Committee for the Abolition of Illegitimate Debt

 Des taux d’intérêt bas dans les années 2010

The US Federal Reserve FED
Federal Reserve Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/ , the Bank of England, and the European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx all adopted ex-tremely low 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. rate policies during the 2010s. Real 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. in northern nations were frequently near zero percent [1] between 2010 and 2022. Because interest rates were higher and their money was better rewarded in the South, private creditors like banks and investment funds Investment fund
Investment funds Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity. responded by lending to governments and businesses there.

For the first time in their history, a number of nations—most notably those in sub-Saharan Afri-ca—have issued government bonds on the financial markets (more on this later). Due to the comparatively low interest rates and the interest offered by banks and investment funds in the southern countries, these governments were enticed to borrow money in order to finance them-selves. However, these interest rates were a complete sham. Furthermore, variable-rate loans, which are based on fluctuations in interest rates set by the main Western central banks [2], account for 57% of the total amount of foreign debt owed by so-called developing nations (apart from China). Therefore, if interest rates fixed by the US Federal Reserve, the European Central Bank ECB
European Central Bank The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html , and the Bank of England increase, the amounts to be repaid climb abruptly. Furthermore, when governments refinance their debts as they mature (by borrowing to pay back prior loans, etc.), rising interest rates make debt far more costly for these governments because interest payments climb tenfold. This is what transpired starting in 2022.

 Since 2020, revenues dry up, the rates and repayments soar

Since 2020, a number of phenomena have reduced the foreign exchange earnings received by the countries of the South. In today’s globalised capitalist system, these incomes, mainly in dol-lars, are required by these countries to import what they do not produce and to pay off their for-eign debt. These foreign earnings are provided in particular by exports and the influx of tourists (who exchange their foreign currency for local currency).

Nevertheless, a number of shocks have restricted foreign exchange from flowing into southern nations.

The first of these occurred in 2020, which saw a drop in foreign exchange earnings for Global South countries:

• The Covid-19 crisis has drastically reduced international tourism during the 2020s and 2021s, and cut off certain supply chains from international trade. Some countries, such as Sri Lanka, are extremely dependent on tourism. We’ll return to this later. 2020 there-fore marks a decline in foreign currency earnings for the countries of the South.

A second phase followed in 2022, involving an increase in foreign currency expenditure for developing countries:

• Russia’s invasion of Ukraine in February 2022 initially triggered speculation on the price of food grains and chemical fertilizers, of which Ukraine is a major producer. Fears of a reduction in production drove prices up, before a real reduction in production exacerbated the rise. Most countries in the southern hemisphere have specialized in the production of a few export goods over the past fifty years, and are now net importers of cereals. As a result, the price of cereal imports has risen, driving up import expenditure in southern countries, while their export and tourism revenues have dried up.

• Rising interest rates, unilaterally decided by the European Central Bank, the US Federal Reserve and the Bank of England from 2022 onwards, caused an automatic increase in the interest paid by countries and companies in the Global South (via variable-rate loans) and a flight of capital that had lent to the South because interest rates were low in the North. As creditors return to the North, countries and companies in the Global South have to offer higher interest rates to refinance their debt (borrowing to repay old loans that have fallen due) or to cover their deficits and therefore pay more to take on debt. This snowball effect results in higher levels of indebtedness and interest rates for coun-tries in the South.

The year 2022 therefore marks the beginning of an increase in foreign currency spending by Southern countries.

These three phenomena (the Covid crisis, Russia’s invasion of Ukraine, and rising interest rates) have therefore led to a drop in foreign currency revenues (2020) (falling tourism and dis-ruption of supply chains) and a rise in foreign currency expenditure by countries in the global South (2022: rising cereal prices and rising interest rates). They were compelled to repay more with less, thereby incurring higher interest payments. With this uncertain situation and rising interest rates in the North, private creditors further reduced their loans to the Global South, re-paid them, and increased their debt purchases there.

The rise in interest paid by Southern countries is clearly visible in Graph 7, which shows the interest paid by South Asian countries, in billions of US dollars, between 2010 and 2023.

Figure 1 : Interest paid by South Asia on its external public debt (billions of US dollars)

Graphs 8 and 9 illustrate capital flight. Lenders have reduced their lending to Southern countries from 2022 onwards. They have reduced their bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. purchases and have been repaid.

Graph 8: Bonds issued by public authorities in so-called developing countries outside China (in billions of current dollars)

Loans to developing countries, granted through purchases of government bonds by private cred-itors, were halved between 2021 and 2022, before rising slightly in 2023.

 
Graph 9: Net transfer of public debt to developing countries (excluding China))

The so-called developing countries received more loans than they repaid over the period 2009 - 2021 (as private creditors lent en masse to benefit from better interest rates than in the North). But from 2022 onwards, faced with economic difficulties in the South, private creditors begin to flee, and governments find themselves repaying more than they receive in new loans.

In short, the three phenomena explained above have led to an economic and debt crisis in the South. Governments had to repay more with less.

 The consequences: defaults

Falling foreign exchange earnings combined with rising interest rates and import costs have put various states in extremely difficult situations. Several countries in the Global South defaulted on their debts, i.e. they no longer had enough foreign currency (mainly dollars) to continue pay-ing their debts and ensuring their imports. This was the case for Zambia in 2020, for Ghana and Sri Lanka in 2022, and for Ethiopia in 2023.
 

Source : International debt statistics

Other countries may follow. Foreign exchange reserves in months of imports are a good indica-tor for assessing a country’s external debt situation. Generally speaking, a country should have between 3 and 6 months of imports in reserve. Table 2 clearly shows, for example, that Paki-stan, whose situation became extremely critical after the terrible floods of summer 2022, is in great difficulty with only 3 months of import reserves. Pakistan is one of the countries that has signed the most agreements with the International Monetary Fund (25 between 1958 and 2024). Egypt and Tunisia are also in critical situations, close to default.

Faced with these three shocks in 2020 and 2022, the countries in difficulty could have invoked the fundamental change in circumstances, which is an argument under international law, to sus-pend payment of their debts. Indeed, the drop in tourism and import revenues due to war and a global pandemic and the sudden rise in interest rates are nothing other than a fundamental change in circumstances. This legal argument must therefore be used to suspend payment of the debt, thus reversing the pressure from borrowers to creditors, who then fear not being repaid. This reversal of the 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. of power can then enable governments to renegotiate their debt, car-ry out a citizens’ audit and cancel part of it.