Debt: New challenges

10 October 2005 by Eric Toussaint

Eric Toussaint’s Contribution to the International conference « Resistances and Alternatives to the domination of the Debt [1], La Havana 28-30 September 2005.

1. Changes that have affected the debt of the third world between 1985 and 2005

1.1. In 1985 when several conferences convened in Cuba on the issue “la deuda es impagable” (the debt cannot be paid back"), the debt crisis that had exploded in Mexico in 1982 had so far mainly affected Latin America and the Caribbean. [2] The Cuban government’s initiative was essentially related to the Western hemisphere.
During the following twelve years all developing countries (except China) and the former Soviet Block as a whole were hit by the debt crisis. The neoliberal structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

policies were gradually introduced into over 160 countries.
The more industrialised countries could not avoid a crisis of public indebtedness, and today all governments apply neoliberal policies that are strikingly similar to those imposed onto countries of the South.

With some few exceptions the government policies implemented everywhere involve privatisation, higher taxes paid by workers while capital holders pay less, the commodification of all social relations and of all common goods Common goods In economics, common goods are characterized by being collectively owned, as opposed to either privately or publicly owned. In philosophy, the term denotes what is shared by the members of one community, whether a town or indeed all humanity, from a juridical, political or moral standpoint. , a rise in social inequalities, in precariousness, attacks against social security systems based on solidarity, violation of the environmental balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. , unrestrained productivism, free flow of capital, commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. and services but severe constraints on the circulation of people (except of course capitalists of whatever nation), armament race, increasing use of violence and aggression wielded by the governments of the most industrialised countries...

1.2. Beyond similarities between neoliberal policies implemented in the South and in the North there is still a significant difference. The debt crisis in countries of the South is essentially an external debt, and it is used as a tool to reinforce the domination of the richer countries, which can rely on the passivity or even complicity of most governments of the South. The debt crisis in countries of the North is mainly a crisis of the internal public debt. It is used by capitalists of the North to reinforce their hold on the State. The capitalists’ share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. in the national income of countries in the North has significantly increased since the 1980s to the detriment of the wage earners’ share. We can thus observe both similarities and differences in the public debt crises in countries of the South and of the North.

1.3. Among the developments that have characterised the last 20 years regarding the debt, we have to notice an increase in the internal public debt in most countries of the South. This development is particularly clear in Asia and Latin America. The explosion of the internal public debt is to be related to the obnoxious combination of the crisis in the external public debt, recurring financial crises in the 1990s and the implementation of shock treatments imposed by the Wold Bank and the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
. A large part of what was owed by banks and private companies was systematically taken over by public authorities. Private debts became public thanks to neoliberal magic. This affects all continents. Among the most famous instances we can mention Mexico between 1995 and 1998 and Indonesia in 1998-1999.

Insofar as most banks in countries of the South have been bought over by bank holdings in the North, the internal public debt and the external public debt are largely in the same hands. For the past three years the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

has warmly recommended that public authorities in the South complement their external debt with an internal debt. [3] It is to be noted that part of the internal debt is linked to a strong currency (dollar, yen, or euro), which makes it even closer to the external debt.

1.4. For the last 20 years the Third World’s Indebtedness has functioned both as a powerful tool to submit countries of the South to countries of the North and as a permanent process through which what wealth produced in the South is transferred to capitalists in the North, the World Bank, the IMF, the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

, while governments and capitalists in the South levy their commissions. This latest device in draining resources has been added to other well-oiled processes such as unfair terms of exchange, brain drain, and the pilfering of natural resources.

2. Flashback to the 1980s

2.1. The pioneering initiative taken by Cuba in 1985 found an echo beyond Latin America. In Sub-Saharan Africa, the young Burkinabe President Thomas Sankara addressed all African heads of state who had convened for the 25th OAU conference (Organisation of African Unity conference) at Addis Abeba on 29 July 1987 as follows [4]:

Our debt is still neocolonialism with colonialists turned into “technical advisors”. Actually they ought to be called technical murderers. They suggested financing possibilities, “generous lenders”. (...) Those money lenders were recommended to us. We were presented with appealing files and financing operations. We got our nations into debt for fifty years or more. Which means we were led to compromise the lot of our peoples for over fifty years.

Debt in its current form is subtle way of reconqering Africa, so that its growth and development conform to thoroughly alien standards. Each one of us is turned into the financial slave, so a slave, of those who were cunning enough to lend us money. (...)

