Committee for the Abolition of Illegitimate Debt

Many countries had been trapped in debt for the previous two decades, with reckless lenders being bailed out by new loans from 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 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.

, while economies stagnated and debt increased.

The ‘Hands Around the G8 G8 Group composed of the most powerful countries of the planet: Canada, France, Germany, Italy, Japan, the UK and the USA, with Russia a full member since June 2002. Their heads of state meet annually, usually in June or July. ’ protest was a pivotal moment in the global “Jubilee” campaign, the movement that came together to tackle the debt crisis, inspired by the Jewish scriptures’ concept of ‘jubilees’, times when debts were cancelled and slaves freed. Eventually, after hard fought campaigning by people around the world, the G8 leaders returned to the UK in 2005 and committed to a significant amount of debt cancellation.

Thirty-six countries have now had $130 billion of debt cancelled through the initiatives created by the G8 in response to campaigning.

However, there were three main things the campaign did not achieve. One was that in order to receive debt relief, countries had to bring in contentious free market economic policies, including water privatisation in Tanzania and selling off grain reserves in Malawi. Secondly, many countries were excluded from the debt relief scheme because, despite facing big poverty challenges, they were considered to be too rich. Some of these, such as Jamaica and Pakistan, have continued to suffer an ongoing debt crisis for the last twenty-five years, with 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. payments being extracted at a cost to poverty reduction and economic development.

Thirdly, the Jubilee campaign’s proposals to prevent debt crises from occurring again were largely ignored. Ten years after the 1998 protest, this failure was brought home with the financial crisis in North America and Europe in 2008, and subsequent Eurozone debt crisis which replicated many of the features of the ‘Third World Debt Crisis’ in the 1980s and 1990s.

Fifteen more years on, we are now witnessing another debt crisis emerging across many impoverished countries. Average government external debt payments have increased 150% in the last decade, and are at the highest level since 1998.

One key reason for this vulnerability is dependence on commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. – fossil fuels, metals and cash crops – for income earned from the rest of the world. Commodities vary wildly in price and often provide few jobs. When prices are high speculators are keen to give loans. But when they fall, economic collapse can be the result. Dependence on commodities is a legacy of colonialism, where European countries used colonies as a source of raw materials, and sold back higher valued manufactured goods.

Another factor behind the current debt crisis is global 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. . Following the 2008 financial crisis, interest rates were kept low in order to try and stimulate growth in the US and Europe. This led to lenders looking to increase lending to lower income countries where they could still charge high interest rates, seeking large profits. In some of the most extreme cases, such as Mozambique, lenders and government officials have hidden loans form parliaments and the public, preventing the loans from being held to account.

Rising global interest rates are now increasing debt payments, at a time when governments are even more stretched due to the Covid pandemic, rising food and energy prices and the impacts of the climate emergency.

Debt cancellation is a necessary response when debts are too high. But one-off debt cancellations will just lead to cycles of crisis being repeated unless the underlying causes of debt dependence are tackled.

Governments and lenders need to be made more accountable, through regulations to strengthen transparency around lending. And global action is needed to tackle tax avoidance and evasion, as well as renewed attention on policies which will enable countries to become less dependent on commodities.

The response to the new round of debt crises has been very similar to that in the 1980s and 1990s, and in the Eurozone in the 2010s. More loans are being given by the likes of the IMF and World Bank, enabling interest to be paid, while debts increase. This actively incentivises reckless lending, by ensuring lenders are paid off. Instead, lenders should be made to pay the price for reckless lending.

The UK has a key role in doing so. 90% of debts owed to private lenders by lower income countries are governed by English law. This means the UK could pass legislation to ensure private lenders take part in debt relief. Doing so would both help tackle the current debt crisis, and incentivise lenders to act more responsibly in the future. You can join the campaign here.

This time we cannot wait another twenty years for a one-off sticking plaster solution – a debt relief scheme which provides limited breathing space but does nothing to address the underlying causes of the boom bust cycle of debt crisis. New rules for responsible lending alongside ending the system of bailouts for lenders can bring an end to this crisis, and greatly reduce the chances of debt crises in the future.