In 1978, Erwin Blumenthal (an IMF-man appointed to run Congo’s central bank) reported that large amounts of lenders’ cash had gone missing and that there was "no chance, I repeat no chance, that [Congo’s] creditors will ever recover their loans." Congo’s foreign debt then stood at $5 billion. Nevertheless, in the 1980s, after Blumenthal left, the World Bank, IMF among other northern creditors lent Mobutu almost US$5 billion more. In this case however the international financial institutions (IFIs) did recover their cash. In 2002, the Democratic Republic of Congo (DRC) cleared its arrears of US$132 million to the World Bank. Bilateral donors (Belgium, France, Sweden and South Africa) issued cash-strapped DRC with sizeable new loans to enable it to do so. In 2002, DRC also cleared arrears to the IMF and African Development Bank (AfDB). DRC was in arrears to the AfDB to the tune of US$800mn. The arrears clearance operation involved partial repayment of the arrears and a consolidation of the balance into a new credit facility. It was supported by international donors. And so the multilateral institutions recouped their cash, even though a significant number of loans were of dubious origin and the “loot” squirreled-away in Swiss, UK and other Western banks.

Processes of arrears clearance such as these are not widely known about or reported on. Yet, as this report reveals, current practices of arrears clearance - in particular to the international financial institutions but also to the Paris Club - display many very worrying features. In this paper, Eurodad explores several recent and current cases, including the Democratic Republic of Congo, Iraq, Haiti and Nigeria.

We reveal key concerns in a number of areas. These include the impact of arrears clearance on principles of creditor co-responsibility and allegations of odious or illegitimate debt by developing countries; the negative impact on countries’ levels of indebtedness to the international financial institutions; the implications on countries’ policy space or autonomy; the impact of arrears clearance on donor aid budgets and the impact on poor countries’ very scarce financial resources.

The paper also looks at several probable future cases of arrears clearance, including The Sudan, Liberia and Somalia and argues that, from an ethical point of view, these countries should not be pushed down this same well-trodden and very dubious path. Instead, we argue that the cases cited in this report demonstrate the clear need, so far denied by the international creditor community, for a radical shake-up of the international debt architecture. In particular, we suggest that some form of international insolvency or bankruptcy framework could be applied to these cases. We suggest that this approach could help reignite debates on the crucial principle of creditor co-responsibility within the international community. This will be one important step towards addressing, over the longer-term, the wider issue of odious and illegitimate debt. At the end of this report, Eurodad details what such a mechanism could look like, and argues that debt audits (both on the debtor and creditor sides) could greatly enhance these processes.

But we also suggest that longer-term, civil society organisations should think about how far they would support the development of new, international lending standards or guidelines. This report ends with a series of challenging questions that it is hoped will generate lively discussion and a number of ideas on how work in this vital area could proceed by organisations in the South and North alike. We feel this is particularly timely - both because the international community is currently seeking solutions to the protracted arrears crises of countries such as The Sudan but also because at the same time, creditors continue to rely on the ad-hoc drip-feed cycle of limited cancellations for a minimal number of some of the poorest countries based on all the usual structural adjustment conditionalities as demonstrated by the most recent “deal” on debt by G8 Finance Ministers. This approach has dismally failed to comprehensively address the debt crisis and indeed only serves to perpetuate the “lend-forgive” cycle.

Eurodad (European Network on Debt and Development) welcomes comments and feedback on any part of this report at any time. Please contact Gail Hurley on ghurley@eurodad.org.

1) Introduction
2) Arrears clearance: a dubious and well-trodden path
3) Dubious debts - but the creditors don’t care
4) A bitter irony: arrears clearance cranking up the debts
5) More cash yes - but only if you do exactly as we say
6) The many guises of international aid
7) Conclusions and Recommendations: Where next?
8) Discussion questions
9) References