Who among us does not wish for the debt to be cancelled? Whoever does not can walk out of this room, take a plane to the World Bank and pay straight away. I don’t want the proposal made by Burkina Faso to be perceived as some immature youthful rebellion. I don’t want people to delude themselves that only revolutionary can think this way. I’d like everybody to understand that this is plain common sense, and indeed that we have no choice.

I can refer to leaders who advocated not reimbursing our debt, some young and some old, some are revolutionaries, some are not. I’ll mention Fidel Castro as an obvious example. He said we shouldn’t pay. He is not my age though he is a revolutionary.

Three months later impetuous Thomas Sankara was murdered. Afterwards, under the leadership of Blaise Compaoré, his country has become a docile pupil of the World Bank, the IMF and the Paris Club.

2.2. In Latin America the 1980s saw the end of several dictatorships that had been established in the 1960s (Brazil) and 1970s (Chili, Argentina, Uruguay). Those governments had attempted to destroy the people’s movement in order to develop a neoliberal model submitted to the richer countries. When these countries recovered democratic governments, the latter decide to take on the odious debts that had been contracted under the dictatorships. The aim of the military dictatorships in terms of submission to the interests of the North and to those of local capitalists was thus achieved thanks to the dictatorship of creditors.

2.3. Between 1980 and 2004 Latin America and the Caribbean paid their creditors some USD 2,109 billion, that is almost nine time the mount they owed [5]. For 1 USD owed in 1980 Latin America paid almost 9 but still owes more than 3.

If we consider all the 165 developing countries (including the former Soviet block), the total amount paid back between 1980 and 2004 is up to USD 5,300 billion, i.e. almost ten times the amount due. [6] For one USD 1 owed in 1980 developing countries paid almost 10 but still owe almost 5.

2.4. Popular protests against the IMF and the WB have become massive and at times even violent since April 1984 when the Dominican people’s uprising was severely suppressed. Riots have repeately broken out all over the globe. The February 1989 uprising in Caracas was crushed in bloodshed (several thousands were killed). Some uprisings led to governments’ fall. From Equador to Indonesia, including Bolivia and Argentina, populations have ousted presidents who implemented neoliberal policies.

3. The example of Argentina

Argentina has proved that one country, even isolated, could stop paying its debt on a long term basis.

During the night between 19 and 20 December 2001 the Argentinean people walked out against the antisocial policies implemented by President De la Rua and his creepy Minister of Economy Domingo Cavallo. No longer supported by the IMF Argentina suspended payment of its external public debt to private creditors for over USD 80 billion.

The IMF, the World Bank, governments of the more industrialised countries, and major international media had announced that Argentina would sink into complete chaos if it stopped paying. And what has happened? Far from sinking into recession Argentina started experiencing renewed economic growth in 2003, which was confirmed in 2004.

The Argentinean government proposed that private creditors exchange their bonds against others at a lower value. After long negotiations from 2002 to early 2005 over 76 % of their private creditors agreed to a deal in which they cancel about 50% of the value of their former securities.

Argentina has thus demonstrated that it is indeed possible to challenge private creditors and stop paying for a long period.

Should we then congratulate the Argentinean government ? I don’t think so. Indeed the government should have severed all agreements with the IMF and the WB. On the contrary it insisted on maintaining them and committed itself to liberate a tax surplus so as to guarantee that the debt owed to the Bretton Woods institutions will be paid. It could have referred to Alejandro Olmos’ sentence and decided that the debt owed to the IMF and the WB was odious and therefore void.

In 2001-2003, as a consequence of their obvious failure in Argentina, Brazil, Russia, and South-East Asia, the IMF and the WB were badly weakened. The amount of the debt they claimed was high and Argentina’s refusal to pay would have left them in a tight predicament. They needed Argentina’s agreement, not the other way round.

As to the final agreement with private creditors, it ensures that their return will be proportional to the country’s economic growth. Why should creditors benefit from economic growth when it is produced by the people of the country?

The amounts that the Argentinean government pledged it would pay within the coming years are so high that they make it impossible to implement an alternative policy to the neoliberal model. It will not be possible to meet social expectations, however justified they may be.

This being said, Argentina has proved that a country could very well stop reimbursing its debts in the long term without the creditors being able to take any effective measures against it.

If the Peronist presidents Rodriguez Saa, Duhalde and Kirchner, who have governed Argentina in turn since December 2001, have been able, albeit most timidly, to resist private creditors for three years, how come Lula, Brazil’s president, has proved so malleable and has failed to challenge the reimbursement of the debt ? An alliance among several Latin American countries against their creditors would have changed the situation to the benefit of the people.

