IOU: The Debt Threat and Why We Must Defuse It

‘If Africa is to remain loyal to the Western cause, its economic interests must coincide with, and reinforce, its political sympathies; and one of the major problems of the relationship between the West and Africa will be to ensure an adequate flow of economic assistance, and particularly capital, through various channels to the newly emerging States. On any reckoning the amounts required will be considerable; and, if the Western Powers are unreasonably insensitive to the economic aspirations of independent Africa, the Governments of the new states may be compelled to turn to the Soviet Union for the assistance that they will certainly need.’

With that threat looming Washington launched a dual strategy to provide ‘friendly’ African regimes with weapons and also to channel funds to them through their own development agency, US-AID, along with the World Bank and other international financial institutions. As one National Security Council memorandum recommended in 1965: ‘US-AID should be used (#litres_trial_promo) as a political weapon with the major assistance going to African friends of the US.’

Which of course meant that now that the Sino-Soviet love affair with Africa was officially a ménage à trois, the Soviets started to lend even more to key countries in the region to ensure that the parties they were backing didn’t switch camps. This led to the increasingly commonplace and clearly undesirable situation of rival groups within the same country being funded by either the East or the West. In Angola, for example, the Soviet Union provided loans for MPLA to purchase weapons. While FNLA and UNITA, MPLA’s enemies, purchased their weapons with American dollars.

How ironic that loans made during the Cold War in the name of security and peace even at the time were clearly engendering conflict and instability. And how indicative of one of the major ironies of Cold War lending: that, in the pursuit of addressing immediate national security concerns, the world’s superpowers played significant roles in laying the foundations for future insecurity and instability.

They did this in two ways. First, their profligate lending actively helped to jack up the debt mountain so that the Third World owed levels way above what many of its countries could realistically service, sowing the seeds of the crisis the developing world currently faces. And second, by the frequent bankrolling of tyrannical, corrupt, or self-seeking regimes, regimes which never considered the needs of the majority of their people in their investment decisions, whose legacies have been increasing levels of domestic poverty, conflict, unrest and civil strife.

The corrupt regime of Mobutu Sese Seko in Zaire (now the Democratic Republic of Congo), for example, received half of all US aid to black Africa in the late 1970s. Zaire’s favoured borrowing status persisting even after a damning internal memo was made public in 1978 by Karin Lissakers (later to become US executive director of the IMF). The memo did not mince its words: ‘the corruptive system in Zaire with all its wicked manifestations is so serious that there is no (repeat no) prospect for Zaire’s creditors to get their money back.’ Mobutu’s spending sprees became quite legendary: Concorde chartered for private shopping trips to Paris; dozens of estates bought in Continental Europe; the building of the world’s largest supermarket, and of a steelworks that one banker said the country needed ‘like it needs central heating’, to name but a few. Yet, despite the absolute clarity of the 1978 IMF memo and the progressive worsening of Mobutu’s spending, in 1987 the US (through the IMF) pushed through yet another loan in exchange for Mobutu making his territory available for US covert action against neighbouring Angola. Today the people of the Democratic Republic of Congo (#litres_trial_promo) have to spend 37 per cent of government revenues servicing their debt – not great for a country whose Gross National Income per capita is $90 (#litres_trial_promo).

Another tyrannical regime, that of Saddam Hussein, was provided with loans amounting to around $100 billion, several times Iraq’s GDP, during the 1980s by governments intent on serving their own geopolitical purposes. Half of this money came from Arab states (#litres_trial_promo), led by Saudi Arabia, in order to support Iraq’s invasion of Iran. On top of this came $7 billion worth of credits from the Russians, $6 billion from the French, several billion from the Germans and British and at least $10 billion from the US, much of which was covertly pumped into Iraq throughout the mid-1980s through their export credit agencies – institutions we will be looking at in the next chapter.

