We've been here before

Debt, default and relief in the past – and how we are demanding that the poor pay more this time

Joseph Hanlon, March 1998

Summary and key points

Debt and default are not new. The present problem of countries not able to repay debts is very similar to the 1930s – and the 1880s and 1840s.

In the 1930s Britain defaulted on its First World War debt to the United States – AND HAS NEVER PAID. Britain still owes $12.8 bn to the United States for loans during the First World War; only three countries in sub-Saharan Africa have larger debts. The rest of Europe owes another $17 bn to the United States. None are repaying this money. If rich Britain believes that it need not repay such a huge amount, what right does it have to demand that poor countries pay?

Not only are we demanding that the poor pay, but we are demanding that they pay far more than we considered acceptable for ourselves and our allies in the past. For example, Britain and Germany are demanding that poor countries pay more than five times as much in debt service as they agreed to pay after the Second World War.

The International Monetary Fund, the World Bank and the Paris Club of government creditors in 1996 set out its initiative for Highly Indebted Poor Countries (HIPC), which involves cancellation of "unpayable" debt, leaving poor countries with debt repayments that are considered "sustainable". This study of historic debt settlements shows that these levels have been set three to five times higher than what was considered sustainable in the past; indeed they are much higher that levels once considered unsustainable.

One HIPC criteria is the debt-service-to-export ratio – that is, what portion of export earnings goes to repay principle and interest on debts. HIPC says 20% to 25% is "sustainable".

By contrast in Germany in the late 1920s, 13%-15% was considered so excessive that opposition to it was credited with having helped promote the Nazi take-over. In 1951, Germany was asked to use 10% of exports to repay debts, but it argued this was unsustainable. Its former enemies agreed, and Germany payments were limited to 3.5%. British repayments to the United States for loans after the Second World War were capped at 4%.

When the West wanted to give political support to Indonesia after the overthrow of a left government, it ignored huge human rights violations (including the massacre of 750,000 people) and granted debt relief. The Paris Club agreed that a 20% debt-service-to-export ratio was totally unacceptable and capped repayments at 6%.

If 10% was unsustainable for Germany and 20% was unsustainable for Indonesia, why is 20-25% now sustainable?

Finally, the study notes that the 1980s and 1990s are very similar to the 1930s and to the end of previous cycles. One writer described the 1980s as "hauntingly familiar to those who have read the history of debt crises." In each case a surplus of deposited funds led banks to substantial international over-lending and "loan pushing" – using cheap interest rates and other inducements to push developing countries to take loans they do not need. Many countries borrowed only to use the money to repay old loans; when the bubble burst, they could no longer obtain loans and could not pay. Many writers argue that the banks and richer countries must take more responsibility for loan pushing, and that it is both impractical and immoral to demand repayments of loans pushed onto the poor.

Historic debt relief table

Debt-service-to-export ratio

20-25% HIPC

< 4% UK, 1945

< 3.5% London agreement for Germany, 1952

6% Indonesia, Paris Club, 1970-71

Agreed, but later considered unacceptable

13%-15% Germany, 1924, Dawes Plan

Proposed but rejected because considered unacceptable or unsustainable

10% Germany, Abs, 1951

< 20% Indonesia, IMF, 1970

Debt-to-export ratio

200%-250% HIPC

77% Latin America, 1945

Debt write-off

< 80% HIPC

90% Mexico, 1942

Outstanding debts not being collected

$ 30 bn European debts to US for World War 1, 1930s default,

including UK $12.8 bn

?? Mississippi debts to UK, 1842 default

 

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