Version 2.0: A new debt trap from the South to the North

The external debt of Developing Countries: a Timebomb

Part 2

22 February by Eric Toussaint , Milan Rivié

In the first part, we saw that the external indebtedness of developing countries (DC) went through two stages from 2000 to 2019. From 2000 to 2007-2008, the debt stagnated or increased moderately in parallel to negative net transfers. From 2008 to 2019, the opposite happened: debt doubled and net transfers were positive. In this article, we analyse different factors that have a direct influence on the DC’s capacity to carry on making debt repayments.

Provided that it is legitimate and invested in productive sectors that are essential or useful to the population, debt in itself is not a bad thing. However countries most often fall into the debt trap. When faced with the rising debt of DC, advocates of the dominant economic policy generally claim that the sums borrowed are going to be invested in the economy, generate growth and jobs, improve infrastructure, increase GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
and in fine produce the wealth necessary to repay the debt alongside higher income. The truth is that this interpretation ignores the differential between the amounts borrowed and the amounts actually received after the generous commissions and fees creamed off by the creditors, and also 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.
. It ignores embezzlement of public money, enabled by banking secrecy ensured and defended by big private banks with the support of governments and institutions such as 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.

, 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.
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.
, multilateral regional banks like the Inter-American development banks, the African Development Bank, the Asian Development Bank, the European Investment Bank and so on. It ignores the trade mechanisms and agreements on foreign investment that impoverish States and their populations: free-trade treaties, bilateral treaties on investments, repatriating profits by multinationals, etc. That interpretation also ignores exogenous shocks that severely limit governments’ ability to defend their populations if they are to continue debt repayments: the catastrophic effects of the global environmental crisis, the global health crisis, the global economic crisis. Those who are eager to explain that public indebtedness is a compulsory step for the countries of the South if they want to progress and develop forget to consider the fact that DC are particularly vulnerable to these exogenous factors. No developing country, with the exception of China – which is not really a DC except in the statistics of the World Bank and other international bodies—has the power to make a significant impact on variables like international 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. rates, the exchange rate for their national currency against strong currencies, the price of raw materials (or what is known as terms of trade), the great flows of investments, decisions made by multilateral institutions (the IMF, World Bank, WTO WTO
World Trade Organisation
The WTO, founded on 1st January 1995, replaced the General Agreement on Trade and Tariffs (GATT). The main innovation is that the WTO enjoys the status of an international organization. Its role is to ensure that no member States adopt any kind of protectionism whatsoever, in order to accelerate the liberalization global trading and to facilitate the strategies of the multinationals. It has an international court (the Dispute Settlement Body) which judges any alleged violations of its founding text drawn up in Marrakesh.

etc.). Whenever there is a shock on one or more of these variables, DC can soon find themselves suffocating or at least considerably destabilized.

 1. Evolution of the public external debt of DC by type of lender

Graph 1: Evolution of the public external debt of DC by type of lender (in billions of $US)

In the graph above, can be seen the two phases described earlier. Furthermore, the lenders can be distinguished, divided into 4 categories:

  • In blue: bilateral creditors. These are loans between States.
  • In yellow: multilateral creditors. These are loans from the international financial institutions (IMF, World Bank and the development banks).
  • In grey: IMF’s loans [1].
  • In green: private creditors. A distinction is made between: dark green, for loans contracted on the financial markets in the form of sovereign bonds, usually sold on Wall Street; khaki green, for bank loans; and light green for loans from other kinds of private creditor.

In short:

in billions of USD 2000 2010 2019
Amount As % Amount As % Amount As %
Bilateral part 418.84 31.65 347.72 20.01 439.3 13.43
Multilateral part 318.19 24.05 469.91 27.04 691.13 21.13
IMF part 77.6 5.86 135.26 7.78 170.29 5.21
Bondholders part 320.05 24,19 505,65 29.10 1527.5 46.70
Owned to private bank 122.55 9.26 244.18 14.05 368.3 11.26
Owned to other private creditors 66.01 4.99 35.12 2.02 74.24 2.27
Total 1323.24 100 1737.84 100 3270.76 100

While the official bilateral and multilateral creditors hold a roughly stable amount of the DC’s debt in absolute terms, there has been a significant increase of the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. held by private creditors, which has climbed from 38% in 2000 to 60% in 2019. Although it is true that bank loans have increased, this tendency is mainly due to the weight of 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, i.e. sovereign bonds sold by the DC on the financial markets, mainly Wall Street).

Unlike loans from official creditors, private loans have the advantage of not carrying political conditionalities. On the other hand, interest rates are higher and may vary according to the credit rating given by Credit 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 :
or the evolution of the benchmark interest rates fixed by central banks.

