The Committee for the Abolition of Illegitimate Debt (CADTM) on private debt and human rights

13 January by Chiara Filoni , Eva Betavatzi , Mats Lucia Bayer


This is our contribution to the appeal made by the UN Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, Mr. Juan Pablo Bohoslavsky. Mr. Bohoslavsky, in the course of preparing his next thematic report for the Human Rights Council on the subject of private debt and human rights, called on the CADTM along with other organisations for international solidarity. The report will be presented to the Human Rights Council during the 43rd session in February/March 2020.

Private debt held by households, students, women and farmers can drive debtors into dire poverty, violence and social exclusion.

Let us take a closer look at some of this privately held debt. Each example will be followed with considerations of its impact on human rights and pubic debt.

 Student debt

The problem of student debt is very significant is some countries, including the United States and Chile. Tuition costs for higher education are high and so many students are obliged to borrow from banks or other lending institutions.

Student incurred debt represents the second most commonly held debt, following mortgages; in 2018 it amounted to $1.5 trillion.

In the United States, this concerns about 45 million individuals [1]. Student debt is now the second-largest source of household debt (after housing), reaching $1.5 trillion in 2018 [2]. Two thirds of US students are now burdened by an average of $27,000 in debt, and default rates are rising; more than 1 million people default on their student loans each year. In Chile, 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. on student loans has risen as high as 6% at times, subjecting thousands of students to decades of repayment and indebtedness. In 2018, 40% of students with loans were behind in their payments [3]. In the United States today, four borrowers out of ten are at risk of default [4], 63% are paying off only the interest and fees. The fact that the beneficiaries of federal loans (including student loans) may file for personal bankruptcy gives lenders unprecedented leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. : they may garnish wages, social security benefits, or even disability pensions. Social and economic exclusion is therefore a real risk for students in the US. Although the largest loans are taken out by middle-income families, low-income families are the most impacted. Blacks and Latinos are most affected: 81% of Black students continue to pay off debt after graduation, compared to 67% of Latino students and 64% of White students [5]

Article 26 of the Universal Declaration of Human Rights dated 10 December 1948 guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). the right to education for all and equal access to higher education for all on the basis of merit.

We observe that public authorities have been disengaging from financing education, leading to a situation of inequality and asymmetry among individuals, which is in contradiction to the Universal Declaration of Human Rights. Thus, this is anything but a problem relating to individual persons, it is truly a societal issue, concerning nearly 15% of the population of the United States, and will have a decisive influence on the development of inequality in the country high student debt creates a problem for any economy because, in the context of a high level of financialisation, this debt is the target of speculation, increasing the risk of a new financial crisis [6] and thus acting as a destabilising factor for the economy in general.

 Housing debt

In the first quarter of 2019, the value of mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
loans subscribed around the world was estimated to be $1.8 trillion, an increase of 3.4% from the previous year [7]. Lowered 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.
explain some of this increase. The global financial crisis did not reduce the level of private borrowing [8]. Central banks in the United States, China and Australia recently expressed concern over the steep increases in housing prices. More than two thirds of the financial crises experienced in recent decades were preceded by a boom-and-bust real estate cycle.

The increase in the amount of mortgage debt may result in a real estate bubble that could have devastating effects comparable to those experienced in 2007

The increase in the amount of mortgage debt may result in a real estate bubble that could have devastating effects comparable to those experienced in 2007 [9].

Housing loans have become more common as the rental market has eroded : abandonment of rent control leads to increased costs, rental agreements that are less advantageous for tenants, and more short-term rentals such as those offered on Airbnb, which has captured a significant 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. of the housing stock in particular in cities that draw masses of tourists (Barcelona, Florence, Lisbon, Athens, to name only a few). When governments do not take effective counter-measures to rectify the rental market, households seek to ensure their future lodging through acquisition, and thus contract mortgage debt.

The United States in fact encourages families to purchase housing: favourable tax measures, development of public housing stock for purchase by middle-income families, sale of social housing to private enterprise (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.
in particular), decrease or absence of public investment in housing (leading to an insufficient offer of accessible, regulated housing).
Given this context, many studies have sounded the alarm with regard to the “financialisation of housing” [10].

The right to decent housing, i.e. a place where people can live safely and in human dignity, is interdependent upon other human rights. It is therefore essential that this right should be preserved. Thus, the millions of foreclosures, evictions and removals carried out in recent years are a source of extreme concern. States and the international community are not taking enough action to provide a strong framework of protection for this right.

