UK Government responds on Lift the Lid
The UK government has responded to campaigners who have contacted them about illegitimate debt, as part of our ongoing Lift the Lid campaign. Below is Jubilee Debt Campaign’s comment on their response (you can download a printable version from the right hand column).WE SAY: True, but many countries that need debt cancellation have been excluded.
There has indeed been progress on debt cancellation in recent years. For example the Highly Indebted Poor Countries initiative and the Multilateral Debt Relief Initiative, which came out of G8 agreements in 2005, were prompted by strong pressure from campaigners.
These initiatives are not perfect but they are certainly significant for more than 20 countries. Funds released through this cancellation are already being used to pay for schools, build roads, support health care and provide emergency food supplies.
But countries qualify for these initiatives based on an arbitrary measure of debt-to-export ratios and there is no consideration of the legitimacy of the debts. This means that billions of dollars of debts that have been unfairly accumulated, are still being repaid by poor countries.
THEY SAY: “The UK is at the forefront of international initiatives on responsible lending and borrowing”
WE SAY: This is welcome, but responsible lending standards need to be binding and applied to all loans past and present.
We welcome the recognition of countries, including the UK, of the need to develop standards on responsible lending. It is encouraging that the Government is taking this forward in the international arena, and we urge for any responsible lending standards to be binding, rather than a purely voluntary set of guidelines. For these standards to be meaningful their implementation needs to be monitored and enforced.
However, we are concerned about the Government’s focus on the Organisation for Economic Co-operation and Development (OECD) Export Credit Agencies Working Group (ECG) to take the issue of responsible lending forward.
Many non-governmental organisations (NGOs) are deeply unhappy with the ECG, citing a lack of meaningful, transparent dialogue, and incoherence between the members of the ECG and broader OECD policies, including those on environment and development issues. It is alarming that the Government considers this an appropriate forum to discuss responsible lending standards and we hope that alternative avenues will be pursued.
In addition, responsible lending standards must apply to all developing country lending and not just to export credit guarantees.
In recognising the principle of responsible lending, and its role in sustaining the benefits of debt relief and preventing future debt crises, it is logical to apply such standards retrospectively.
A large proportion of the current debts that poor countries are paying is the result of irresponsible past lending, which for example sought to buy allegiance during the Cold War and often did not benefit the people of the country, so should not be repaid.
Illegitimate debt is clearly the other side of the coin of responsible lending: if rich country governments want to have credibility in discussing responsible lending, they must also look back at their own record on past lending and the ways in which this has contributed to the debt crisis. By cancelling illegitimate debts, the international community sends a strong message to creditors that irresponsible lending has serious consequences.
THEY SAY: “The UK government recognises your concern about so-called ‘illegitimate debts,’ where the governments of debtor countries have poor records on governance or corruption”
WE SAY: It’s not good enough for lenders to pretend that all the responsibility for the debt crisis lies with poor country governments. Rich countries must inspect their own past lending records and cancel debts found to be illegitimate.
The classification of some debts as illegitimate relates to the behaviour of the creditor, rather than of the debtor. National law is illustrative here. In national law, there are clear rules and protections in place for debtors as well as creditors. It is the responsibility of the creditor to exercise ‘due diligence’ when they extend a loan to an individual (for example a bank must ensure that someone has a sufficient income to repay a loan and looks carefully at the project for which the loan is required). In addition, there are guarantees against extortionate interest rates and penalty charges. And, should anything go wrong, national bankruptcy procedures ensure an orderly work-out and avoid a run on the debtor’s assets. We need similar structures for sovereign lending.
THEY SAY: “We do not consider any debt to be "illegitimate". These loans were made to internationally recognised governments and are bound by legal contracts, recognised in international law.”
WE SAY: There are precedents for cancelling illegitimate sovereign debts, and these should form the basis of a fairer international debt settlement process.
In fact there are various examples of sovereign debts being cancelled on the basis of being illegitimate. These include: the United States refusing to pay Cuba’s debt to Spain, on seizing Cuba from the Spanish in 1898, on the grounds that the debt had been imposed on the people by force, without their consent and was used to harm the people; and the Argentine federal judgement in 2000 that debt contracted during the period of the military dictatorship (1976-1983) was illegitimate. Most recently in 2006, the Norwegian Government cancelled, without conditions, a total of $80 million of debts being paid by Ecuador, Egypt, Jamaica, Peru and Sierra Leone on the grounds that Norway “shared responsibility for their creation”. Norway had lent money to prop up its ship building industry, sometimes delivering useless or damaged ships, and not checking that the countries needed the ships or could afford to pay for them. It now admits this was a “development policy failure”; so Norway has cancelled these debts.
These individual examples provide legal precedents for cancelling sovereign debts on the basis of legitimacy. There now need to be agreed criteria as to what constitutes responsible lending and a fair and transparent international process, like at the domestic level, whereby the legitimacy of debts can be investigated, and unjust debts cancelled. The government’s response implies that a responsible lender needs to consider only a country’s debt situation and the economic and social impact of the project to be funded by the loan. There is more to responsible lending than this, some of which the domestic parallels illustrate. At the moment, any cancellation takes place on an ad hoc basis and billions of dollars of illegitimate debts continue to cripple poor countries. Moreover there is no incentive for lenders to lend responsibly, because there is no system in place to hold them to account if they do not.
THEY SAY: “If we cancelled these debts, the full cost would have to be met from the Department for International Development’s aid budget”
WE SAY: The poor should not pay, through reduced aid, for the cancellation of debts that cannot anyway be legitimately claimed from them.
Debt relief is an issue of justice. Donors share responsibility for the poor lending decisions that created many of today’s debts. It is also worth remembering that the cancellation of a debt costs nothing up-front, it is only accounting procedures that dictate that government departments must be compensated, and the true cost is measured only in future payments foregone. There is also the precedent of Norway, which in 2006 cancelled debts for which it admitted ‘creditor co-responsibility’ without counting the cancellation as Official Development Assistance (ODA).
Certainly cancellation of debts arising from export credits should never count as ODA. Export credit supports creditor countries’ businesses, and export credit agencies are required to be self-financing by covering the risk of defaults through premiums charged. Cancellation may well assist the finances of the debtor country, but this has been paid for through premiums, and the operation has also benefited businesses. It is therefore unacceptable to pass off the costs of this as ‘aid’ or ‘development assistance’ in any sense.
THEY SAY: “It is likely that creditors would start refusing to lend to developing countries in case the loans were later repudiated”
WE SAY: This is an exaggerated threat, and has not been the case for countries that have received debt cancellation so far.
The argument that cancellation of a country’s debts would cause creditors to refuse to lend to those countries, was also made with regards to cancelling debts on the basis of the economic situation of the country. Yet the Government now accepts debt cancellation on this basis, and the current debt cancellation processes have not had a negative effect on countries’ ability to borrow. There is no reason to believe that this problem would emerge for debts cancelled on the basis of their illegitimacy either.
The threat of creditors refusing to lend to countries that have repudiated their debts has also probably been exaggerated. In reality, private investment arrives when it can reasonably expect a decent return. Investors are not very interested in ‘punishing’ countries. Within the context of a pro-poor development plan, repudiation is therefore a serious option for countries to consider, and decide for themselves. As debt 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.