While European loans to Iraq were made primarily to serve the interests of their domestic arms dealers, geopolitics played a significant part in the US’s decision to lend there. It emerged in the 1990 Iraqgate-BNL (#litres_trial_promo) (Banca Nazionale Del Lavaro) scandal, backed by hundreds of US documents, that hundreds of millions of dollars of US Department of Agriculture loans had been channelled to help Iraq build its military capacity: ‘BNL’s loans to Iraq were part of a covert operation coordinated with Italian officials by the Reagan administration and continued by George Bush. The scheme was designed to finance the secret re-arming of Iraq, both to balance the scales in the Iran-Iraq war and to gain bargaining leverage for 50 or so US hostages who were at the time being held by the Iranians at the US embassy in Teheran.’

Clear geopolitical interest dictated lending policy throughout the Cold War. This meant that both tyrannical regimes and regimes which didn’t even pay lip service to the lenders’ ideological beliefs, were bankrolled by the West and the East to secure allegiance or to realize strategic goals. Zaire was lent money by the Americans although it never adopted a free market economy. Angola was lent money by the Soviets despite its insincere playacting at socialism. Saddam was lent monies by the West and Arab states up until the 1991 Gulf War despite the fact that his chemical gas bombing of the Kurdish city of Halabja which killed 5,000 of his own people and wounded 10,000 others was by then common knowledge. The Argentinian military junta of the 1970s was lent money by the US despite the fact that it was known to be ‘disappearing’ tens of thousands of people during its reign. As Lyndon Johnson famously observed in defence of Washington’s support of Ngo Dinh Diem (#litres_trial_promo), the corrupt and brutal but Communist-fighting South Vietnamese leader to whom over $4 billion of loans and grants was given: ‘Shit, Diem’s the only boy (#litres_trial_promo) we got out there.’

The superpowers gained an obvious advantage through these loans. But why did Third World countries borrow such huge amounts of money from other countries when the quid pro quo was so explicit? When in exchange they had to promise allegiance? It’s not too difficult to answer that.

In the worst cases, because their leaders knew that they could easily ill manage, misappropriate or divert funds – no bank manager would be peering over them asking them on what they would be spending the money, or how they might pay it back.

In others, because the borrower country simply wasn’t in Mao or Bolivar or Vajpayee or Shinawatra’s position – desperate for cash these nations needed to borrow money from abroad. Domestic savings weren’t sufficient to finance necessary investments for growth and development or in some cases even current consumption requirements. Exports weren’t providing enough foreign exchange to fund imports and service existing debts. Commodity price shocks (such as the oil hike in the 1970s) meant that they needed to offset their impacts (just as a person might take out a loan to tide them over when they lose their job). Grants weren’t available (#litres_trial_promo) at levels of magnitude needed. And either loans weren’t available elsewhere or the monies being offered by the bilateral (government to government) lenders were being offered at significantly better terms than other alternatives, often at well below market rates.

But more often than not, and why the amounts borrowed were often far above what was actually needed, was because the battle for power between the East and West seemed like it would never end. As long as the superpowers were fighting it out, most Third World countries believed that they could continue playing one off against the other, and that they would remain in the money. They believed that the ‘banks’ wouldn’t foreclose, and that the tap, which ensured that new loans were always forthcoming and that rescheduling was always an option, would never be turned off.

Although there were times when there was a real, legitimate or proper need to borrow, the lending process had become divorced from sober economics (where a low-cost loan is put to sound economic use.) Sometimes loans were used productively. Brazil, for example, took out many loans during the Cold War to invest in developing its manufacturing industry; some of Africa’s loans were used to invest in its infrastructure. And the lenders, for their part, were sometimes sensible enough to make loans to countries that were rich in oil, minerals, coffee and other exportable resources. In other words, countries that were creditworthy. More often than not, however, the lending process was so distorted by geopolitics that the logic that underpins sound borrowing – that one incurs a debt in the hope of making an investment that will produce enough money both to pay off the debt and to generate economic growth that is self-sustaining – was simply absent. As too was the criteria that underpins sound lending – that the lender be likely to be able to repay the loan. And this isn’t selective reporting. While it may be that good news is sometimes not reported, and there are undoubtedly more ‘positive’ debt stories out there than I have highlighted, there is no question that in the vast majority of cases this is the way it was.

