Enough is enough: The debt repudiation option

A Christian Aid report looking at the dangers and benefits for poor country governments of choosing not to pay all or part of their debts, in order to spend the money on vital services.

It demonstrates 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). It argues that much of that debt is illegitimate. This fact is increasingly recognised as important and lends much weight to the idea of repudiation.

Download the full report (PDF, 835k)

The rest of the 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.

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.