A history of the debt of the world’s poorest\nnations. Can it be written off?<\/em><\/p>\n\n\n\n Campaigns such as Drop the Debt<\/em> have called for western,\nindustrialised nations to write off the debt owed to them by the poorest nations\nof the South. At a United Nations meeting on the 7th September 2000,\nNigerian President Olusegun Obasanjo, chairman of the Group of 77, presented a\npetition with an unprecedented 22 million signatures to the United Nations\ncalling for the cancellation of debts of the world\u2019s poorest nations.<\/p>\n\n\n\n In the past, there have been agreements to write off portions of the debt of\nthe world\u2019s poorer nations, due to their inability to pay. These agreements\nhave all been limited in scope. To understand why the entire debt cannot simply\nbe written off by politicians we need to understand the global, economic context\nwithin which politicians are forced to act. Here we shall examine the origins of\nwhat is now referred to as the \u2018debt crisis\u2019 and the economic interests\nwhich stand in the way of the debt being cancelled.<\/p>\n\n\n\n The build-up of third world debt during the 1970s, which proved to be the\norigin of the ‘debt crisis,’ is especially well documented in Banks,\nBorrowers and the Establishment<\/em>, by Karen Lissakers, The Global Struggle\nfor More<\/em> by Bernard Nossiter and A Fate Worse Than Debt<\/em> by Susan\nGeorge. Here we shall aim to draw out the key factors behind the build-up of the\ndebt crisis from such commentators before considering what this can teach us\nabout the likely effectiveness of campaigns such as Drop the Debt<\/em>.<\/p>\n\n\n\n First of all, we need to consider the actual extent of the debt accumulated\nby the South. Here we shall use ‘The South,’ which as a term referring to the\nworld\u2019s poorest nations, given that they are predominantly in the southern\nhemisphere.<\/p>\n\n\n\n The scale of the debt of the South is small in relation to the global\neconomy, although cripplingly large in relation to the size of their economies.\nAt this writing, the First World’s financial markets are estimated at\napproximately at $2 trillion in equity and $1.5 trillion debt.( p146; 6)<\/p>\n\n\n\n The Debt of the 41 most heavily indebted poor countries (H.I.P.C.s) was $215\nbillion in 1995(4; p32). By the year 2000,\nAfrican governments alone had $350 billion of foreign debt. African governments\nhave to spend two-fifths of their revenues to service their debt. (4; p32) On\naverage, Bello notes, debt is 35% of the G.D.P. of a developing nation.(3; p54)<\/p>\n\n\n\n It is of course the scale of debt relative to the size of their economies\nthat is the main concern for nations of the South. Due to the debt being such a\nlarge percentage of overall G.D.P. in debtor nations, they are left with very\nlimited scope for investing in infrastructure. The communications, legislative\nsystems, education and health services, that are required for them to develop,\nsuffer as a consequence.<\/p>\n\n\n\n It was during the early 1970s that lending to the South reached an\nunprecedentedly high level, taking the debt above manageable levels. Generally,\nthis only gradually became clear to debtors and creditors during the following\nten to fifteen years.<\/p>\n\n\n\n The extent of their over-commitment was rarely, if ever, apparent during the\ntime of this initial, rapid expansion of borrowing by the South. These loans\nwere to trigger a steady increase in debt that the South was to struggle with\nduring the following years, if not capitulate under. Well documented are the\nexamples of countries being forced to take out further loans in order to service\nexisting ones. For this reason, the early 1970s are considered to be the start\nof the debt crisis. A study of the causes of the growth in the South’s borrowing\nto unsustainable levels must therefore stretch back to this time and the years\nthat preceded it.<\/p>\n\n\n\n In the early 1970s, there was a sense of optimism among the world\u2019s poorest\nnations that, through economic growth, they could raise their wealth to the\nlevel of the first world. Many developing countries had seen high levels of\ngrowth during the 1960s. Brazil, for example, experienced five miraculous years\nfrom 1968 to 1973, under the guidance of Finance Minister Antonio Delfim Neto,\nwhen the economy grew at more than 11 percent per\nyear.