Committee for the Abolition of Illegitimate Debt

In 1960, 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.

already began to see the danger of a debt crisis looming, as the main indebted countries were struggling to keep up with the rising amounts they had to repay. The warning signs increased throughout the ‘60s until the oil crisis of 1973. The World Bank leaders, private bankers, the Pearson Commission and the US General Accounting Office (GAO) published reports warning of the risk of a crisis. However once the price of petroleum had started to rise in 1973 and huge amounts of petrodollars were recycled through the big commercial banks of the industrialised countries, there was a radical change of tone. The World Bank no longer spoke of a crisis. Yet indebtedness was still gathering speed. The World Bank competed with the commercial banks in granting the maximum number of loans as fast as possible. Until the debt crisis broke in 1982, the World Bank held a double discourse. One, destined for the public and the indebted countries, claimed that there was nothing to worry about and that if there were problems, they would be short-lived; that was what appeared in official documents available to the public. The other discourse took place behind closed doors at internal meetings. One internal memorandum reads that if banks see risks rising, they will cut down on loans and « We may see a larger number of countries in extremely difficult situations » (29 October 1979) [1].

After 1960, there were plenty of warning signs.

In 1960, Dragoslav Avramović and Ravi Gulhati, two eminent World Bank economists [2], published a report which clearly highlighted the danger of seeing the developing countries reach an unsustainable level of indebtedness due to the gloomy prospects of earning much in export revenues:

“In several major debtor countries, most of which already have high debt service Debt service The sum of the interests and the amortization of the capital borrowed. ratios, service payments are predicted to rise in the next few years. (...) In some cases uncertain export prospects and heavy debt service schedules constitute a serious obstacle to substantial amounts of further borrowing”. [3]

This was just the beginning of a long series of warnings which appeared in different successive World Bank documents until 1973.

On page 8 of the World Bank’s 1963-64 Annual Report we read: “The heavy debt burden that weighs on an increasing number of its member countries has been a continuing concern of the World Bank group... the Executive Directors have decided that the Bank itself may vary some terms of its lending to lighten the service burden in cases where this is appropriate to the debt position of the country”. [4]

The 20^th Annual Report, published in 1965, carries a large section on the debt. It emphasises that exports of agricultural produce are increasing faster then the demand from the industrialised countries, triggering a fall in prices [5]: « agricultural export commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. growth has tended to be more rapid than the growth of demand in the industrialized countries. Consequently, the developing countries suffered from a sustained decline in the prices of their agricultural exports during 1957-1962 ». For example, while coffee exports increased by 25% of volume between 1957 and 1962, the export revenues they brought in fell by 25% [6]. Cocoa and sugar prices also fell. The report showed that exports from the developing countries were essentially raw materials for which Northern demand was slow and erratic. The prices of raw materials were falling. [7] The report also indicated that financial flows towards the developing countries were insufficient, whether in terms of donations and loans or of foreign investments, because of the large amounts paid out in debt repayments and repatriation of profits on foreign investments.

The report mentioned that the debt had increased at an annual rate of 15% between 1955 and 1962 and had then accelerated to a rate of 17% between 1962 and 1964. Just over 50% of the debt was concentrated on eleven countries. All were big clients of the Bank (India, Brazil, Argentina, Mexico, Egypt, Pakistan, Turkey, Yugoslavia, Israel, Chile, Colombia).

The growth rate of the external public debt of the developing countries was very high. Between 1955 and 1963, the debt increased by 300%, from 9 billion to 28 billion US dollars. In just one year from 1963 to 1964, the debt increased by 22% to reach 33 billion dollars. The total amount of debt service increased fourfold over that whole period (1955-1964).

In 1955, debt service came to 4% of export revenues. By 1964, it had tripled to 12%. And in the case of certain countries, it was almost 25%!

The report placed the accent on the need to properly define the conditions under which the World Bank and other creditors granted loans. What was the underlying reasoning?

The harsher the conditions, the higher the repayments. The higher the repayments, the higher the volume of aid would have to be. Consequently, the relative harshness or flexibility of conditions was as important as the volume of aid. Two key factors determined the harshness or flexibility: first, the percentage that was donated, and secondly, the actual terms and conditions of loans (the duration and 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 ).

