6 months after the official announcements of debt cancellation for the countries of the South: Where do we stand?

18 September by Milan Rivié

As they were faced with requests for debt cancellation from several heads of state from countries of the South and social movements [1] at the end of March and in early April, international financial institutions and other creditor groups suggested various initiatives [2] to provide financial resources that are indispensable in times of health and economic crisis. Six months after they were launched, what has been achieved? Do these measures respond to the urgency of the situation and the needs of the populations?

 1. Factual Background

In February 2020, the Covid-19 epidemic, which so far had been limited to a few countries, officially became a global pandemic. The financial and stock markets values, already in great difficulty since the fall of 2019, collapsed in the wake of the epidemic. The health crisis is coupled with an economic and financial crisis on an unprecedented scale impacting countries of the South in all sorts of ways, so that international financial institutions and other major bilateral creditors have come together to develop various plans to avoid serial defaults which would be against their interests.

At the end of March 2020, the World Bank, the IMF and the G20 communicated the implementation of emergency financing measures for developing countries. There would thus be no cancellation per se

At the end of March 2020, the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

communicated the implementation of emergency financing measures for developing countries. Then they called on G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). countries to meet and coordinate to implement bilateral debt relief initiatives. There would thus be no cancellation per se.

After coming together, the G20 countries called on the 22 bilateral creditors in the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

to establish a Debt Service Debt service The sum of the interests and the amortization of the capital borrowed. Suspension Initiative, or DSSI, for the 73 IDA countries [3] - the poorest countries eligible for financing from the International Development Association, one of the five subsidiaries of the World Bank Group - that will apply for it. If they comply with several conditions, the volunteers selected by the Paris Club will then see the repayment of their bilateral external debt (including principal and interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. ) due in May-December 2020 be deferred and added to the repayments due between 2022 and 2024.

 2. Bretton Woods Institutions (BWI) measures

The IMF/World Bank’s invitation to bilateral creditors was ironic. In fact, neither institution has or will cancel multilateral debt (public debts owed to multilateral institutions such as the BWIs and other development banks). On the contrary, the measures set out below apply only to developing countries that are not in arrears with their payments.

Putting forward the argument of its solvency and a potential downgrading of the sovereign debt ratings of the countries concerned, the World Bank has instead sided with the financial markets and creditors

Putting forward the argument of its solvency and a potential downgrading of the sovereign debt Sovereign debt Government debts or debts guaranteed by the government. ratings of the countries concerned, the World Bank has instead sided with the financial markets and creditors, players who also finance it through its bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. issues. Rather than a cancellation, the World Bank will increase its leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. “up to $160 billion over the next 15 months to help countries protect the poor and vulnerable, support businesses, and bolster economic recovery”, [4] all either in the form of grants (in a small proportion) or loans (in most cases). In fact, since the beginning of the crisis, the poorest countries have repaid more to the World Bank than they have received in aid from the Bank. [5]

The IMF’s strategy is broadly similar. [6] It has made available US$100 billion in emergency financing in the form of concessional and non-concessional loans. As of September 15, 2020, 80 countries had subscribed to these loans for a disbursed amount of US$87.9 billion. [7] At the same time, it proposed 28 countries a “false” cancellation of debt service owed to the IMF between April 13 and October 13, 2020. The operation consists of the creation of a “Disaster Assistance and Response Trust Fund”, funded by IMF member countries, [8] which would be paid back to these 28 countries in the form of grants and then directly redirected to the repayment of debt service owed to the IMF. The snake bites its own tail. This artificial aid, $251 million, [9] represents less than 1 percent of the total external debt payments of low-income countries in 2020... For both measures, the IMF said there was no need “to have a full-fledged program in place”. Later in the text, however, it calls on governments to implement “appropriate policies to address the crisis”. [10] In other words, a structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
package that the IMF is suggesting governments should implement. The IMF did not fail to show its lack of political neutrality by refusing a $5 billion loan to the Venezuelan government in open conflict with the United States, while a few weeks later it granted $24 billion to Chile, currently presided over by Sebastian Piñera, former World Bank president, a country that has been undergoing massive mobilizations against austerity and precariousness since October 2019. At the same time, some fifteen countries have seen IMF financing, including adjustment measures, extended. [11]

