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Overview

We are entering a period with unprecedented amounts of debt in economies right around the world. Global debt hit $255 trillion in 2019, reaching a historical high of 320% of GDP. This includes all of the debt held by corporations, financial institutions such as banks, governments, and households. Since 2010, total debt has risen in 80% of emerging and developing economies.

In 2019, approximately a quarter of all debt in the world was held by governments. This debt is known as sovereign debt. This resource concerns itself with sovereign debt in particular. Sovereign debt – how it accumulates, how it is managed, and how sovereign debt crises are avoided or tackled – is at the root of many of the global structural injustices and financial crises which have caused and exacerbated economic inequality both within and between countries in the last 50 years, in both Global North and Global South.

Sovereign debt is further divided into internal (domestic) sovereign debt and external (foreign) sovereign debt. External sovereign debt is debt owed by a government in a currency other than its own, in a currency it does not have sovereignty over. That is the form of debt which this article and these activities broadly focus on. For further information about the differences between domestic and external sovereign debt, see the FreshUP article on Modern Monetary Theory.

Meanwhile, debates – academic and political – continue to rage about how much sovereign debt governments should hold, who is responsible for un-repayable debts and for causing debt crises, and what is the appropriate way to respond when governments are unable to repay their debts – i.e. face debt crisis.

The highest growth in debt globally in the past decade has been in corporate debt – the debts of private companies, excluding banks and other financial institutions. While in theory the risks associated with this debt lie with private companies and shareholders – and therefore don’t impact on the general public – in reality, often when companies face difficulties repaying their debts, they turn to governments (and, therefore, taxpayers) for support. Although in low-income countries non-publicly guaranteed external private debt has remained a small portion of their total external debt, it has substantially increased in a decade, from US $3.99 billion in 2008 (5 % of total external debt in low-income countries or LICs) to US $14.25 billion in 2018 (9.49 per cent of total external debt in LICs). In middle income countries, private debt makes up a third of all external debt.

Is having high levels of sovereign debt always a bad thing? 

Opposition to high levels of sovereign debt is often associated with the neoclassical and neoliberal school of economics. According to this school of thought, the fundamental job of a government is to maintain a balanced budget; to ensure that government spending does not exceed revenue. Where borrowing is required, these debts should be repaid quickly, including by cutting spending in other areas where necessary.

By contrast, Keynesian and Marxist economists view debt as a useful counter-cyclical tool, with borrowing and high government spending being used to invest in an economy which is sluggish or in recession. Moreover, they view the ability to repay debt as the key issue – and understand that ability to repay is not simply down to the size of the debt, but also to the strength of the economy.

However, in many cases, excessive sovereign debt, and debt repayments, are problematic from a social justice perspective.

The first reason is in cases where the debts which a country now owes were not accumulated fairly. The reasons for this can vary from a lender lending irresponsibly (knowing a country cannot afford the loan), to lenders lending to leaders who are undemocratic, and known to use loans to fuel things such as war, weapons or personal enrichment, or loans which originate in colonialism. More detail on this is provided below in the section on debt crises.

Debts also become problematic when their repayment inhibits governments from investing in public services and economic development. At least 20 governments in the global south spent more than 20 per cent of their revenue to service external debts in at least one of the last five years. In some cases, such as in Angola, Djibouti, Jamaica, Lebanon, Sri Lanka or Ukraine, more than 40 per cent of government revenue was destined for external public debt service at some point between 2014 and 2018.

In 2018, 46 countries spent more on servicing sovereign debt than on their national healthcare budgets. Low income countries (LICs) spend on average 28.5% of their public revenues on debt service, and on average only 2.5% on healthcare services. According to the IMF, government spending on public services in Sub-Saharan Africa will reach a historic low of only one fifth of GDP in 2024 – even though overall debts are projected to increase.

Finally, some kinds of loans, in particular bonds, increase countries’ exposure to the fluctuations of international currency markets, meaning that countries are vulnerable during times of international recession or economic downturn.

Different types of debt create greater and lesser problems. Countries with high debts denominated in their own currencies have more options available as to how to manage it. These options are explored in the FreshUP article on Modern Monetary Theory.

What causes a debt crisis?  

The mainstream economic explanation for debt crises is that they are caused by governments spending more money than they can “afford” to – i.e. that their total revenues are lower than their total expenditures. This explanation of debt crisis lies within the neoclassical school, which views balanced budgets as the epitome of good economic governance.