(2; p63)<\/p>\n\n\n\n Loans were seen as necessary to facilitate the continuation of this economic\ngrowth. The firm belief in the benefits that would be brought by loans is\nevident in the manifesto issued by the Banco Central do Brazil in 1973. Entitled\nThe External Sector and National Economic Development, <\/em>it was a lengthy\ndefence of the rapid increase in Brazil’s external debt. As Lissakers explains,\n\u201cHeavy foreign borrowing, the central bank argued, hastened economic\ndevelopment, raised the level of domestic savings above where it would be with\nless borrowing, and in fact made the country less rather than more vulnerable to\nforeign shocks even from the foreign debt market.\u201d(2; p64)<\/p>\n\n\n\n We must also consider the creditors’ motives for extending their lending to\nsuch a high level. This issue itself raises the question of who the creditors\nwere. In fact, they were a combination of governments, the financial\ninstitutions they set up as well as private, commercial banks. All had an\nimportant part in the wave of lending during the early 1970s. In 1981, writes\nBello, “commercial banks supplied 42 per cent of net credit flows to the\nThird World and official finance institutions 37 per cent.”(3; p69)<\/p>\n\n\n\n The largest of the financial organisations set up by governments\ninternationally was the World Bank. The immediate factors that shaped the\nlending policy of this institution were somewhat different to that of a\ncommercial bank. The World Bank had strong ties to the governments of the\nnorthern, industrialised nations of the North who were largely responsible for\nproviding it with the capital to lend. This close relationship was reflected in\nthe political motivation behind World Bank policy. Head of the World Bank during\nthe 1970s was former U.S.A. president Robert McNamara. He oversaw aid programs\nduring this time and a large increase in World Bank lending to the South. He\nacknowledged that U.S.A. strategic interests were an important factor to him in\nthis role, commenting that “the foreign aid program is the best weapon we\nhave to insure that our own men in uniform need not go into combat.” (1;\np117 – McNamara: Foreign Aid is the Best Weapon<\/em>, quoted in Denis Goulet\nand Michael Hudson, The Myth Of Aid<\/em> (Maryknoll, NY, Orbis Books, 1973),\np98.)<\/p>\n\n\n\n Prominent among these strategic interests was the need to preserve spheres of\ninfluence in the struggle with the alliances formed by the Soviet Union. This\nwas made plain by the Canadian Prime Minister John Diefenbaker who commented\nthat:<\/p>\n\n\n\n $50 million a year . . . would be cheap insurance for Canada . . . to halt\nCommunism in Asia.(2; p116)<\/p>\n\n\n\n Among these strategic interests was that of ‘containing’ the South itself.\nFollowing the period of economic growth, as mentioned above, there was a move\ntowards political association among nations of the South which sought to clarify\ntheir collective interests and continue to achieve economic growth. Moves\ntowards collective action, such as the G7 Summit, were seen as a threat by\nNorthern leaders of a significance comparable to that of the alliances formed by\nthe Soviet Union during the cold war.<\/p>\n\n\n\n Another threat from the South was the O.P.E.C. alliance of oil producing\nnations which was seen by some Southern leaders as a potential mechanism for\nrepresenting Third World interests. Only to a limited extent, however, did\nO.P.E.C. attempt to use it’s cartel position to gain concessions from the North,\non behalf of the G77 nations as a whole. As Nossiter points out, the G77 was\nunable to agree on the specific detail of issues where they had hoped to\nestablish a common negotiating position, such as commodity prices. The unity for\nwhich some G77 leaders had hoped did not emerge. In 1977, the North did agree to\na $1bn aid fund(1) but overall the attempt of the South to gain concessions\nthrough political association was unsuccessful. (See Footnote 1)<\/p>\n\n\n\n Political containment was not the only motive for the institutions of the North to become involved in economies of the South. Loans such as those provided by the World Bank tied closely to the interests of Northern capital, with the South being a potential source of cheap labour and important export markets. The series of articles on Globalisation<\/a> elsewhere on this website details the process through which the North was able to gain increasing influence over the shape of economies of the South. This process was administered through institutions such as the World Bank which were, as pointed out above, set up and funded by the industrialised nations of the North. These institutions can therefore be viewed as extensions of the state apparatus of the North, acting on the global, rather than national, level.