Committee for the Abolition of Illegitimate Debt

The Counter-summit in Marrakesh has shone a spotlight on the spiral of indebtedness that threatens the States of the South. Eric Toussaint, in a wake-up call to the movement for global justice, explains:

Several hundred activists opposed to neoliberal policies left Marrakesh on Sunday under the shadow of gloomy perspectives. The months ahead look likely to be months of great hardship for the populations of numerous countries of the South, threatened by what can only be called “a new debt crisis”, asserts Eric Toussaint. Toussaint was one of the initiators of the Counter-summit coordinated by about 70 organizations and networks, in a parallel meeting to the Annual Meetings of 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 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.

(see our Friday issue). The Belgian political scientist and economist, founder of the anti-debt network the CADTM, gave Le Courrier his analysis of the financial dimension of this umpteenth systemic crisis of Capitalism, which, like environmental damage and disruptions in health services, impact the most fragile people first.

What are the contours of this new debt crisis which is affecting so many States in the South?

Eric Toussaint: Since last year, an increasing number of countries have been finding themselves unable to refinance their debt on the markets. The main cause for this is the cessation of the Quantitative Easing policies (QE) that Central Banks had engaged in after the housing and banking crises in the United States in 2006-2007, which turned into a generalized crisis of the European and North-American finance system in 2008. As well as injecting thousands of billions of dollars, euros and pounds sterling to save the banks, there was a policy of extremely low-to-zero 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. , until 2021. Throughout that decade, States that had never been able to access the financial markets, even the poorest, like Rwanda or Ethiopia, suddenly found takers for their debt securities in Wall Street. 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. and banks, seeing that the returns on French or German bonds were near zero, showed an 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. in financing the governments of the South against interest rates of 4%, 5% or 6%. These States then became indebted, telling their populations: “as you see, all is well, the money markets have confidence in us, we are credit-worthy”, and so on. But the moment Western Central Banks, faced with inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. , suddenly hiked their interest rates up to 5%, financiers turned once again to the bonds of the North, and the countries of the South could no longer find money to refinance their loans for less than 9%, 12% or even 15%.

The shock was aggravated by the consequences of the Covid crisis. The States had to increase their spending, especially on health, while at the same time their income was drying up, often dependent on the global market for raw materials or on tourism. Finally, we have to mention speculation on the price of cereals and oil, after the invasion of Ukraine by Russian imperialism. A great many countries of the South are net importers of those two products.

The QE policy was probably not viable in the long term, but what explains the sudden flare-up of inflation after over a decade without an increase?

First of all, we have to remember that the policy of rescuing the banks was not a good idea. In fact, it also caused indebtedness of the countries of the North. As for the inflation, it was mainly the result of decisions made by big food and fuel companies to increase their 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. margins, taking advantage of breakdowns in the supply chain and price fluctuations due to the Covid crises and war.

In the South, which countries are the weakest links of the new crisis?

"The first victims of the crisis are often former star pupils of the IMF,”
Eric Toussaint

They are often those that were formerly considered star pupils by the neoliberal finance system. Take Sri Lanka, a country which had never defaulted. In the past, it had even had to drop regulation of the price of rice. Previously self-sufficient, it became dependent on the global market (Vietnam, Thailand, the United States). Then Sri Lanka invested massively in the tourist industry. But with Covid and the war in Ukraine, tourism ground to a halt and the price of cereals rocketed! By April 2022, Colombo had no choice but to suspend debt payments and stop imports; which in turn led to an explosion of social unrest. Another example is Ghana, “a model of openness”, which also had to suspend debt servicing.
Egypt, Pakistan and Bangladesh only narrowly avoided suspension of payments thanks to the intervention of the IMF, but with the usual draconian conditionalities (privatisations, austerity, deregulation) which have already slammed down on the population.

We should expect to see a new wave of 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/ policies.

Yes indeed, this new crisis marks the triumphant return of the IMF, which always thrives best on disaster in the South. We are certainly not about to see the generalization of suspension of payments, but rather a flurry of problems that engender systematic recourse to the IMF. That institution has signed over a hundred loan agreements. The more difficulty countries have to pay their debts, the harsher and more numerous austerity programmes will become. We are talking of amounts going from a few tens of million dollars to 45 billion for Argentina, or 15 billion for Ukraine. You can imagine the power of coercion that that places in the hands of the IMF.

Debates in the Counter-summit revealed much scepticism as to the possibility that the New Development Bank (NDB), established by BRICS BRICS The term BRICS (an acronym for Brazil, Russia, India, China and South Africa) was first used in 2001 by Jim O’Neill, then an economist at Goldman Sachs. The strong economic growth of these countries, combined with their important geopolitical position (these 5 countries bring together almost half the world’s population on 4 continents and almost a quarter of the world’s GDP) make the BRICS major players in international economic and financial activities.  [1], might provide an alternative to the Bretton Woods institutions (FMI/BM). Why?

In our view, it is absolutely not an alternative, since it is based on the same extractivist and productivist model. The NDB, in which China plays a central role, sees Africa simply as a site for extracting raw materials or a source of underpaid labour. Its interest rates are similar to those of the IMF and the World Bank. The main difference is that it does not impose economic and political conditionalities on borrowing countries. That is what sparks the interest of many African countries. But that does not make it a development bank. It is not lending so that Africa can industrialize, but to create the infrastructure to export raw materials or to carry out prestige policies.

What alternative is there, then? Have you seen an element of hope emerge during the Counter-summit?

I was struck by the extent to which the social movements of Sub-Saharan Africa understand the true nature of the IMF’s and the World Bank’s policies. There are far fewer illusions than in the past about creditors’ promises. There are more and more actors of civil society who envisage development without those bodies. By adopting alternative monetary, fiscal and judiciary policies, African States could manage without them for good.

Translated by Vicki Briault (CADTM)