South/North Dialogue – Quito – 10-15 September 2008

International Conjuncture. Full version

5 September 2008 by Eric Toussaint

In 1982, the external public debt crisis of the developing countries was triggered by the combined effects of the rise in 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.
imposed by the United States two years earlier, and the fall in prices of raw materials, particularly oil. The epicentre was in the South and the first casualties were the governments of the developing countries, who suddenly found themselves owing enormous amounts in debt repayments.
The financial crises of the 1990s practically only affected developing countries - there was the Mexican crisis of 1994-1995, the Asian crisis of 1997-1998, the Russian crisis of 1998, the Brazilian in 1999, Turkish in 2000, Argentine in 2001-2002 and Brazilian again in 2002. Each crisis was triggered by sudden movements of capital and speculative attacks on the currencies of the countries concerned. Financial capital that had been directed towards these countries before the crisis was withdrawn, causing the crisis. It was a question of capital flight to safety, with capital being returned to the financial centres of the North, considered more secure.

In August 2007, a financial crisis exploded in the North in the world’s leading economy, which so far has mainly affected private finance companies in the industrialized countries, especially in North America and in Western Europe. The crisis in the financial system of the North is such that capital flight to safety is operating in the opposite direction to that of the past. Capital is being directed away from the North towards the flourishing stock-exchanges of countries like India, China and Brazil [1]
, now perceived as safe havens. These capitals quite possibly flow out again shortly if more viable financial opportunities present themselves elsewhere in the world. [2]

The global situation has changed over the last 25 years in other ways, too:

1) History shows that between 1982 and 2004 there was a tendency for the price of raw materials to fall and the terms of exchange between industrialized and developing countries deteriorated. Since 2005, there has been a renewed sharp rise in prices.

2) Most developing countries register trade surpluses, especially China which is inundating the global markets with its manufactured goods.

3) In 1982 and the years that followed, developing countries’ foreign exchange reserves were limited. Since 2002, slowly at first and gathering pace since 2005, they have continually increased.

4) Interconnected markets have led to an increase in private debt in both the North and the South in the form of complex types of derivative products which, far from ensuring greater stability, make for more opacity and speculation. We have a vast financial system with a considerable sector based on the accumulation of debt paper that could collapse at any moment like a house of cards.

5) Internal public debt has reached all-time highs in the developing countries, while the external public debt is falling. In the USA it has increased too, although more slowly, and in Japan it remains extremely high at 185% of the GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
, according to 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.

6) There is an explosion of food prices worldwide.

7) There has been a frenzied acceleration of the arms race led by the United States.

8) South-South capital flows are on the increase.

9) China is making itself felt as never before in international economic and financial relations.

10) A group of Latin American countries has launched the foundations of new multilateral regional institutions, starting with a Bank of the South.

Accumulation of developing countries’ foreign exchange reserves
Since 2004, the economic situation has been characterized by the high price of raw materials and a number of agricultural products. This has allowed a large number of developing countries to increase their export revenues and accumulate significant foreign exchange reserves, especially countries which export oil, natural gas and minerals. Some agricultural exporters have also benefited from this favorable situation. China, by exporting manufactured goods, has accumulated impressive quantities of foreign exchange reserves, amounting to stock of over 1 800 billion dollars in June 2008. However, not all the developing countries are included in this scenario; some sub-Saharan African States have seen their situation take a turn for the worse.

In 2007, the developing countries together hold over 4 800 billion dollars [3]
in foreign exchange reserves while the industrialized countries hold less than a third of this sum. How do the developing countries use their reserves?

1) A considerable 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. (certainly over 900 billion dollars [4]
) is loaned to the United States through the purchase of Treasury bonds [5]
. China lends the United States 400 billion dollars of its reserves, emanating from its trade surplus with them, so that the North-American economy can continue to buy Chinese products. Many Latin-American, Asian and African countries also lend part of their reserves to the USA.

2) A significant number of governments have taken the opportunity to make early repayments of their debts to the IMF, 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.

, the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

and private bankers.