<\/p>\n\n\n\n Having identified some of the most important factors motivating\ngovernment-initiated lending through institutions such as the World Bank, we can\nnow turn to the factors that prompted the private, commercial banks to increase\nthe scale of their lending.<\/p>\n\n\n\n The drastic increase in oil prices during the early 1970s sparked a huge\nincrease in deposits to the Northern banks from the oil producing nations. This,\nin turn, left the banks with a lot of excess credit which they needed to put to\nprofitable use.<\/p>\n\n\n\n The correlation between this influx of credit and the growth of loans is\nclearly demonstrated by the Quarterly Bulletin, <\/em>published by the Bank of\nEngland in June 1981:<\/p>\n\n\n\n \u201cafter all countries have netted out the value of goods and services\nexchanged (shown on the “current account” of the balance of payments),\nthe remaining gap between countries in surplus and countries in deficit that has\nto be financed has been twice as large since 1973 as it was in the twenty-three\nyears preceding the oil-price hike.(2; p28.)<\/p>\n\n\n\n Economic slowdown<\/p>\n\n\n\n Whilst this rise in available credit (often referred to as ‘petrodollars,’\ndue to it being oil revenue) was an important spur to lending by the commercial\nbanks, it does not explain why this lending became unsustainable. It was an\ninability among the Southern countries to sustain the levels of growth achieved\nduring the 1970s that caused them to start defaulting on their repayments. This\nreduction in economic growth was part of a global economic slowdown during the\nmid 1970s.<\/p>\n\n\n\n Higher oil prices were actually an important catalyst for this slowdown.\nLissakers cites William Cline of the Institute for International Economics who,\nshe explains,<\/p>\n\n\n\n estimated that oil price increases added $259 billion to the import bills\n of non-O.P.E.C. developing countries in the ten years from 1973 to 1982,\n over and above what their imports would have cost if oil prices had simply\n kept pace with U.S. inflation.(2; p35; William R. Cline, International\n Debt and the Stability of the World Economy<\/em>, Washington DC:\n International Institute for Economics, 1983, 20)<\/p><\/blockquote>\n\n\n\n Citing a rise in oil prices does not of course singularly explain the economic slump. There were other factors in the 1970s slowdown and a longer term view of trends in the global economy shows that economic slumps are a regular feature of capitalism. It is argued elsewhere on this website that they are an inevitable feature of the system (see Booms and Slumps – What Causes Them?)<\/a><\/p>\n\n\n\n In spite of this inevitability, it is also the nature of economic slumps that\nparticipants in an ‘overheating’ economy (i.e. one that is on the verge of a\ndownturn) do not know precisely when a slump will occur and how severe it will\nbe. This should be remembered when we consider the behaviour of the financiers\nat the time of increasing loans to the South.<\/p>\n\n\n\n Profitable lending<\/p>\n\n\n\n Banks did not deliberately intend to increase their exposure trhough loans to\nan extent that would jeopardise future profits. Initially at least, their\nlending policy proved to be highly profitable and this was generally expected to\ncontinue. As Lissakers points out:<\/p>\n\n\n\n For all the complaining in the late 1970s about cut throat competition\n and hair-thin spreads, the returns on these loans were nothing short of\n spectacular: the combination of grossing up of interest rates and full\n creditability of withholding taxes land substantial up-front fees) produced\n yields far better than anything the banks could earn on their domestic\n assets and more than double the profits one would estimate by looking only\n at the stated spreads on these loans.(2; p130)<\/p><\/blockquote>\n\n\n\n The profit motive, combined with the need to recycle ‘petrodollars’ were the\nprimary motives behind the lending.<\/p>\n\n\n\n Generally, during the 1970s and even the early 1980s, the banks rarely\nconsidered the possibility that they might be over-exposing themselves,\nproviding credit that could not be repaid in the future. Banks can, of course,\nprofit from a loan when repayment is delayed so the possibility of some\nrescheduling would not necessarily jeopardise their position.<\/p>\n\n\n\n In March 1980, Paul Volcker, the chairman of the Federal Reserve (the job\nthat Greenspan was eventually to take in the 1990s) said:<\/p>\n\n\n\n The impression I get from the data I have reviewed is that the recycling\n process has not yet pushed exposure of either borrowers or lenders to an\n unsustainable point in the aggregate.