Guide to debt jargon

The issue of debt justice is a central one in many different ways. However, with it being a complicated question, with a complicated terminology (scroll down for some definitions), it isn’t put in the spotlight enough. In order to raise awareness on this problem, we would like to share with you a basic understanding of some of the key elements. The first question, that no one ever asks is:

What is money?

Money can be any item or verifiable record which is generally accepted as payment for goods or services, or repayment of debts. It is declined in a lot of different currencies, which are issued by governments.

However, money’s value is not fixed. It depends on its purchasing power, the amount of goods or services that you can buy with one unit, which can fluctuate with the market.

→ When there’s a general increase in prices, the value of the currency decreases. You can buy less with the same amount of money: that’s inflation.

→ On the contrary, when there’s a general decrease in prices, the value of the currency increases. You can buy more with the same amount of money: that’s deflation.

The value of money also depends on the money supply of a country, which is controlled by central banks. They have the legal monopoly on the availability of currency.

Its policy can either be:

→ Expansionary: to expand the money supply. It can stimulate the economy but also cause inflation.

→ Contractionary: to reduce the money supply. It can curb inflation, but also risks increasing unemployment.

Central banks work to find a balance between inflation and economic growth.

Then if governments issue money, why do they need to borrow?

Governments need to find money to finance their public expenditure. It can be financed through taxation, but not only.

→ If the total expenditure exceeds the fiscal revenue, there’s a fiscal deficit: the government needs to borrow more money.

→ If the total expenditure is inferior to the fiscal revenue, there’s a fiscal surplus: the public debt decreases.

To borrow money, governments can promote treasury auctions to sell government bonds. Investors can lend money to a state, for a predetermined period of time (maturity of the bond), with a certain level of interest, paid by the government on regular periods.

The interest rate is, again, determined by the market.

→ If the demand is high, the government can fund its public expenditure at a lower cost.

→ But if the demand is low, it becomes more and more expensive for governments to borrow.

Some countries with really healthy finances even borrow with a negative interest rate: that’s the case of France or Germany for example.

In 2020, the world owed US$226,000 billion, 40% of which was the public debt of states.

Why can’t we just print more money?

Since the 1980s, central banks have become independent from governments in most countries: it’s considered that such an enormous power shouldn’t be left in the hands of politicians. In addition, central banks are often legally prohibited from lending money directly to the government.

Moreover, even if central banks decided to increase the money supply too much, that could lead to inflation.

Inflation can have different causes:

→ Demand pull inflation is caused by an increase in demand: demand exceeds supply, prices go up.

→ Cost-push inflation is caused by externalities that drive up production costs: the supply is reduced, prices go up.

→ Imported inflation: in countries that rely on imported goods, if the prices of importation increase, it can lead to inflation as well.

In our neoliberal system, inflation needs to be controlled. It’s one of the roles of central banks: their objectives are low levels of inflation and price stability. Excessively high inflation could spiral out of control, and become hyperinflation: the money loses all of its value.

Who sets these objectives that limit government spending?

There are two main international financial institutions: the World Bank and the International Monetary Fund (IMF).

The IMF has an enormous influence on policy making: it monitors fiscal policies and economic conditions, and sets guidelines on conventional levels for certain indicators. Yet, the level of inflation recommended by the IMF is not a consensus among economists, and is partially unjustified. For low- and middle – income countries, the influence of the IMF on their policy decisions restricts their public investments, which are necessary to meet the Sustainable Development Goals.

Why do some debts become unsustainable?

In many countries, debt repayment has become a large part of their spending, which is not allocated to other needs such as education, health or infrastructure.

Surprisingly, the most indebted countries are the richest. High-income countries and China were responsible for 90% of the new debt contracted in 2020. Yet, they are also the countries who can borrow easily. Low- and middle-income countries have limited access to finance and have to borrow at higher rates, making it very difficult to pay back.

