Many missionaries and development workers are not surprised by the current global financial crisis. For many, it seems like a re-run of the 1970s and 1980s when banks lent money recklessly to the leaders of Third World countries and then demanded that the poor pay back the money many times over.
In 1973, the price of oil went from being $4 a barrel to $16 over night. This had a major impact on the economies of First World countries and threw many of them into recession. On the other hand, Middle Eastern countries and other oil producers were building up huge financial reserves, which they invested in Western banks. Since the banks were flush with these petrodollars they vied with one another in encouraging Third World countries to borrow money. Walter Writson, former President of Citibank, justified his own bank’s imprudent lending by stating that he believed that loans to sovereign countries could not go bad. The reason he gave was that “countries do not fail to exist”( Susan George, A Fate Worse Than Debt, (New York: Grove Weidenfeld, 1990) page 23)).
The banks’ sales-talk to Third World governments and leaders, many of whom were dictators, like Mr. Marcos in the Philippines, was impeccable. They argued that since interest rates were low, it made good business sense for Third World countries to borrow in order to develop their economies, especially by engaging in huge infra-structural projects.
Many of these loans were syndicated loans, in other words, a number of banks, including the World Bank might be involved. In an almost perfect parallel to what happened in recent times with the Sub Prime lending in the United States and the building-led bubble in Ireland, many of these loans were made without checking the economic viability of the project. It is clear that the bankers failed in applying due diligence in checking out the credit-worthiness of their clients. But it was worse than that, they must have been aware that many of the leaders, such as Marcos in the Philippines and Mobuto in Zaire (Congo) were using the money for useless prestige projects or buying arms, or funnelling off billions of dollars into their own bank accounts in Switzerland. In her book, Odious Debts, Pat Adams gave a detailed account how many of these should have never been repaid because they were obtained through fraud.( Pat Adams, Odious Debts, (Toronto: Earthscan, 1991), page 160).
The bankers were not fools. In the mid-1970s, when they lent the money, interest rates were low. However, the loans were borrowed at a variable rate, instead of a fixed rate of interest, which was normally set at a half percent above the U.S. prime rate. During the late 1970s and early 1980s, interest rates began to climb. In May 1981, the U.S., prime rate had topped 21%. This, together with the compound interest factor, sent the debts of Third World countries through the ceiling. In Brazil, the debt had reached $35 billion by 1978. Four years later in 1982 it had topped $82 billion and by 1990 it was almost $140 billion. You might think that the debt ballooned out of control because Brazil was not servicing its debt. Nothing could be further from the truth. In fact, it paid a staggering $80 billion in interest and principal repayments between 1978 and 1985. That outflow of financial resources was tantamount to cutting an economic artery for a country which had at the time a growing population and a huge percentage of its people living below the poverty line. In her book, The Debt Boomerang, Susan George estimated that between 1982 and 1990, there was a net transfer of $418 billion dollars from poor countries in the Majority World, to banks in the rich Minority World. In order to help people understand the enormous sums involved, she wrote that it was the equivalent of six Marshall Plans. This aid package, which helped rebuild Europe, was called after General George Marshall who was Army, Chief of State in the US Army from 1939 to 1945. After World War II he became Secretary of State in the Truman Administration. (Susan George, The Debt boomerang (London: Pluto Press, 1992) pages xv-xvi).
In August 1982, Mexico threatened to default on its external loan. If Mexico had defaulted, many of the top U.S. banks, including Citibank and Chase Manhattan would have become bankrupt. To avoid this happening the US Treasury, in coordination with the World Bank and the International Monetary Fund organised a “rescue” plan which was supposed to lead to economic stabilization. The majority of the banks were saved, but the price which both the people and the environment paid was horrendous.
Fr Sean McDonagh is a researcher on Justice Peace Integrity Creation (JPIC) priorities.