 2. Evolution of interest rates

Graph 2: Evolution of the Prime Rate and the main Central Banks (in %)

The US dollar, the euro and the yen are the main 3 lending currencies.

In 1979, the FED’s brutal interest rates applied after a unilateral decision by the United States was one of the main factors that triggered the debt crisis in the Third World. Following the subprime crisis in 2007-2008, the Central Banks of Europe and the United States applied a very low interest rate. They have pursued this policy without ever really succeeding in improving the economic situation. With the new financial disturbances of Autumn 2019 and the collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. effects of Covid-19, it should be extended, but for how long? If rates were to rise, the cost of debt repayment would increase significantly for the DC. The risk is enhanced by the currency profile of the DC’s debt. 75 % are denominated in US dollars, 9 % in euros, 4.4 % in yen (see graph 3).

Graph 3: Evolution of the composition of the DC’s public external debt by currency (in %)

This graph shows only the main exchange currencies as indicated by the World Bank. In blue we have the US dollar, in green the IMF’s Special Drawing Rights (SDR – a basket of currencies), in grey the Japanese yen, in yellow the euro and in red “all other currencies”. To make the graph clearer and because their proportion is below 1 %, we have omitted to show the Swiss franc (0.38%), the British pound sterling (0.27%) and “miscellaneous currencies” (0.53%).

It is immediately obvious that by far the majority of loans are contracted in US dollars (80.5%). Next come, in yellow, loans denominated in euros (8.5%), loans denominated in yens (4.33%), then in red, “all other currencies” (3.97%). The latter is rising sharply, probably because it rests to a large extent on the yuan, the currency of the State of China, which has become one of the largest lenders to the DC.

Graph 4: Evolution of interest rates on the DC’s loans (in %)

The graph represents the average interest rates paid by the DC. In grey are those owed to private creditors, in orange those owed to official creditors and in blue, the average of both those.

As shown in Part 2, we note a fall in interest rates consecutive to decisions of the Fed and the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.
, with a subsequent rise from 2013 onward. The upward inflexion gets noticeably steeper from 2018 onward. While lower than before, the level of interest rates has thus gradually increased. At their lowest between 2013 and 2015, they reached an average of 3%; from 2015 they climbed by an average of 4%. Afterwards, the increase was much steeper. By way of comparison, in 2019-2020 countries like France, Germany, Japan or the United States borrowed at either negative interest rates or at a rate varying between 0 and 1%.

An important fact that this graph highlights is a rise in interest rates from 2015. The overall increase in the DC’s debt, their weak credit ratings on the financial markets, in correlation with the end of the super cycle of raw materials and the slowdown in world growth during the trade war between the USA and China, lead creditors to fear a series of defaults on repayments in 2020. Consequently, the lenders “protect” themselves by raising the risk premium Risk premium When loans are granted, the creditors take account of the economic situation of the debtor country in fixing the interest rate. If there seems to be a risk that the debtor country may not be able to honour its repayments then that will lead to an increase in the rates it will be charged. Thus the creditors receive more interest, which is supposed to compensate for the risk taken in granting the loan. This means that the cost to the borrower country is much higher, accentuating the financial pressure it has to bear. For example, in 2002, Argentina was faced with risk premiums of more than 4,000 points, meaning that for a hypothetical market interest rate of 5%, Argentina would have to borrow at a rate of 45%. This cuts it off de facto from access to credit, forcing it even deeper into crisis. For Brazil in August 2002, the risk premium was at 2,500 points. that they demand from borrowers from the South. This trend is particularly noticeable over the last two years. When the average interest rate was 4.22% in 2018, it had more than doubled in 2019 (9.35%). Private creditors speculate on future defaulting.

Is a new debt crisis in motion? Is the debt trap closing on the DC? Several factors are developing in that direction; this is what we are about to see.

 3. Evolution of exchange rates for DC currencies

To calculate the cost of loans an economy takes out, it is not enough to take into account the interest rates (and risk premiums which make the loans even more expensive); how the value of the debtor country’s currency evolves in relation to the currency in which the loan is denominated also needs to be included. If a country borrows mainly in dollars and its own currency loses, say, 5 % of its value compared to the dollar, the burden of debt repayment will automatically increase. Now most countries of the South have seen their currency depreciate against the dollar during 2020. The ratio varies between 2.7 (Tunisian dinar) and 10,470 (Uzbek som) to 1USD. In the case of Venezuela, the ratio even reaches 1,035,256.1, i.e. over one million of Venezuelan bolivars for 1USD.

