Debt Restructuring & Relief
“If you owe a bank $1000 and cannot pay, you have a problem. If you owe a bank $1 000 000
and cannot pay, the bank has a problem”
Debt Restructuring – The banks of developed countries have loaned so much money to poorer
nations that their very existence would be in jeopardy if defaults became common. If these
banks went bankrupt, the financial stability of the entire world would be up in the air. Western
government were left with 2 options 1) force heavily indebted countries to accept more loans
2) run the risks of devastating their own economies
Additional loans or the rescheduling of existing loans took place which resulted in higher debt
charges to be paid and a greater total debt load. Most of this additional funding came from the
World Bank and the IMF. Many strings were attached to the recipient countries
-Had to reduce value of their own currency (to discourage imports and stimulate exports)
-Had to increase export earnings (often at the cause of the environment)
-Had to restrict social spending (health and education)
Debt Relief – debt that is written off, or excused. In the 1990’s, it became evident that no
amount of debt restructuring would alleviate the problem, poorer countries would never be able
to pay off the debts. Some relief was necessary. Various efforts have been made.
Highly Indebted Poor Countries (HIPC) Initiative
-Created by the World Bank and IMF in 1996
-applies to the world’s 41 poorest nations which had a US$175B debt in 2004.
-3 Stages – Pre-decision point – when a country is determined to be eligible for the initiative.
- Decision point – An acceptable poverty reduction plan is made in consult with the
World Bank, IMF, and local NGO’s.
- Completion point – IF the poverty reduction plan is working, then the relief is given.
Donor countries pay off the portion of debt (this counts as foreign
aid) which essentially means paying banks or other developed
countries (sometimes themselves).
Jubilee 2000
-begun in 1990 with the goal of marking the new millennium by having all US$240B owed by
the 50 poorest nations forgiven. Faith leaders spearheaded the movement.
-It argued that debtor nations had already paid more than a fair amount for loans which were
forced on them. (between 1980-1992 – US$1.6T was paid yet debt increased from US$567B to
US$1.4T.
-It argued that it is unfair for current citizens to pay the consequences of loans from decades ago.
-Despite wide popularity ( a petition with 20M names), the goals were never reached.