3) Some have created development funds, into which they can place some of their foreign reserves, in view of financing social and infrastructure projects such as buying up companies in the industrialized countries [6]
. These funds are known as Sovereign Wealth Funds. In order of importance, the biggest are those of the emirate of Abu Dhabi (the amount of fund is not published, but estimates place it between 250 and 875 billion dollars!!), then Kuwait, China, Singapore, Russia. Libya has just created a fund of 40 billion dollars. Venezuela created the « Fonden » (fund for national development) in early 2007. In all, the various public funds of the developing countries place about 2 500 billion dollars at their disposal. The biggest funds buy up companies in the industrialized countries or their shares, which is a source of anxiety for those governments. Many of these funds have taken advantage of the crisis faced by a number of big Western private banks since August 2007 to buy their shares (UBS, Merrill Lynch, Citigroup,…) This is the case particularly of the fund of Singapore (Temasek) and a number of Chinese ones. The developing countries are now having recourse to different policies from those adopted in the years following the oil boom of 1973. In those days, the governments of the developing countries recycled petrodollars by lending them to the private banks of the North and then became indebted to those banks. Present policies are more solid, but in no way break away from the dominant logic of capitalism. Investments are not made in alternative projects, whereas they could serve as powerful levers to set up policies reinforcing the public sector by breaking private control over the major means of production, developing a solidarity-based economy, and radically redistributing wealth by applying principles of justice and equality.

Massive increase in domestic public debt

A recent development which also has to be considered is that the domestic public debt is increasing rapidly. In 1998 the internal and external debts were equal; in 2006 the domestic public debt exceeded the external debt by a factor of three [7]
! This phenomenon is very important: from now on, it is no longer possible to measure the level of debt of developing countries solely on the basis of the external debt.

The weight of public debt repayments

The latest figures published by the World Bank indicate that servicing the external public and private debts by developing countries amounted to 523 billion dollars in 2007 [8]
. If we only consider the servicing of the external public debt, since this falls under the responsibility of the state budget, it represented 190 billion dollars in 2007. Despite the fact that the external public debt/GDP ratio is decreasing, the total volume of the debt is continuing to rise. More ominously, if we include servicing the domestic public debt, which also falls under the state’s responsibility, it is the astronomical sum of more than 800 billion dollars a year which the public authorities of developing countries have to repay for both external and domestic public debt. [9]

Increase in the indebtedness of private firms

We must not lose sight of the increasing indebtedness of private firms of developing countries. The external debt of developing countries’ private companies increased from 664 billion dollars in 2004 to 911 billion in 2006, which represents a hike of 37% [10]
. Since the raw material exporting countries are witnessing an upturn in their fortunes, the private banks of the most industrialized countries have multiplied their loans to these private companies. The two private sectors which are indebting themselves most in developing countries are the banks and the firms dealing with hydrocarbons and raw materials. We must pay particular attention to this development: the private banks of the developing countries borrow from the North on 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. rates, mostly on a short-term basis, to lend this money to the internal market at a higher rate and on a long-term basis. If the economic situation suffers a downturn (which is likely in the coming years), we might witness a number of bankruptcies of the private banks of developing countries, just like the financial crises which hit Mexico in 1994-1995, the countries of South-East Asia and South Korea in 1997-1998, Ecuador in 1998-1999 and Argentina in 2001. Today’s private debt of banks might, if we are not careful, become tomorrow’s public debts. The same applies to the sector of hydrocarbons and minerals.

Vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
descend upon weaker countries

Vulture funds are private 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.
that buy up large portions of the debt of a poor country on the secondary market Secondary market The market where institutional investors resell and purchase financial assets. Thus the secondary market is the market where already existing financial assets are traded. , at a very low rate, in order to sue the country and obtain the face value of the debt they hold, plus late penalties. These vulture funds have already received close to one billion USD on court decisions.

London Interbank Offered Rate
An average rate calculated daily, based on transactions made by a group of representative banks. There are several LIBORs for some ten different currencies and some fifteen duration rates, from one day to twelve months.