As World Bank Managing Director David Malpass said at the end of March, the aim is to “reassure markets”, to “those countries that have excessive regulations, subsidies, licensing regimes, trade protection or litigiousness as obstacles, we will work with them to foster markets, choice and faster growth prospects during the recovery” [12] amidst the scandal of the institution’s Doing Business report. [13]

 3. Southern countries disavow the Paris Club

On the bilateral creditors’ side, the Paris Club launched the DSSI. Aimed at 73 countries, only 39 had applied for it by early September, 9 are awaiting the Club’s decision, while the remaining 30 have had their bilateral debt service to Club members deferred between 2022 and 2024. [14]

The low level of subscription to DSSI points to the complete disavowal of the countries of the South against the Club and its increasingly obsolete solutions

The low level of subscription to DSSI points to the complete disavowal of the countries of the South against the Club and its increasingly obsolete “solutions”. Despite the exceptional nature of the situation, the DSSI remains far below the already inadequate HIPC Heavily Indebted Poor Countries
In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.

The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.

Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.

List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia.
initiative launched in 1996. In return for deferring payment of their debt service due to the Paris Club between April and December 2020, i.e. a maximum of 0.4% of the public external debt of the so-called developing countries, countries must complete a letter of request for DSSI addressed to the Paris Club/BWI duo, in which they commit to not having any arrears to the BWIs while extending or subscribing to an adjustment program with the IMF.

Threats applied by rating agencies Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/
and private creditors, aimed respectively at downgrading their sovereign ratings and limiting future investments, may certainly partly explain this low subscription. Only in part, because the possibility that the Paris Club, which is almost always a minority creditor for these countries, could postpone 8 months of repayment in return for close IMF surveillance is not very attractive. France, which is trying to restore the Paris Club’s former influence, [15] has understood this by inviting the G20 countries to extend the ISSD to 2021. Without success for the moment. China, often the main creditor of these same countries, either directly or via its private satellites, continues to go it alone, without being more generous in terms of cancellation. [16]

 4. Where are the private creditors?

Neither calls from the BWIs nor meetings between the Club and representatives of the IIF have succeeded in convincing private creditors to concede any cancellation

In addition to 50% of poor countries flouting the Paris Club’s offer, private creditors are also on the receiving end. In spite of the privileged links between these two categories of actors, officially or behind the scenes of power and interest games, the Paris Club has met with failure. Neither calls from the BWIs nor meetings between the Club and representatives of the International Institute of Finance (IIF) have succeeded in convincing private creditors to concede any cancellation.

It is true that usually, if not always, the Paris Club and the BWI have the habit of paying them back before any debt restructuring operation. With the policy of money printing and other liberal stimulus plans applied by the major Western central banks since the beginning of the crisis, coupled with their position as majority creditor, one quickly understands how little interest they would have in showing humanity and compassion. Unless they are forced to do so...

 5. The countries of the South must unite

We notice a significant increase in public external debt, debt servicing at levels not seen since 2004, some twenty countries in default, rising interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
, considerable bond debt repayment deadlines, end of the commodity super cycle, depreciation of national currencies against the US dollar, severe slowdown in growth, investment downturns and capital flight, falling revenues, reduction in foreign exchange reserves, uncertain future, all in a context of a health, economic, ecological and even food crisis requiring increased spending.

By putting debt back into the public, and therefore political, sphere, the states of the South would have considerable legitimacy to form a united front against debt payments and force creditors to sit around a negotiating table

In spite of the economic situation, the southern states have not received any significant support from creditors and informal influential groups (G7, G20).

In the absence of cancellation measures, it is necessary to shift the debate on sovereign debt settlements, which has become inaccessible and inaudible today because it focuses on technical issues. Debt is above all political. The States of the South have solid arguments for suspending and repudiating payments. Force majeure, a state of necessity or a fundamental change of circumstances, these three elements are invocable in international law. Contrary to the position supported in particular by the Senegalese economist Felwine Sarr, [17] it is necessary to move away from the moralist discourse that makes debt repayment a matter of honor. If it does not benefit the population, debt can be repudiated. Citizen audits could shed light on the unsustainable, illegal, odious or illegitimate nature of the debts with regard to the use of the borrowed funds or the opacity of the contracts established with the shared complicity of the signatories. It is also necessary to get out of the blackmail exercised by private creditors and rating agencies. It is not acceptable that these actors can brandish financial threats and thereby exclude themselves from any sovereign debt cancellation operation.

