Poor countries overpaying billions as result of irresponsible lending says new research

As the world bank meetings open in Singapore, new research from nef (the new economics foundation) says that the time has come to look again at foreign debts forced wrongly on developing countries – so-called ‘odious debt’ – and shift the spotlight onto the ‘odious lenders’ – the bankers who made large loans to illegal regimes.

The nef research, Odious lending: debt relief as if morals mattered, for the first time demonstrates the true scale of the impact of debts that result from ‘odious lending’, and how that impact continues to grow until the loan is cancelled.   Long after ‘odious debts’ are technically off the books, subsequent generations are still effectively paying for them.  Taking 13 clear examples of odious lending, nef’s new calculations reveal that amongst the worst cases:

• Indonesia has already ‘overpaid’ in the region of US$151 billion relating to odious debts - twice the level of recorded debt.   This means that Indonesia has made a cumulative net transfer to the North of US$138 billion to date - or 90 per cent of Indonesia’s GDP.
• Argentina has already ‘overpaid’ in the region of US$77 billion relating to odious debts - 75 per cent of the country’s recorded debt.
• Nicaragua has odious debt of over five times the country’s total GDP.

The case for debt cancellation on the grounds that the vast loans made to ‘odious’ regimes should not be enforceable under international law, is gaining momentum. But until now, no-one has tried to put a price on the repercussions of odious debt that reverberate for many decades – even after an oppressive and corrupt borrower regime may have left the scene. 

The nef research reveals that for at least ten countries, their total debt results from ‘odious lending’. For the ten countries identified as having 100 per cent odious debt: Indonesia, Argentina, Nigeria, Phillipines, Pakistan, Peru, Sudan, South Africa, Democratic Republic of Congo and Nicaragua, all debt servicing is inappropriate.  This means that they have, in fact, been ‘overpaying’ and are owed not just a total cancellation of all outstanding debt, but a substantial repayment, currently amounting to US $383 billion.

Not only are successor governments saddled with paying off the loans - but because the borrowed money was often not put to productive use, there are inadequate funds to repay interest and capital.  The result is a vicious circle of debt in which new loans have to be taken out by successive governments to service the odious ones, effectively ‘laundering’ the original loans. This can give a legitimate cloak to debts that were originally the result of odious lending.   And, as the nef research reveals, the net loss to these countries economies’ often exceeds the total outstanding debt.

“This means that people in these – often desperately poor – countries end up paying three times for loans ostensibly taken out in their name: first they are oppressed by the regimes propped up and enriched by these loans; secondly they are impoverished by the cost of servicing the loans; and thirdly they are oppressed again by the penalties imposed if the odious regimes default.” Says Stephen Mandel, a senior economist at nef and the report’s author.

Also, if debt cancellation only comes through the procedures of the Paris Club and the Heavily Indebted Poor Countries (HIPC) initiative, they pay a fourth time when IMF conditionality imposes the often disastrous policies of trade and capital account liberalisation, privatisation, and restrictions on social expenditure.

nef proposes a new process for dealing with the problem including a new independent body that would assess the track record of regimes that incurred the debts and declare whether it was odious or legitimate.   Loan contracts entered into by ‘odious’ regimes would then be deemed unenforceable. And, for the backlog of the past, debtor countries would be able to apply to an independent arbitration panel for a debt work-out. A moratorium would be declared on all debt service while the case was examined. Odious debts would be declared null and void before debt service could be considered on the rest. The key components of the nef proposal are:

• an internationally recognised independent body to decide on the odious nature, or otherwise of regimes
• on a country by country basis, arbitration panels consisting of representatives of: creditors to odious regimes (the ‘odious lenders’), legitimate creditors, present government and civil society with a mutually agreed chair to decide on debt work-out, designed to leave any country no worse off than they would have been if there were no odious loans.

As well as relieving legitimate governments of the burden imposed on them by undemocratic predecessors, this would make it much more difficult for future dictators and other corrupt regimes to raise loan finance, thus greatly strengthening the forces of democracy and justice.

“We believe it is time for a new kind of debt relief for debts that have resulted from odious lending: debt relief as if morals mattered,” adds Stephen Mandel.

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	Publications Odious Lending: debt relief as if morals mattered

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	Steve Mandel