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Response to financial crash is sowing the seeds of the next global crisis

  • Global debt levels between countries projected to be up 30% in four years, to $14.7 trillion
  • Lending boom to impoverished countries makes them vulnerable to new global crises, 10 years after historic G8 summit in Gleneagles committed to cancel debt

A report released today by the Jubilee Debt Campaign shows that debts owed between countries have been increasing since 2011, as major economies have exacerbated dangerous imbalances in the global economy. Debt burdens in the most impoverished countries are increasing, 10 years after the G8 summit in Gleneagles committed to cancel developing country debts.

Entitled, ‘The new debt trap: How the response to the last global financial crisis has laid the ground for the next’, the report investigates the debts owed by countries as a whole – both their governments and the private sector – minus the debts owed to them. It finds that the level of such debts owed between countries has risen from $11.3 trillion in 2011 to $13.8 trillion in 2014, and predicts that in 2015 they will increase further to $14.7 trillion.
Major global debtors, including the US, UK, France, India and Italy, have been increasing their debts with the rest of the world, whilst Germany, Japan and Russia have been increasing their surpluses.

Tim Jones, economist at the Jubilee Debt Campaign and author of the report said:

“Large economies are doing the opposite of what is needed to create a more stable global economy, with net lenders increasing surpluses, and so debtors their debts. As happened in 2008, this risks spreading chaos round the world when the lending taps shut off and debts are not able to be paid.

“This is not solely about the debt of governments, much of which for large economies are owed within their own country, rather than outside. The private sector is a major driver of these debts between countries, such as the large amounts of lending to British banks.”

Whilst they have little impact on global levels, debts owed by low income countries are also increasing rapidly, with Mozambique the most indebted country – public and private sector – in the world as a proportion of GDP. Lending to low income countries has trebled since 2008, driven initially by borrowing by countries to cope with the impacts of the global financial crisis. This has been followed by an increase in ‘aid’ being given as loans, including through multilateral institutions such as the World Bank, the emergence of new lenders such as China, and low interest rates in the Western world causing private lenders to seek higher returns in developing countries.

Tim Jones continued:

“Current levels of lending to impoverished countries threaten to recreate debt crises. Lenders are equally responsible for debt as borrowers, but there is little accountability on the part of major lenders such as the World Bank, Japan, China, France and Germany, or the private sector. Major changes to global regulation are needed to make lending more responsible and ensure it is used for productive purposes which reduce poverty and inequality.”

The report identifies nine countries that are heavily dependent on foreign lending: Bhutan, Ethiopia, Ghana, Lao PDR, Mongolia, Mozambique, Senegal, Tanzania and Uganda. These countries are growing faster than the average for low income countries. However, they are making less progress in reducing poverty than the average for low income countries, and inequality is increasing in them all. For example, in Ethiopia between 2005 and 2011 GDP grew by 60% per person, but the number of people living on less than $2 a day increased by 5.4 million.

Tim Jones concluded:

“Foreign lending can be useful to fund productive investments which will help reduce poverty. But the evidence is that those countries heavily dependent on foreign lending are experiencing increasing poverty and inequality. Countries need help in getting hold of their own resources lost through tax avoidance, evasion and capital flight, to fund investments and become less vulnerable to global financial changes.”


Countries

Ethiopia, France, Germany, India, Italy, Japan, Mozambique, Russian Federation, United Kingdom, United States
Jubilee Debt Campaign is a company limited by guarantee, number 3201959
Jubilee Debt Campaign's registered charity number is 1055675