The report noted that the 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 donations had fallen (mainly those of the USA). 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. had dropped slightly and the conditions of loans had toughened up. In other words, harshness had been increased on one side and reduced a bit on the other. Note that the USSR lent money at a considerably lower interest rate than that fixed by the “West” [8]. Great Britain announced that in future, it would grant interest-free loans to the poorest countries. Canada said much the same. The report pleaded for greater flexibility in the conditions carried by loans.

None of the 19 reports that had preceded this one contained this kind of analysis. How can the particular tone and the original contents of this report be explained?

In fact, the report was written under pressure of events. Numerous Third World countries had joined the Non-aligned Movement Non-Aligned Movement
NAM The Non-Aligned Movement is a group of countries who, beginning in the 1950s, promoted a policy of neutrality towards the blocs led by the two superpowers – the USA and the Soviet Union –, who were by then fully engaged in the Cold War. In April 1955, a conference of Asian and African countries was held in Bandoeng (Indonesia) to promote unity and independence for the Third World, decolonization and an end to racial segregation. The initiators were Tito (Yugoslavia), Nasser (Egypt), Nehru (India) and Sukarno (Indonesia). The actual birth of the Non-Aligned Movement occurred in Belgrade in 1961. Other conferences would follow in Cairo (1964), Lusaka (1970), Algiers (1973) and Colombo (1976).
The work of the Non-Aligned Movement, which includes 120 countries, has had limited impact in recent years. . They had a majority within the UN General Assembly and in 1964 they had managed to have the United Nations Conference on Trade and Development UNCTAD
United Nations Conference on Trade and Development This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

founded. UNCTAD is the only UN institution run by representatives of the developing countries [9]. These countries were strongly critical of the attitude of the industrialised countries. The World Bank itself counted 102 member states at the time, most of which were Third World countries. The Bank’s leaders were obliged to take account of the recriminations of the South in their analysis.

The 21^st Annual Report published in 1966 also discussed loan conditions, pleading for greater flexibility and pointing out that under the present logic, the debt was bound to increase permanently. “While the increasingly heavy debt burden of developing countries points to the need for funds on easier terms ... the average terms of total bilateral assistance may become less, rather than more, concessionary... A higher level of aid on inappropriate terms, however, could make the external debt problem even more difficult. If aid is not made available on average terms which are more concessionary, the gross volume of assistance will have to be steeply and continuously increased in order to maintain any given level of real resources transfer” [10].

To summarise, the World Bank had clearly detected the persistent danger of a debt crisis breaking out due to countries’ inability to sustain rising debt payments. The solutions proposed by the Bank in the texts quoted above consisted of increasing the volume of loans and proposing more favourable conditions: lower interest rates, and longer periods for repayment. In fact, the Bank did not see the problem in terms of financial flows. It merely saw that for the indebted countries to be able to repay their debt, they would need to borrow more money on easier terms. Plainly, this was the start of the vicious circle where new debts serve to repay old ones, both in theory and in practice.

In the same reports, the Bank expressed confidence in an increase of private capital flows (loans and investments) towards the developing countries. The increase of private loans was considered as an important objective. Such an increase would reduce expectations linked to public finance, according to the reports.

The 20^th Annual Report published in 1965 reads: “The World Bank group and other international organizations (...) are making strenuous efforts to encourage and enlarge the flow of private capital into the less developed countries. There is no doubt that this flow can be expected to increase (...) thereby accelerating the pace of development and relieving the pressure on public funds” [11]. In the one published in 1966, the need to free up international movement of capital is highlighted: “It is to be hoped that conditions can be established in world [private] capital markets which will permit a freer movement of capital internationally.” [12] Then, remarkably, after a long discussion of the difficulties of repaying the debt, the Bank declares that there should be no reduction in loans: “None of this, however, should be taken to mean that developing countries cannot afford, and hence should avoid, any increase in debt service obligations”. [13]

The designation of the Commission Pearson in 1968 by Robert McNamara, the new president of the World Bank, is one of the ways in which the US leaders tried to deal with the growing indebtedness and demands of the South. Partners in Development, the report published by the Pearson Commission in 1969, predicted that the burden of debt would increase to reach crisis situation in the following decade. The percentage of new gross loans used to service existing debt reached 87% in Latin America in 1965-67.

