Norway makes ground-breaking decision to cancel illegitimate debt

Added 27 Mar 2007

Norway's Minister of International Development Erik Solheim announced today that Norway is unilaterally and without conditions cancelling US$80 million in illegitimate debts owed by 5 countries: Egypt, Ecuador, Peru, Jamaica and Sierra Leone. Norway's Government has, in effect, admitted that it's lending in these particular cases was irresponsible and motivated by domestic concerns, rather than an objective analysis of the development needs of the countries involved. The débacle involves the export of Norwegian ships to developing countries between 1976 and 1980. It exported these ships mainly to secure employment for a domestic ship-building industry in crisis, not because these ships served the development needs of the countries concerned. It is only fair therefore that Norway accept co-responsibility for the debts which resulted from these deals. So far however, creditor countries have been incredibly reluctant to accept shared responsibility for negligent and often politically motivated and corrupt lending in the past. They have continued to insist that poor countries service these debts. Today however this practice effectively ended with the unilateral action of one government. Eurodad hopes that the Norwegian announcement will now prompt other creditor countries to open public and serious enquiries into their lending policies and practices of the past.
"This is a groundbreaking decision which has huge ramnifications for other lenders that acted irresponsibly in the past", said Eurodad's Gail Hurley. "We urge Norway to continue to be at the forefront of international efforts to gain recognition for illegitimate debt. It is not fair that the populations of debtor nations continue to pay the price of corrupt, negligent and politically motivated lending in the past. Today the silence has been broken and we urge other creditor countries, in particular in Europe, to follow Norway's bold lead".
Below Eurodad has posted the press releases from the Norwegian Debt Campaign and the Norwegian Government as well as an explanation of what exactly illegitimate debt is all about. We also post some reactions from Ecuador.
Finally, it is also worth noting that Norway will NOT count today's historic cancellation as Official Development Aid (ODA). Typically, creditor nations count debt cancellation operations as ODA which has the effect of artificially inflating aid budgets and making-out that more aid is being made available to poor countries than is really the case. The Norwegian Government must also be praised for this and it becomes very clear that most donors simply must (and can) do far better.

Press release from The Norwegian Campaign for Debt Cancellation (Jubilee Norway/SLUG)
Date: 02.10.06
Norway cancels illegitimate debt and takes co-responsibility for failed development policy
– A historic victory for the debt movement
Norway's Minister of International Development Erik Solheim announced today that Norway is unilaterally and without conditions cancelling US$80 million in illegitimate debts owed by 5 countries: Egypt, Ecuador, Peru, Jamaica and Sierra Leone.
"Norway now cancelling illegitimate debt and admitting co-responsibility for a failed development initiative is simply historic", says Kjetil G. Abildsnes, Chair of Jubilee Norway. "Solheim shows political courage that won't go unnoticed", he said.
Norway will then have settled an ugly chapter in Norwegian aid history – the Ship Export Campaign (1976-80). This unfortunate episode in Norway's aid history had the effect of cranking up debts in 21 countries.
"This is clearly a case of illegitimate debt. Norway broke its own rules by not assessing the development needs of the countries we were exporting our ships to", says Abildsnes.
"But Solheim is now cancelling all of this debt. This is a historic victory for us", says Abildsnes. "It's the end of an embarrassing story for Norway. We applaud Solheim for this bold step".
Burma and Sudan who also have loans to Norway after the Ship Export Campaign will not receive any cancellation until the situation in the two countries change. We expect these countries to also get their debts cancelled when there is a change in their situation.
The reason given by Norway for this unprecedented unilateral cancellation is a failed development policy lacking proper needs assessment and a proper risk analysis.
"This campaign represented a development policy failure. As a creditor country Norway has a shared responsibility for the debts that followed. In cancelling these claims Norway takes the responsibility for allowing these five countries to terminate their remaining repayments on these debts", said Minister of International Development, Erik Solheim today. "Cancelling these debts will have consequences for how we think about responsible lending in the future", he continues.
The debt movement has long said that debt incurred by dictators, for failed projects, or where money have disappeared in corruption is illegitimate and not the responsibility of the people. By cancelling these claims Norway is taking another step towards defining the concept of illegitimate debt.
"That Norway takes co-responsibility in this way is unique in the world. Norway has now become the first country which by action confirms lender responsibility by cancelling illegitimate debt", says Abildsnes.
Norway has now broken the unspoken rule of creditor solidarity. Creditors have until now banded together to insist that poor countries repay their debts and have refused to admit that they share some responsibility for having extended loans irresponsibly, often for geopolitical strategic purposes. This has been at the expense of poor countries. Norway is setting an example and creates a precedence that other countries surely must follow. Norway is now in a position to demand action from other countries and international institutions on this issue.

