Jubilee 2000 report: 'Unfinished Business', September 1999

Executive Summary

After the Group of Seven (G7) leaders met in Cologne, Germany in June 1999 they claimed to have agreed to write off up to $100 billion of debt owed by the world's most impoverished nations. Whilst this was heralded as a step forward, analysis from the Jubilee 2000 Coalition reveals that the Cologne initiative will give a little to a few countries and nothing to many others. The International Monetary Fund (IMF) itself admits that Mali, the 8th poorest country in the world, will, pay more in debt service after the Cologne initiative than it does currently. One in four children in Mali will still not live to see their fifth birthday. Even Zambia – where life expectancy will shortly fall to 33 years – will still pay more on debt service than on health and education combined. Once again, creditors have failed to grasp the nettle and cancel enough debt to free resources for poverty reduction.

Creditors often state that one of the major barriers to greater debt cancellation is cost. “Where will we find the money to pay for this initiative?” is often heard as a response to the millions around the world that support the call for poor-country debt cancellation to celebrate the Millennium. Indeed, the build-up to the annual meetings of the World Bank and IMF was dominated by attempts to persuade intransigent creditors to come up with funds to pay for the Cologne initiative.

Jubilee 2000 asks these institutional creditors to take a large dose of reality. Using the value of poor country debt as traded on the secondary markets, it makes an honest assessment of the likely cost of cancellation. Much of this debt is worth a fraction of its face value. In total the 41 Heavily Indebted Poor Country (HIPC) countries owe $200 billion in face value terms, which is only worth $24 billion at market value.

The 52 Jubilee 2000 countries have $354 billion debts on paper, but these are worth only $109 billion at market rates and would cost taxpayers only $71 billion to cancel. Spread out over 20 years, this is less than $4 per year – only one penny a day - for each person in the industrialised world. This cost is likely to be even less as Jubilee 2000 acknowledges that some countries can pay some of their debts.

There is no better time than now. Both the United States and Britain have reported huge budget surpluses. Put in the context of a world where Bill Gates' wealth is worth more than the national income of 30 poorest countries put together, debt cancellation is affordable. If bilateral and multilateral creditors used the secondary market assessment as a guide to valuing the debt, they would have little difficulty in finding the resources needed for cancellation.

Sadly they have yet to bite the bullet. Ann Pettifor shows the lengths to which the international financial community will go to bail out speculators and political allies. After the crisis of the Asian tiger economies, the IMF prioritised the interests of foreign banks with a massive $120 billion bail-out of creditors who made bad lending decisions. Money can be easily found to protect the private sector from the discipline of market forces.

Chapter 3 shows how various convoluted systems including the Multilateral and HIPC Trust Funds use “aid” to pay debts, to the World Bank and IMF who are being rewarded for lending recklessly. Because funds can be transferred to different government budgets, taxpayers' money – supposedly aid to help the poorest – is instead used to repay debts of impoverished countries to western creditors.

Equally absurd is the practice of keeping bad debts on the books so as to maintain the myth that effectively bankrupt countries are still able to repay those debts, obscuring the reality that they are bankrupt and the loans are worthless. This is particularly foolish, because compound interest makes these debts spiral out of control. Unpaid debts grow exponentially as countries pay interest on interest on interest. In Sub Saharan Africa 65% of new debt since 1988 has been capitalised interest and arrears.

The debts of the HIPCs have risen by 7.4% per year since 1980 while their economies have grown by only 1.1% per year in the same period. The poorest countries struggle to pay at least some of their debt service due, to try and slow the exponential growth of their unpayable debt. HIPCs are now spending more than 30% of government revenue servicing external debt, with individual countries such as Nicaragua and Honduras spending over 60%. This is money which comes directly out of the government budget, and is taken away from essential service provision. This not only exacerbates poverty, but also discourages the private investment the international community says it wants to promote.

For the poorest countries, most debt is with the international institutions and western governments, because private commercial lenders have partly been bailed out and have partly taken their losses. When a commercial bank makes a bad loan, it writes it off or at least admits it will only collect part of the money. This standard banking practice led to the development of a “secondary market” in developing country debt, in which bonds and loans are sold off at a deeply discounted value. In contrast, the World Bank and IMF refuse to act like banks and pretend instead that this money will some day be repaid. So the debt continues to mount up as do the claims as to how much it will cost to cancel the debt.

Cost can no longer be held up as a reason for not providing desperately needed debt cancellation. Creditors have lessons to learn from the realism of the market. Jubilee 2000 urges the leaders of the rich creditor nations not to let the historic opportunity of the millennium pass without doing the right thing for the poorest people in the world. We ask that they meet again before the year is out, to agree a final deal on debt cancellation.

Jubilee 2000 does not want to reward bad governments. That is missing the point and will not prevent the debt mountain from building up again. We ask that the process of debt cancellation and the allocation of funds released be carried out by a transparent and independent process involving representatives from civil society.

By taking the opportunity of the new millennium and injecting it with some meaning, the leaders can start to narrow the “chasm that has widened between the affluent peoples and those whose only aspiration is to eat their fill and quench their thirst, to survive and preserve their dignity.” ^[1]

In the past 15 years, the face value of the debts has grown due to compound interest on unpayable bad loans. Do we reward bad lending? Better that we say: “Get real. Admit these loans are worthless and cancel them.”

These loans have almost no value, but to the children of Burkina Faso or Bolivia who do not survive or do not go to school these debts have a real cost. Morality, common sense, and good banking practice all require that the debt be cancelled.

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Footnotes

^[1] Thomas Sankara, then president of Burkina Faso, speaking to the United Nations in 1984.

 

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