If Argentina could do it on its own, in spite of the limits we have outlined above, it is obvious that a Latin American Alliance against creditors could yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. most positive results.

4. New situation in 2004-2005

The combination of low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, lowered risk premiums, and rising raw material prices produced a sharp increase in the foreign exchange reserves of developing countries, which rose to $1.6 trillion at the end of 2004-a level never reached before and greater than the total external public debt of all developing countries! [7]

The increase in the main developing countries’ solvency (more than $200 billion in new debt between 2002 and 2004) allowed them to increase their indebtedness by issuing public and private bonds on financial markets in the North. Although some developing countries partially reduced their external debt (Russia and Venezuela, for example), others continue to increase their debt greatly (Brazil, Mexico, and Argentina after the conclusion of negotiations with its creditors). All or nearly all are increasing their internal public debt.

The current situation presents an unusual opportunity for the governments of developing countries to modify their situation substantially or even radically. It is possible to get out of debt. China alone, with $600 billion of foreign exchange reserves could change the international situation in favor of developing countries, if its autocratic government wanted to. What if there existed a united Chinese-Russian front against the governments of the major industrialized nations? These two countries could stack the deck on the world scale if they had an alternative project in common. The governments of a considerable number of developing countries spread over four continents (Asia, Latin America, Africa, and Eastern Europe-if you include Russia, as the IMF and World Bank do) temporarily hold the key to change. On a global level, they are net creditors to the main world superpower and private banks of the North. Theoretically, they could completely do without the IMF by repaying what they still owe. They could create a support fund for those developing countries that have less hard currency than they do (beginning with the fifty least developed countries Least Developed Countries
A notion defined by the UN on the following criteria: low per capita income, poor human resources and little diversification in the economy. The list includes 49 countries at present, the most recent addition being Senegal in July 2000. 30 years ago there were only 25 LDC.
), enabling them to rapidly get out of debt (the total amount necessary to eliminate their debt is quite low).

Never before has the situation been as advantageous for the periphery from a financial standpoint. Yet, no one is talking about changing the rules. The governments of China, Russia, and the main developing countries (India, Brazil, Nigeria, Indonesia, Mexico, South Africa...) do not express any intention of changing the world situation in practice in favor of the people. Yet, politically, if they wanted to, these governments could constitute a powerful movement capable of imposing fundamental democratic reforms on the entire multilateral system, fifty years after Bandung. They could adopt moderate policies-a planned repayment of debts with a below par rating-or radical policies-repudiate the debt and institute a series of policies that break with neoliberalism. The international situation is in their favor because the main world superpower is bogged down in the war in Iraq and the occupation of Afghanistan, and is confronted by strong resistance in Latin America that is leading to bitter defeats (in Venezuela, Cuba, Ecuador, Bolivia...) or to an impasse (in Colombia).

I am persuaded, however, that this will not materialize; neither the moderate nor the radical scenario will be put in place in the short term. The overwhelming majority of the current leaders of the developing countries are totally caught up in the neoliberal model. In the majority of cases, they are completely tied to the interests of local ruling classes that have no perspective for distancing themselves concretely from (not to mention breaking with) the policies followed by the major industrial powers. Capitalists in the South confine themselves to a rentier behavior and when they do not, they try at most to capture market shares. This is the case with Brazilian, South Korean, Russian, South African, Indian, and other capitalists, who ask that their governments exact this or that concession from the most industrialized nations in the context of bilateral or multilateral commercial negotiations. In addition, competition and conflicts between developing countries’ governments are real and can get worse. The commercial aggression of Chinese, Russian, and Brazilian capitalists with regard to their competitors in the South is causing tenacious divisions.

Only the irruption of the people on the stage of history could change the course of things, but there is as yet no solid indication pointing in this direction.

5. The current, unusual situation illustrates the impasse that the neoliberal model represents for people of the South

According to the dominant economic theory, development of the South has been delayed due to insufficient domestic capital (insufficient local savings). Also according to this theory, countries wishing to undertake or accelerate development must appeal to external capital in three ways: first, by taking on external debt; second, by attracting foreign investments; third, by increasing exports in order to procure the hard currency necessary to buy foreign goods that facilitate growth. The poorest countries are also supposed to behave themselves, like good students of the developed countries, to attract grants. However, reality contradicts theory: developing countries supply capital to the most industrialized nations, to the US economy in particular. The World Bank does not deny this: “Developing countries, in aggregate, were net lenders to developed countries” (World Bank 2003a, 13), and “Developing countries are now capital exporters to the rest of the world” (World Bank 2005, 56).

