Severe shortage of funds for roads programme - AIM report
The concept of “illegitimate debt”, sometimes also called “odious debt”, evolved in the period before the round of debt cancellations at the start of the millennium. The argument was that banks and other lenders have a fiduciary responsibility to borrowers not to make obviously unwise loans – if a gambler goes to a bank and says ‘I have lost all my money but I am sure I will win next time, lend me money’, then if the bank is foolish enough to lend, it is liable and not the gambler. In periods of surplus capital, such as the 1970s and now, banks pushed developing countries to take loans they did not need – known as “loan pushing”. If banks lend money to poor countries that is not in their interest, then the loan is “illegitimate” and it is the responsibility of the bank, not the poor country.
This is outlined in the chapter on Debt and Development (written by me, jh, and eminently readable) in the Oxford University Press textbook Introduction to International Development which is available for free download on http://bit.ly/Debt-Dev
The argument is that the $2 bn secret loans were a form of “loan pushing”; furthermore the banks, Credit Suisse and VTB, which organised the loans and bonds, failed to carry out the due diligence which would have clearly shown the guarantees to be unconstitutional and illegal, and also failed to take into account Mozambique’s ability to repay. The loans are clearly not in the national interest and were given improperly, and are thus “illegitimate” and the liability of VTB and Credit Suisse, not Mozambique.
By Joseph HanlonSource: News reports & clippings