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KAIROS Background Paper on International Debt
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The purpose of this note is to update information on KAIROS’ work on international debt with reference to the achievements of the Jubilee debt remission campaign. |
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- Current Demands of the Canadian Debt Campaign
- Debt Relief for Tsunami Victims Falls Far Short of Expectations
- Iraqi Debt Remission Sets Precedent
- Congolese People Forced to Pay Odious Debts
- Achievements to Date of the Jubilee Debt Campaign
- HIPC Totally Inadequate
- SAPs Continue Despite Evidence of their Destructive Consequences
- Illegitimate Debt
- Argentina’s Debt: A Case Study in Illegitimacy
- Apartheid Debt and Reparations Campaign
- South-North Working Group on Illegitimate Debt
Current Demands of the Canadian Debt Campaign
- SECURE the immediate and unconditional cancellation of 100% of the debts owed to multilateral financial institutions by all impoverished countries that need debt cancellation in order to meet the Millennium Development Goals, including halting the HIV/AIDS pandemic;
- ENSURE that countries are free to implement their own national development strategies by ending IMF and World Bank Structural Adjustment Programs;
- RECOGNISE that neither the people of Iraq, nor citizens of other countries formerly ruled by dictators, should be obliged to repay odious debts; and
- GUARANTEE adequate financing for impoverished countries including through the dedication of 0.7% of Gross National Income to Official Development Assistance.
Debt Relief for Tsunami Victims Falls Far Short of Expectations
Shortly after the devastating Dec. 26, 2004 Indian Ocean tsunami killed over 227,000 people and displaced 5 million more, Canada offered an indefinite moratorium on collecting bilateral debts owed by any of the 12 affected Asian and African countries. Eight of the twelve countries owed Canada a total of just under C$1 billion at the end of 2004 when the tsunami struck. However, the Canadian offer was subject to consultations with other Group of Seven nations and further negotiations in the Paris Club of bilateral creditors.
Subsequently the G7 decided that they would defer payments only until the end of 2005. Then the Paris Club decided that countries taking advantage of the moratorium would not only have to reimburse any payments deferred during 2005 but also pay interest on the arrears.
Given these terms it is understandable that only 3 of the 12 affected countries decided to take up the Paris Club offer – the Seychelles, Indonesia and Sri Lanka. Only the latter two have bilateral debts owing to Canada amounting to C$589 million in the case of Indonesia and C$99 million for Sri Lanka. Thus the amount of annual debt payments actually deferred by Canada will only be about two thirds as much as originally offered and will last for only one year instead of the three years assumed in the original Canadian offer. After a one-year grace period Indonesia and Sri Lanka will have to start paying back the deferred amounts plus interest.
Thus in the end the much touted tsunami debt moratorium turned
out to be what Jubilee South calls “a feeble and token gesture”.
KAIROS joins our partners in Jubilee South in calling for immediate
and unconditional debt cancellation for the tsunami-ravaged countries
and all other Southern countries who have suffered terrible disasters
and crises, including the silent tsunami that claims 130,000 African
lives every week from preventable diseases.
Iraqi Debt Remission Sets Precedent
Decisions by creditor governments to write-off most of the debts left behind by the Saddam Hussein dictatorship constitutes a modern application of the doctrine of “odious debts”. During the late nineteenth and early twentieth centuries some debts contracted by dictatorial regimes without the consent of their population and used against their interests were deemed “odious” and written off in their entirety. When the Bush Administration first broached the idea of writing off debts accumulated by Saddam Hussein “to build palaces and acquire weapons”, it referred to these debts as “odious”. The US later stopped using the term lest it be taken as establishing a precedent.
Nevertheless, the November, 2004 decision by the Paris Club of creditor nations to write off 80% of Iraq’s debt constitutes a de facto precedent that should also be applied to the debts accumulated by other notorious dictators. Debts accumulated by the Marcos regime in the Philippines, the Mobutu dictatorship in Zaire (now the Democratic Republic of the Congo) and the generals who wage their “dirty war” against the people of Argentina are equally odious and must be cancelled as well.