In 1969, Nelson Rockefeller, brother of the president of the Chase Manhattan Bank, explained in a report to the US President about the problems Latin America had to face: “Heavy borrowing by some Western hemisphere countries to support development has reached the point where annual repayments of interest and amortization absorb a large share of foreign exchange earnings... Many of the countries are, in effect, having to make new loans to get the foreign exchange to pay interest and amortization on old loans, and at higher interest rates” [14].

In 1969, the General Accounting Office (GAO) handed the government an equally alarming report: “Many poor nations have already incurred debts past the possibility of repayment... The US continues to make more loans to underdeveloped countries than any other country or organization and also has the greatest loss ratio. The trend toward making loans repayable in dollars does not ensure that the funds will be repaid” [15].

Some time later, in 1970, in a report to the US president, Rudolph Peterson, president of the Bank of America, sounded the alarm: “The debt burden of many developing countries is now an urgent problem. It was foreseen, but not faced, a decade ago. It stems from a combination of causes [but] whatever the causes, future export earnings of some countries are so heavily mortgaged as to endanger continuing imports, investment, and development.” [16]

In short, from the late 1960s, diverse influential and inter-related sources in the USA considered that a debt crisis could break in the ensuing years.

Despite being aware of the danger ...

For his part, Robert McNamara also considered the rate at which Third World indebtedness was growing as a problem. He declared that by the end of 1972, the debt would come to 75 billion dollars and the annual service of the debt would exceed 7 billion dollars. The amount paid in debt servicing had increased by 18% in 1970 and 20% in 1971. The average rate of increase of the debt since the decade of the 1960s represented almost double the growth rate of the export revenues with which the indebted countries had to service the debt. He added that the situation could not go on indefinitely. [17]

...from 1973 on, the World Bank set out to increase debt in competition with the commercial banks

Yet the World Bank presided by McNamara kept up the pressure on the countries of the Periphery to get them even more into debt.

The rise in prices of petroleum products and other raw materials in 1973 led countries to rush blindly into even greater debt. The publications of the World Bank, 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 bankers, showed less and less pessimism concerning the repayment difficulties that the developing countries were faced with.

Take for example the IMF’s annual report for 1975, which contained the following dispassionate message: “The investment of the surpluses of oil-exporting countries in national and international financial markets together with the expansion of international financing (through both bilateral arrangements and multilateral facilities) has resulted in a satisfactory channeling of funds into the current account deficits of the oil-importing countries” [18]. It is interesting to note that this diagnosis is at loggerheads with the one that would appear when the debt crisis had arisen. No sooner had the crisis broken in 1982, than the IMF blamed it on the two oil crises of 1973 and 1979. Yet the 1975 quotation implies that for the IMF, the recycling of petrodollars combined with public lending had largely solved the problems of oil-importing countries.

Why did the World Bank encourage debt in the 1970s?

The World Bank absolutely wanted to increase its influence over the maximum number of countries that clearly positioned themselves in the capitalist camp or at least kept a distance from the USSR (like Yugoslavia) or were trying to (like Romania) [19]. To maintain or increase its influence, it needed to strengthen its 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. by constantly upscaling the amounts it lent. Now, commercial banks also wanted to increase their lending and were ready to offer more competitive rates than the World Bank [20]. This sent the Bank off in search of projects that might require loans. Between 1978 and 1981, the amounts lent by the Bank rose by 100%.

Robert McNamara made a great show of confidence in the 1970s. In 1977 he declared in his annual presidential address that “the major lending banks and major borrowing countries are operating on assumptions which are broadly consistent with one another” and he concluded that “we are even more confident today than we were a year ago that the debt problem is indeed manageable.” [21]

Some big commercial banks also showed great serenity [22]. In 1980, the Citibank declared: “Since World War II, defaults by LDC Least Developed Countries
LDC A notion defined by the UN on the following criteria: low per capita income, poor human resources and little diversification in the economy. The list includes 49 countries at present, the most recent addition being Senegal in July 2000. 30 years ago there were only 25 LDC. ’s, when they have occurred, have not normally involved major losses to the lending banks. Defaults are typically followed by an arrangement between the government of the debtor country and its foreign creditors to reschedule the debt ... Since interest rates or spreads are typically increased when a loan is rescheduled, the loan’s present discounted value may well be higher than that of the original credit”. [23] This statement is to be taken with the greatest caution as to the motivations of its author. In fact, by 1980 the Citibank, one of the most active banks in the 1970s in terms of Third World lending, was beginning to sense that the wind was changing. At the time these lines were written, it was already preparing to withdraw, and was granting almost no more new loans.