All change

Once the Cold War ended, things changed (#litres_trial_promo). The allegiance of strategically important Third World countries was suddenly perceived as unnecessary. Loans were called in overnight (#litres_trial_promo), and new lending (which was the way many countries had been able to service old debts in the past) was either curtailed, or provided under far less generous or far more conditional terms.

Moscow, in its new post-Soviet guise, and now suffering its own economic collapse began harassing the former Soviet Union’s satellite states for repayment of outstanding loans (#litres_trial_promo), having quite happily rescheduled them in the past. President Clinton started championing ‘trade-not-aid’ policies, despite the fact that the by now aid-addicted countries were massively weighed down with significant debt burdens that they would never be able to service through trade alone, especially given the protectionist trade policies of the West which meant that the very goods that the developing world could have hoped to export to the developed were as a consequence rendered uncompetitive.

Countries that had played off the superpowers so effectively during the Cold War now saw themselves fast abandoned by their former sponsors. North Korea was so feted by the Soviets in the 1960s that the Russians, based solely on the North Korean argument ‘You must take into account that the Americans have already built an oil refinery in South Korea’ even provided loans for a North Korean oil refinery, despite the fact that the country had no oil of its own. But by the early 1990s, the Soviet Union had drastically cut back its support.

Regimes that had once enjoyed the benefit of blind eyes in the lending nations were now suddenly chastised. Zaire, for example, began receiving tough messages to combat corruption from its long-time donors – messages which had never been delivered when Mobutu’s support had been valued.

With a lack of concern and seriousness that can only shock, aid was significantly cut back too. Between the last days of the Cold War, and the last days of the millennium, development aid in general fell by 40 per cent, despite the worsening financial and health conditions in much of the Third World, and despite the fact that countries were by now drowning in levels of debt to service. Entire regions were abandoned by their former ‘protectors’: most of Latin America saw its US backing disappear (#litres_trial_promo) and Africa was hit hard. As the African Research Bulletin explained in 1994: ‘The Cold War’s demise (#litres_trial_promo)…has proven a setback for black Africa. Superpower rivalry once gave crucial purchase to poor lands with prized real estate for military bases, or a grip on maritime “choke points”, or large reserves of strategic materials…Africa’s leverage has markedly weakened.’

Many nations caught in the backdraft of the new global power vacuum were left to scramble for new loans, aid and ‘patrons’, in often quite poignant ways. In 1993, Vietnam made the extraordinary offer to take up the debts of the former South Vietnam hoping that honouring the repudiated wartime debt would help it to attract more Western loans. Particularly poignant given that Vietnam, by agreeing to do so, was essentially agreeing to assume the debt burden of its former foe. Also, the country was (and continues to be) one of the world’s most highly indebted poor countries. So when Vietnam eventually agreed to pay the United States $146 million of South Vietnam’s wartime debt in 1997, that $146 million represented three-quarters of the nation’s annual health budget. But as Nguyen Manh Hoa, director of the external financial division of the Finance Ministry explained: ‘We had to agree on old debts so we could have new relations, such as new loans and cooperation agreements.’

By the mid-1990s, most developing countries found themselves having to face huge bilateral Cold War-era debts, often ones that had been racked up by regimes long-since vanished. In the new environment the lender had become much less understanding, and borrowers, in order to get their loans rescheduled or relieved, had to jump through many tortuous hoops (as we will see in later chapters).

Debts which had been warmly welcomed by Third World leaders as something which they could use to their advantage, became in the post-Cold War era a ball and chain weighing their countries down.

Of course, not all countries faced similar abandonment. Some retained their geopolitical importance, and continue to this day to receive loans and have their debts rescheduled or even cancelled. Turkey’s regular bailing out, for example, is testimony to its position as a ‘gateway to oil’, as well as to its geopolitical import to NATO. Even after its disagreement with the US over the deployment of American troops during the war on Iraq, Turkey was offered up to $8.5 billion in loan guarantees to ‘relieve potential balance of payments needs (#litres_trial_promo) that may result from hostilities’.

