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Aid, Debt & Development

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The State of Debt
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Thirty years of debt crisis have devastated livelihoods across the world. Debt cancellation finally released some countries from one debt trap, but the First World Debt Crisis shows yet again why reckless lending and borrowing need to be governed and controlled, says a report by the Jubilee Debt Campaign.

The First World Debt Crisis has led to government debts in impoverished countries increasing, and unregulated opaque private lending also risks increasing inequality and crisis. We need a new system for monitoring and regulating the way money moves across the world, so that finance works for people.

Link to full report: The State of Debt: Putting an end to 30 years of crisis [pdf] 

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21st May 2012

Financial crisis 'will drive up debt repayments for poorer nations'

By Heather Stewart, The Observer, 20th May 2012

Poor countries can expect to see their debt repayments to the rest of the world increase by an average of a third by 2014, as they battle with the consequences of the financial crisis in the west, according to a new report by the Jubilee Debt Campaign.

Leaders of the G8 economies, including the US and Japan, have expressed their frustration at this weekend's summit at Camp David that European governments have failed to secure the future of the single currency – or erect a powerful enough firewall to prevent the consequences of a potential euro meltdown spreading.

But many far less powerful states will be severely hit by the events playing out across Europe, with no chance to urge Angela Merkel and François Hollande to act. Jubilee's Tim Jones says: "Impoverished countries could be dramatically affected by the worsening European debt crisis."

Just as in the first wave of the global credit crunch, poor countries are likely to suffer falling income from exports as demand from recession-hit European countries declines; from capital flooding out of the country as banks and other multinational firms repatriate funds to shore up their finances back home; and from declining revenue from migrants living in Europe who send cash back to their families.

In its report The State of Debt, Jubilee uses predictions from the IMF andWorld Bank to show that among 61 poor countries it analysed, total debt repayments are expected to rise by a third on average over the next two years as a result of the slower growth and shaky financial system in the rest of the world.

The recession of 2008-09 ended a long-term decline in many poor governments' debt repayments. Intense public pressure from a global coalition of campaigners had earlier helped to bring about widespread debt cancellation among scores of poorer countries.

Jubilee's research shows that international debt relief, championed by Gordon Brown in the UK and administered by the IMF and the World Bank under the so-called heavily indebted poor countries (HIPC) scheme, helped to cut debt repayments sharply, from 20% of government revenue in 1998 to less than 5% in 2010.

There is evidence that the benefits have been felt by ordinary families in those nations: in Tanzania, for example, school fees were abolished after the country was granted debt relief in 2001, and primary school enrolment jumped to 82%, from less than 50% in the late 1990s.

More recently, however, the burden of debt has begun to increase again as governments have borrowed to tide themselves over during the last few tough years. In many cases, the new lending has come from the IMF, which bailed out countries in distress when the downturn first hit. There has also been a large increase in private-sector lending to the world's poorest countries, while new international players such as China and India have begun to exert growing influence across Africa, building everything from giant container ports to five-star hotels, usually with money loaned to the host country.

Some countries that received international help with debt, including Ethiopia, Mozambique and Niger, could soon be spending as much on repayments as they were before they received that relief. Jubilee fears that this may be sowing the seeds of a future crisis. Many HIPC countries have large current-account deficits, of 5% or more, revealing a strong reliance on foreign finance. That could leave them highly vulnerable if investors decide to pull out their cash, as they undoubtedly would if a Greek exit from the eurozone sparked a rush towards the world's safe havens.

Max Lawson, head of policy at Oxfam, says developing countries will find it harder to cope with a fresh financial crisis in Europe because many dived into the red to cope with the credit squeeze of 2008-09. He argues that the IMF, then under the leadership of the left-of-centre Dominique Strauss-Kahn, deliberately allowed governments extra leeway to prevent the downturn hitting social spending such as education and health budgets.

But many developing countries are now being urged by the IMF, under the more orthodox Christine Lagarde, to implement strict spending targets to eliminate the deficits run up over the past few years. "Their advice to poor countries tends to mirror the G8 mood," Lawson says. "We were briefly Keynesian in the north, and the IMF became more flexible, but now it's all about austerity."

Kate Dooley, of Save the Children, agrees that the world's poorest countries will pay a hefty price for the renewed turmoil in Europe. "The problem this time around is really high unemployment," she says: this hits migrant workers from poor countries hard, and cuts off the flow of so-called remittances they were sending back home. "The other is the lower capital flows because of the recapitalisation of the banks in Europe."

Jubilee hopes that the eurozone's travails over the past 12 months will underline the potentially catastrophic consequences of allowing debts – whether to other governments or private sector lenders – to run out of control. Instead of a financial free-for-all, it would like to see governments given the power to impose so-called capital controls, limiting the flow of short-term, speculative cash in and out of vulnerable economies. And debt campaigners have long called for an international system for arbitrating cross-border debts and ensuring both creditors and debtors are dealt with fairly: something that has been woefully absent in the Greek case, where the fraught question of who owes what to whom has led to political paralysis.

In fact, Jones insists the only answer to Europe's travails will be for it to have its own jubilee, and write off some of the unpayable debts of countries such as Greece and Portugal. He says: "Europe rapidly needs to move away from austerity and bailing out reckless banks, and cancel debts which are too high."

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