Global debt justice campaigners take a different view about how debt crises happen. They believe that sovereign debt crises cannot be simply blamed on excessive government spending; after all, many countries with high sovereign debts – and high government spending – never enter a debt crisis, for example, the United States.

Instead, debt justice campaigners believe that sovereign debt crises happen for complex and varied reasons. For example:

  • Much debt – especially in the Global South, has its origins in colonialism, and the enforced uneven development of the Global South.
  • Much debt originated through lending by official lenders – the IMF, the World Bank, rich governments – to corrupt leaders who were known to be using loans for personal enrichment, or funding wars. These governments were often kept in power by rich allies such as the United States.
  • Much debt originated because of irresponsible lending – by multilateral, bilateral and private lenders – to countries who were clearly unable to afford the loan repayment terms. This happens because lenders have a financial incentive to lend because they earn interest from these loans. Without the threat of debt write-downs when countries cannot repay, there is a moral hazard that lenders will lend irresponsibly.
  • Often, debt burdens increased as a result of the failure of economic reforms which were imposed on countries in the Global South as a condition of lending.
  • Sometimes, sovereign debt results from the state nationalising private debts of corporations, as happened when governments in countries such as Ireland took on the debts of bankers. The rise in public debt globally since 2010, for example, can be traced back to government bailouts of private corporations in the last financial recession.
  • If a country develops an unsustainable debt burden because of one of the reasons above, often the only way for the country to avoid bankruptcy is to take on even more loans. This leads to a vicious cycle of snowballing debt. 

Modern Monetary Theory (MMT) provides additional explanations and theories about the causes of sovereign debt crises, which are explored in the FreshUP article on that topic.

A history of sovereign debt crises1 

“We think that debt has to be seen from the standpoint of its origins. The origins of debt arise from the origins of colonialism. Those who lend us money are the same who colonized us before. They are those who used to manage our states and economies.”

– Thomas Sankara, former President of Burkina Faso (1987)

The Bretton Woods decades

The 1980s saw the first widespread global sovereign debt crisis. Understanding the roots of this crisis requires examining how the economies which entered into this crisis had developed.

After World War 2, the upheaval which the world had seen since 1914 meant that proposals for a more stable international economic order won the day. The Bretton Woods Institutions were established in 1944, with the International Monetary Fund intended to maintain currency stability and act as a lender of last resort when needed, and the World Bank established to provide development loans to lower-income countries. An agreement was also reached to link the value of the US dollar to the price of gold. Along with a number of other political and economic developments, these measures successfully ensured that the period from 1945 to 1970 saw unprecedented increases in quality of life, workers rights, and social services.

The first global sovereign debt crisis

This post-war settlement started to unravel when, in the early 1970s, the United States decoupled its currency from gold, allowing greater currency fluctuation, and the US, soon followed by other wealthy countries, began to remove the restrictions which were in place to limit the free movement of money around the world. This liberalisation of capital flows coincided with the 1970s oil crisis, in which oil producing countries coordinated cuts to oil production, which in turn drove up their profits. These profits were recycled into western banks, and, coinciding with rapid financial deregulation during the same period, were used to fuel a lending boom which precipitated the first major global sovereign debt crisis.

In almost all cases, these economies, under colonialism, had been developed to depend heavily on the export of raw commodities – on terms highly beneficial to the colonising power.  As well as having a low ‘added value’ in economic terms, reliance on commodity exports also meant that, whenever commodity prices on international markets fell, the economies of many postcolonial countries were deeply exposed. In some countries, the colonial roots of debt are even more stark. For example, following the slave rebellion and Haiti’s independence from France in 1804, Haiti was forced to pay millions of gold frances as reparations for the slaves and land France “lost” because of independence, beginning two centuries of debt.

Many postcolonial countries saw a significant drop in commodity prices from the beginning of the 1980s, which continued for almost two decades, and took a dramatic toll on many postcolonial economies. Their debts became harder and harder to repay. Of the 57 countries which faced difficulties repaying their debts in the 1980s, all were former colonies.

A sustained campaign by debt justice campaigners led to debt cancellations for some of the poorest countries, from the mid-1990s to the present day. This was known as the Heavily Indebted Poor Countries Initiative (HIPC). However, the amount of debt cancelled has been small. And, even more importantly, many of the conditions attached to debt cancellation pushed the same economic model onto economies, a model which had itself contributed to the debt crisis.

Sovereign Debt Crisis in the Global North

In 2003, debt economist Ann Pettifor wrote a article titled “The Coming First World Debt Crisis”2, Sovereign debt – how it accumulates, how it is managed, and how sovereign debt crises are avoided or tackled – is at the root of many of the global structural injustices and financial crises which have caused and exacerbated economic inequality both within and between countries in the last 50 years, in both the Global North and Global South.