(2; p113)<\/p><\/blockquote>\n\n\n\n As late as 1983, several years after the increased lending, Citibank’s chief\nspokesman on Third World lending stated, with regard to loans to Brazil: \u201cThe\nBrazilians have an absolutely fabulous record of managing their international\nfinancial situation. We have a great deal of confidence in them. We don’t feel\nunduly exposed.\u201d(George J. Clark, executive vice president, Citibank NA,\nbefore the Senate Committee on Banking, Housing & Urban Affairs, 98th\nCongress, 1st Session, 15 Feb 1983.)(2; p64)<\/p>\n\n\n\n How wrong this supposition proved to be. During the 1980s, Brazil ended up\npaying US $90 billion in interest payments on it\u2019s debt – almost as much as\nthe total debt itself at this time, which was US $120 billion.(5; p176)<\/p>\n\n\n\n The atmosphere among the key decision makers is encapsulated in this\ncommentary by Lissakers:<\/p>\n\n\n\n To the end, home governments of the lending banks did nothing to stop or\n even slow the flood of credit. L. William Seidman, chairman of the Federal\n Deposit Insurance Corporation (FDIC), served on the White House economic\n staff in the Ford administration. He recalls an economic policy dispute\n there in 1975 or 1976 in which the question of petrodollar recycling came\n up. Everyone sang the banks’ praises, Seidman says, including William Simon,\n then secretary of the treasury, and Alan Greenspan, then chairman of the\n President’s Council of Economic Advisors. The only dissent was Arthur Burns,\n chairman of the Federal Reserve Board. This isn’t recycling,” he\n grumbled. “It’s bad loans.” But even Burns’s Fed did nothing to\n stop the lending.(2; p110)<\/em><\/p><\/blockquote>\n\n\n\n This was, of course, the same Alan Greenspan who is now widely hailed in the\nUnited States as the most prudent of Central Bankers. As is hinted in the above\npassge, Lissakers shows that there was a feeling of unease among a minority of\nbankers about possible over exposure, even during the 1970s. Henry Wallich, for\nexample, who was an economist on the Federal Reserve board in the U.S.A., warned\nthat levels of lending were becoming unsustainable. Yet, even with this element\nof uncertainty, the pressure on individual actors to give out loans was\nconsiderable. This is borne out in a comment from a Deutsch Bank officer, quoted\nby Lissakers who was embarrassed to discuss some loans by his bank to Argentina:<\/p>\n\n\n\n It was a classic case of the exporters pushing us into lending. The firms\n argue, `Here is a big sale. If you don\u2019t do the loans, we will lose the\n deal to U.S. or other competitors. It means a lot of jobs, etc., etc.’ There\n was big pressure. So we made the loans. (2; p102)<\/p><\/blockquote>\n\n\n\n This case of financiers placing their vested interests before any doubts they\nmay have about the longer term sustainability of lending parallels the incentive\nfor many economic forecasters to produce favourable predictions. This is\ndescribed by The Economist <\/em>in March 2001, in relation to the economic\ndownturn in the U.S.A.:<\/p>\n\n\n\n Investment banks, which have made billions out of the boom, \u2026. have a\n vested interest in remaining bullish about the economy at large. Most Wall\n Street firms are still officially forecasting no recession in America. But\n an alarming number of their economists have privately admitted to The\n Economist<\/em> that they believe that the risk of recession is higher than\n their published forecasts say. They are not alone in their dishonesty.\n International organisations such as the IMF are no doubt just as inhibited\n about forecasting a recession in the country that is their biggest\n shareholder.(7)<\/p><\/blockquote>\n\n\n\n Lissakers points out that during the wave of lending during the 1970s and\nearly 1980s, banks did have their own teams of researchers, known as\n‘country-risk teams’ who assessed the economic situation in the borrowing\nnations.<\/p>\n\n\n\n The banks put thousands of people in the field in the borrowing\n countries, who knew the local economies into which they were lending and\n knew the political scene.(2; p11)<\/p><\/blockquote>\n\n\n\n However, Nossiter argues that banks asked for little explanation of how\nprofits would be achieved by debtor nations. He points out that they greatly\nexceeded the recommended debt to export earnings ratio of 20%. An important\nfactor in this was a lack of awareness amongst banks and governments at the\nscale of the lending, due to government statistics falling behind.(2; p108) Also\nvery significant was the competition amongst banks which meant that they would\nnot share information about the loans they were making. As John Donnelly of\nManufacturer\u2019s Hanover, a large U.S. bank, in Mexico City concluded:<\/p>\n\n\n\n The problem was we weren’t talking to our colleagues. If we had known in\n 1981 what was being lent, we would have done something. The government would\n ask us for $100 million for six months. We would say, ‘They have no problem\n paying that in six months.’ But they were asking twenty other banks at the\n same time.(2)<\/p><\/blockquote>\n\n\n\n This lack of co-ordination amongst competing capitalist enterprises is a common theme in the origins of financial and economic crises. Each enterprise seeks to gain a share of a lucrative market and the foreign debt market was no exception to this. More recent examples have been the huge surge in investment into South East Asia prior to the financial crisis of 1997 (Boom Goes Bust in Asia<\/a>) and the so-called \u2018Dot Com bubble\u2019 on the U.S. stock exchange in the late 1990s.) Capitalism is, after all, an unplanned system in which future trends and effect are often unpreditable.<\/p>\n\n\n\n As Lissakers explains, there was a strong tax incentive for banks to organise\nloans to developing nations during he 1970s and early 1980s. Tax credits, she\npoints out, could be claimed by Northern banks in their home country on all\noverseas loans. The reason for these tax credits was that banks were often\nliable for a \u2018withholding tax\u2019 on their loans to be paid in the borrowers\u2019\ncountry (in borrowing countries that were outside the O.E.C.D.) Significantly,\nthese credits were calculated on the basis of gross<\/em> revenues from the\nloans whereas they were applied to net<\/em> profits resulting from the loan.\nThis meant that the scale of the tax credits was large in relation to the actual\nnet profit to which they were applied. However, the credits were transferable\nand so surplus credits resulting from one loan were applied by banks to offset\nagainst the profits from other loans.<\/p>\n\n\n\n In real terms, this system of tax credits increased the post-tax rate of\nreturn on the loan. The benefits to the creditor were even greater when, as\noften happened, banks avoided paying the withholding tax, which was the\njustification for the credit in the first place! The tax credits could even be\nused to offset against domestic income, as banks managed to generate \u2018spare\u2019\ncredits due to high, often \u2018notional,\u2019 withholding tax. The United Kingdom,\nfor example, permitted foreign tax credits, up to a notional 15 percent\nwithholding tax rate, to be credited against U.K. taxes on all other types of\nincome.(2; p122)<\/p>\n\n\n\n Lissakers writes:<\/p>\n\n\n\n As a result, in the United Kingdom, Japan, and Canada and other countries\n where the lending banks are based, the possibility of using these tax credits\n to offset against other income produced a \u201chidden layer\u201d of profit for the\n banks from their Third World loans.(2; p13)<\/p><\/blockquote>\n\n\n\n As interest rates increased in the early 1980s, tax credits provided even\nmore of an incentive. The scale of the gains to banks cannot be precisely\nmeasured due to company tax returns often covering up the amount of withholding\ntax that had (or had not) been paid on the loan. According to one report:<\/p>\n\n\n\n In 1985, twelve U.S. money-center bank holding companies claimed $1.3\n billion in foreign tax credits-dollar-for-dollar reductions in their U.S.\n tax obligations to offset foreign taxes. These offsets were equal to 25.2\n percent of the banks’ net pre-tax income and 546 times their current U.S.\n federal taxes actually paid.( 2; p117 – Saloman Bros, Tax Reform: It’s\n Complex But Highly Manageable<\/em>, I, 3 Oct 96, fig. 4)<\/p><\/blockquote>\n\n\n\n Before 1986, according to Marsha Fields of the U.S. Treasury Department’s\nOffice of Tax Analysis, “Banks (paid) almost no tax in the United States on\nforeign or domestic source income.” In 1985, when the U.S. federal\ncorporate income tax rate was 46 percent, Citicorp paid U.S. federal income tax\nof $30 million on pre-tax income of $1,716,000,000- an effective rate of l.8\npercent. p116 (Saloman Bros, Tax Reform: It’s Complex But Highly Manageable<\/em>,\nBank Weekly<\/em>, 3 Oct 96, fig. 2)<\/p>\n\n\n\n It is pointed out that Northern governments were effectively subsidising\nloans through the system of tax credits. It is unsurprising, therefore, that\nduring the 1980s, as the extent of the over-exposure of Northern creditors\nbecame apparent, this policy was changed.<\/p>\n\n\n\n In May 1989, a ruling in the U.S.A, which was retroactive to December 1986,\nplaced a restriction on the practice of using tax credits to offset against\ndomestic income. Under this formula, banks with mounting foreign loan losses\nmight have insufficient foreign-source income to absorb all possible deductions.