Lending boom to impoverished countries threatens ‘Greece style’ debt crisis

By agency reporter
April 1, 2015

Figures calculated by the Jubilee Debt Campaign, based on recently released data from the World Bank, show that loans to impoverished country governments have increased by 40 per cent in just one year, and have almost tripled since the global financial crisis began in 2008.

Lending to ‘low income countries’ increased to $17.3 billion in 2013, the latest year with figures available, up from $12.2 billion in 2012 and $6.1 billion in 2008. Of the loans since the global financial crisis began, 63 per cent are from multilateral institutions, primarily the World Bank and International Monetary Fund, 27 per cent from governments such as China, Japan, France and Germany, and 10 per cent from private lenders.

Tim Jones, economist at the Jubilee Debt Campaign, said: “The current boom in lending is being fuelled by donors giving more ‘aid’ as loans rather than grants, and low interest rates in the US and Europe leading to speculation on developing country debts. A ‘Greece style’ debt crisis could be just around the corner unless action is taken to increase government revenues through tackling tax avoidance and evasion, and measures introduced to signal that reckless lenders will no longer be bailed out.”

Previous research by the Jubilee Debt Campaign has shown that two-thirds of impoverished countries face large increases in the share of government income spent on debt payments over the next ten years. On average, current lending levels will lead to increases of between 85 per cent and 250 per cent in the share of income spent on debt payments, depending on whether economies grow rapidly, or are impacted by economic shocks. The new increase in lending will only heighten concerns about the possibility of future debt crises.

One of the first countries to be entering a new debt crisis is Ghana. Two weeks ago, IMF staff reached an agreement to lend $310 million a year over three years to Ghana, in order to bailout previous lenders. This money will be used exclusively to meet debt payments to other foreign lenders to the West African country, which equal $1.2 billion to $1.6 billion a year over 2015 to 2017 (16-19 per cent of government revenue).

In September 2014, the United Nations passed a resolution to begin negotiations on creating a ‘bankruptcy’ process for governments. Such a mechanism would indicate that reckless lenders would no longer be bailed out by the IMF and other public institutions, as is happening in Ghana and has happened in Greece.

Campaigners warn that these bailouts of lenders incentivises them to continue lending recklessly, whilst leaving large debts with the country concerned. Just 11 countries voted against the UN negotiations taking place, but this included the UK, US, Germany and Japan. The next negotiating session at the UN will take place on 28-30 April 2015.

* Jubilee Debt Campaign http://jubileedebt.org.uk/


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