Report: Arrears Clearance: Loan Laundering and Creditor Co-Responsibility

This report was originally published by EURODAD

This paper explores how the international community currently deals with arrears clearance operations, in particular to the international financial institutions (IFIs). Currently, for all developing countries the total amount of external debt in arrears stood at US$130bn in 2003. The regions most in arrears difficulties are Sub-Saharan Africa and Latin America.

This paper examines several recent cases of arrears clearance operations, such as the Democratic Republic of Congo, Iraq, Haiti and Nigeria. We argue that in many cases, these arrears should not be cleared in the first place because the debts are odious or illegitimate in origin. In addition, we reveal how current approaches to the problem have several other very serious knock-on effects. These include the negative impact on countries’ overall levels of indebtedness to the international financial institutions; the implications on countries’ policy space or autonomy; the impact on donor aid budgets and on poor countries’ very scarce financial resources.

Given these considerations we find that current approaches to the arrears problem only serve to support the skewed and highly conditional (re)engagement of countries with the international community. This perpetuates the debt-poverty and dependency trap many developing nations find themselves in. It also exonerates creditors from all co-responsibility for the crisis and thus contributes to “moral hazard” on the part of the creditors. Given that several other countries are likely to embark on this same well-trodden path in the near future – such as the Republic of Congo and Liberia – Eurodad has produced this discussion paper to highlight the concerns we have with current approaches and to suggest to the international community that there are alternative ways forward.

The proposals outlined in this report include practical steps to address the historic unpayable – and in some cases illegitimate – debt burdens of the past at the same time as measures to improve future lending and borrowing practices. And as this paper will show, these proposals for reform are not radical but are politically achievable, not to mention essential. Measures need to be undertaken by both debtor and creditor governments and commercial banks alike. They require the full involvement of national parliaments and local and international civil society actors. More specifically we recommend that the international community support comprehensive debt audit processes, as well as alternative more egalitarian forums for debt work-out processes: in this context we propose alternatives to the Paris and London Club forums. We indicate that civil society organisations are working to define a set of responsible international financing standards for the future and urge the international community to support these efforts.

We believe that action comes down to sheer political will. If donors and creditors show willingness to embark on more fundamental reform of the international debt architecture, in partnership with all relevant stakeholders, this will indicate their readiness to seriously address the debt problem and the gross power imbalances that characterise the current system. Certainly NGOs and social movements around the globe will continue to fight for an approach to international development finance that is based on solidarity, not conditionality, penalties and gross inequalities.

Read the report