Meanwhile, debates – academic and political – continue to rage about how much sovereign debt governments should hold, who is responsible for un-repayable debts and for causing debt crises, and what is the appropriate way to respond when governments are unable to repay their debts – i.e. face debt crisis.

Despite being so fundamental to accurately understanding the roots of social and economic justice and equality, debt remains a knotty concept, whose complexity often puts educators and learners alike off deeper engagement with the issue. This resource aims to address this problem.

The purpose of this resource is to give educators and facilitators who wish to provide training to adults on the subject of debt justice the tools to do so. It includes the following:

  1. Debt: A Short Introduction for Adult Learners, a two-page introduction to debt and debt justice, which can be used as a handout or introductory reading for adult learners.
  2. Debt: A Deeper Guide for Facilitators, an in-depth ten-page look at the main issues and debates relating to debt and debt justice, in the Global North & the Global South. This is intended to strengthen the confidence and knowledge of facilitators who wish to carry out workshops or trainings about debt with adult learners. A guide to further reading is provided for those who wish to delve deeper.
  3. Debt: Suggested Activities for Adult Learners, a series of four activities, to be used together or as standalone sessions, which introduce adult learners to the topic of sovereign debt & debt justice, using a range of active learning methodologies.

1. Debt: A Short Introduction for Adult Learners#

Every year countries of the Global South spend $300 billion on debt repayments. Debt causes poverty in the affected populations and undermines economic, social, and cultural rights. This introduction will describe how debt crises happen, why debt is a justice issue, and what needs to change to achieve debt justice.

Who is the money owed to, and who controls global finance?
Countries borrow money from other countries (bilateral lending), multilateral institutions (e.g. the IMF, World Bank, African Development Bank), and private lenders (e.g. commercial banks and funds). Lenders dominate in setting the rules and definitions surrounding debt issues, especially the International Financial Institutions (IFIs), the World Bank and the IMF.

  1. The World Bank
    Aim: To end extreme poverty and boost shared prosperity
    Activities: Gives loans for specific projects with conditions, or policy advice, to countries in the Global South.
  2. The IMF (International Monetary Fund)
    Aim: To create global financial stability and sustainable economic growth
    Activities: Gives loans to countries who are in financial trouble. IMF loans come with strict conditions.

Power and decision making at the World Bank and IMF
189 countries are members of the World Bank and 190 countries are members of the IMF. Ireland is a member of both. At both the IMF and the World Bank the size of each country’s vote is linked to the size of its economy and how much money it pays into the institution. This means that both the World Bank and IMF are controlled by the richest countries in the world. The countries of the Global South, who borrow most, have the least say in decisions. The president of the World Bank is always American, and the president of the IMF is always European. The World Bank and IMF work together. A government often has to agree to IMF policy conditions before it can get assistance or a loan from the World Bank, and vice versa.

Debt is a Justice Issue

Illegitimate Debt includes loans that

  • Exploit the vulnerability or impoverishment of the borrower
  • Are so unsustainable that repaying them undermines human rights by making it impossible for the state to meet obligations / fulfill core aspects of economic, social and cultural rights
  • Were given for obviously useless or overpriced projects
  • Caused harm to people or to the environment
  • Odious debt describes loans
    Given to a despotic power (i.e. a ruler or regime with unlimited power over other people, and often using it unfairly and cruelly) or authoritarian regime
  • Given by a creditor who knew (or should have known) that the money would not be used to benefit the people
  • Used against the interests of the population, for instance to fund military regimes that deny people their fundamental rights

The Impact of Debt on Communities
Money for debt repayments is diverted from vital services. For some countries, their debt repayments are such a big portion of the budget that it does not leave enough money to adequately fund basic services. In 2019, 64 countries were spending more on debt payments than on health, 45 countries were spending more on debt payments than on social protection and 24 countries were spending more on debt payments than on public education.

When countries are in, or on the brink of, economic crisis they go to the IMF for a loan. IMF loans come with political and economic conditions. The IMF says that by meeting these conditions the government will make their economy more stable. However, history has shown that when governments have implemented IMF policy conditions, the country has not become more financially stable. Policy conditions of IMF loans have been bad for equality. Conditions have included; cutting the public budget by reducing welfare including pensions, freezing or reducing minimum wage, increasing the price of basic products via VAT, and reducing trade union rights. These ‘Structural Adjustment Programmes’ increase poverty and inequality and undermine democracy because important policy changes come from the lender, not the democratically elected government.

