The Problem
The on-going debt crisis of developing countries is integral to the perpetuation of an unjust economic system, one that concentrates wealth and power in the hands of a few. EVERY SINGLE DAY in 1999, $128 million was transferred from the poorest countries to the richest in debt repayments. For every one dollar in aid to developing countries, more than seven dollars comes back to rich countries in the form of debt servicing.

Governments of the poorest countries repay debts to international creditors at great cost to people who lack food, clean water, housing, health care and education. The debt crisis also exacts an enormous toll on the environment, as natural resources are pillaged in return for foreign exchange with which to pay back foreign creditors. Workers are typically laid-off as public companies are sold-off.

Developing countries are highly indebted to creditors based in G7 countries, such as private banks, export credit agencies and G7 governments, or to G7-controlled creditors, such as the International Monetary Fund and the World Bank. It is in their role as creditors that the IMF and the World Bank require developing countries to globalize, in other words to liberalize their economy, privatize their assets and limit the role of government to maintaining law and order and a sound investment climate. It is through liberalization and privatization that multinational corporations are able to dominate industries and gain control over natural resources.
 

Its Origins

The Third World debt crisis has been the ugly underside of the world economic system for years. The oil price hikes in the early 1970's resulted in large earnings of foreign currency for oil producers, and massive deficits for oil importers. Banks, awash in petro-dollars, sent out money salesmen who competed to pump out loans. More often than not, the funds were used for industrial mega-projects, "white elephants" with little benefit to anyone but the multinational corporations that got the contracts. Loans made their way back to northern bank accounts in more direct ways as well, through dictators who stole money and sent it north into their private accounts, with northern bank complicity.

A court case in Argentina against loans incurred by the military dictatorship found that most credit operations between the military and their foreign creditors were carried out in totally clandestine conditions with no accountability. The evidence presented read "?in the late 1970's when Britain was supporting the Argentine military dictatorship (before it attacked the Falklands/Malvinas), British banks made multi-million dollar loans to Argentine parastatal companies - knowing that the money never went to Argentina, but remained in accounts in London.

The oil price hikes caused prices of many consumer goods to rise in industrial countries, increasing inflation. To curb inflation, industrial countries raised interest rates, which caused an enormous global recession. Poor countries' economies deteriorated rapidly as their debt payments staggered under interest rates that rose from an average of 0.5% on bank loans to governments to an average of 13.1%. Export earnings dropped as commodity prices crashed. Faced with falling commodity prices and soaring debt service costs, developing country governments tried to balance their books in part through new borrowing. Much of the new debt built up after 1980 went to refinance old debts instead of being invested in development.

The crisis peaked when Mexico defaulted on its debt payments in 1982. The crisis received serious attention as it threatened the solvency of the largest North American banks. The IMF was called on to provide a loan for balance-of-payments support and to orchestrate debt-restructuring with the international banking community.

International banks were bailed out, as countries consolidated their loans at the IMF.

In return for financing, the IMF required countries to submit to structural adjustment, eliminating budget deficits, increasing interest rates, eliminating capital controls, orienting economies towards exports, privatizing assets etcetera. The World Bank also began to make structural adjustment loans. In 1999, 72 % of World Bank lending to Africa went for structural adjustment loans.

Developing countries are trapped in the vicious cycle of debt. By the mid-1970's, Latin America owed $60 billion to external creditors. By 1980, the debt ballooned to $204 billion due to the increase in interest rates. By the end of 1999, due to interest rates, late payments and new debts incurred to service old one, Latin America's debt was $706 billion. However between 1982 and 1996, the region had paid $739 billion in debt servicing payments, an amount greater than its total accumulated debts.

Action to Date

Outrage at this perverse flow of resources from the poor to the rich has resulted in a huge mass movement for debt cancellation and a growing movement for reparations for wealth stolen from the people of developing countries - human, ecological and monetary wealth.

In 1994, the World Bank and the IMF celebrated their 50th anniversary. Few celebrated with them as people's movements around the world joined together to say 50 years is enough of debt bondage and structural adjustment.

In 1995, the G7, meeting in Halifax, "encouraged" the World Bank and the IMF to "develop a comprehensive approach to assist countries with multilateral debt burdens".

In 1996, the World Bank and the International Monetary Fund announced the Highly Indebted Poor Country (HIPC) Initiative, which saw minimal debt reduction for a select few countries after the countries completed successfully six years of structural adjustment. The Bank and the Fund did not take any losses for little debt that would be reduced, instead the Bank and the Fund set up a trust fund to which G7 and other countries contribute to 'bail-out' the creditors. Canadian NGOs called the HIPC Initiative a cruel hoax.

Too few, too little, too late was the rallying cry of international debt campaigners. Churches around the world launched a campaign to cancel the debt of the poorest countries. The campaign was popularly known as Jubilee 2000. As a result of this movement, 17 million petitions calling for debt cancellation were given to the G7 leaders in Koln in 1999.

The Enhanced HIPC Initiative gives minimal relief now after the successful completion of three years of corporate-led globalization. In 2001, at least 8 countries are delayed in receiving debt relief due to failures to meet structural adjustment targets. In addition, to structural adjustment, the country must also agree to develop a poverty reduction strategy paper (PRSP). Whereas some groups welcome this requirement on their governments who have not consulted them previously, many view PRSPs as furthering mission creep and control of the creditors, who will now judge social and economic policies and priorities of their countries.