Table 2: Evolution of exchange rates for 38 DC currencies against the US dollar between 1 March 2020 and 1 January 2021

Currecny Variation (%) Value on 1 March 2020 Value on 1 January 2021
HTG Haïti [Gourde] 21.6 % 88.3 72.6
LRD Liberia [Liberian dollar] 20.6 % 196.6 163
EUR Euro zibe [Euro] 11.8 % 0.9 0.8
CNY China [Yuan renmimbi (RMB)] 6.8 % 6.9 6.5
ZAR South Africa [Rand] 6.0 % 15.6 14.7
PHP Philippines [Peso philippin] 5.9 % 51.1 48.2
Tunisie [Tunisian Dinar] 5.7% 2.8 2.7
LBP Lebanon [Lebanon Livre] 0.0 % 1507.5 1507.5
EGP Egypt [Egyptian Livre] -0.7 % 15.6 15.7
MXN Mexico [Mexican Peson] -0.9 % 19.7 19.9
SDG Sudan [Sudanese Livre] -0.9 % 54.7 55.2
INR India [Indian Roupie] -1.2 % 72.2 73.1
NPR Nepal [Nepalese Roupie] -1.2 % 115.4 116.8
GMD Gambia [Gambian Dalasi] -1.5 % 50.9 51.7
AFN Afghanistan [Nouvel afghani] -1.6 % 75.8 77.0
LKR Sri Lanka [Roupie ] -1.8 % 181.7 185.1
NIO Nicaragua [Cordoba] -1.9 % 34.2 34.8
MGA Madagascar [Ariary] -2.2 % 3720.3 3805.0
BIF Burundi [Burundi Franc] -2.6 % 1888.4 1939.0
MNT Mongolia [Tugrik] -3.5 % 2752.5 2852.3
NGN Nigeria [Naira] -3.7 % 364.0 378.0
PKR Pakistan [Roupie ] -3.8 % 154.0 160.1
SLL Sierra Leone [Leone] -3.9 % 9704.4 10100.5
JMD Jamaïque [Jamaican Dollar] -4.1 % 137.1 142.9
LAK Laos [Kip laotien] -4.1 % 8902.6 9288.9
GNF Guinea [Guinean Francn] -4.7 % 9520.4 9988.4
MWK Malawi [Kwacha malawite] -4.7 % 727.1 763.2
PEN Peru [Sol] -5.1 % 3.4 3.6
RWF Rwanda [Rwanda Franc] -5.4 % 936.7 990.4
PYG Paraguay [Guarani] -5.7 % 6517.6 6912.2
CRC Costa Rica [Colon] -6.7 % 569.1 610.0
KES Kenya [Shilling] -7.4 % 101.1 109.1
GHS Ghana [Cedi] -8.1 % 5.3 5.8
DOP Dominican Republic[Peso] -8.2 % 53.3 58.1
UYU Uruguay [Peso] -8.5 % 38.6 42.1
DZD Algeria [Dinar] -9.0 % 120.1 132.1
UZS Uzbekistan [Som] -9.2 % 9507.1 10470.1
KZT Kazakhstan [Tenge] -9.4 % 381.5 421.2
RUB Russia [Rouble] -10.0 % 67.1 74.6
MZN Mozambique [Metical] -12.9 % 65.2 74.9
UAH Ukraine [Grivna] -13.2 % 24.6 28.3
BRL Brazil [Real] -13.6 % 4.5 5.2
CDF Congo/Kinshasa (RDC) [Congolese Franc] -13.8 % 1694.6 1966.6
TRY Turkey [Lire] -16.1 % 6.2 7.4
KGS Kirghizistan [Som] -16.4 % 69.8 83.5
ETB Ethiopia [Bir] -17.9 % 32.3 39.3
IQD Iraq [Dinar] -18.5 % 1190.1 1460.0
AOA Angola [Kwanza] -24.8 % 492.2 654.6
ARS Argentina [Peso] -26.1 % 62.2 84.0
ZMW Zambia [Kwacha] -28.8 % 15.1 21.2
SCR Seychelles [Roupie] -40.5 % 12.4 20.9
SRD Surinam [Dollar] -46.8 % 7.5 14.0
ZWL Zimbabwe [dollar] -78.1 % 17.9 81.8
VES Venezuela [Bolivar] -92.9 % 73617.1 1035256.1

Map: Evolution of the respective values of currencies compared to the UD dollar from 1st March 2020 and 1st January 2021

Map: Evolution of the respective values of currencies compared to the Euro from 1st March 2020 and 1st January 2021

Table 2 and the map above show the evolution of the respective values of 50 DCs and of the world at large compared with the US dollar from 1st March 2020, the time when the CoViD-19 pandemic became global, and 1st January 2021 when this text was drafted.