The Libor (London Interbank Offered Rate) is the interest rate at which London banks lend money to each other. Almost all variable rate loans granted to developing countries are based on it. Loan contracts specify that the interest owed is equal to the LIBOR interest rate plus a given percentage, for instance, Libor + 3%. If the Libor rate is at 4.5 %, the interest owed will be 7.5 %. Since the crisis that started in August 2007, the Libor rate has been extremely unstable. When banks lose their confidence in each other the Libor rate increases. This is what happened in September when the Libor rate soared before decreasing again. If the crisis that started in August 2007 drags on, which is not at all impossible, the Libor rate may reach a much higher level than the present rate. In which case the following paradoxical situation could arise: the US interest rate falls while interest rates paid by developing countries actually increase because of an increase in the Libor rate. Developing countries would then have to dig into their reserves in order to pay a higher bill. Of course this is one possibility which should not be excluded and that developing countries must consider when making their choices.

A significant number of indebted countries risk finding themselves in the situation of the cicada in the fable

Since 2003‑2004 most indebted countries with middle incomes no longer find it difficult to service their debt. This is the consequence of several economic factors: growing estimated returns thanks to the elevated price of raw materials which they export, the arrival of speculative capital in search of short-term profits notably in the stock exchanges of emerging countries, relatively low interest rates and extremely low risk premiums in 2004-2005-2006.
All this can change within a year or a few years.

The cash revenue and reserve levels can diminish, the interest rates can rise and increase the servicing of the debt on the loans contracted at a variable rate, the cost of the new loans to refinance old debts is going to grow because it will be applied to a more elevated interested rate, the risk premiums can rise again [11]
A significant number of indebted countries risk finding themselves in the situation of the cicada in the fable of La Fontaine. At the end of the summer, when the economic environment deteriorates, they risk finding themselves in payment difficulties and their exchange reserves risk melting like snow in the sun.
It is a further argument for putting an alternative policy with respect to establishing a common front of indebted countries for the non-payment of the debt into practice.

Increase in South-South lending and the growing role of China

Private and public Banks in some developing countries (China, Brazil, India, Malaysia, South Africa) grant more and more loans to governments or companies in other developing countries. Loans by Chinese public banks to Africa have soared. India, South Africa and Brazil as well as China are on the lookout for raw materials, which accounts for their banks granting more loans in order to back up supplies. These countries also try to sell their goods and services to other developing countries. The more vulnerable countries may thus fall into a new kind of dependence that will not necessarily be any better than the current one towards industrialized countries. In order to avoid this happening, South-South loans must be part of a more general process aiming at mutual empowerment.

The Bank of the South: the first step towards a new international financial architecture

It is all the more essential to develop a new international institutional architecture which would include the WB and IMF being replaced by democratic institutions. The IMF and the WB will eventually overcome their ongoing crisis if developing countries do not rapidly develop new alternative financial instruments Financial instruments Financial instruments include financial securities and financial contracts. . Indeed were there to be a new financial crisis in developing countries, we can be sure that the IMF would be straight back in the lead as last resort creditors. Even though they have been weakened, these two institutions are still implementing their neo-liberal agenda.

Developing a new architecture will require the creation and reinforcement of South-South regional integration processes: setting up one or several Banks of the South that will have to coordinate their efforts, devising counter-trade mechanisms among developing countries that are based on solidarity. [12]
Such mechanisms are already producing interesting results in Latin America and the Caribbean, for example a marked improvement in the field of health care, energy security (Petrocaribe), education and information (Telesur).
Since December 2007, the Bank of the South is on track, even though all the choices have yet to be concluded at the time of writing this text. Its founders (Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay, Venezuela) want to finance their regional integration and social projects. The governments of Brazil and Argentina argue for a neo-developmentalist project of regional expansion of capitalist enterprises, based on the model of European integration where the interests of big capital dominate. The operation of the future Bank of the South has not been finalized, for example at the level of the voting rights of the member countries or on auditing mechanisms. On the other hand, other countries have created an ALBA bank (Bolivia, Cuba, Nicaragua, Venezuela).

ICSID ICSID The International Centre for the Settlement of Investment Disputes (ICSID) is a World Bank arbitration mechanism for resolving disputes that may arise between States and foreign investors. It was established in 1965 when the Washington Convention of that year entered into force.

