How it all Began; Causes of the Debt Crisis

Cause of the Debt Crisis

Many people know what it feels like to owe money, even if only to a building society for a mortgage. But it's a different matter altogether to be deeply in debt and unable to repay it. And even worse to be in that situation if someone else ran up the debt and left you to carry it.

When individuals become deeply indebted, we draw a line under the debt. That line is called bankruptcy. It is a line beyond which we do not allow people to fall. No such line can be drawn in international law. When poor countries become deeply indebted they fall into an abyss of economic degradation. Their governments owe vast sums to Western governments and international, Western-controlled institutions. These same institutions then take on responsibility for determining levels of debt relief.

This is unjust. It's time we did something about it.

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In the beginning..

How were these huge debts amassed? And why are governments still making so little headway in the struggle to pay them off?

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Born in the USA

In the 1960s the US Government had spent more money than it earned and to make up for this decided to print more dollars. So the world's stocks of dollars fell in value.

This was bad news for the major oil-producing countries, whose oil was priced in dollars. The money they made from exports now bought less. So in 1973 they hiked their prices. They made huge sums of money and deposited it in Western banks.

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Banking on the future

Then the trouble really began. As interest rates plummeted, the banks were faced with an international financial crisis. They lent out the money fast, to stop the slide, and turned to the Third World, whose economies were doing well but who wanted money to maintain development and meet the rising costs of oil.

Banks lent lavishly and without much thought about how the money would be used or whether the recipients had the capacity to repay it. Third World governments, for their part, were pleased to take advantage of loans at very low interest rates - below the rate of inflation.

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Dictators' development

Some countries, like Mexico and Venezuela, took out loans to repay previous debts. But for others, this was the first time they had borrowed from commercial banks. Many intended to use the money to improve standards of living in their countries.

In the end, little of the money borrowed benefited the poor. Across the range, about a fifth of it went on arms, often to shore up oppressive regimes. Many governments started large-scale development projects, some of which proved of little value. All too often the money found its way into private bank accounts. The poor were the losers.

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Heading for disaster

In the mid 1970s, Third World countries, encouraged by the West to grow cash crops, suddenly found that they weren't getting the prices they were used to for the raw materials they sold, like copper, coffee, tea, cotton, cocoa. Too many countries - advised by the West - were producing the same crops, so prices fell.

Then interest rates began to rise, pushed further by an increase in US interest rates. Meanwhile oil prices rose again. The trap was sprung - Third World countries were earning less than ever for their exports and paying more than ever on their loans and on what they needed to import. They had to borrow more money just to pay off the interest.

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Caught in the trap

In 1982 Mexico told its creditors it could not repay its debts. The International Monetary Fund (IMF) and World Bank stepped in with new loans under strict conditions, to help pay the interest. The IMF is a Western-dominated creditor, which in effect acts as a Receiver but unlike a Receiver makes short-term loans to help countries pay off other loans.

This pattern was repeated over and over in the following years as other countries found themselves in similar situations to Mexico's. But their debts continue to rise, and new loans have added to the burden.

Essentially, the poorest countries have become bankrupt.

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Enter the troubleshooters...

When Mexico defaulted on its debt repayments in 1982 the whole international credit system was threatened. Mexico owed huge sums of money to banks in the US and Europe, and they didn't want to lose it. So they clubbed together and got the support of the International Monetary Fund (IMF) for a scheme to spread out or reschedule the debts.

Since then the IMF and the World Bank - the two main international financial institutions - have been involved in lending money and rescheduling debt in countries which, like Mexico, cannot pay the interest on their loans.

But their loans add to the debt burden and come with conditions. Governments have to agree to impose very strict economic programmes on their countries in order to reschedule their debts or borrow more money. These programmes are known as Structural Adjustment Programmes (SAPs). SAPs have particularly affected the countries of sub-Saharan Africa, whose economies are already the poorest in the world.

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SAPping the Poor

SAPs consist of measures designed to help a country repay its debts by earning more hard currency - increasing exports and decreasing imports. In a few countries SAPs appear to have had some good effect; in most they have worsened the economic situation. In all countries applying SAPs, the poor have been hit hardest.

In order to obtain more foreign currency, governments implementing SAPs usually have to:

• spend less on health, education and social services - people pay for them or go without
• devalue the national currency, lowering export earnings and increasing import costs
• cut back on food subsidies - so prices of essentials can soar in a matter of days
• cut jobs and wages for workers in government industries and services
• encourage privatisation of public industries, including sale to foreign investors
• take over small subsistence farms for large-scale export crop farming instead of staple foods. So farmers are left with no land to grow their own food and few are employed on the large farms.

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Jubilee 2000 proposes ...

a one-off cancellation of the backlog of unpayable debt for the world's poorest countries - which either cannot be paid, or can be paid only with enormous human suffering. This wouldn't be setting a precedent for cancelling all debts repeatedly. Rather, it would be a once-only gesture to mark the millennium, a gesture showing that creditors and debtors alike have made mistakes and that the slate needs to be wiped clean. The procedure for agreeing this debt relief should be undertaken by an independent body, perhaps under the UN. The procedure will be open, transparent and fair. This would change millions of lives, without taking away the responsibility of debtors to pay their future debts.

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