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What Is International Debt Relief?

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  • Written By: Ray Hawk
  • Edited By: E. E. Hubbard
  • Last Modified Date: 13 September 2016
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International debt relief is an organized approach to reduce the total amount of debt owed by a nation to foreign investment firms and governments, or to reduce payments and interest on such debts. In the 20th and 21st centuries, international debt relief has initially focused on developing nations referred to collectively by the World Bank as the Heavily Indebted Poor Countries (HIPC). As of 2001, this comprised 41 nations with a combined debt of $170,000,000,000 US Dollars (USD) owed to foreign creditors. It is estimated that 90% of the nations owing this debt had insufficient exports or gross national product (GNP) income to maintain the debt at current levels or to pay it down over time. As of 2011, international debt relief also falls within the debt conditions of first world nations including some members of the European Union, such as Greece and Ireland, as well as debt owed by war-torn nations to the international community, such as Iraq.

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When discussing international debt relief, the focus is usually placed on three international organizations that exercise control over such debts: the International Monetary Fund (IMF), a branch of the World Bank referred to as the International Development Association (IDA), and the African Development Fund (AfDF). Since international debts are also largely owed to a few first world central banks in advanced nations, international debt relief is also broken down by whether the debt is Paris Club debt or not. The Paris Club is an informal Group of Ten nations that work through the IMF to finance development in the third world. This Group of Ten (G10) organization was formed in Paris, France, in 1961, and initially included the following countries: Japan, the US, Canada, and the seven European Union nations of the UK, Belgium, France, Germany, Italy, the Netherlands, and Sweden.

The overarching purpose behind total debt forgiveness or debt reduction is that international organizations such as the IDA that hold records of such debt are also responsible for administering development programs to help third world nations modernize. This process is seen as being significantly hampered and counterproductive when a nation has a debt that is increasing year by year and curtailing domestic spending. Arguments against debt relief point out, however, that, when it has been done, the poor in most nations have not benefited from the process because these nations were already bankrupt. Debt relief to such nations often only benefits corrupt, totalitarian, or otherwise mismanaged governments that created the unsustainable debt in the first place. Despite these limitations to benefiting the poor, a 2005 decision known as the Multilateral Debt Relief Initiative (MDRI) was put in place to completely remove debts to all HIPC countries held through the IDA, IMF, and AfDF over the course of several years.

Debt settlement for Iraq, which was estimated to be $125,000,000,000 USD as of 2003, included $37,150,000,000 USD owed to Paris Club member states, with the rest owed to other international groups and states such as Saudi Arabia. The Paris Club portion of the debt was reduced by 80% almost immediately, with the US, for instance, forgiving the $4,100,000,000 in debt owed to the US by Iraq in 2004. Other nations that later joined the Paris Club, boosting its membership to 18 countries, relieved Iraq of 80% of its Paris Club debt in 2005, with Russia being the last member to forgive Iraq of its debt, by releasing $12,000,000,000 USD owed to Russia by Iraq in 2008.

One of the reasons debt relief to Iraq took twenty years to complete, from proposals in 1988 until full implementation by all members of the Paris Club in 2008, was due to the fact that Iraq was seen as capable of servicing its debt obligations through eventual sale of its vast oil reserves. This set a precedent for international debt relief to otherwise solvent nations. They were labeled as non-HIPC nations whose debt problems are seen as requiring a specific case-by-case analysis before any action is taken.

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