What is the International Debt Crisis

" As we approach the Great Jubilee, our faith and our Church call us to stand with the poor in their just call and urgent hope for debt relief." - A Jubilee Call For Debt Forgiveness, USCC 4/99

What is International Debt?

Like individuals and families who borrow money to pay for a house or an education, countries borrow money from private capital markets, international financial institutions, and governments to pay for infrastructure such as roads, public services, and health clinics; to run a government ministry; or even to purchase weapons. Also like individuals, countries must pay back the principal and interest on the loans they take out. But there are important differences between individuals and countries. If a person borrows money, he or she receives the money directly and can use it for purposes benefiting the borrower. But if a country borrows money, the citizens are not necessarily notified or informed of the purpose of the loan or its terms and conditions. In practice, some governments have used loans for projects that do not meet minimum standards of social, ecological, or even economic viability. At times, these loans have been used to enrich a small group of people.

In other cases, although the money was used for legitimate purposes, financial conditions beyond the government's control made loan repayment impossible. Another difference between individuals and countries is that a business or a person who falls on hard times and cannot meet his or her financial obligations over time goes bankrupt. A court is appointed to assess the debtor's situation and banks acknowledge that the debtor cannot fully pay his or her debts. But countries cannot file for bankruptcy. There is no such procedure, no arbitrator. At the international level, the creditors, not a court, decide whether and under what conditions to require a country to pay its debt.
 

How Did the Debt Crisis Come About?

The causes of the current debt crisis are complex, rooted in economic policies and development choices going back to the 1970s and 1980s. When the Organization of Petroleum Exporting Countries (OPEC) quadrupled the price of oil in 1973, OPEC nations deposited much of their new wealth in commercial banks. The banks, seeking investments for their new funds, made loans to developing countries, often hastily and without monitoring how the loans were used. Some of the money borrowed was spent on programs that did not benefit the poor, such as armaments, failed or inappropriate large scale development projects, and private projects benefiting government officials and a small elite. Meanwhile, as inflation rose in the U.S., the U.S. adopted extremely tight monetary policies that soon contributed to a sharp rise in interest rates and a worldwide recession. The irresponsible lending on the part of creditors, mismanagement on the part of debtors, and the worldwide recession all contributed to the debt crisis of the early 1980s.

Developing countries were hurt the most in the worldwide recession. The high cost of fuel, high interest rates, and declining exports made it increasingly difficult for them to repay their debts. During the rest of the decade and into the 1990s, commercial banks and bilateral creditors (i.e., governments) sought to address the problem by rescheduling loans and in some cases by providing limited debt relief. Despite these efforts, the debt of many of the world's poorest countries remains well beyond their ability to repay it.
 

The Impact of International Debt

Poor countries pay a high price to service their debt, and this cost is particularly born by people living in poverty. The massive debt payments that poor countries owe to rich countries and to multilateral creditors like the World Bank and International Monetary Fund (IMF) take resources away from investments that benefit ordinary people and contribute to social and economic development. According to Oxfam International's April 1997 report, Poor Country Debt Relief, "Debt repayments have meant health centers without drugs and trained staff, schools without basic teaching equipment, and the collapse of agricultural extension services." The obligation to meet debt service payments also means that aid from other countries like the United States is often used to refinance debt payments rather than improving health care, education, and other social services.

The International Monetary Fund and the World Bank require economic restructuring (Structural Adjustment Programs, or SAPs) before a country can qualify for debt relief. These requirements can include reducing inflation, removing price controls, reducing tariffs and other restrictions on foreign trade, and government downsizing. While in the long run they may help a country become more competitive in the global market, in the short run they can lead to local business failures in the face of global competition, massive lay-offs, lower wages, and even less investment by government in education, health, and other social programs.

The debt crisis can also affect the environment. International debts have to be paid back in creditors' currencies, or so-called "hard currencies" like U.S. dollars. This may have exacerbated the harmful environmental practices that prevail in many countries, as governments and entrepreneurs mine their natural resources in order to generate hard cash.

The debt burden carried by impoverished countries affects citizens in the rich countries as well. Environmental damage has global repercussions. Widespread poverty means that people have less money to buy goods and services from other countries. Debt reduction for the poorest countries would not represent a new or unique policy for the United States. Over the years, we have substantially reduced debts owed by Poland, Jordan, and Egypt. After Word War II, Germany's debt was substantially reduced in order to allow it to rebuild. We have also on occasion reduced debts owed by African countries. In these cases, the U.S. has recognized that debt reduction can be sound foreign policy.

Discussion Questions

1. Who are the winners and losers in the international debt crisis?

2. What are the obligations of creditors in this crisis, and what are the obligations of debtors?

3. How is international debt similar to, and different from, personal debt? Should international bankruptcy provisions be established?

4. What are some possible solutions to the international debt crisis?

Information in this handout is based on materials from the USCC Department of Social Development and World Peace, Catholic Relief Services, the International Co-operation for Development and Solidarity (CIDSE), Caritas Internationalis, The World Bank, The International Monetary Fund, Oxfam International and Jubilee 2000/USA.