessful or poorly planned development projects. Finally, much of poor country debt is related to the Cold War, when creditor countries were eager to forward money to their supporters to suit their own strategic purposes.
What will ensure that corrupt leaders do not siphon off the benefits of debt cancellation for themselves?
Increasingly we see countries with active civil societies that can hold their governments accountable. Withholding debt cancellation will only penalize ordinary people, not the corrupt leaders. It is our responsibility to support the efforts of civic movements towards greater democracy, respect for human rights and transparency that will ensure that resources available from debt relief are used for genuine social development.
We who live in Northern creditor countries must be careful not to set ourselves up as the judges of who is worthy of debt relief. In cases of countries known for their abuse of human rights and corrupt practices among government officials, our first step is to establish a dialogue with civil society groups within those countries to obtain their views on whether and how their countries should be treated in campaigns for debt relief.
Often, governments use the issue of corruption to withhold debt relief on the one hand, while they trade or provide aid with the other.
Odious debt refers to debt that is contracted by despotic or oppressive regimes, not in the interest of the nation, but to strengthen the power of the regime. This concept of "odious debts" has a long history, arising initially from the United States capture of Cuba from Spain in 1898. Spain demanded that the US pay Cuba's debts and the US refused, on the grounds that the debt had been "imposed upon the people of Cuba without their consent and by force of arms." Furthermore, the US argued that, in such circumstances, "the creditors, from the beginning, took the chances of the investment." The concept of "odious debt" was upheld and formally entered international law in 1923.
What are contemporary examples of odious debt?
The Anglican Archbishop of Capetown, Njongonkulu Ndungane, currently makes the case that South African apartheid debt is odious debt. He says that South Africa is a prime example of a country with governments that systematically oppressed the majority of its people. In 1973, the United Nations began to describe apartheid as a crime against humanity. Nevertheless, the international financial community continued to make loans to South Africa, for which the new government is now held responsible. Clearly, such loans were not in the interests of the majority of the people of South Africa.
Other examples of odious debt include debt contracted by Mobutu Sese Seko who was the ruler of Zaire and that of Philippine dictator Ferdinand Marcos. In Rwanda, the external debt was largely incurred by the genocidal regime that preceded the current administration. In so far as these dictators and regimes committed gross human rights violations, were corrupt, and blatantly transferred money to Swiss banks, these debts might be termed odious.
Who should pay for odious debt?
It seems very clear who, in moral terms, should not have to pay for these debts. The victims of oppression in these countries must not be required to pay the financial cost of their own torture and imprisonment. They have already paid the human cost; it is immoral to ask them to now pay the financial cost.
There is good reason why it is the lenders who should be burdened with the cost. Many of these debts we now refer to as odious were given knowingly to prop up oppressive regimes. In fact, the British Jubilee 2000 campaign suggests that one-fifth of all developing country debt consists of this kind of loan. By forcing repayment of these loans we indicate that it is acceptable to lend to corrupt and oppressive dictatorships. Only when lenders are genuinely forced to take the chance that loans may not be repaid will they see that these loans are not only immoral but also uneconomic. This will then prompt them to stop making such loans in the future. If lenders wish to try and collect from the dictators, they can do just that, though this has not been a popular option.
What is the Jubilee 2000 campaign for debt cancellation?
The Jubilee 2000 is a global campaign that aims to lift the burden of unpayable debt from the poorest countries. Millions of people around the world signed petitions calling on the leaders of the lending nations to take action to enable poor countries to have a fresh start as they enter the new millennium.
What happened to the Jubilee Petition?
The 635,000 Canadians who signed the Jubilee debt cancellation petition were part of a group of 24 million people from around the world who called on the leaders of the G7 to cancel the debts of the world's poorest nations. Canadians also demanded an end to Structural Adjustment Programs (SAPs), the destructive austerity measures that have historically accompanied G7 debt relief plans. 50,000 Jubilee activists gathered in Köln, Germany in 1999 to present the petition to the G7 leaders. The G7 issued a new plan for debt relief at Köln, and plans for its implementation were made at meetings of the World Bank and International Monetary Fund (IMF) in September 1999.
How can we help prevent this from happening again?
Debt cancellation involves enabling debtor countries to make a fresh start towards genuine social and economic development. Austerity and structural adjustment policies are currently imposed on indebted countries as a condition for new loans. These have only worsened the debt crisis, leading to deeper poverty and disparity as well as environmental degradation. Debt cancellation, coupled with an end to structural adjustment, will allow governments to retain their own resources and make them less reliant on external borrowing. A clearer set of rules and mechanisms for international borrowing and lending must be established where borrowers and lenders share responsibility and liability. The poor must not shoulder the burden of risk for the mistakes of others.
