Beginners' guide to debt

Beginners' guide to debt--------------------------------------------------------------------------------


Beginners' guide to debt

"Debt is tearing down schools, clinics, hospitals and the effects are no less devastating than war," Dr Adebayo Adedeji.

A child dies in an obscure Third World country clinic. Another suddenly drops out of school. One's future dashed in infancy, the other's hopes and dreams crushed before they could even begin to unfold.

But they have something deeper in common - both are victims of the effects of the crushing debt burden facing the Third World.

The debt burden is the biggest single barrier to development in the Third World, the most powerful tool that western nations use to keep whole countries in bondage.

It is estimated that the Third World pays the developed North nine times more in debt repayments than they receive in aid. Africa alone spends four times more on repaying its debts than it spends on health care.

It is therefore not surprising that most of the 32 debt-distressed countries in the world are in Africa

How did Africa and other poor regions of the world end up with such a colossal debt burden?

In order to understand the debt crisis and the struggle to cancel the debts of the poorest countries, we must understand how it all started.

We need to look at the huge impact on the economies of developing countries; how the West and Third World have responded to the crisis.

We also need to examine the nature of debt relief being offered and administered. This Guide concludes with a description of the various types of debt and the campaigns for debt cancellation.



The start of the crisis

The early 1970s saw the United States government overspending and printing more dollars to make up for it, resulting in a sharp fall in the value of the dollar all over the world.

This in turn affected the price of oil, a vital commodity that has always been priced in dollars. Oil-producing countries reacted by raising the price of their commodity in 1973. Much of the world felt the pain of this sharp oil price rise, while the oil producers made billions of dollars and deposited them in western banks.

This created another crisis in the banking sector as interest rates crashed. To avert total disaster, banks started lending out money to Third World countries that wanted to maintain development and meet the rising cost of oil at the same time. For more see this Oneworld partner site: http://web.archive.org/web/20041013223801/http://www.jubilee2000uk.org/debt.html



Debt relief

The West's response to the growing debt crisis has been to hatch up plan after plan, initiative after initiative, fearing that the Third World would not be able to pay back much of what it owes.

None of these plans have adequately addressed the whole problem and the bulk of the crisis remains unresolved.

The Brady Plan: was devised in 1989 when it became very clear that debts to commercial banks were becoming worthless because the banks had theoretically written off huge chunks of it under the assumption that they would never be paid back.

Brady encouraged commercial banks to cut the actual value of the outstanding debt so that they would have less to pay back. Writing off some of the debt did this with some funding from the IMF and World Bank. The remaining debts were rescheduled by converting them into what became known as the Brady Bonds that were sold on the secondary market.

Trinidad Terms: Former British Prime Minister John Major mooted a plan which proposed to cancel 50 per cent of debts owed by the lowest income countries while rescheduling the rest, shelling out a net relief of about £18 billion to the poorest countries.

Sixty-seven per cent debt write-off was eventually agreed to at the 1994 G7 summit, but this was only applied to a small number of poor countries' debts.

HIPC (Highly Indebted Poor Country) Initiative: In 1996 the IMF and World Bank pulled a major surprise when they produced an initiative that `contemplated' debt cancellation for the first time.

The initiative also included a strategy that would enable debtor countries to get out of unsustainable debt. Visit these sites for more information on HIPC:http://web.archive.org/web/20041013223801/http://www.oneworld.org/eurodad/hipc.htm; http://web.archive.org/web/20041013223801/http://www.worldbank.org/hipc/; http://web.archive.org/web/20041013223801/http://www.imf.org/external/np/hipc/hipc.htm

1999 Cologne Debt Initiative: otherwise known as (HIPC2), was really much ado about nothing. It was touted as a positive development by the world media as it promised to write off $100 billion of debt owed by poor nations.

Why then were debt campaigners and NGOs unhappy with this initiative? Visit http://web.archive.org/web/20041013223801/http://www.odc.org/commentary/ibaug99.html to learn why.

Mauritius Mandate: In September (2OOO?) the British government tried its best to breathe some fire into the flickering embers of HIPC at the Commonwealth Finance Ministers' summit in Mauritius. It demanded that most of the 21 HIPCs quickly reach decision point by the end of the year 2000.

Campaigners believe the number of such countries could very easily be raised to 50 but what shocked them was that even Britain's limited proposal was met with severe hostility by other creditor countries.

Delays in granting relief to Nicaragua and famine-prone Ethiopia are clear examples of donor reluctance to effect deeper debt relief

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However to get a grip on the problem of the debt burden, one must move away from the figures and understand three key issues eloquently explained by Kevin Morrison on this site: http://web.archive.org/web/20041013223801/http://www.odc.org/commentary/ibaug99.html:




Conditionality


Debt service Vs Debt stock


Financing




Types of debt

Multilateral Debt: is money owed to international financial organisations such as the IMF and World Bank, as well as regional development banks such as the African Development Bank. Forty-five per cent of HIPC debt is multilateral.

Bilateral Debt: is money owed to individual governments like the United States, Britain, Japan and France. These governments meet in two groups, the Paris Club (US, Japan and European countries) and the non-Paris Club group (Asia and Eastern Europe). Forty-five per cent of HIPC debt is bilateral.

Commercial Debt: is money owed to international commercial banks like Citibank. Commercial debt accounts for 10 per cent of HIPC debt.



The campaigns

Jubilee 2000: has been by far the leading debt campaign organisation. It is a coalition of like-minded NGOs and faith-based organizations and charities that drew its inspiration from the Biblical concept of the Year of Jubilee, described in Leviticus 25, during which slaves were to be freed and all debts and obligations cancelled.

Together with organisations like Christian-Aid (http://web.archive.org/web/20041013223801/http://www.christian-aid.org/), Oxfam UK (http://web.archive.org/web/20041013223801/http://www.oxfam.org.uk/), World Development Movement (http://web.archive.org/web/20041013223801/http://www.wdm.org/), CAFOD (http://web.archive.org/web/20041013223801/http://www.cafod.org.uk/), Tearfund (http://web.archive.org/web/20041013223801/http://www.tearfund.org/) they raised the issue of debt on the agenda of G8 countries, multilateral and bilateral donors.

They underscored debt as one of the biggest barriers towards the attainment of global economic justice and have pledged to continue to fight until sufficient strides are made to cancel debts of the poorest nations.

Jubilee 2000 called for:


Definitive cancellation - not just reducing or rescheduling debt service.


Cancellation of all UNPAYABLE debts NOT all debts, although for the poorest countries, cancellation of unpayable debt would naturally mean canceling all debt!


Removal of stringent policy reform conditionality demanded by most adjustment programs that worsen poverty.


Recognition of the responsibility of both lenders and borrowers in the crisis and joint action in the recovery of all resources stolen by corrupt regimes.


Cancellation that benefits ordinary people and negotiated on terms that are agreed to in a transparent and participatory process that will break the never-ending cycle of debt.