The concept of illegal and illegitimate debt

Brenda Rosser

How legitimate can it be for, on the one hand, political leaders to be accepting loans on terms that leave their nations economically vulnerable, and on the other for the US to have the power to ‘unilaterally’ and unjustly increase loan liabilities for the world’s poorest (and other) nations?

The long-term outcomes of such an international lending regimes have been disastrous. Since 1970 – in the period known as the ‘oil boom’ the official poverty level grew from 50 to 70 percent and under or unemployment increased from 15 to 70 percent. Public debt increased from $240 million to $16 billion. At the same time “Vast areas of rain forest have fallen, macaws and jaguars have all but vanished, three Ecuadorian indigenous cultures have been driven to the verge of collapse, and pristine rivers have been transformed into flaming cesspools.”
The concept of illegal and illegitimate debt

Last month a special debt audit commission in Ecuador released a report charging that much of that nation’s foreign debt was illegitimate or illegal. “The commission evaluated all commercial, multilateral, government-to-government and domestic debt from 1976-2006”.

Perhaps the most critical element of this commission’s ruling is the charge that Paul Volker’s decision to hike US interest rates to extraordinary and unprecedented levels in the late 1970s [1] constituted a “unilateral” increase in global rates that compounded Ecuador’s indebtedness.

The loans to Ecuador, according to John Perkins in his 2004 book ‘Confessions of an Economic Hit Man’ were denominated in US dollars and designed from the outset to “to foment conditions that make [Ecuador] subservient to the corporatocracy running our biggest corporations, our government, and our banks.” The conditions of the infrastructure loans were that “engineering and construction companies from our own country must build all these projects. In essence, most of the money never leaves the United States; it is simply transferred from banking offices in Washington to engineering offices in New York, Houston, or San Francisco.” [2]

How legitimate can it be for, on the one hand, political leaders to be accepting loans on terms that leave their nations economically vulnerable, and on the other for the US to have the power to ‘unilaterally’ and unjustly increase loan liabilities for the world’s poorest (and other) nations?

The long-term outcomes of such an international lending regimes have been disastrous. Since 1970 – in the period known as the ‘oil boom’ the official poverty level grew from 50 to 70 percent and under or unemployment increased from 15 to 70 percent. Public debt increased from $240 million to $16 billion. At the same time “Vast areas of rain forest have fallen, macaws and jaguars have all but vanished, three Ecuadorian indigenous cultures have been driven to the verge of collapse, and pristine rivers have been transformed into flaming cesspools.”[3]

Ecuador’s use of legitimacy as a legal argument for defaulting on their loans sets a major precedent in international finance and the global economy. “Indeed, the mere formation of a debt auditing commission does so.” [4] There is no doubting, however, that the rapidly increasing poverty and hunger along with the dire state of the world’s living environment means attention to the impacts of unreasonable and unjust debt regimes is long overdue.

Brenda Rosser

[1] Paul Volker was then chairman of the US Federal Reserve.

[2] Confessions of an Economic Hit Man by John Perkins

Plume, 2005, paperback, 280 pp.,

http://www.ecobooks.com/books/ecohitman.htm

[3]Confessions of an Economic Hit Man by John Perkins

Plume, 2005, paperback, 280 pp.,

http://www.ecobooks.com/books/ecohitman.htm

As Crisis Mounts, Ecuador Declares Foreign Debt Illegitimate and Illegal

By Daniel Denvir, AlterNet. Posted November 26, 2008.

http://www.alternet.org/audits/108769/as_crisis_mounts,_ecuador_declares_foreign_debt_illegitimate_and_illegal/