By putting debt back into the public, and therefore political, sphere, the states of the South would have considerable legitimacy to form a united front against debt payments and force creditors to sit around a negotiating table. While the EU and the US have been able to release US$2.5 trillion to support their economies since the beginning of the crisis, writing off the US$3 trillion debt of the 135 countries of the South, or 83% of the world’s population, does not seem to be an insurmountable obstacle.

Proofreading of the translation: Christine Pagnoulle


[1See, CELAG, « L’heure est venue d’annuler la dette extérieure de l’Amérique latine », March 27, 2020, https://www.cadtm.org/L-heure-est-venue-d-annuler-la-dette-exterieure-de-l-Amerique-latine , Collective, « Immediate cancellation of South Asian debts! », June 8, 2020, https://www.cadtm.org/Immediate-cancellation-of-South-Asian-debts and Gustave Massiah, « Le lancement de l’appel pour l’annulation de la dette publique africaine est un événement majeur », June 26, 2020, https://www.cadtm.org/Le-lancement-de-l-appel-pour-l-annulation-de-la-dette-publique-africaine-est-un

[2See “Joint Statement from the World Bank Group and the International Monetary Fund Regarding A Call to Action on the Debt of IDA Countries”, March 25, 2020, https://www.worldbank.org/en/news/statement/2020/03/25/joint-statement-from-the-world-bank-group-and-the-international-monetary-fund-regarding-a-call-to-action-on-the-debt-of-ida-countries and

[4World Bank, “The World Bank Group Moves Quickly to Help Countries Respond to Covid-19”, April 2, 2020, https://www.worldbank.org/en/news/feature/2020/04/02/the-world-bank-group-moves-quickly-to-help-countries-respond-to-covid-19

[5Sara Harcourt, Time for the G20 to step up on debt, ONE, July 17, 2020, https://www.one.org/international/blog/gleneagles-new-debt-deal-covid19/

[6IMF, “The IMF’s Response to Covid-19”, June 29, 2020, https://www.imf.org/en/About/FAQ/imf-response-to-covid-19

[7IMF, “Covid-19 Financial Assistance and Debt Service Relief”, September 2, 2020, https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker

[8Kristalina Georgieva, “IMF Executive Board Approves Immediate Debt Relief for 25 Countries”, April 13, 2020, https://www.imf.org/en/News/Articles/2020/04/13/pr20151-imf-executive-board-approves-immediate-debt-relief-for-25-countries

[9Ibid, footnote n°6

[10Ibid, footnote n°5

[11Ibid, footnote n°6

[12“Remarks by World Bank Group President David Malpass on G20 Finance Ministers Conference Call on Covid-19”, March 23, 2020, https://www.worldbank.org/en/news/speech/2020/03/23/remarks-by-world-bank-group-president-david-malpass-on-g20-finance-ministers-conference-call-on-covid-19

[13Isabel Ortiz, Leo Baunach, “It Is Time to End the Controversial World Bank’s Doing Business Report”, Inter Press Service, September 2, 2020, https://www.ipsnews.net/2020/09/time-end-controversial-world-banks-business-report/

[14Paris Club, “Progress on the implementation of the debt service suspension initiative”, September 01, 2020, https://clubdeparis.org/en/communications/press-release/progress-on-the-implementation-of-the-debt-service-suspension. To the list of 28 countries has to be added: Tajikistan, Lesotho and the Maldives.

[15See Milan Rivié, « Jeu de dupes sur la dette des pays pauvres », Le Monde Diplomatique, June 2020, https://www.monde-diplomatique.fr/2020/06/RIVIE/61866

[16Virginie Mangin, “L’Afrique dans le piège de la dette chinoise”, August 24, 2020, Le Soir, https://plus.lesoir.be/320762/article/2020-08-24/lafrique-dans-le-piege-de-la-dette-chinoise

[17Felwine Sarr in “Les européens s’inquiètent pour nous et nous nous inquiétons pour eux”, seneplus, 30 avril 2020. Disponible à : https://www.seneplus.com/societe/les-europeens-sinquietent-pour-nous-et-nous-nous-inquietons-pour

Milan Rivié

CADTM Belgium
milan.rivie @ cadtm.org




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