This part provides a general overview of debt trends in Southern countries, [1] highlighting the significant amount of money used to pay off debt, which is in many cases odious, illegal, or illegitimate, and detrimental to the basic rights and needs of people. In Part 3, we will examine this trend for Africa, Asia, and Latin America.

2.1. By type of external debt and debtor

The figure above shows the external debt of DCs by type of debtor. External debt is the debt taken on by a country (the State or private borrowers) from foreign creditors. When it is incurred by different government administrations, it is called external public debt. External private debt is the debt incurred by private borrowers (financial organisations, companies, and households).
External debt makes indebted countries vulnerable to changes in the international financial environment (financial crises in other countries, increasing international interests rates, etc.). In addition, indebted countries sometimes have little control over their own debt, since it may be in foreign currencies or subject to foreign jurisdictions, which are often more favourable to the creditors. Finally, external debt (public or private) can reflect the extent to which an economy is dependent on external funding to cope with the misappropriation of its internal resources.

2.2. Debt in the South by region

In recent years, external debt has increased significantly in absolute values. In fact, it doubled between 2000 and 2012, and most of this increase was concentrated in the private sector.

Table 2.1. External debt by region ($ billion)

The situation is similar in terms of external public debt, which nearly doubled in several regions from 1990 to 2012. It is especially Asia and Latin America that reported the highest external public debt as of 1980 (and even before).

2.3. External public debt creditors

The figure above shows the amount of debt by type of creditor. In general, bilateral debt and especially debt contracted from international financial institutions, such as the IMF, World Bank and regional development banks, reflect the funding difficulties encountered on the private markets. These official loans generally include conditionalities imposing severe adjustments that have disastrous consequences on the lower classes in the countries concerned.

As the figures above indicate, private creditors are owed half of the DCs’ external debt, and this funding is especially based on the securities they issue. In effect, given the tremendous liquidity in capital markets, which offer financing at a very low rate—an economic context that has been more favourable to some economies in the South, which have accumulated large quantities of currency reserves (see point 2.8)—the IFIs are no longer the primary lenders they were in the past.

In the last three decades, only one significant change has occurred in the breakdown of external public debt. Whereas the share of loans from international financial institutions has decreased, this drop has been offset by an increase in bilateral loans. Meanwhile, the share from private actors decreased in the 1980s and 90s, before increasing significantly in the 2000s.

Table 2.2. Trends in the breakdown of external public debt creditors (%)

Table 2.3. External public debt by region ($ billion)

2.4. Debt in the South and the resources to repay it

Since 1980, there has been a 900% increase in the external debt of Southern countries. Nearly 30% of this debt was contracted by the public sector. Due to this situation, the governments allocate more money for external debt repayments than the official totals reported in their books as official development assistance from the Northern countries and the official organisations that work for them. We say ‘official totals reported’, because in reality a large proportion of this official development assistance is trapped in the North by various mechanisms, and never makes it to the South.

Table 2.4. External debt of developing countries and the resources needed to service this debt ($ billion) [4]

2.5. Odious debt

Regardless of how much debt has accumulated, it is vital to remember the origins of public debt. In many cases, the process through which debt has accumulated was initiated by non-democratic governments. Consequently, this debt must be considered as odious, which means that the countries concerned are not obliged to pay back their creditors.

Generally speaking, odious debt is defined in terms of the following criteria:

• no consent by the people in the country concerned by the debt,
• no benefits for the people,
• The creditors knew (or were in a position to know) the odious use of the loans

Table 2.5. The origins of odious debt ($ billion)
Odious debt: debt incurred during a dictatorship [5]

2.6. Net debt flows

Net debt flow is defined as the total amount of loans and credits received minus the total amount of capital and interest repayments made. A negative figure means that the debtors transferred more resources to their creditors than they received in new loans and credits.

For thirty years, external debt has been a mechanism pumping economic resources out of developing countries, in the form of a negative net debt flow. In other words, DCs have been paying their creditors more than they have received, so the net capital flow has been from the DCs to developed countries, and not in the opposite direction as one would imagine.