Congolese People Forced to Pay Odious Debts
The US$12 billion external debt of the Democratic Republic of the Congo was almost entirely contracted when the country, then known as Zaire, was under the despotic rule of Mobutu Sese Seko. After Mobutu was overthrown in 1997, the Financial Times of London commissioned an investigation which revealed how Mobutu had initially received financing directly from the US Central Intelligence Agency before borrowing heavily from the World bank and the IMF. The US Treasury has admitted that during the 1980’s Mobutu deposited some US$4 billion in stolen wealth abroad.
Nevertheless, the Bank and the Fund kept on lending, even after Erwin Blumenthal, a German banker sent to investigate on behalf of the IMF, reported on the extreme amount of corruption within the Mobutu regime.
When Laurent Kabila took over from Mobutu he decided to stop making payments to the Bank and the Fund because he wanted to take a stand against paying illegitimate debts and to avoid subjecting his country to further structural adjustment programs.
Then in January 2001 Laurent Kabila was assassinated and succeeded by his son, Joseph Kabila. The World Bank lured the younger Kabila back into recognizing the debt partly though a US$50 million donation and also by persuading Belgium, the former colonial power, to pay off part of the debts.
Civil society groups in the DRC continue to maintain that their country has as strong a case as does Iraq for having past debts recognized as odious and written off in their entirety.
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Achievements to Date of the Jubilee Debt Campaign |
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Initially the Jubilee debt remission campaign had two demands – total cancellation of the debts of all low-income countries and an end to Structural Adjustment Programs. SAPs are the core policies demanded by international financial institutions as conditions for debt relief or new loans. Too often they result in the erosion of health care, education and the environment and further impoverishment of the poorest.
The international Jubilee debt campaign has been a tremendous mobilization success. We have gathered over 640,000 petition signatures in Canada alone and some 24 million worldwide. Yet the response by governments and international financial institutions has been woefully inadequate.
After the petitions were presented to the leaders of the Group of Seven industrial countries at their 1999 Summit in Koln, Germany, the G7 responded with their own Koln Debt Initiative. It called for some minor changes to the already existing Heavily Indebted Poor Country (HIPC) Initiative and for “a framework for poverty reduction” to be “integrated with structural adjustment programs”.
Canada did move out ahead of its G7 partners by unconditionally writing off $600,000 worth debt owed by Bangladesh in December of 1999 and by becoming the first G7 country to announce that it would cancel 100% of the bilateral (i.e. country to country) debts owed by countries qualifying under HIPC. Then in December of 2000 Canada’s Finance Minister, Paul Martin, announced that Canada would no longer collect payments on debts owed by HIPCs that exhibited good governance.
Unfortunately the effect of these unilateral Canadian gestures has
been minimal as Canada holds less than one half of one percent of
all low-income countries’ debts. As of October 2004, Canada
has provided C$609 million in bilateral debt relief under the HIPC
initiative which is equivalent to just 0.3 percent of the long-term
debts owed by all 42 HIPCs at the end of 2002. The biggest obstacle
to debt remission for the poorest countries is the refusal of the
multilateral financial institutions – the World Bank, the
IMF and regional development banks – to cancel debts.
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HIPC Totally Inadequate |
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When the HIPC Initiative was launched in 1996, the total debt of the 42 countries on its list of potential beneficiaries was US$189 billion. By the end of 2002, these countries total debts still amounted to US$188 billion, despite seven years of “debt relief”.
As of July, 2004, only 27 countries have qualified for the “enhanced” debt relief promised at Koln. Nine years after its birth, the HIPC Initiative is projected to deliver US$53.7 billion worth of nominal debt relief for these 27 countries once they all reach their “completion point” some time in the future. This amount is equivalent to only 12% of all low-income countries’ long-term debts.
Of these 27 countries only 15 have reached the “completion point” under HIPC when they are supposed to have achieved a lasting exit from “unsustainable” debt burdens. The other 12 countries are in an “interim” period, having qualified for some debt relief, but still under the supervision of IMF and World Bank structural adjustment programs. Many of these 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.
HIPC has been a failure, even on its own terms. A recent internal World Bank review found that nine out of fourteen HIPCs it studied will still have “unsustainable” debt burdens even after reaching their completion points. 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”.