"By cancelling these debts we want to give raise to an international debate on lender responsibility", says Solheim.
"The debt crisis is not over. We will make sure that Norway continues to push for a just international monetary system where debts are legitimate and responsible lending the norm, not the exception", says Abildsnes
Kjetil Abildsnes, SLUG (Norwegian Jubilee Campaign)
Editor's notes: What is illegitimate debt?

Many civil society organisations in the North and the South believe that many debts are illegitimate and should not be repaid. But what is illegitimate debt? Illegitimate debts can be divided into four broad categories: illegal debts; odious debts; illegitimate debts; ecological debts.
Illegal debts are those which do not follow the basic legal norms and procedures of the country that takes-on the loan, for example the person that signs for the loan is not authorised by the state to take-out loans in the name of the state (see: Eurodad 2005 "Paraguay Repudiates Illegal Debt") or the creditor and debtor do not follow the procedures as stipulated in the national constitution of the debtor country. It is the shared responsibility of both creditor and debtor to ensure that loan agreements follow all legal norms and procedures and those which do not may legitimately be questioned.
Odious debts are defined by three main characteristics: a/ the loan did not benefit the population of the debtor nation in any way and indeed the funds may have been used to oppress the people(s) of a nation (absence of benefit) ; b/ the population of the debtor nation did not give its consent to the loan (absence of consent); and c/ the creditor was aware of these facts and yet proceeded to disburse the loan anyway (creditor awareness). Typically, odious loans are associated with dictatorial regimes such as that of Mobutu Sese Seko in the Democratic Republic of Congo, Ferdinand Marcos of the Philippines, General Suharto of Indonesia, the apartheid regime of South Africa and Saddam Hussein of Iraq. These regimes racked up huge debts with bilateral creditors such as USA, UK, France, Germany, the World Bank and IMF among many other creditors. Many of these loans were extended for purely geopolitical strategic purposes. Many NGOs argue that it is not fair that the populations of debtor countries bear these huge debts alone and that creditors should bear at least some co-responsibility for negligent, politically motivated lending.
Illegitimate debt is a much broader category. It applies for example to ill-conceived development projects which should never have been financed in the first place. An example of this is the Bataan nuclear power station in the Philippines. It is the Philippines' largest single debt. Completed in 1984 at a cost of US$2.3 bn, it was never used because it was built on an earthquake fault at the foot of a volcano. The nuclear power station was financed by the US export credit agency Ex-Im Bank, Union Bank of Switzerland, Bank of Tokyo and Mitsui & Co, all of whom are still being repaid. The debt that has been cancelled today by the Norwegian Government is also an example of illegitimate debt. Between 1976 and 1980, Norway had a policy of supporting the export of ships to developing countries (such as Ecuador, Peru, Jamaica, Egypt, Sierra Leone, Burma and Sudan). It exported these ships mainly to secure employment for a ship-building industry in crisis in Norway rather than any objective analysis of the development needs of the country purchasing the ships. This has been explicitly acknowledged by the Norwegian Government today which announced the historic step of taking co-responsibility for the debts which then followed (see government press release below).
Ecological debts can be those which cause untold environmental damage in the debtor nation (and the creditor was aware of the negative impacts which would follow on the local environment and/or local populations). Alternatively, many civil society organisations believe the North owes a huge "environmental debt" to the countries of the South. This is because it is the countries of the North that are responsible for the majority of the world's environmental concerns, such as carbon emissions which are leading to global warming. Yet is is the countries of the South that are most suffering most the consequences of environmental degradation, such as erratic weather patterns.
Civil society organisations believe that it is the shared responsibility of both debtor and creditor nations to ensure that loan agreements reflect the aspirations of the debtor country and are not extended for purely political purposes. If creditors are assured that they will always be repaid (as is the case under the current system) there is no incentive to act responsibly. This is the classic moral hazard problem and is one of the factors that contributed to the current debt crisis. Eurodad, among many other civil society groups, is pushing for the principles of co-responsibility to be enshrined in international debt management.

