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The repudiation option: Southern government debt strategies

15 February 2007

Introduction

New report by Christian Aid weighing up the debt repudiation option of Southern Governments.

The dust is settling on the huge Make Poverty History mobilisation of 2005, and the debt cancellation deals announced amid so much fanfare are finally being signed. But how much has really been done to provide poor countries with the ‘sustainable exit’ from debt crisis promised by rich country creditors more than ten years ago?

The answer is that a select few of the world’s poorest countries – around 20 – have received substantial debt cancellation (although some of them countries still face real debt difficulties). But most countries have received little or no debt cancellation, and many face even worse debt problems now than they did a decade ago.

In September 2005, Christian Aid published a report heralding a new era of debt campaigning, entitled What About Us? Debt and the Countries the G8 Left Behind. We called for a fair and transparent arbitration process through which countries could reach a fair resolution to years of debt bondage, taking full account of odious debt and the harmful role lenders often play in the build-up of debt. We stand by those recommendations and urge the international community to take them forward. But we also recognise that the need to deal with the debt remains urgent. Increasing numbers of analysts and campaigners, including the influential economist Jeffrey Sachs, are calling for countries to consider simply not paying all or part of their debt obligations in order to spend money on vital services. In this briefing, Christian Aid supports that call.

In the first two sections of this paper we demonstrate that debt remains one of the main barriers to development in many of the world’s poorest countries, and in many so-called middle-income countries (MICs). We argue that much of that debt is illegitimate. This fact is increasingly recognised as important and lends much weight to the idea of repudiation.

The rest of this paper argues that it may well be in poor people’s interests for their governments to repudiate debt. So far, debates about debt repudiation as a genuine, moral and positive option for debtor countries have been dominated by threats from creditors. Countries that have chosen in the past to repudiate or default on all or part of their debt have sometimes been ‘punished’ by creditors and potential future financiers.

They have found that their financing, especially concessional financing, has been cut off; diplomatic relations have turned frosty; and assets held abroad have even been seized.

Countries considering non-payment are warned by creditors that they will be ostracised from the global financial market. But there are strong reasons to suspect that such costs of repudiation have been exaggerated. In reality, private investment arrives when it can reasonably expect a decent return. Investors are not very interested in ‘punishing’ countries. And although it is real, the threat of becoming politically ostracised is less dangerous in a world where rich countries face electoral pressure if they are seen to be acting against the interests of poor countries.

Repudiation still comes at a cost and needs to be treated very seriously. However, its benefits seem to have been overwhelmingly ignored. Advice from creditors, such as the World Bank and the International Monetary Fund (IMF), is increasingly accepted as having had disastrous consequences on a range of issues. These range from rapid liberalisation and privatisation to reducing capital controls and charging fees for education and health. Creditors’ views on the issue of non-payment of debts are equally self-serving and one-sided.

Reserving the money currently being spent on servicing debt for education and health and other urgent needs has clear social benefits. Countries with major debt problems often pay more to service their debt than on basic services. People’s lives can be saved and improved in the short term if more money is quickly diverted from debt payments to meet their needs.

But the simple economic benefits of debt repudiation are the most overlooked. Yes, there is a price for refusing to pay one’s debts – an exaggerated price maybe, but a price nevertheless. But having a generation of young people who lack an education also comes at a price, as does having an unhealthy workforce that lacks access to medical treatment, and millions of children who have been orphaned by HIV. Lacking an infrastructure that can promote the domestic and export market comes at a high price. How can economic prosperity be built on such foundations? It is time for economists and politicians in all countries to weigh up the real pros and cons of non-payment, and act in the interests of citizens instead of powerful financial institutions.

Not all governments should be encouraged to repudiate. If a government does not pursue a pro-poor agenda, debt repudiation – just like traditional debt relief, aid or any type of funding – may not lead to positive outcomes for poor people. But within the context of a pro-poor development plan, repudiation should be taken seriously as a realistic option. But even when repudiation is not the right option, opening up a debate about repudiation is still the right way forward for debt campaigners and developing-country governments. The issue of illegitimacy is paramount. How long will the self-serving myth persist that lenders are exempt from blame? To counter it, debt audit processes are springing up throughout the developing world as citizens seek to find out the truth about the debt burdens blocking their development. As these audits uncover the secrecy, failure and often criminality surrounding loans, calls for repudiation are bound to grow. By exposing the history of loans and debt accumulation, such processes will lead to greater accountability of governments to their parliaments and people.

Christian Aid calls on countries to repudiate their debts when doing so will lead to vital improvements in basic service delivery In the report What About Us? we stated that if developing countries wait for creditors to cancel their debts, they could be waiting a long time. We have had no reason to reevaluate that assessment since 2005. It is time for debtor countries to take the initiative in the interests of their people. It is time for the weak to stand up to the strong. It is time, for some countries, to repudiate their debt.

Full report:

Enough is Enough: The Debt Repudiation Option : 835 Kb