Whenever Third World debt cancellation is discussed, it is automatically assumed that somebody, somewhere has to suffer a loss. Either banks must cover the losses, taxes must be raised or Western governments must foot the bill.
In fact, Third World debts could be cancelled with little or no cost to anyone. Indeed, cancellation would be not only the simplest process imaginable, but to the general advantage of the world economy. All that is involved is a bit of creative accountancy — something at which the West has shown itself highly adept when this has suited its political purpose.
To appreciate this, it is essential to recall that the dominant form of money in the modern economy, bank credit, is entirely numerical. It is an abstract entity with no physical existence whatsoever, created in parallel with debt. Debt cancellation is therefore largely a matter of numerical accountancy. This is emphasised by the fact that only one factor prevents the immediate cancellation of all Third World debts — the accountancy rules of commercial banks.
Third World debt bonds form part of the assets of commercial banks, and all banks are obliged to maintain parity between their assets and liabilities (deposits).
If commercial banks cancel or write off Third World debt bonds, their total assets fall. Under the rules of banking, the banks are then obliged to restore their level of assets to the point where they equal their liabilities, usually by transferring an equivalent sum from their reserves. In other words, when debts are cancelled, normally banks suffer the loss.
There are two options for overcoming this accountancy blockage. They involve acknowledging that debt-cancellation is both desirable and possible, and adapting bank accountancy accordingly.
The first option is to remove the obligation on banks to maintain parity between assets and liabilities, or, to be more precise, to allow banks to hold reduced levels of assets equivalent to the Third World debt bonds they cancel. Thus, if a commercial bank held $10 billion worth of developing country debt bonds, after cancellation it would be permitted in perpetuity to have a $10 billion dollar deficit in its assets. This is a simple matter of record-keeping.
The second option, and in accountancy terms probably the more satisfactory (although it amounts to the same policy), is to cancel the debt bonds, yet permit banks to retain them for purposes of accountancy The debts would be cancelled so far as the developing nations were concerned, but still valid for the purposes of a bank’s accounts. The bonds would then be held as permanent, non-negotiable assets, at face value [pp.135-136] … The cancellation of international debts, or their conversion to national debts [see pp.140-143], is the sine qua non if Third World nations are to discover a path away from poverty and decline and towards more socially and culturally benign futures. The acknowledged need is for Third World countries to develop their agricultural and industrial infrastructure for their own domestic consumption and direct less effort towards export-led growth. To the extent that international debts remain, the export imperative remains.
The Third World cannot be said to be in material debt to the industrialised nations. The developing nations are in financial debt to international banks. But whilst not actually in material debt to the industrialised nations, because these bank debts are denominated in dollars, they are forced to behave as if they were in debt to the West, seeking a perpetual export surplus [p.145].