Reactions from Ecuador

Said Hugo Arias of Jubileo Guayaquíl, "this is good news. It is the result of pressure from social movements that have denounced this debt as illegitimate. The recognition by the Norwegian Government that the export of these ships was incompatible with their developent cooperation policy implicitly acknowledges that these debts are illegitimate. This opens the door to other countries that have cases of illegitimate debt, the payment of which causes much damage to millions of families the world over. This is a victory for organisations that work to cancel debts that violate human rights and that have fraudument and corrupt origins. Norway however continues to owe our country. The original debt we contracted was for US$59mn. Ecuador has paid US$100mn for these ships yet a debt of US$35mn was still left on the books. This means that Norway owes us more than US$100mn. Norway should support the return of this money. This is not an act of charity from rich to poor," ends Arias.

Hugo Arias
Coordinator of Jubileo 2000 Red Guayaquil Ecuador

Press release
No.: 118/06
Date: 02.10.06
Cancellation of debts resulting from the Norwegian Ship Export Campaign (1976-80)
In its forthcoming national budget for 2007 the Norwegian government will propose to the Parliament (Stortinget) to cancel NOK 520 million of official debts from Ecuador, Egypt, Jamaica, Peru and Sierra Leone.
The claims originate from the Norwegian Ship Export Campaign (1976-80).
- This campaign represented a development policy failure. As a creditor country Norway has a shared responsibility for the debts that followed. In cancelling these claims Norway takes the responsibility for allowing these five countries to terminate their remaining repayments on these debts, says Minister of International Development, Erik Solheim.
The Government proposes that these claims be cancelled unilaterally and unconditionally, without budgetary allocation and without reporting the cancelled amounts as Official Development Assistance (ODA) to the OECD. The debt cancellation will, in other words, be additional to Norway’s ordinary ODA.
Additional information is supplied in the annex below
Annex to press Release
No 118/06
Cancellation of debts incurred as a result of the Norwegian Ship Export Campaign (1976-80)
Norway’s claims vis-à-vis developing countries amount to approximately NOK 4,4 billion.
Approximately NOK 2.9 billion of the debt owed by developing countries to Norway (including accrued interest on arrears) is related to the Norwegian Ship Export Campaign (1976-80), under which Norway exported 156 vessels and ship’s equipment totalling NOK 3.7 billion to 21 countries.
The campaign was financed through the Norwegian Guarantee Institute for Export Credits’ (GIEK) old general guarantee scheme and its old special scheme for developing countries. A great many of these projects proved to be economically unsustainable, so that government guarantees were triggered and the Norwegian Government became creditor.
In 1988-89, the Brundtland Government conducted an evaluation of the Ship Export Campaign, in which the campaign was criticized for inadequate needs analyses and risk assessments. The main conclusion was that this kind of campaign should not be repeated.
A little more than NOK 1.1 billion of this debt has been cancelled previously, primarily in connection with Norway’s follow-up to the debt relief initiative for the poorest countries (Heavily Indebted Poor Countries, HIPC).
It is now generally agreed that the Ship Export Campaign was a development policy failure. As creditor, Norway shares part of the responsibility for the resulting debts. By cancelling these claims, Norway takes the responsibility for allowing Ecuador, Egypt, Jamaica, Peru and Sierra Leone no longer to be obliged to service the remainder of these debts.
As of 30 June 2006, the remaining ship export debt is shared by:
Myanmar: NOK 1 579 million