Contrary to some opinions defending the fact that ICSID mechanism has been widely accepted in the American hemisphere, many States in the region continue to keep their distance: Canada, Cuba, Mexico and Dominican Republic are not party to the Convention. In the case of Mexico, this attitude is rated by specialists as “wise and rebellious”. We must also recall that the following Caribbean States remain outside the ICSID jurisdiction: Antigua and Barbuda, Belize, Dominica (Commonwealth of) and Suriname. In South America, Brazil has not ratified (or even signed) the ICSID convention and the 6th most powerful world economy seems to show no special interest in doing so.

In the case of Costa Rica, access to ICSID system is extremely interesting: Costa Rica signed the ICSID Convention in September, 1981 but didn’t ratify it until 12 years later, in 1993. We read in a memorandum of GCAB (Global Committee of Argentina Bondholders) that Costa Rica`s decision resulted from direct United States pressure due to the Santa Elena expropriation case, which was decided in 2000 :
"In the 1990s, following the expropriation of property owned allegedly by an American investor, Costa Rica refused to submit the dispute to ICSID arbitration. The American investor invoked the Helms Amendment and delayed a $ 175 million loan from the Inter-American Development Bank to Costa Rica. Costa Rica consented to the ICSID proceedings, and the American investor ultimately recovered U.S. $ 16 million”.

Since May 2 2007, Bolivia is no longer a member of the ICSID, the International Centre for the Settlement of Investment Disputes, an organ of the World Bank. It is very important to convince other governments to do the same.

Integral Debt Audit

Ecuadorean government has created the CAIC in July 2007. Project of new constitution includes permanent debt audit process.

We must demand the cancellation of illegitimate public debts, whether internal or external, so as to free up new resources to meet human development, which forcibly requires that human rights be respected. This is why initiatives concerning debt auditing are essential.

Translated by Vicki Briault, Judith Harris, Christine Pagnoulle and Diren Valayden in collaboration with Elizabeth Anne.


[1See the extended report on this subject in the Financial Times, 18 October 2007.

[2The Thai government had already taken steps to control capital movement in 2006 for the same reasons.

[3The value of foreign exchange reserves is calculated in dollars, the main international currency of foreign exchange reserves, although in fact, the reserves are also made up of other currencies: euros, yens, sterling, Swiss francs…Worldwide reserves for 2007 are 2/3 in dollars. ¼ in euros and the rest in other strong currencies. (See Bank for International Settlements, Annual Report 2008, Bale, p.89)

[4Estimation of the author. It is not unlikely that the amount is much higher but it is very difficult to obtain a precise number since the majority of central banks do not disclose how their reserves are divided.

[5See the critical analysis of this policy in “Bank of the South, International Context and Alternatives” Sept 2006,

[6This is the case of Venezuela, Russia, China. The Norwegian government has done the same thing to maximize the returns on petroleum. (See Bank for International Settlements, ibid, p. 104.)

[7World Bank, Global Development Finance 2007, Washington DC, p. 46.

[8World Bank, Global Development Finance 2008, Washington DC

[9According to the calculations of the author. Neither the World Bank nor the other IFI provide reliable data on the reimbursement of the domestic public debt. The basis of the calculations is the following: according to the World Bank, in 2007, the internal public debt was three times higher than the external public debt. In 2007, the interest rate for the internal public debt of developing countries was generally higher than the interest rate for the external public debt. Since the repayment of the external public debt of developing countries amounted to about 190 billion dollars in 2007, we can estimate that the total repayment on the external and internal public debts exceeded the sum of 800 billion dollars in 2007.

[10World Bank, Global Development Finance 2007, Washington DC, Tables, All Developing Countries

[11Risk premiums began to rise again since 2007 for some developing countries (See Bank for International Settlements, Annual Report 2008, Bale, p. 56-58).

[12See the kind of trading developing between Bolivia, Venezuela and Cuba in 2006-2007, for instance in the fields of hydrocarbons, technology transfer, health care and education.

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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