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Developing countries have for decades been caught in a lose-lose situation: stay underfinanced and therefore not in a position to meet the needs of their populations and internationally agreed development goals, or take out loans to fill the financing gap, but consequently fall into severe debt. This dilemma is increasingly also felt in European nations. 

Following the international economic and financial crisis, which began in 2008 and saw huge publicly-funded bailouts for failed banks and a vast amount of loans being dispersed at the international level, both developing and industrialised countries have seen debt stocks soar. 

Public debt in Europe reached the highest levels ever seen in times of peace. Meanwhile, debt levels surged in developing countries where increased financing needs coincided with declining levels of real aid, volatile commodity prices, and continuous problems in 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 debt stocks stem from loans with little pro-poor benefits, and which have had adverse impacts on human rights and the environment. They may have been used for the purchase of arms and military equipment for undemocratic or corrupt elites, or used to fund failed projects with negative development outcomes. Creditors should not demand repayment for such debts 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: via the Joint IMF-World Bank Debt Sustainability Framework. The framework fails to take human needs into account and bases its analysis principally on a limited set of financial considerations. This flawed international system means debt repayments continue to divert money away from poverty reduction and equitable development and towards the pockets of creditors.

Lenders are also in the driving seat in setting 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 impunity for those involved in the contracting of illegitimate debts. The United Nations has in the past pursued several reform initiatives in these areas, though these currently face political obstacles that need to be overcome. 

Eurodad works together with members and allies in the global south 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 and ensure 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 rights based approach to debt sustainability;
  •  and cancellation of unsustainable and unjust debts.

Eurodad argues that current institutions to prevent and resolve sovereign debt crises are seriously deficient. Dominated by creditors, current procedures are done on an ad hoc basis, and fail to tackle unsustainable and illegitimate debts in a fair, speedy and effective manner.

Moreover, all too often they approach the question of how sustainable a country’s debt is only in terms of financial considerations, ignoring development needs and human rights obligations. Consequently, debt crises continue to harm people and undermine development.

A sustainable solution to sovereign debt problems requires an international mechanism that:

  • takes into account the financial resources needed by a government to fulfil its legal human rights obligations including to provide essential services for its population, when assessing a government’s capacity to service its debt, and considers the impact of ongoing debt servicing, hence supporting a human rights based approach to debt sustainability;
  • undertakes debt assessments and takes decisions independently of creditors and debtors and is situated in a neutral forum such as the United Nations or international courts of justice;
  • can reach a country’s bilateral, multilateral and private creditors, in order to deal with its entire debt stock 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 of the borrowing country;
  • and gives all stakeholders, including civil society, the right to be heard and give evidence.

Read more:

Towards s sustainable solution to debt crises. Submission to the UN General Assembly

The Evolving nature of developing country debt and solution for change

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 simply to 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, and whether it can handle more debt. The Joint IMF-World Bank Debt Sustainability Framework says very little about the consequences for human development and the enjoyment of human rights 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. 

Read more:

Civil Society position on the IMF and World Bank Debt Sustainability Framework

UN Guiding Principles on foreign debt and human rights

Eurodad believes that citizens should not be burdened by paying for debts which did not benefit a country’s people. Such debts are referred to as illegitimate debts. A debt may be illegitimate because it was contracted without democratic or parliamentary approval; because a country’s rulers stole the cash, used it to build up its military capabilities or to oppress its people; or because a loan was contracted for ill-conceived and corrupt development projects which ultimately 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 extend loans with the full knowledge that the funds will 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

Recognition from official forums has been reflected in the UNCTAD Principles on Promoting Responsible Sovereign Lending and Borrowing, and the G20 Operational Guidelines on Sustainable Financing. These however fall short of what is needed, are not enforceable, and fail to ensure violations are effectively sanctioned.  

Eurodad is working with other civil society actors towards a binding and multilaterally agreed set of responsible lending and borrowing standards.

We also support citizen debt audit campaigns in Europe and the Global South, for example through the International Citizen’s Debt Audit Network (ICAN). Debt audits are used as a tool to identify specific cases of illegitimate debt by assessing a country’s loan portfolio to reveal which debts are of dubious origin and therefore should not be repaid. Governments that have conducted debt audits in the past include Norway (as a creditor) and Ecuador and Greece (as borrowers).