Sometimes a country is considered too close physically to be allowed to fail. This is certainly what drove President Clinton to make Mexican President Ernesto Zedillo a $20 billion loan in 1995, despite the fact that 85 per cent of the American public were at the time against the bailout. ‘Bob Rubin (#litres_trial_promo) and [Lawrence] Summers told me if we don’t do this, Mexico’ll collapse, Brazil’ll collapse. We had no option,’ Clinton now explains.

In other cases, the battle for a country’s allegiance is still up for grabs. The Chinese and Taiwanese, for example, continue to mirror the bipolar world of the Cold War by competing for diplomatic recognition in Africa (#litres_trial_promo) and the Pacific on the basis of which can give the most aid, with their ‘clients’ playing them off against each other as effectively as ever. Or a country is needed on-side to fight the 21st century’s new wars. Pakistani President General Pervez Musharraf’s support for the war on terrorism after September 11, for example, was rewarded with a $1 billion debt write off, nearly a third of what Pakistan owed the US. And on December 13, 2001, just two months after the attack on the twin towers, the Paris Club (the group of sovereign creditors to which a country must go to negotiate debt rescheduling) offered Pakistan a $12 billion ‘stock reprofiling’ of loans for 38 years under which it would have to pay nothing in debt service during the first 15 years – terms which it would have never got a few months earlier. While in January 2003, Ethiopia saw a $30 million write-off of its US debts over a year before this was due under the Cologne initiative. The timing was clearly chosen to serve the US’s own interests – this was, after all, precisely when America was looking to shore up support (#litres_trial_promo) for the war against Iraq in the developing world.

On other occasions, a country is given a loan simply in order to maintain influence in a region. The French provided loans to the Habyarimana regime in Rwanda in 1992 to buy weapons including Kalashnikov rifles, anti-personnel mines, plastic explosives, mortars and long-range artillery, in order to maintain its credibility and influence in French-speaking Africa. The US tends to bail out countries which are facing financial crises not only if they are nearby but also if they are playing host to a US military base. South Korea, with its large American troop presence, won US help during the 1997/98 Asian crisis, for example, but Thailand and Indonesia did not.

To this day, the moral character of the borrower often remains an irrelevance. Turkey was offered the 2003 aid and debt restructuring package, for example, despite its continuing human rights abuses (although it has been making progress in its treatment of the Kurds). The French loans to Rwanda were made to a regime known to be highly repressive and were in all likelihood the monies used to buy the weapons used to commit the terrible 1994 genocide. America’s post-9/11 debt relief package to Pakistan was made in spite of the fact that calls to Pakistan to reinstate democracy following the 1999 coup that brought Musharraf to power had not been heeded. And various central Asian countries continue to be provided with loans by the US in exchange for their support in its war against terrorism, despite their own ongoing human rights violations.

It is abundantly clear that the lender is not an alms giver in the world of real-politik. The agenda is to serve the perceived self-interest of the lender, debt to be granted and withdrawn as he sees fit.

Under their thumbs

Just think how such naked self-interest could be interpreted by the borrower country’s people. In many cases, these people never got any benefits from the monies borrowed, either because the loans were used by despots to retain their internal power base or because they were unwisely spent. And then add this: the thought of how easy it is to interpret debt as a tool of subjugation, whereby countries are kept in debt specifically to keep the weak weak, the poor poor, the powerless powerless, not only to maintain pre-existing social and economic hierarchies but also to strengthen and reinforce them – something Mao Zedong, as we saw, so clearly feared.

