HOW THIRD WORLD DEBT IS CREATED
The financial position of even the wealthiest nations is one of acute financial pressure, with massive private and national debt, and budgetary difficulty dominating the economy. How can the wealthy nations, from a position of such perpetual monetary shortage and insolvency, lend money to the developing nations? The answer is that they do not.
The money advanced to Third World nations is not money loaned from the wealthy nations. These sums consist almost entirely of monies that have been created, via the commercial banking mechanism, specifically for the purpose of the loan concerned. In other words, the same debt-based, banking process used to supply money to national economies is also employed for the creation and supply of funds to debtor nations.
Thus, these monies are not owed by debtor countries to the developed nations, but to private, commercial banks.
The World Bank
Holding only a nominal reserve contributed by the wealthy members, the World Bank raises large quantities of money by drawing up bonds and selling these to commercial banks on the money markets of the world. Thus, the World Bank does not itself create the money it advances to Third World nations, but sells bonds to commercial banks which, in purchasing these bonds, create money for the purpose. The World Bank therefore functions along the lines of a country's national debt. Just as with the government bonds of a country's national debt, when a commercial bank makes a purchase of World Bank money-bonds, the commercial bank creates additional bank credit.
In essence, the World Bank acts as broker for commercial banks, who are the actual money-creation agents and who hold World Bank bonds in lieu of monies they create in parallel with debts registered against Third World nations. Although these loans may be denominated in pounds, dollars or Francs, such loans advanced under the World Bank have no connection with respective national economies, and in no sense represent monies loaned by these nations, nor debts owed to them by developing nations.
The debts are owed to private, commercial banks (via the World Bank) in respect of money they have created through the purchase of debt bonds.
International Monetary Fund
The IMF presents itself as a financial pool -- an international reserve of money, built up with contributions, known as quotas, from subscribing nations, that is, most nations of the world. However, credit creation accompanies almost every aspect of IMF funding.
a) 25% of each nation's IMF quota is paid in the form of gold, the remainder in the nation's own currency. The 25% gold quota is the only component of IMF lending capacity that does not, in some way, constitute additional money created in parallel with debt.
b) The 75% of a nation's quota payable in national currency is invariably funded by the government concerned through the sale of bonds, thus adding to that nation's national debt. Therefore the IMF, whilst not itself creating credit, places monetary demands on member countries for quotas that can only be funded via each country's national deficit. This involves the sale of government bonds to commercial banks, leading to money creation by those banks. This source of revenue forms the main fund of IMF monies available to developing nations.
c) Since the monetary demands on the IMF are constantly increasing, due to rising demand for Third World loans, the quota demands by the IMF have reached the point where (so-called) creditor nations such as America and Britain are reluctant to undertake yet more bond issues and further national debt to supply these funds. Therefore, in recent years, the IMF has begun to circumvent the restrictions of its overall quota. By co-operating directly with commercial banks to organise more substantial loans than it can fund from its own quota resources, the IMF administers 'loan packages' made up in part from its own quotas and in part from commercial sources. For example, of the $56 billion loan advanced under the IMF to South Korea in the wake of the Asian crisis, only $20 billion was contributed by the Fund; the remaining $36 billion was arranged by direct co-operation with international commercial banks, who created money for the purpose.
d) The total funds of the IMF were substantially increased and its function and status as a money-creation agency clarified when, in 1979, the IMF instituted Special Drawing Rights (SDRs). These SDRs were created, and intended to serve, as an additional international currency. Although these SDRs are 'credited' to each nation's account with the IMF, if a nation borrows these SDRs (defined in dollars) it must repay this amount, or pay interest on the loan. Whilst SDRs are described as amounts 'credited' to a nation, no money or credit of any kind is put into nations' accounts. SDRs are actually a credit-facility just like a bank overdraft -- if they are borrowed, they must be repaid. Thus, the IMF is now creating and issuing money in the form of a new international currency, created in parallel with debt, under a system essentially the same as that of a bank -- the IMF 'reserve' being the original pool of quota funds.
In summary, of the $2,200 billion currently outstanding as Third World, or developing country debt, the vast majority represents money created by commercial banks in parallel with debt. In no sense do the loans advanced by the World Bank and IMF constitute monies owed to the 'creditor nations' of the World Bank and IMF. The World Bank co-operates directly with commercial banks in the creation and supply of money in parallel with debt. The IMF also negotiates directly with commercial banks to arrange combined IMF/commercial 'loan packages'.
As for those sums loaned by the IMF from the total quotas supplied by member nations, these sums also do not constitute monies owed to 'creditor' nations. The monies subscribed as quotas were initially created by commercial banks through the agency of national debts. Therefore both the contributing nation and the borrowing Third World nation carry a burden of debt associated with these sums. Both quotas and loans are owed, ultimately, to commercial banks. [Above extracted from "The Invalidity of Third World Debt", 1998, pp.14-17]
HOW TO CANCEL THIRD WORLD DEBT
Following extracted from "Goodbye America: Globalisation, debt and the dollar empire":
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 its 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].