What’s worse is that some countries, Chad, the Democratic Republic of the Congo, Niger, Uganda and Zambia, will actually have to make higher annual debt payments after passing through the HIPC process than they did before qualifying for "debt relief". For example, Zambia was making annual debt payments averaging US$137.5 million in the three years before reaching its HIPC "decision point" in 2000 and will have to pay out an average of US$185.7 million during each of the five subsequent years.
The total amount of debt relief promised so far to all of Sub-Saharan
Africa under the HIPC Initiative (US$44.9 billion) is less than
half as large as the debt reduction slated for Iraq (about US$96
billion) once its new administration agrees to accept IMF conditionality.
Jubilee USA estimates that after receiving HIPC debt reduction African
governments will still spend an average of US$14 per person a year
on debt payments and just US$5 per capita on health care.
Nine years after the HIPC initiative began the sad reality is that
many of the poorest countries in the world remain caught in the
debt trap despite the International Financial Institutions’
promises. The fiscal restraints inherent in IMF-imposed Structural
Adjustment Programs (SAPs) demanded by the HIPC process prevent
countries from combating the spread of HIV/AIDS.
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SAPs Continue Despite Evidence of their Destructive Consequences |
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Despite the promise of the Koln Debt Initiative, no real change to the essence of Structural Adjustment Programs (SAPs) has occurred. The renaming of the IMF’s “Enhanced Structural Adjustment Facility” as the “Poverty Reduction and Growth Facility” was only a cosmetic gesture.
A report on the actual experiences of countries that have prepared Poverty Reduction and Growth Papers assesses whether civil society has actually been consulted. The report, compiled by Jubilee South, the Bangkok-based Focus on the Global South, the African Women’s Economic Policy Network and the Centro de Estudios Internancionales in Managua, finds that “Large numbers of people – particularly those who live in hardship conditions … - are alienated from the decision making process.” The report confirms that the World Bank and the IMF remain wedded to their traditional SAPs promoting export-oriented growth, privatization of such basic services as potable water, cost recovery schemes for health and education, and removal of subsidies – all measures which themselves induce greater poverty.
A report from Actionaid concluded that civil society groups participating in PRSPs are largely prohibited from having input on macroeconomic policies. Key documents on macroeconomic policy conditions developed by the IFIs are not made available to civil society or to parliamentarians. Poverty reduction measures are debated within the budgetary limits predetermined by the World Bank and the IMF in consultation with donor governments. Similarly a joint five-year, ten country review of SAPs involving the World Bank, civil society and governments conducted by the Structural Adjustment Participatory Review International Network provides concrete evidence regarding their failure on a number of fronts including:
- the generation of increased current-account and trade deficits and debt;
- disappointing levels of economic growth, efficiency and competitiveness;
- the misallocation of financial and other productive resources;
- the “disarticulation” of national economies;
- the destruction of national productive capacity and
- extensive environmental damage.
Poverty and inequality are now far more intense and pervasive than they were 20 years ago, wealth is more highly concentrated, and opportunities are far fewer for the many who have been left behind by adjustment. Yet, in spite of the overwhelming evidence the World Bank and IMF continue to force countries to implement SAP measures as a condition for debt relief. (to read more about the Structural Adjustment Participatory Review International Network visit www.saprin.org)
Some developed country governments have begun to question some aspects of Structural Adjustment conditionality. For example, the British government has issued a policy paper admitting “structural adjustment reforms during the debt crisis of the 1980s sometimes failed to take account of the social impact, especially on poor people.” The UK paper goes on to question some aspects of privatization and trade liberalization reforms. However, it does not question core IMF macroeconomic policies.
Similarly, Finance Minister Ralph Goodale has also said the IMF
and the World Bank “need to become more sensitive to local
conditions, especially with respect to structural reform conditionality”.
It is time for our government to move beyond questioning and tinkering
with this IMF and World Bank model and abandon it.
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Illegitimate Debt |
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In response to calls from our Southern partners to examine the legitimacy of the foreign debt, the Canadian Ecumenical Jubilee Initiative broadened its debt campaign demands beyond those found in the original petition. At a November 2000 policy forum we heard testimonies from partners from South Africa, Brazil and the Philippines concerning the illegitimacy of their countries' foreign debts. The forum identified the following types of illegitimate debts:
- Debts which cannot be serviced without causing harm to peoples or communities
- Odious debts contracted not for the needs of the people but to strengthen a despotic regime
- Debts contracted for fraudulent purposes
- Debts whose proceeds were stolen through corruption
- Debts for projects that were never built or from loans that were not put to the use for which they were contracted
- Debts incurred at usurious interest rates
- Debts which became unpayable as a result of creditors unilaterally raising interest rates
- Private loans converted to public debts under duress in order to bail out lenders.