The global financial crisis of 2008 had disastrous repercussions on households and their right to decent housing. In the United States, there were 10,000 foreclosures in 2008; 35 million people were evicted in the five years following. In Spain, at least 500,000 people have been evicted since the crisis; over-indebted households, their homelessness notwithstanding, were required by law to continue to pay off their mortgages. These are just a few examples that illustrate the dangerous consequences of securitisation of mortgages and other practices on the financialised housing market, as well as the effects of inappropriate regulations.

The global south has not been spared. Low-income and native communities are faced with financial companies that appropriate land and real estate and widen the gap between those who can and cannot afford to own housing (as in Honduras). Informal housing is regularly razed and replaced with luxury housing (this is the case in Lagos). 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.

and other financial institutions promote financialisation as a strategy to meet housing needs, even though in fact it is an approach that increases socio-economic inequalities.

 Microfinancing

Women represent 81% of the beneficiaries of micro-loans.

Microfinancing is the practice of making small loans to entrepreneurs or craftspersons who do not have access to “traditional” bank loans. Microfinancing was mostly developed in the global south to serve the poorest population, excluded from the banking system. In 2014 alone, microfinance institutions (MFIs) granted $87 billion in micro-loans to about 111.7 million people around the world, for an average amount of $718. Women represented 81% of the beneficiaries of micro-loans. [11].
Yet we are forced to draw the conclusion that microfinancing does not actually boost local business, but is mostly used to solve problems related to daily survival: rental fees or deposits, school fees for children, health care costs, etc.

The way micro-loans are used in fact accentuates the vulnerability and poverty of the beneficiaries.

This is the case in Morocco, where the microfinancing model was encouraged by the State, through public financing, beginning in the mid-1990’s. This type of loan is typically granted for 500 to 5,000 dirham (between about $52 and $5,200) at an average interest rate of 35%, which may be much higher depending on the amount borrowed [12].

MFIs send their agents out into the towns, villages and markets to go door-to-door in the poorest neighbourhoods where most inhabitants do not have a regular income, are often illiterate and not at all familiar with the world of finance. They present contracts that are especially difficult for non-specialists to understand, printed in small type, with no explanations for the various clauses. In addition, the effective annual interest rates – between 30 and 35% – are often glossed over (the monthly rate of 1.5 to 3.5% is emphasised). These annual rates are particularly high, especially for poor people who do not have access to ordinary bank loans (in Morocco, interest rates for loans vary between 6 and 7%) [13].

In Colombia, microfinancing interest rates swing between 30 and 50%

In Colombia, microfinancing interest rates swing between 30 and 50% and variable rates re-indexed every three months are also allowed by the government [14]. In Latin American countries, the total volume of microfinancing rose from $136 million in 2002 to $3,800 million in 2016, for annual growth of 28.1%. In 2015, the return on equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. (ROE) was phenomenal: Bancamia reached 11.7%, Women’s World Banking (WWB) 9.1%, and Mundo Mujer 21% (largely surpassing major banks such as Goldman Sachs) [15].

While these profits grow, so does the impoverishment of the population: in Colombia 32% of the borrowers are over-indebted and had to request the restructuring of their microfinancing repayment. In South Africa, borrowers spend up to 40% of their income on loan repayment.

Bangladesh is another country where microfinancing is very developed: out of a population of 160 million, 29 million received micro-loans in 2015, for an average amount of €200. The effective interest rate varied between 35 and 50% (if we include official commissions paid) [16].

All of these examples demonstrate that while the amounts lent are mostly modest, the underlying approach is speculative (as the usurious fees and interest rates prove), and this practice should be prohibited if we are to guarantee access to credit to low-income individuals. Overly indebted individuals are not only denied the right to access credit, they are also burdened with guilt. CADTM ATTAC carried out an investigation in Morocco that revealed a rate of micro-loan default of over 75% in the country [17]. The investigation reported: “then begins the spiral of non-payment, leading to harassment by the MFI debt collectors that may go as far as physical or psychological violence, confiscation of assets, the instigation of expeditious judicial procedures”.