A Brief History of Debt Crises

Between the 1940s and 1960s, countries in the Global South became independent from colonial rule. These newly independent countries were left with weak economies and needed to borrow money. Rich countries gave loans, often irresponsibly.

In the 1970s, because of the increase in the price of oil, western banks were rich in financial deposits, and decided to invest this money in giving loans to countries of the Global South. In the late 1970s, the interest rates on these loans went up (more than doubling between 1979 and 1982). At the same time, the price of goods (commodities) that countries of the Global South trade went down. This made it more difficult to repay the loans.

In the 1980s, global recession meant rich country lenders wanted to collect debts. Countries of the Global South were unable to repay these loans to private banks and so the IMF and World Bank gave them more loans, equating to ‘borrowing from Peter to pay Paul’. The loans came with strict conditions, especially about spending less on public services like health and education. These were the ‘Structural Adjustment Programmes’ mentioned above. This had such a damaging impact that it has led the 1980s to be called the “lost decade of development”.

In 2008, with the global financial crash, the debt crisis reached countries of the Global North.

Debt Justice

The Debt Justice Movement goes back to the 1970s, when people around the world protested the impact of the IMF’s policies on their countries, including in Argentina, Egypt, Costa Rica and South Africa. Throughout the 1980s and 1990s the international movement calling for debt cancellation continued to grow. In the late 1990s the Jubilee 2000 petition collected over 24 million signatures. A debt jubilee is when a country or large organization cancels debt and clears it from the public record. Today, the movement continues to push for debt justice initiatives, including:

  • A UN based debt resolution mechanism: an independent, international, legally-binding mechanism for negotiating debt write downs of illegitimate and unaffordable debt.
  • Debt audits: both government audits and independent citizens’ audits to examine the terms and conditions, purpose, actual use and impacts of these loans.
  • The establishment of an international taskforce on tackling historic illegitimate debt.
  • Cancel debts that are illegitimate or odious.
  • End policies that build up more loans. In particular, use grants, not loans, for managing the cost of climate change.

which preceded a 2006 book by the same name. Pettifor, who had been a leading economist working for the campaign to cancel third world debt in the 1990s, argued that the world’s richest countries, in particular the United States, showed all the major signs of a forthcoming debt crisis.

In 2008, she was proved right. As the US subprime mortgage market began to unravel, the Lehman Brothers bank collapsed in 2008. Soon, banks across the world’s wealthiest countries began to seek guarantees from governments in order to avoid collapse. In countries like Ireland, the government guaranteed all of the debts of the major banks, including commercial debts, meaning that any losses were transferred from the private shareholders, to the state’s citizens.

The nationalisation of bank debt led to a surge in sovereign debt across many rich countries. Over the next few years, it became clear just how much bad debt had been nationalised, and countries like Ireland faced the prospect of not being able to repay the bank debts they had guaranteed. Instead of defaulting on these debts, the Irish government sought loans from the IMF, European Commission and other lenders totalling €67.5 billion. The loans came with stringent conditions imposing harsh austerity on the country – public spending cuts and tax increases – something which the IMF itself has admitted slowed the recovery of the economy.

The New Debt Crisis

Since 2010, both sovereign debt and private, corporate debt have reached new all-time highs globally. Much of this rise can be traced back to the large financial crisis post-2008. After 2008, governments in a number of rich countries chose to nationalise the debts of private corporations and banks. Additionally, the policy of “Quantitative Easing” (QE) by the European Central Bank, the US Federal Reserve and other central banks released $11 trillion into the global economy – effectively increasing government debt in order to buy up corporate debt – and provide cash to those corporations. There was little control over how this cash release was used, and much of it was lent on to countries in the Global South, who are now exposed to corporate lenders. This is similar to the pattern of lending in the 1970s and 1980s.

These factors combined meant that annual lending to countries in the Global South more than doubled from $185 billion in 2007 to $452 billion in 2018. The profile of lenders has also shifted, with over 55% of all interest paid by Sub-Saharan African countries on sovereign debt going to private lenders (whose interest rates are far higher). An increase in private loans exposes countries to fluctuations in international currencies and bond markets , meaning that, as debt spirals in the Global South, so too does their exposure to any coming global financial crisis.

And in the Global South, instead of this new debt being used to invest in economic development, or in achieving the Sustainable Development Goals (SDGs), the evidence shows that many times, the new debt was simply used to repay existing, escalating debts.

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