It is not true that developing countries only have recourse to debt to finance their development. Today, recourse to loans essentially serves to ensure the continuation of repayments. In spite of the existence of significant foreign exchange reserves, governments and local ruling classes in the South are not increasing investment and social expenditures-with one exception: the government of Venezuela that is in opposition to local ruling classes and to US and European Union imperialism. Sooner or later, the people will free themselves from debt slavery and from the oppression carried out by the ruling classes in the North and the South. Through their struggles, they will win the implementation of policies that redistribute wealth and put an end to the productivist model that is destroying nature. Then, public powers will be forced to give absolute priority to the satisfaction of fundamental human rights.

6. Questions for the activists and networks of the South and the North :

— Do we agree on demanding total cancellation of the external public debt of all the developing countries?

— Do we agree to refuse conditionality imposed by the creditors?

— Do we agree to support the DCs who stop repaying debts?

— Do we agree to support countries who decide to break agreements with the IMF and the World Bank?

— Do we agree to support debt audits, whether they are instigated by civil society, the authorities or both?

— Do we agree to demand reparation for the historical debt and the environmental debt, owed by the North to the South

7. New challenges

Back in 1985 a government took the pioneering initiative to launch a campaign urging countries not to pay their debts. At the time it mainly concerned Latin America and the Caribbean. In 1998-1999 the Jubilee movement (in which Christian churches play a major part) collected over 20 millions signatures. It was a massive protest but it remained too timid in that it only demanded the cancellation of the part of the debt very poor countries would never be able to pay. It hardly moved beyond Christian communities. Shall we be able to launch a powerful and global campaign in 2006-2007, and to involve as many communities as possible? I do think that this is possible, considering that major convergences have appeared over the past years between social movements and campaigns which until not very long ago had some difficulties in combining their forces. Let us hope that we will be up to this challenge.


[1The present text is an improved version of Eric Toussaint’s speech on the occasion of the opening session of the international conference “Resistances and Alternatives to the Domination of the Debt” that took place in La Havana on 28-30 September 2005 and that convened over 400 delegates fromsome fifty countries. The conference was organised by the international coalition Jubilee South, the international network CADTM, the Cuban chapter on the hemisphere’s social Alliance, the Alliance of the Peoples of the South that are Creditors of the Debt on the environment, Afrodad-Zimbabwe, KAIROS-Canada, SLUG Norway, the Observatory of the Debt in Globalisation - ODG - Barcelona, 50 years is enough - United States, Christian Aid - UK, the Globalisation and Economic Justice program of the World Council of Churches, the Lutherian World Federation’s programme on the illegitimate debt, Eurodad, Action Aid International - UK, the Debt and Development coalition - Ireland, Jubilee Debt Campaign - UK. It was organised in the wake of the December 2000 Dakar conference “From Resistances to Alternatives”, which had been organised by CADTM, Jubilee South, CNCD -11.11.11 - Belgium and CONGAD - Senegal.

[2Actually it had also affected Eastern and Central Europe (mainly Poland, Rumania and Hungary) which at the time was part of the Soviet block.

[3See a.o. GDF 2005

[4See the complete text as reproduced in Damien Millet, L’Afrique sans dette, CADTM-Syllepse, Liège-Paris, 2005, p. 205.

[5In 1980 the external debt of Latin America and the Caribbean amounted to USD 243 billion. At the end of December 2004 it reached USD 773 billion.

[6In 1980 the external debt of all developing countries amounted to USD 541 billion. At the end of December 2004 it reached USD 2 600 billion.

[7Source: World Bank, Global Development Finance 2005, p. 165. At the end of 2004, developing countries had approximately $1.6 trillion at their disposal in the form of foreign exchange reserves ($1.591 trillion)-more than the total of their external public debt ($1.555 trillion, see p. 161). China, Malaysia, Thailand, India, and South Korea have foreign exchange reserves greater than their external public debt. As a whole, developing countries in Asia have foreign exchange reserves that are more than double the amount of their external public debt (or 30 percent more than the sum total of their public and private external debt-see tables on pp. 161 and 165). China’s reserves alone constitute more than seven times its external public debt. For North Africa and East Asia, the foreign exchange reserves are as high as $141 billion while the external public debt is up to $127 billion. Algeria’s reserves are as high as $41 billion against an external public debt of $27 billion.

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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