This trend has only been reversed in recent years due to the rapid increase in external debt through additional borrowings that more than balance outgoings. Nonetheless, there is still a negative net external debt flow in the public sector of Southern countries. The resources (i.e., the total amount of loans and credits granted, minus the total amount of repayments made) transferred by the governments of DCs to developed countries between 1985 and 2012 are the equivalent of 2.5 times the resources provided by the Marshall Plan for the reconstruction of Europe after the Second World War.

Table 2.6. Net debt flows for all DCs ($ billion)

2.7. Comparison of financial flows

In this section, we compare the different financial flows going from the North to the South, and from the South to the North. Official Development Assistance (ODA) and the remittances sent by emigrants are much lower than the flows from DCs to their various creditors and to the foreign corporations that do business in the DCs.

In other words, the developing countries are net creditors of the developed countries, as shown in the table below. It is worth noting that in 2012, DC governments repaid to their creditors ($182 billion) much more than the ODA they received ($133 billion). [6] In fact, the money entering DCs is to a large extent in the form of remittances from emigrants ($350 billion), which is 2.6 times the ODA. Finally, we must highlight the tremendous profits made by multinational corporations that flow rapidly out of DCs ($678 billion in 2012), and cannot therefore be used to finance their development or social services.

Table 2.7. [7]

2.8. Accumulation of international reserves

The logic of the current system obliges developing countries to incur debt in unfavourable conditions, and at the same time to accumulate reserves in the currencies of the most economically developed countries. What explains this system?

• First, the currencies of weaker economies are more unstable with exchange rates that vary a great deal compared to strong currencies. As a result, to obtain external funding at a lower cost, DCs generally borrow money in foreign currencies, especially ones that are strong and stable (mainly the US dollar).
• Second, external goods and services (imports) are purchased in strong currencies (for example, the euro to import machinery from Germany, the yen to buy computers from Japan, and the dollar for oil imports).
• Third, they need currency to pay back the external debt. We see that it is a vicious circle: they borrow currency and incur new debt to pay back their old debt.
  For these three reasons, they must accumulate foreign exchange reserves in strong currencies.

In recent years, many DC economies recorded a positive debt flow. In other words, more money flowed into their economies than out of them. Two of the principal causes were a favourable context for the raw materials export market, with increasing international demand and prices, and improved South-South economic relations. This situation has enabled DCs to accumulate growing volumes of foreign exchange reserves. To maintain their reserves, they have decided to invest in assets considered to be safe, the least risky of which are public debt instruments of developed countries, such as US Treasury bonds. Consequently, we are in a situation in which the economies of developing countries are financing the economies of developed countries. On the one hand, by repaying their external debts; and on the other, through their own reserves that are invested in the debt instruments of Northern countries.

Table 2.8. Trends in international reserves of DCs and China ($ billion) [8]

This table shows the growing accumulation of foreign exchange reserves, particularly in the case of China. In 2012, almost half (49%) of the total foreign-exchange reserves of developing countries were held by China.

The most highly developed countries have foreign exchange reserves amounting to only about $2.3 trillion. $50 billion of those reserves are held by the US, which does not need foreign exchange reserves since the rest of the world accepts the dollar as the international currency— one of its privileges. The eurozone only has foreign exchange reserves of $220 billion. We should stress that Japan (about $1.2 trillion in foreign exchange reserves) and Switzerland (about $490 billion) hold more than 70% of the total foreign exchange reserves of the most highly developed countries. [9]

Table 2.9. Foreign exchange reserves of DCs and external public debt in 2012 ($ billion)

Table 2.10. Developing countries and emerging economies that are creditors of the United States [10] (value of US Treasury bonds in $ billion)

This table shows the value of US treasury securities held by developing countries. China holds more than one quarter of such public debt instruments (27.4%), and is therefore the principal foreign creditor of the US.