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Developing countries have for decades been caught in a lose-lose 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 fall into severe debt. This dilemma is increasingly felt in European nations, too. 

Following the international economic and financial crisis, which saw huge publicly-funded bailouts for failed banks and a vast amount of loans being dispersed on an international level, both developing and industrialised countries have seen soaring debt levels. 

Public debt in Europe has reached the highest levels ever seen in times of peace. Debt continues to be a problem in developing countries where increased financing needs coincide with declining levels of aid and continuous problems of fighting tax evasion. This is both a symptom of a skewed global financial system and a cause of imbalances and poverty.

The debts of several countries are not just unsustainable. A large part of public debts originate 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, lenders 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 speedy and orderly insolvency procedure 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. The United Nations is pursuing several reform initiatives in these areas, though these face political blockages that still need to be overcome. 

Eurodad works together with members and southern allies to promote reforms and 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;
• and cancellation of unsustainable and unjust debt.

In 2015, 100,000 people signed a petition calling for the cancellation of Greek debt and for the establishment of fair rules under the UN. Watch this video to see what happened when we presented this petition to the Eurogroup Working Group:

 

This project is supported in part by the financial assistance of the European Union.

Eurodad argues that current measures to deal with sovereign debt problems are seriously deficient. Dominated by creditors, current procedures fail to discipline lenders and prevent them from irresponsible lending in the future.

Moreover, all too often they only make financial considerations when assessing how much debt a country can continue servicing, failing to take human needs into account.

A fair solution to sovereign debt problems requires an international mechanism that

• takes into account the financial resources needed by a government to fulfil its obligations to provide essential services for its population, when assessing a government’s capacity to service its debt, hence providing a human needs based approach to debt sustainability;
• is independent of creditors and debtors in analysis and decision making, and is situated in a neutral forum such as the United Nations or regional courts of justice;
• includes bilateral, multilateral and private creditors, and deals with all public debts in a speedy and comprehensive way;
• is available to all sovereign states at risk of debt distress;
• holds lenders and borrowers to account for irresponsible behaviour by auditing the legitimacy of lenders’ claims and demanding the cancellation of unjust debts based on corrupt, irresponsible or undemocratically contracted loans which did not benefit the people and environment of the borrowing country;
• and gives all stakeholders, including civil society, the right to be heard and give evidence.

Read more: A fair and transparent debt work-out procedure: 10 core civil society principles

Eurodad believes that current practices in the way a country is deemed to have “sustainable” or “unsustainable” debts by the international financial community are flawed, both on theoretical and practical levels. The approach adopted by International Financial Institutions (IFIs) and the international creditor community is to simply assess whether, given certain analyses of economic growth, external trade dynamics and the availability of external financial resources, a debtor country is able to service its obligations. The Debt Sustainability Framework says very little about the consequences for human development that such payments entail.

Following the global financial crisis, the framework was ‘flexibilised’ to allow countries to take on more debt before being considered to be in ‘debt difficulties’. Eurodad is worried however that it gives donors a get-out clause from putting on the table significantly increased amounts of concessional finance.

Eurodad’s work in this area involves advocating for a concept of debt sustainability which takes into account the resources developing countries need to tackle poverty. Eurodad, along with its network members and colleagues in the global south, works to expose the limitations of the IFIs’ approach, both in general and in its application to particular countries. The UN has also supported this human development approach to debt sustainability.

Alternative approaches to debt sustainability include “Debt relief as if people mattered” by the New Economics Foundation and “Putting poverty reduction first” by Eurodad. 

Eurodad believes that citizens should not be burdened by paying for debts which did not benefit the people. Such debts are referred to as illegitimate debts. A debt may be illegitimate because the loan was contracted by a despotic power which then stole the cash, used it to build up its military capabilities or to oppress the people, or because the loan was contracted for ill-conceived and corrupt development projects which failed.

Eurodad argues that these debts must be declared null and void and creditors must assume co-responsibility for reckless lending. In many cases, creditors extended loans with the full knowledge that the funds would not be used for effective purposes. 

The campaign for the international recognition and cancellation of illegitimate debt focuses on exposing key cases and working to secure new international lending standards and approaches. These are outlined in Eurodad’s Responsible Finance Charter and the Global Platform on Sovereign, Democratic and Responsible Financing

Norway agreed to cancel the debts of five countries acknowledging “shared responsibility” for the debts which ensued from failed domestic-interest driven lending in the 1970s and 1980s. So far Norway is the only lender to take this important step, but Eurodad is working with colleagues across Europe to push other governments to follow this lead. 

Debt audits are used as a tool in identifying specific cases of illegitimate debt by unpacking the loan portfolio to reveal which debts are of dubious origin and therefore should not be repaid. Eurodad supports citizen debt audit campaigns in Europe and the South, for example through the International Citizen’s Debt Audit Network (ICAN). Governments that conducted debt audits include Norway (as creditor) and Ecuador and Greece (as borrower).