By Ron Morrison
BALANCE OF TRADE DEBTS
Inter-government balance of trade accounts result in debtor and creditor balances between nations, usually denominated in their respective national currencies. Where one currency is weak, debt might arise from contracts demanding settlement in an alternative currency.
Such debts used to be settled by bullion transfers, but nowadays are in the form of debt ‘instruments’ — interest-bearing IOUs.
These debts can be written off by the creditor State at no cost to their taxpayer other than foregoing the tribute of interest.
INTERNATIONAL MONETARY FUND DEBTS
IMF debt is incurred when the borrowing State accepts credit denominated in a currency other than its own, in similar fashion to a commercial bank overdraft.
That is, no institutional or private funds are raised to back these credits.
They are called Special Drawing Rights and are like bank credit “created out of thin air” and their credibility depends upon their being repaid or, if “written off” as bad debt, the loss requires to be claimed against the bank’s capital or profits — ultimately a loss to be borne by the bank’s shareholders.
However, the shareholders in the case of the IMF are the various member States, and in that case although each State shareholder has put up some capital, an agreement between them could authorise the writing off of the debt, again at no actual cost to taxpayers other than the tribute of interest which they would otherwise have earned. The selling off of IMF gold reserves is a red herring.
WORLD BANK DEBTS
The World Bank raises the bulk of its funds from the financial markets and makes loans on a commercial basis, earning for itself a profit of interest — last year approximately £1bn.
It cannot write off debt without incurring an actual loss — eventually to be borne as real losses, by those institutions which provide its funds.
Where these primary lenders are banks lending “credit”, various governments can authorise the write off of the debt under their respective domestic Banking Legislation, and there would be no loss to the taxpayer — although there would be a loss to the banks of the tribute of interest which they would otherwise have earned.
PRIVATE INVESTMENT DEBTS IN DEVELOPING COUNTRIES
Then we have private investment in developing countries, whereby multi-national oil companies and banks move into a poor country, presumably at their invitation, but upon terms which seem to be little short of daylight robbery. This kind of “aid” may well be prone to most of the corruption.
Lending to governments is seen by banks as a no-risk business and if, as is often the case this turns out not to be so, they should be prepared to accept the losses without recourse to the taxpayers’ assistance.
In the UK the taxpayer already pays 30% of their losses anyway when the Inland Revenue allows them to write off such losses against profits.
THE QUESTION OF “AID”
As regards “aid”, surely this word is often being used as a euphemism for money lending. Genuine aid would be in the form of financial grants or — even less corruptible — as goods and services donated.
Anyway, why are the countries of a rich continent like Africa require to borrow such huge sums and remain in dire poverty? It seems that there is a serious lack of understanding as to how their domestic currency/monetary policy should work.
There can be no case for needing foreign currency except to purchase imports, yet they are exporting their wealth, importing little and getting deeper in debt.
What they need is some real aid in the form of good legal and accountancy advice.
They should be looking into the nature of the debt contracts which have been entered into and considering their legality in terms of international law. After all, there is a basic factor in all good banking practice known as the banking hazard whereby there is an equal responsibility upon borrower and lender that the credit contract being entered into is a reasonable risk and likely to be implemented by both parties.
A good case could be made for some of the more egregious lenders to be arraigned before the international courts of Justice and Human Rights, which should have the powers to terminate unreasonable contracts — particularly where funds have been diverted via corruption and the people left with the debt.
The current debate about aid disguises an often dirty business conducted by a relatively small number of powerful individuals who are able to manipulate the politicians of both lenders and borrowers — corruption needs two consenting parties. Their success is built upon ignorance of how national and international monetary systems function. We should not be appealing for concessions and forgiveness from such people, we should be naming and shaming, exposing their greed and moral turpitude.
As I wrote in a letter published in the Glasgow Herald on 27th July 2005:
“First and foremost, help is certainly not lending money, nor is it necessarily giving money. It is about co-operating with organisations and volunteering constructive assistance, it’s about sending them sound serviceable equipment from our own schools and hospitals and substituting it here with new, preferably home-made, state-of-the-art replacements. It’s about sending a shipload of building materials with a volunteer architect and a dozen competent tradesmen to train the locals how best to use it. Most of all it’s about us sending representatives to make sure that what we provide is what the locals really want.
“Let’s also send out a few volunteer accountants and lawyers to get a grip of the existing debt contracts and establish if these were ‘mis-sold’, and let’s give a little legal and accountancy ‘aid’ so that debt write-off decisions are removed from self-regulating lenders and brought before the appropriate international courts of Justice and Human Rights.”
The credit business has now completely superseded State-issued money as our means of exchange (97% to 3%) — both Nationally and Internationally. The means of exchange should be neutral but it has now become just another business.