The goal of the G7 debt reduction schemes is to get impoverished countries to a level of "debt sustainability" in which they continue to make payments to the full extent possible given their economic situation. And so long as they remain indebted, the creditors, whether they be countries or institutions, can interfere in their internal operations.

Since the G7 in Koln, only 23 countries have qualified for the Enhanced HIPC Initiative. In return for debt relief, Honduras is being forced to privatize its telecommunication sector, liberalize its mining sector and impose bank service fees. In Bolivia, the World Bank imposed water privatization resulted in increased user fees, from $5 a month to $25 a month. The average worker earns $80.

Throughout 2001 Nicaraguans were starving because of drought and the collapse of coffee export prices. Yet the IMF was not satisfied with the government's efforts to cut the budget, build up foreign reserves and privatize public services. IMF documents released Oct. 2, 2001 indicate that the HIPC debt program for Nicaragua would not move forward until the country complies with fiscal, monetary and privatization conditions.

Mr. Ian Bennett, the IMF Executive Director representing Canada, justified the IMF action this way: "Unfortunately, Nicaragua veered significantly away from the policy targets that it had agreed to? Nicaragua's authorities could not provide assurances that government spending could be controlled. It was therefore with regret that the IMF had to suspend the PRGF*." (The PRGF is an abbreviation for the "Poverty Reduction Growth Facility," the new name for the structural adjustment program. Without IMF approval, granted through the PRGF process, the whole debt relief program is halted-not only for the IMF but for almost all other creditors, such as the World Bank, the Inter-American Development Bank, and wealthy countries.)

What does this have to do with Argentina?

In December 2001 following social unrest that left 30 people dead, Argentina declared that it would be suspending payments on its $132 billion dollar debt. Argentina's crisis is the latest in a string of crises affecting emerging market economies, middle-income coutries. Thailand, Indonesia, Turkey, Russia, Argentina's debt crisis differs from severely indebted low income countries in that financial crises are precipitated by large movements of short-term debt held by private capital markets.

The costs of financial crises are borne by ordinary people, whereas the benefits of financial liberalization that precede them accrue to banks and those with large financial assets .

The IMF, backed by G7 governments, is offering to bailout Argentina, as it bailed out the countries in crisis before it, by demanding more economic austerity. These bailouts are then used by governments to meet debt needs of private creditors such as Chase Manhattan, Citibank and in the case of Argentina, Scotia Bank.

Real Solutions

Even though last year's G8 Summit discussion document was entitled "Beyond Debt Relief", the debt crisis of developing countries is far from over.

Even Canadian Finance Minister recognized this when he went to the semi-annual meetings of the World Bank and the IMF in April 2002 and called on G-7 countries to launch an immediate review of the process that provides debt relief to heavily indebted poor countries (HIPCs).

The HIPC Initiative is fundamentally flawed as it is designed to ensure that creditors continue to get a return, even though they have been paid back many times over, through interest, late fees and for public and natural assets stolen or sold well below market prices over the years.

At the World Social Forum in Brazil in February 2002, an International People's Tribunal on Debt was held to raise awareness of the illegitimacy of debts owed by people of developing countries.

Excerpts from the Verdict:

THAT neoliberal polices lead to an explosive growth in the external debt affecting the capacity to carry out social policies and compromising seriously the political sovereignty of the countries of the South.

THAT according to studies and dates the debt of the poorest countries has been paid several times over so that, in addition to resulting unpayable, is also illegitimate, unjust and immoral.

THAT the unilateral decision of the United States at the end of the 1970s to increase interests rates over their historical level from 4-6 percent to more than 20 percent over a period of a few months spelled a betrayal of good faith assumed in the original contracts in addition to forcing the debtor countries to take out more debt in order to pay interests rates, occasioning additional payments that in the case of Latin America represented a loss of 106 billion dollars.

THAT the external debt constitutes a permanent violation of human, economic, social and cultural rights established by the United Nations on December 16, 1988. Here the UN demands the recognition of the right of national self-determination, to economic development as well as to freely dispose its wealth and natural resources, and that in no case can a people be deprived of its own means of subsistence.

We call for unity among the citizens present in this forum and to the people of the Third World as well as citizens of countries in the North who stand in solidarity with the peoples' cause, and jointly realize a campaign of external debt cancellation.

Initiate processes of the sovereign and independent audits of the external debts of countries in order to verify actual existing legal and, if indeed there is still a debt that should be repaid, establish participative and democratic procedures for social control over indebtedness.

Debt campaigners around the world call on the creditors to:

• cancel the debt of the poorest countries immediately, using their own resources;
• end requirements to for structural adjustment;
• accept a fair, independent and transparent debt arbitration mechanism with the authority to assess and cancel illegitimate debts. Illegitimate debts include: debts that cannot be serviced without causing harm to people or communities, odious debts incurred to strengthen despotic regimes, debts contracted for fraudulent purposes, debts whose proceeds were stolen through corruption, debts that became unpayable as a result of creditor unilaterally raising interest rates. This mechanism must be independent of all creditors, including the IMF.