Except for countries of the North, DCs in the eurozone, the 15 countries that are former French colonies in West and Central Africa and in the Comores, countries that indexed their currency on the US dollar (such as Ecuador), and China, we notice that the overwhelming majority of DCs’ currencies depreciated over that period (map 1). The overwhelming majority of DCs’ currencies depreciated over that period. Actually this depreciation had started in 2015. It was accelerated by coronavirus’ collateral economic consequences.

Several factors can explain this evolution:

Clearly, the ruling classes in the South are partly responsible since they have organized the flight of capital. Indeed local ruling classes buy dollars (or some other strong currency) to place ‘their’ money safely in countries of the North or in some tropical tax haven Tax haven A territory characterized by the following five independent criteria:
(a) opacity (via bank secrecy or another mechanism such as trusts);
(b) low taxes, sometimes as low as zero for non-residents;
(c) easy regulations permitting the creation of front companies and no necessity for these companies to have a real activity on the territory;
(d) lack of cooperation with the inland revenue, customs and/or judicial departments of other countries;
(e) weak or non-existent financial regulation. Switzerland, the City of London and Luxembourg receive the majority of the capital placed in tax havens. Others exist, of course, such as the Cayman Islands, the Channel Islands, Hong Kong and other exotic locations.
instead of investing it in their country’s economy. Buying dollars with local currencies boost the dollar compared with those currencies. This leads the central bank of the concerned country to try and limit depreciation of the local currency by repurchasing it with dollars it has in reserve. This in turn results in depleting exchange reserves. This is what has happened in Turkey since 2015. It is also what tragically happened in Lebanon in 2020. The diminution of the central bank’s exchange reserves reduces its ability to repay the sovereign debt Sovereign debt Government debts or debts guaranteed by the government. in dollars or in any other strong currency to the point that the country has to default, either totally or partially. This is also what happened in Argentina and in Lebanon en 2020.

Other actors are responsible for the depreciation of the local currency: for instance, the large foreign corporations that send their profits back to the parent company located in the North or foreign investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
that resell shares they had bought on the local stock market. Another factor that works against the local currencies is the fall in exports and thus on the amount of dollars brought in by the sale of exported products on the global market.

A further factor can account for this depreciation/devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of currencies in the South compared with the dollar, namely the plummeting of commodity prices from 2015 onward (see part 3 of the e series). As they are mainly intended for export, a fall in prices results in a proportional fall in the countries’ revenues, and throw their trade balance Trade balance The trade balance of a country is the difference between merchandize sold (exports) and merchandize bought (imports). The resulting trade balance either shows a deficit or is in credit. into the red (ratio between import and export revenues). Consequently, the foreign currency reserves that are necessary to repay the external debt contract accordingly.

Simultaneously, with depreciations, the amount of local currency that has to be converted into dollars to repay the external debt (or the internal debt if the currency is indexed on the dollar, as is often the case) strongly increases, according to a simple arithmetical mechanism. Indeed, even if interest rates remained at historically low levels (see part 2 [?]), countries would have to dig deeper and deeper in their exchange reserves to repay their debt. Since export revenues are decreasing because of the global economic crisis that was dramatically aggravated by the consequences of Covid-19, the situation has become critical for a number of DCs including so-called emergent countries such as Argentina (-26.1%), Brazil (-13.6 %), India (-1.2%), Mexico (-0.9 %) or Russia (-10.0 %). Several of the concerned countries are already overindebted or have suspended payment.

In the third part, we analyze the evolution of commodity prices, the schedule for debt repayment, and the aggravating factors resulting from the global crisis related to the pandemic.

Translated by Christine Pagnoulle and Vicki Briaut Manus


[1While the IMF is a multilateral creditor, it is not mentioned under this name in the WB’s database.

[2Data collected on the FXTOP website. The reference currency is the US dollar on 1 January 2021. Accessed on 17 January 2021 at

[3The closer the colour is to red or black, the more the national currency depreciated compared with the USD. The closer to dark green, the more the currency appreciated compared with the USD. Accessed on 1 January 2021. Source:

[4The closer the colour is to red or black, the more the national currency depreciated compared with the euro. The closer to dark green, the more the currency appreciated compared with the euro. Accessed on 1 January 2021. Source:

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography:
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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Milan Rivié

CADTM Belgium
milan.rivie @
Twitter: @RivieMilan

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