Countries are usually only given debt relief if, as we will see, they conform to the rich world’s own set of rules. Creditors are allowed to negotiate en masse, while the articles of the Paris Club explicitly deny that right to borrower countries. The US Treasury did not even consider (#litres_trial_promo) providing Nicaragua and Honduras with debt relief in the wake of Hurricane Mitch in 1998, Treasury Department officials actually admitting at the time that ‘loss of leverage’ was their reason for refusing to consider comprehensive debt cancellation for the two countries. The United States decided (#litres_trial_promo) in July 2003 to withhold military aid from countries which refused to exempt American soldiers from prosecution by the International Criminal Court. Many examples seem to give this interpretation credence. But the extent to which this interpretation is accurate is almost beside the point. The fact that debt can so easily be interpreted in this way creates very real problems of its own. Problems that, as we will see in later chapters, can harm all of us, wherever we are.

For using debt as a highly effective mechanism of control will only serve to engender discontent in the very countries where the West seeks to exert influence, particularly given the heavy-handed way in which the lender often displays his dominance. When Yemen, for example, voted (#litres_trial_promo) against UN Resolution 678 which authorized the first Gulf War, a senior US diplomat commented on the occasion, ‘This will be the most expensive “no” vote you have ever cast.’ A $70 million US aid project for Yemen was subsequently cancelled. This despite the fact that Yemen was (and remains) one of the world’s most highly indebted poor countries, and that life expectancy was only 46. Not unsurprising, then, that there were very large anti-American demonstrations in Yemen in 1991 and the US embassy was attacked with small arms fire.

So we begin to unpack the story of developing world debt. And what an unsavoury chapter this one has been proven to be. It is true that there are a few cases where countries have tended to lend for relatively altruistic or disinterested purposes (Finland and the Netherlands spring to mind (#litres_trial_promo)), but any general interpretation of lending to developing countries as being primarily motivated by a desire to help Kennedy’s ‘struggling’ masses would clearly be naive. For the story behind country-to-country lending is on the whole neither one of altruism, nor even of enlightened self-interest. The self-interest is more usually myopic. The altruism is missing (#litres_trial_promo).

While it is true that in some cases, whatever motivated the lender, loans did result in high economic and social returns, all too often the outcome was one of bad guys getting benefits while the poor, marginalized and vulnerable saw very little of the spoils.

As we have seen, some developing countries who could afford to, have taken a stance against borrowing. Some others have had no choice and on occasion have used the loans for productive investment, but the majority have taken what they could get from the eagerly proffering superpowers. As a result, most of them, after the end of the Cold War, are mired in impossible levels of debt repayment that profoundly damage their country’s well-being. The lenders, for their part, not only provided the means, and sometimes the weapons for internal and external wars, they also provided the means to shore up dictatorships and corruption in pursuit of immediate national security concerns.

This chapter has been the story of reckless borrowing and of profligate lending, the antithesis of a rational process of lending and borrowing where a loan is requested and granted in circumstances where it is believed that the investment will produce enough money both to pay off the debt and generate self-sustaining economic growth. It is also the story of a complete failure to understand long-term security considerations. The slashing of aid to the world’s poorest countries after the end of the Cold War, for example, under the misconception that this signalled the end of an era of high security risks, has undoubtedly played a contributory role in creating the insecure world we all now inhabit.

The short-sighted decisions created by geopolitical considerations devoid of humanity – or even intelligent self-interest – are a crucial component in the building story of the debt threat.

CHAPTER THREE Backing the Bad Guys (#ulink_84944222-f19e-58fa-a432-14629e06ac46)

‘Imagine you went to your bank manager and said, can you lend me a few hundred million for a project that is environmentally unsound, highly corrupt, and unlikely to even materialize…or alternatively how about a few hundred mil so that I can blow somebody’s brains out?’

A timeless illustration

On February 5, 2003, Colin Powell presented a dossier to the UN Security Council with reasons for why the world should go to war against Iraq.

One reason was the existence of a chemical weapons plant, ‘chlorine plant Faluja 2’, 50 miles outside of Baghdad, a plant which the US claimed was a key component in Iraq’s chemical warfare arsenal and which even the cautious Hans Blix, the former UN Chief Weapons Inspector, had reported to the Security Council might have to be destroyed.