The text was destined for smaller banks, especially local banks in the USA, of the Savings and Loans type, that companies like the Citibank were trying to reassure so that they would continue to grant loans. In the Citibank’s view, the money that Savings and Loans continued to send to the countries of the South would enable them to repay the big banks. In other words, for the indebted countries to carry on repaying the big banks, there had to be other lenders. They could be private (small or middle-sized banks, less well informed than the bigger ones or misinformed by them) or public (the World Bank, the IMF, public export credit agencies, governments...). There had to be lenders of last resort for the big banks to be sure of getting fully repaid. In this respect, it might be said that in falling over themselves to be reassuring in the run-up to the crisis, institutions like the World Bank and the IMF connived with the big banks that were on the look-out for lenders of last resort. The smaller banks that continued to lend capital to the developing countries were forced into bankruptcy after the 1982 crisis and they were bailed out by the US Treasury, that is, by US taxpayers.

The watershed 1979 - 1981

The second oil crisis of 1979 (after the Iranian revolution) coincided with a fall in prices of other raw materials.

At the end of 1979, two factors forced up the cost of the debt: a very sharp rise in interest rates and the appreciation of the dollar. Attempts from the South to revive negotiations for a New World Order failed and in Cancun in 1981, the dialogue between the North and the South fell through. Moreover, the United States did not apply the budget austerity they imposed on the countries of the South. Instead they reduced taxes, increased military spending and spent more on consumer goods.

The general about-turn towards what the World Bank called « 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/ » was announced in a speech made by Robert McNamara at the UNCTAD conference in Manila in May 1979.

The double discourse of the World Bank

Until the debt crisis broke in 1982, the World Bank held a double discourse. One, destined for the public and the indebted countries, claimed that there was nothing to worry about and that if there were problems, they would be short-lived; that was what appeared in official documents available to the public. The other discourse took place behind closed doors at internal meetings.

In October 1978, one of the vice-presidents of the World Bank, Peter Cargill, in charge of Finance, addressed a memorandum to the president, McNamara, entitled “Riskiness in IBRD’s loans portofolio”. In it, Peter Cargill urged Robert McNamara and the whole of the World Bank to pay a lot more attention to the solvency of indebted countries. [24] Peter Cargill claimed that the number of indebted countries in arrears regarding payments to the World Bank and/or that were seeking to renegotiate their multilateral debt had risen from three to eighteen between 1974 and 1978! Robert McNamara himself made known his worries internally on several occasions, particularly in a memorandum dated September 1979. One internal memorandum reads that if banks see risks rising, they will cut down on loans and « We may see a larger number of countries in extremely difficult situations » (29 October 1979) [25].

The World Development Report published by the World Bank in 1980 gives an optimistic view of the future, predicting that interest rates would stabilise at the very low level of 1%. This was completely unrealistic, as was proved by real events. It is edifying to learn through the World Bank historians that in the first, unpublished, version of the report, there was a second hypothesis based on a real interest rate of 3%. That projection showed that the situation would eventually be unsustainable for the indebted countries. Robert McNamara managed to get that gloomy scenario left out of the final version! [26]

The World Bank’s World Development Report of 1981 mentions that it seemed very likely that borrowers and lenders would adapt to the changing conditions without starting a general crisis of confidence. [27]

Robert McNamara’s presidential mandate at the World Bank ended in June 1981, a year before the crisis broke and became common knowledge. The president, Ronald Reagan, replaced him with Alden William Clausen, president of the Bank of America, one of the major private creditors to the developing countries. Rather like putting a fox in the chicken-run...

Translated by Vicki Briault with the collaboration of Elizabeth Anne.
Copyright Eric Toussaint 2006