\nWorse for the banks, the I.R.S. ruling threatened to retroactively wipe out\nbillions in other tax benefits on Third World loan banks had already claimed.(2;\np115)<\/p>\n\n\n\n Both of the causes mentioned prior to this discussion of tax incentives: the in-built competition of capitalism combined with the need to re-cycle the \u2018petro-dollars,\u2019 certainly provided much of the momentum for the surge of 1970s lending. However, it is clear from the huge incentive of the tax credit incentives that institutional factors were also important. Lissakers does not address the question of whether the tax credit policy was adopted by Northern governments. It could be argued that it suited their interests to (as she puts it) \u2018subsidise\u2019 their loans, due to the need to achieve political and economic containment of the South. Certainly though, capitalism has an in-built tendency towards over-stretching itself in terms of investment, as discussed in the article: Boom Goes Bust in Asia.<\/a> This was the key factor in why the creditors became over-exposed to the extent they did which was an outcome that went far beyond conscious policy-making.<\/p>\n\n\n\n The 1980s: caution sets in<\/p>\n\n\n\n By the early 1980s, the major U.S. banks had a high loan exposure. By\n 1982, for Manufacturer’s Hanover, Citibank and Chase Manhattan loans\nto Brazil, Mexico, and Argentina combined were 190, 145 and 118 percent \nof\ncapital respectively (2; p113)<\/p>\n\n\n\n At this time, as we have seen, many senior financiers did not perceive the\nloans to be placing their institutions in jeopardy. Yet, even in1981, one-half\nof the loans being taken by developing countries would be used for repaying\nexisting debts, as pointed out by U.S. Senator Frank Church who cited an\nAmerican Express Bank International study.(2; p112)<\/em><\/p>\n\n\n\n During the 1980s a conscious policy of containing future loans was adopted.\nFor example, the Reagan administration resisted proposals to double the\nresources of the I.M.F. in 1982 and accepted a 50 percent increase only when it\nsaw that this was necessary to support the Western banks.(1; p156) The 1989\nreform of the tax credit system was also evidence of this more conservative\npolicy towards lending.<\/p>\n\n\n\n From 1987, private banks started to reduce their exposure. Statistics from\nthe Bank for International Settlements show that the exposure of the banks in\nthe major lending countries peaked in 1987, at $517 billion in loans outstanding\n(including loans to O.P.E.C.). By the second quarter of 1990 this total had\ndeclined to $469 billion.(2; p245) As Lissakers explains: “The retreat is\nnot limited to troubled debtors. These banks …. reduced their lending to\nnon-industrial countries almost across the board, to Asia as well as to Africa\nand Latin America. Loans to Eastern Europe and the Soviet Union declined by $6.4\nbillion in the second quarter of 1990.(2; p245)<\/p>\n\n\n\n The retreat from lending was prompted in part by the banks\u2019 difficulties in\nsecuring loan repayments. A huge proportion of debt owed to commercial banks at\nthe peak of indebtedness have been subject to scheduling, payment interruption,\nor significant interest arrears.<\/p>\n\n\n\n As the sustainability of debt levels came to be questioned by financial\ninstitutions, banks were forced to take out reserves against their loans to the\nSouth to provide greater security for their shareholders. Banks\nwere even forced to write off some of their loans\nas losses. Loans were renegotiated, with the banks compromising on the terms of\nthe loan such as the interest rate being reduced and the repayment schedule\nstretched out over a long period with a suspension of some of the debt. However,\nsuch renegotiations and cancellations had relatively little impact on the size\nof the debt.<\/p>\n\n\n\n The late 1980s and early 1990s were a period of gradual acknowledgement by the banks that debts simply\ncould not be repaid on the original terms. Rather than being prompted by some\nkind of benevolence on their part this compromise was prompted by the stark\nreality of countries having borrowed far beyond a level they could manage.\nDuring the renegotiations, there was tension between this fact and the need to\nenforce the terms of previously agreed loans, in so far as was possible.<\/p>\n\n\n\n The Governor of the Bank of England, Robin Leigh-Pemberton warned that\n“Excessive” (new provisions for debtor nations) “send misleading\nsignals to the debtors themselves.” There was concern that large loan\nreserves, let alone writing off of debt, would, as Gerald Corrigan, president of\nthe New York Federal Reserve put it create “self-fulfilling\nprophesies.”