Given that that dossier was used not only by the United States but also Britain as a justification for war, it is somewhat ironic that it was the British government that had been responsible for building the £14 million factory 17 years before. In 1985, the British Export Credit Agency ECGD, a government agency that funds or insures British corporations wanting to do business in high-risk areas, had provided insurance to a British subsidiary of a German company, Uhde Ltd, so that it could set up the plant in Iraq.

Did the British government know that this plant they were underwriting with British taxpayer money, could be used to develop chemical weapons? Uh, yes. At the time, senior government officials wrote that there was a ‘strong possibility’ that the plant was intended by the Iraqis to make mustard gas. Meanwhile, the British Ministry of Defence warned that the plant could be used to make chemical weapons, noting that the chlorine the factory would produce could ‘be used in the manufacture of phosphorus trichloride, a key nerve agent precursor’. Richard Luce, a foreign office minister, went so far as to express concern that this deal would ruin Britain’s image if news of it were to get out, and counselled: ‘I consider it essential everything possible be done to oppose the proposed sale and deny the company concerned ECGD cover.’ The Tory British Trade minister at the time, Paul Channon, nevertheless revealed all too clearly where the British Government’s priorities lay: ‘A ban would do our other trade prospects in Iraq no good,’ he said.

Those ‘other prospects’ turned out to be lucrative arms deals. The radio manufacturer Racal shipped several sophisticated Jaguar V radios to Saddam’s army in 1985 thanks to ECGD insurance of £42 million, radios that enabled Saddam to overcome enemy jamming on the battlefield. In 1987, Marconi was given ECGD funding to sell Armets – the Artillery Metrological System, crucial for accurate artillery fire – to the Iraqi army; Tripod Engineering was given ECGD backing in 1988 to sell a fighter pilot training complex to the Iraqi air force and Thorn EMI was given ECGD backing for a contract to ship Cymbeline mortar-locating radar to the Iraqi army. The British government even continued (#litres_trial_promo) to issue export credits to Iraq after a British journalist, Farzad Bazoft, was executed by Saddam in 1990.

And it wasn’t just the British whose Export Credit Agencies (ECAs) were underwriting sales by domestic companies to dubious and dangerous projects in Iraq during Saddam’s reign or even financing the entire deals themselves. Pretty much the whole world was at it.

At the same time as the British were smoothing the way for Uhde to set up a chemical weapons facility, the White House, for example, was pressuring its ECA, the US Export-Import Bank (Ex-Im), to approve financing for a new oil pipeline in Iraq, a pipeline that Bechtel would build if the deal went ahead. ‘The State Department has exerted (#litres_trial_promo) strong pressure on Ex-Im to make additional credits available, including for this pipeline,’ noted Bechtel official H.C. Clark in an internal memo on February 29, 1984. This despite the fact that the horrors of Saddam’s reign were well-known, and reports of his gassing of thousands of Iranian troops with chemical weapons during the Iran-Iraq war had received public attention.

With Donald Rumsfeld, then Reagan’s Middle East Envoy, and George Schultz, Secretary of State at the time (and former Bechtel President), both playing key lobbying roles, their efforts paid off. On June 21, 1984, Ex-Im’s board of directors approved a preliminary commitment of $484.5 million in loan guarantees for the pipeline project.

But hang on a minute. Is there some connection between deals like those struck by Uhde, Racal, Thorn EMI and Bechtel and our story of debt? Yes. Because when such deals go sour – following the commencement of hostilities in Kuwait, for example, the Iraqi government stopped honouring their contract with Uhde – the Western Export Credit Agency, the underwriter of the deal, pays the corporation almost all the monies owing it and assumes the debt itself. And then this debt is added to the outstanding bilateral debt owed by the debtor country to the country from which the ECA hails, thus becoming a significant part of the bilateral debt the developing world owes. Around 95 per cent of the debt (#litres_trial_promo) owed to the UK government by developing countries, for example, is export credit debt. While 65 per cent (#litres_trial_promo) of all debt owed by developing countries to official creditors is to ECAs.