Developing countries have for decades been caught in a Catch 22 situation: stay underfinanced and therefore not be in a position to meet the needs of the population, or take out loans to fill the financing gap, but consequently be in severe debt.
Following the international economic and financial crisis which saw a vast amount of loans being dispersed on an international level, both developing and industrialised countries have seen soaring debt level. In a situation of increased financing needs in developing countries combined with declining levels of aid, debt continues to be a problem in developing countries. This is both a symptom of a skewed global financial system and a cause of imbalances and poverty.
Not only are the debts of several developing countries unsustainable. A large parts of developing countries` debts origin from loans with negative development impacts such as human rights violations or severe negative environmental consequences or were given for the purchase of arms and military equipment for undemocratic or corrupt elites or to failed projects with negative consequences. Creditors should not demand repayment for such debt that did not benefit the population of the debtor country.
Nevertheless it is the lenders that dominate in setting the rules and definitions surrounding debt issues. For instance, International Financial Institutions set the rules which determine whether a poor country can or cannot service its debt: the Debt Sustainability Framework. The framework fails to take human needs into account and bases its analysis on limited financial considerations, and debt repayments keep diverting money away from poverty reduction and equitable development.
Lenders are also the ones to set the rules for resolving debt crises. Unlike business and individuals, there is no alternative for states that do not have the money to repay their debts. There are also no rules or mechanisms to hold lenders to account for reckless lending, resulting in illegitimate debts.
Eurodad works together with members and Southern allies to highlight country cases for which lenders should provide debt cancellation either because the debts are unsustainable or because they are illegitimate.
Eurodad calls for
- a binding set of standards to define responsible lending and borrowing
- an independent and fair procedure for debt resolution, which should assess the legitimacy and the sustainability of countries’ debt burdens
- a human needs based approach to debt sustainability
- cancellation of unsustainable an unjust debt.