Terminology

Bilateral debt: debt owed by one country to another.
Creditor: A party to whom money is owed.
Debt Servicing: Annual payments made by an indebted country to try and pay off its debt, or (more usually) just keep up with the interest.
Debt Stock: The amount of money borrowed.
Multilateral debt: Debt owed to a many-government institution, e.g. the World Bank.
Odious debt: National debt occurred which did not serve the interests of the nation. Legal theory deems that this should not be enforceable and should be seen as personal debts of the regime at the time rather than a debt of the state.
Poverty Reduction Strategy Plan Papers: Designed by international institutions to ensure that debt relief would contribute to poverty reduction they are a condition of receiving cancellation under HIPC. The strategies must encompass five core principles; country driven, results oriented, comprehensive in recognising the multidimensional nature of poverty, partnership oriented and based on a long-term perspective for poverty reduction. They also include controversial economic reforms, in line with dominant neoliberal policies.
Structural Adjustment Plans: Policies which were attached to loans from the International Monetary Fund or the World Bank. Said to ensure that the money was spent correctly, the programmes have been highly criticised for extending often damaging free market policies regardless of the context of the country.
Unjust debt: defined on a case by case basis. Includes debts: made to dictators and unelected regimes; relating to weaponry or environmentally unsound projects; made to countries that could evidently not afford to repay then; made without transparent scrutiny by the debtor country, including civil society; associated with conditionalities that compromise the borrower country’s sovereignty.
Unpayable debt: debts which cannot be repaid without impairing a country’s ability to afford its key priorities, such as health, welfare and education.
Washington Consensus: Free market economic policies advocated by Washington based organisations for countries in the global South. The term refers to a range of policy recommendations including trade liberalisation, deregulation, competitive exchange rates and privatisation of state services.

Organisations

DFID: The UK’s Department for International Development is a government department designed to promote development and reduce poverty. They primarily work on issues surrounding; education, health, economic growth and the private sector, governance and conflict, climate and environment, water and sanitation, food and nutrition and humanitarian disasters and emergencies. The total outstanding debt is reported as ODA in the year in which a bilateral deal is signed between the UK and a debtor country. In 2011/12 DFID debt relief of £91 million represented 1 per cent of the DFID programme.
G8: The Group of Eight (G8) is a forum for the world’s largest economies (however, it excludes China and Brazil, 2nd and 6th respectively). They group meet annually, and include the original G6 representatives from France, Germany, Italy, Japan, the UK, the US, and later added Canada and Russia.
International Monetary Fund: Originally created to stabilise exchange rates and the wider international economy following World War II. The official aims of the IMF are to “foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”
Paris Club: An informal group of 19 of some of the world’s biggest economies, initially created to prevent countries with financial problems from imminent defaults on their debt. Debt and interest rescheduling were initially used but contributed to a worsening debt burden for many countries. After the debt crisis in 1980, an increasing number of developing countries faced problems with debt repayments and sustainability, and the Paris Club has taken a greater role in debt cancellation, and are an essential step in the HIPC initiative. Paris club meetings consist of, delegates from the debtor country, creditor country representatives, the IMF (in an active advisory capacity), and international organisations invited as observers.
UK Export Finance: Previously known as the Export Credits Guarantee Department, the UK Government department exists to encourage UK exporters to take ‘high risk’ projects. They provide a guarantee of payment to banks who then extend payment to the UK exporter. This is designed to allow such projects to take place, providing funding with an agreed loan between the overseas buyers. However, this system results in huge debts for poorer countries for projects which are often inefficiently built, not beneficial for the host country and in some cases have a directly harmful impact for people and the environment in the areas.
World Bank: An international financial institution that provides loans to developing countries, with the official goal of poverty reduction. The countries with the most voting power in the World Bank are the United States, Japan, China, Germany, the UK, France, India, Russia, Saudi Arabia and Italy. With voting power based on both economic size and the financial contributions to International Development Assistance, power remains firmly in the hands of richer nations.