(2; p214)<\/p>\n\n\n\n In spite of sentiments such as this, further compromise had to be reached and\nin 1990 the Brady Plan continued the process of renegotiation. The Brady Plan\nsaw the scale of Southern debt being reduced from $517 billion in 1987 to $469\nbillion in the second quarter of 1990. Lissakers writes:<\/p>\n\n\n\n a total of $72 bn of debt had been renegotiated, with a net debt and\n interest reduction worth about $17 billion to the debtors. (B.I.S. Annual\n Report<\/em>, Basle, June 1990, 2; p245)<\/p><\/blockquote>\n\n\n\n In exchange for the Brady Plan, the banks demanded that remaining loans to be\nsecuritised and asked the Northern states to provide collateral for the\nrenegotiated debt. Running alongside these renegotiations of debt was a policy\nof ensuring that debtor nations would repay as much as possible in future.<\/p>\n\n\n\n The presence of institutional mechanisms for enforcing repayment provides confirmation that debt cancellation and even renegotiation were a last resort for the banks and Northern governments. One instrument with which the interests of the financial institutions could be enforced were the credit ratings assigned to each nation. A widely used and influential international credit rating was established by Standard and Poor. As well as repayments, Standard & Poor ratings depended on countries agreeing to a range of policy measures that it was felt would be conducive to achieving the economic growth required for meeting repayments. (See Globalisation<\/a> for an account of the role of the I.M.F. in shaping economic policy in the South.)<\/p>\n\n\n\n More forceful mechanisms were also available to the I.M.F. Chossudovsky\npoints out that \u201cThe IMF \u2026 had the means of seriously disrupting a national\neconomy by blocking short term credit in support of commodity trade.\u201d (5; p52)\nSuch loans encouraged importing of commodities from rich countries. In other\nwords, once the loan agreement had been signed, disbursements could be\ninterrupted if the government did not conform, with the danger that the country\nwould be blacklisted by the so-called “aid coordination group” of\nbilateral and multilateral donors. (5; p56)<\/p>\n\n\n\n Chossudovsky points out that the IMF exercised these powers in the case of\nBrazil. In debt negotiations with the I.M.F. in 1990, Brazil argued that debt repayments must be limited to ability to pay.\nChossudovsky writes:<\/p>\n\n\n\n The advisory group of 22 commercial bank led by Citicorp retaliated by\n vetoing the IMF loan agreement and by instructing the multilateral banks not\n to grant \u2018new money\u2019 to Brazil. This veto was officially sanctioned by\n the G7 at a meeting in Washington. In turn, the United States Treasury\n directed the World Bank and the Inter-American Development Bank (I.A.D.B.)\n to postpone all new loans to Brazil. The IMF, also responding to precise\n directives from the commercial banks and the US administration, postponed\n its mission to Brasilia. The IMF was a mere \u2018financial bureaucracy\u2019\n responsible for carrying out economic policy reform in indebted countries on\n behalf of creditors. (5; p178)<\/p><\/blockquote>\n\n\n\n This was the I.M.F. acting in it\u2019s role as the manager of debt within\nglobal capitalism. The anti-I.M.F. focus of many campaigns also overlooks the\nfact that the I.M.F. played only a very minor role in the provision of credit to\nthe South until the early 1980s. This was after the seeds of the debt crisis had\nalready been sown. The I.M.F. had the task of enforcing the interests of the\ncreditors by ensuring that the maximum possible level of repayments were\nreceived.<\/p>\n\n\n\n In spite of renegotiations under the Brady Plan, the levels of debt rose\ndrastically during the 1980s and 1990s. For the 41 most heavily indebted poor\ncountries, total external debt had risen from $55 billion in 1980 to the 1995\nfigure $215 billion referred to above.(4; 32) This was because no renegotiation\ncould address the fundamental problem of Southern nations lacking the capital to\nrepay such a huge scale of debt.<\/p>\n\n\n\n The I.M.F. now makes the renegotiation of loans conditional upon a country adopting a Structural Adjustment Program (Globalisation<\/a>) This was the case at the G8 meeting in Cologne, when an additional US $45 billion was committed for poor country debt relief. (This scheme was for 41 countries who are most heavily in debt – known as the Heavily Indebted Poor Countries (H.I.P.C.s.) However, this will result in only 16 countries making significantly smaller debt payments because, as Robert Weissman of Multinational Monitor points out: \u201ca large portion of the debt forgiveness would only apply to loans that have already been written off by lenders but that were still on the books: obligations of the poor country borrowers.