Suspending public debt repayments by legal means

6 July 2011 by Renaud Vivien , Cécile Lamarque


Like the governments of the South did in the 1980s, the governments of the North are using the debt as an excuse to introduce austerity policies that in many respects are similar to the 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).

IMF : http://www.worldbank.org/
programmes (SAPs) advocated by 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.

http://imf.org
and the World Bank World Bank
WB
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.

. Naturally, we have nothing against austerity measures being applied to capital holders, speculators and high income earners as a means of ensuring social justice and respect for people’s economic, social and cultural rights (ESCR). Such measures would necessarily include a drastic reduction in arms spending, the suppression of tax benefits for the richest, vigorous counter-measures against tax fraud, and the removal of subsidies and other financial advantages available to exporters. But in actual fact, only the popular classes are presently being hit by these austerity policies, which drastically reduce public spending in essential sectors such as health care and education - areas where spending needs to be increased, financed by higher taxes on big incomes, company profits and personal fortunes. Breaking the vicious circle of debt is a political, economic and social imperative. International public law [1] offers governments of good will some solid arguments for casting off the shackles of debt and the anti-social policies going by the name of “rigour” or “austerity” inspired by neo-liberal thinking.

Repayment of the public debt is not inevitable

To be bound by a loan contract, the State must have given its free consent. This consent has a legal consequence: an obligation of the State to repay the debt it has contracted. This obligation is based on the principle of pacta sunt servanda (agreements must be respected), as embodied in article 26 of the 1969 Vienna Convention on the Law of Treaties [2] through the principle of State continuity, by which the debts of States are passed on from one government to the next.

However, these principles are not absolute [3] and are only valid for “debts contracted in the general interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. of the community”- the key words here being “the general interest of the community” [4]. According to international law, the assessment of a debt’s general interest and whether that debt is licit or illicit comes under the competence of the public authorities [5]. A public debt audit carried out by the authorities and involving representatives of “civil society” is therefore a perfectly legal process.

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Footnotes

[1Sources of international public law are listed in article 38 of the Statute of the International Court of Justice. They include international conventions, custom, general principles of law, doctrine, and jurisprudence.

[3The pacta sunt servanda rule dates back to an era when international relations were established almost entirely by contract (alliances and peace treaties). We now have binding international law. A contract cannot be valid unless it respects international public order (in particular the jus cogens which covers the peremptory norms of international law, the United Nations Charter which affirms its primacy over any other international agreement, etc.).

[4David Ruzié, Droit international public, 17e édition, Dalloz, 2004, p. 93.

[5See Éric Toussaint and Hugo Ruiz Diaz, “L’audit de la dette : un instrument dont les mouvement sociaux devraient se saisir”, http://www.cadtm.org/L-audit-de-la-dette-un-instrument.

Renaud Vivien

member of CADTM Belgium, member of the Truth Commission on Public Debt.

Other articles in English by Renaud Vivien (19)

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Other articles in English by Cécile Lamarque (4)

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