Sierra Leone: NOK 60 million
Sudan: NOK 772 million

Peru: NOK 48 million
Ecuador: NOK 225 million
Jamaica: NOK 19 million
Egypt: NOK 168 million
In the case of Myanmar, Sudan, Ecuador and Sierra Leone, all the debt owed to Norway is ship export debt (99 per cent in the case of Sudan). For Egypt and Jamaica the ship export debt represents 75 per cent of the total debt to Norway. For Peru the ship export debt represents 18 per cent of the total bilateral debt.
In 2007, the Government plans to cancel the remaining debt incurred by Egypt, Ecuador, Peru, Jamaica and Sierra Leone as a result of the Ship Export Campaign by means of a unilateral declaration, without stipulating any conditions.
In the case of Myanmar and Sudan, the ship export debt will not be cancelled until these countries become eligible for multilateral debt relief operations.
Sierra Leone is expected to complete its HIPC treatment around the turn of the year 2006/2007, and in any case all of its outstanding debt to Norway will thereby be cancelled. Therefore, Sierra Leone’s debt will not be cancelled until the country has completed its HIPC treatment.
As of 30 June 2006, the total outstanding debt owed to Norway by Ecuador, Egypt, Jamaica, Peru and Sierra Leone was NOK 520 million (NOK 460 million if Sierra Leone is excluded). Cancellation of these debts will result in a reduction in future payments from the countries concerned and a corresponding reduction in income over the government budget. Based on current exchange rates and interest rate levels, it is calculated that the government’s revenue losses will amount to NOK 577 million over the rest of the ship export debt repayment period, which expires in 2021.
In keeping with the financing facility of the Plan of Action on Debt Relief for Development the Government proposes to cancel the ship export debt without allocating any funds over the development assistance budget and without reporting the amounts forgiven to the OECD/DAC as official development assistance (ODA).
Nor will the cancellation of the ship export debt be covered by the financing facility (which allows for the cancellation of NOK 3 173 million without budgetary allocation), except in the case of Sierra Leone.
The unilateral cancellation of the ship export debt will be implemented outside the cooperative framework of the Paris Club of creditor countries. In this particular case the Government finds that there is good reason for Norway to take an independent stand.
The unilateral forgiveness of debt in 2007 will be a one-off debt relief policy measure. All future debt forgiveness will be effected through multilaterally coordinated debt relief operations.
Royal Norwegian Ministry of Foreign Affairs
2 October 2006
Further information from the Royal Norwegian Ministry of Foreign Affairs:



Wolfowitz Needs to Look at Corruption of Yesterday, Not Just Today and Follow the Positive Example of Norway
One could be forgiven for thinking that Paul Wolfowitz has spoken about corruption and nothing else during the year that he has held the post as World Bank President. Although his predecessor, James Wolfensohn, also highlighted corruption as a serious obstacle to development, Wolfowitz has significantly elevated the issue as a World Bank priority. Wolfowitz’s anti-corruption rhetoric has captured media headlines. But how comprehensive, consistent and effective are the plans and actions behind the talk? How far can the Bank really go with this agenda, in particular where the Bank itself has been the cause of corruption, and odious and illegitimate debts, in the past?
The story presented so far however focuses very much on the “corruption of today” and plays scant attention to the “corruption of yesterday”. Remarkably absent from the anti-corruption strategy presented by officials so far is any critical examination of the Bank’s lending practices to poor countries in the past. The World Bank has over the years been involved with and lent to some of the world’s most notorious and despised regimes such as Mobutu Seke Seso of Democratic Republic of Congo and Ferdinand Marcos of the Philippines. Bank documentation at the time of these transactions, or published shortly afterwards, confirms that many Bank officials – at both country-level and in Washington DC – were perfectly aware of the nature of the regimes in place and that many loans were simply transferred into the bank accounts of the dictators and their generals. It was plain therefore that they did not reach the poor or foster economic development. Despite their odious and illegitimate nature most of these debts continue to be serviced today, at the expense of essential investments in poverty reduction and economic development.
How can any approach to weed-out corruption be successful or comprehensive if it does not look critically at the lending practices undertaken by the institution in the past? The Bank should learn the lessons of the past, accept co-responsibility for its mistakes and agree to cancel Bank debts resulting from loans where Bank officials knew much of the money would be diverted by corrupt elites. Wolfowitz says the real issue at stake is “how to promote good governance and accountability”. Accountability must begin at home, by addressing the mistakes – and in some cases downright negligence – of the past...
Eurodad letter to World Bank President, Paul Wolfowitz on the Bank's need to address crucial issues of odious and illegitimate debt  EURODAD believes that any comprehensive approach to corruption necessarily involves the critical examination of past Bank lending policies and practices and the cancellation of debts found to be fraudulent, corrupt and illegitimate.