\u201d (4; p32) This is corroborated by the Third World Network, who state that the new money agreed by the G8 amounted to US $25 billion (G7 debt deal – more cash, but strings still attached<\/em> – Third World Network www.twnside.org.sg<\/a>, 21 June 2000). The money that has been agreed for the H.I.P.C.s will help to contain their debt but only by achieving high levels of economic growth will they be able to avoid the need for future repayments. (HIPC won\u2019t give permanent exit from debt, says GAO<\/em> – www.twnside.org.sg<\/a><\/p>\n\n\n\n The debt crisis arose from the unplanned system of global capitalism.\nBorrowers and lenders were unable to ensure that borrowing went beyond\n‘unsustainable’ levels due to the competitive, ‘anarchic’ nature of the system.\nAs such, this problem was not unique to the system – the global economy has seen\nsimilar bubbles of over investment burst in the late 1990s. Institutional\nfactors, such tax incentives, played a part in the origins of the debt crisis\nduring the 1970s. But the underlying factor – the drive for profit – is\nessential to capitalism itself and will cause future similar problems to\ncontinue to recur within capitalism.<\/p>\n\n\n\n The debt crisis for the world’s poorest nations is of course especially acute with devastating consequences. However, the banks and governments of the North cannot act to simply write off the debt. The pattern of attempting to ‘contain’ the debt, as has been evident for the past fifteen years,\u00a0 looks set to continue. Debt negotiations such as those under the Brady Plan in 1990 have, as we have seen, been shaped by the desire of Northern banks to keep repayments to a maximum and only write off debt as an absolutely final resort. These banks, after all, are primarily accountable to their shareholders and so must ensure as high a rate of profit as possible. Asking banks, or any other company under capitalism, to do anything else is completely unrealistic. (Why Profit Gets Priority<\/a>) Asking governments to force banks to give up on the billions owed to them by the South is also a predominantly lost cause. All that could be hoped for is that some small adjustments to the debt at the margin (as has happened in the past.)\u00a0<\/p>\n\n\n\n Footnote 1<\/strong><\/p>\n\n\n\n This was reflected in the way O.P.E.C. used the vast revenues that it accrued\nduring the 1970s.<\/p>\n\n\n\n The I.M.F. estimated that of O.P.E.C.\u2019s total $475 billion investable\n surplus through 1981, $400 billion or 85 percent was placed in the\n industrial countries. Only $60 billion or 15 percent flowed to developing\n countries, including contributions to the World Bank and I.M.F.(2; Amuzegar,\n Oil Exporters Economic Development in an Interdependent World<\/em>, p62,\n table 27, I.M.F. Occasional Paper 18, Washington D.C., April 1983.)<\/p><\/blockquote>\n\n\n\n Lissakers points out that about 50% of O.P.E.C. bilateral aid went to three\ncountries: Israel, Syria and Jordan. There is, of course, nothing unusual about\nthe resistance that O.P.E.C. members states showed to the notion that they\nshould use their economic strength to bargain on behalf of the South as a whole.\nThe whole story of global negotiations on economic issues such as trade and\ndevelopment, as well as debt, has been shaped by nation states seeking to\nfurther their own economic interests. They will not seek to further the\ninterests of others unless this can be seen to further their own interests in\nsome way. This is the course that capitalist nation states are compelled to\ntake. Given the lack of unity among the South, the G77 proved to not be as much\nof a threat to the North as was initially expected, although there was still\nplenty of incentive for their policy of \u2018containment\u2019 through institutions\nsuch as the World Bank.<\/p>\n\n\n\n Author: DG<\/p>\n\n\n\n Back to the Global Economy Index<\/a><\/p>\n\n\n\n
\n\n\n\nIntroduction<\/h3>\n\n\n\n
How much is owed – and to whom?<\/h3>\n\n\n\n
The start of the crisis<\/h3>\n\n\n\n
Motives of the South<\/h3>\n\n\n\n
Motives: The States of the North<\/h3>\n\n\n\n
Motives: The Private Banks<\/h3>\n\n\n\n
Petro-Dollars<\/h4>\n\n\n\n
Taxation incentive<\/h3>\n\n\n\n
The North becomes cautious<\/h3>\n\n\n\n
Inevitable write-offs<\/h3>\n\n\n\n
Damage limitation<\/h3>\n\n\n\n
Summary<\/h3>\n\n\n\n
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