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Argentina's Debt: A Case Study in Illegitimacy |
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When Argentina’s citizens took to the streets in December of 2001 demanding a suspension of payments on the country’s foreign debt they had sound reasons for asserting its illegitimacy. Well-documented evidence exists showing that much of Argentina’s debt that began to spiral out of control during the period of military dictatorship (1976-1983) is illegitimate. It fits the classic definition of "odious debt" in that it was contracted without the consent of the people, against their interests and with the full awareness of the creditors.
A private citizen, Alejandro Olmos, initiated a case before the Argentine courts in 1982 alleging that much of the debt was fraudulent. Finally, in July 2000 Argentine federal court Judge Jorge Ballestero handed down a judgement. A summary of the evidence cited in that judgement establishes that:
- the process by which Argentina’s debt grew from 1976 to 1983 did not have legal, administrative nor economic justification
- procedures were discretionary revealing transgressions, irregularities, misconduct and truly illegal acts
- public enterprises were obliged to go into debt with private international banks when they did not need financing
- public enterprises did not collect a single dollar from their supposed external debt
- foreign exchange was placed in the same bank that made the loans at a lower rate of interest than that charged on the loans
- the Central Bank of Argentina used to register the foreign placements in a “black book” constituting double accounting
- the final destiny of the funds is unknown
- the external debt of private enterprises was assumed by the state during an illegal government
- over the years 1976-1983 capital flight amounted to US$35 billion.
In December of 2001 Argentina stopped payments on US$81.8 billion worth of public debt owed to private creditors, mostly overseas bondholders. In February of 2005, the majority of these private bondholders agreed to exchange their old bonds, now worth US$102.6 billion due to accrued interest arrears, for new bonds worth US$41.8 billion. The financial press called this 60% nominal loss incurred by bondholders “a dangerous precedent for future sovereign restructurings”.
However, it is important to view this restructuring in a larger context. First of all the Argentine government of President Nestor Kirchner never challenged the legitimacy of the original debts, many of which date back to the period of military dictatorship as established by the Olmos case cited above. Secondly, even after the restructuring of the privately held bonds, Argentina is still left with a public debt of around US$120 billion, equivalent to about 74% of GDP or more than twice as much debt as is deemed sustainable by the former chief economist of the IMF for middle-income countries like Argentina. One reason for Argentina’s high remaining debt is that the country took on some US$35 billion in new debt to bail out banks and other private businesses after the 2002 economic crisis. Furthermore, Argentina never defaulted on debts owed to the International Financial Institutions, although Kirchner has taken a tougher position than Brazil in negotiating terms with the IMF.
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Apartheid Debt and Reparations Campaign |
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KAIROS is supporting a campaign initiated by Jubilee South Africa to take legal action in New York courts against 20 corporations for their role in propping up the apartheid regime in South Africa with loans and investments. Among the 20 corporations named in the suit are IBM, Ford, General Motors, ExxonMobil, Citigroup and JP Morgan Chase in the United States and British Petroleum, Royal Dutch Shell and DaimerChrysler in Europe.
The campaign aims both to win reparations for individual victims of apartheid and lower the burden of South Africa's US$37 billion foreign debt owed mostly to private banks. In 2000 South Africa spent $5 billion in debt service but only $3 billion on health care, $2.2 billion on welfare and just $450,000 on housing.
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South-North Working Group on Illegitimate Debt |
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KAIROS is a member of a South-North Working Group on Illegitimate Debt exploring with other partners in Jubilee South ways to advance other legal actions aimed at winning write-offs of odious and illegitimate debts. This working group designated Dec. 5, 2004 as a Global Day of Action Against Debt Domination. On that day KAIROS issued a statement citing recent developments that have raised expectations for the cancellation of unjust and illegitimate debts.
Click on the following link to read the KAIROS statement:
http://www.kairoscanada.org/e/media/statements/smtDebt051205.asp
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