Harassment by the MFI debt collectors that may go as far as physical or psychological violence, confiscation of assets, the instigation of expeditious judicial procedures 

In Bangladesh, as most of the borrowers do not own real estate property, the agents do not dispossess the defaulters of land or property, but of the 30% deposit that was required by the microfinancing agency.
We must add the issue of gender to these considerations. Through microfinancing, MFIs have pushed women into the labour market, in particular in sectors producing for export (free zones, textiles, greenhouse farming), where wages are low; employers exploit women’s inexperience with the market and the work place, their ignorance of their rights and their illiteracy.

All of this leads to very long work days, a heavy load of stress and fatigue, an increase in domestic violence, and often to children’s withdrawal from school, prostitution, suicide and attempted suicide [18].

The logic of the World Bank and its Consultative Group to Assist the Poorest (CGAP), where microfinance projects originated, was to bring the poorest members of society into the market. Studies have shown that these projects, rather than fighting poverty and over-indebtedness in the global south, on the contrary increase both for households.

 The impact of private debts on the public debt and the economy

The increase in privately held debt has serious repercussions on the economy of States.

The 2008 housing speculation bubble showed us that private banks have high exposure with non-performing loans. Starting in 2009, those banks had to be recapitalised by States, which increased public debt. This increase led the States to implement austerity measures that had a direct impact on people and their fundamental rights.

The situation is far from resolved, as banks continue to grant new loans that leave them exposed to the consequences of non-payment. The actions of big private corporations, which continue to buy up significant amounts of debt, are not very reassuring, and may be driving the economy towards another global crisis. On the one hand, no measures have been taken to prevent major banks and corporations from engaging in risky, speculative lending. On the other hand, corporations continue to borrow money in order to buy up their own shares on the stock exchange (to increase the value and thus provide a greater return to shareholders), and to buy up debt (structured products from other corporations or individuals, bonds issued by other private corporations, and government securities). In as much as corporations continue to seek a maximum return on debt they own, they are pushed to buy up debt issued by the least sound companies, which are likely to remunerate lenders at higher rates. Thus the market for risky private debt is expanding and a new crisis is brewing [19].

More generally, today, households and individuals must face the growing gap between the rising cost of living and their own incomes, a situation that is the result of austerity policies imposed in the wake of escalating public debt. We observe the financialisation and privatisation of sectors that are important for human life and fundamental rights, such as health, education and housing, among others. In this context, households are left without choice and forced to borrow money from banks and other lending institution who draw profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. from the operation. We believe that this type of debt, when it is the only option available to people, is illegitimate. States, in accordance with their obligations under international law, must support a framework that ensures the respect of human dignity for all.

Translation into English by Grace Coston

Source : https://www.ohchr.org/EN/Issues/Development/IEDebt/Pages/ReportPrivateDebt.aspx



Footnotes

[2Idem 1

[5Strike debt, The Debt Resistor’s Operations Manual, Occupy Wall Street, 2012

[6Eric Toussaint, La montagne de dettes privées des entreprises sera au coeur de la prochaine crise financière, avril 2019, http://www.cadtm.org/La-montagne-de-dettes-privees-des

[8This trend appeared in the 1990’s, continues until 2007 and is still in effect in some countries

[9This was the case in Spain, the United States, Ireland and the United Kingdom in particular. In the United States, Blackstone became the largest owner of rental housing in the country in 2008, spending $10 billion on foreclosed property, through online auction, as households were unable to make their mortgage payments.

[10See Manuel Albeers, The financialization of Home and the Mortgage Market Crises, 2008, or the UN Report on adequate housing, 2017

[12Attac CADTM Maroc, Le microcrédit au Maroc: quand les pauvres financent les riches, avril 2017

[13Ibidem 12

[14Gutiérrez, M. L., Microfinanzas dentro del contexto del sistema financiero colombiano, 2009

[15Toussaint E., Sortir du cercle vicieux de la dette privée illégitime au Sud de la planète, avril 2017, http://www.cadtm.org/Sortir-du-cercle-vicieux-de-la

[16Ibidem 14

[17Ibidem 12

[18Daumas L., Pourquoi la microfinance s’intéresse-t-elle autant aux femmes?, avril 2017, http://www.cadtm.org/Pourquoi-la-microfinance-s

[19Ibidem 6

Eva Betavatzi

Militante au CADTM Bruxelles.

Mats Lucia Bayer

Permanent au CADTM Belgique.

Translation(s)

CADTM

COMMITTEE FOR THE ABOLITION OF ILLEGITIMATE DEBT

35 rue Fabry
4000 - Liège- Belgique

00324 226 62 85
info@cadtm.org

cadtm.org