26. February 2023

Open Letter to the President of the Bundesbank, Dr. Joachim Nagel,

bundesbank | Bundesbank

Dear President of the Bundesbank, Dr. Joachim Nagel,

through your seat on the Council of the International Monetary Fund (IMF) you hold the power to advocate for debt cancellation. This is intended to give back some self-determination to those countries in the Global South with particularly high debt and to allow them to invest in green change.

These countries’ interest payments to financial actors are so high that governments are reducing their spendings on health and education, as well as their investments in low-resource and low-emission infrastructure. At the same time, they are forced to extract fossil fuels to service the interest payments 1 – with consequences that are fatal for the people in these countries and for all of us. This causes a downward spiral in which a lack of investment, e.g. in resilient irrigation systems, can lead to increased interest rate over again. This is due to those countries already having to pay interest rate premiums because of their sensitivity to climate impacts 2. This spiral deepens as new debt is often taken on just to service the existing debt burden. This produces social dislocation and sets in stone fossil fuel development paths. Debt becomes unsustainable. Wherever this happens, debt cancellation is necessary.

The precarious situation of these countries is not self-inflicted. The pandemic required short-term borrowing to protect the population and led to a sharp increase in debt everywhere. Even in the case of climate-related disasters, affected countries that have contributed least to the climate crisis themselves often have to take out new loans because the perpetrators of climate change do not provide sufficient resources. But the conditions for borrowing and repaying loans are not the same for all countries. Many countries in the Global South have to pay a systematically higher interest rate and are also more affected by the global consequences of recent interest rate hikes by the Federal Reserve and the European Central Bank. The ten largest Latin American countries pay on average 25.5% more interest than Germany. This is due to the position of these countries in the periphery of the international financial system, which is the living legacy of colonial exploitation 3 . Therefore, a debt cancellation is not a gift to these countries, but a belated correction of a global historical injustice.

There is ample precedent for debt cancellation and it is a recognized remedy for the distress many countries in the Global South are currently experiencing. However, recent initiatives, such as the G20 Common Framework for Debt Treatment and the High Indebted Poor Countries (HIPC) initiative, have been inadequate 4. Many low- and middle-income countries at high risk of over-indebtedness and with little fiscal space for necessary climate investments have been left out completely. In addition, the debt claims of private lenders remained in full force. Both of these factors diminish the success of debt cancellation efforts.

That is why we call for the introduction of a broad program that implements debt cancellation and holds private lenders accountable 5.

This climate justice measure also benefits us in the Global North. Africa holds 40% of the world’s potential for renewable energy, but only 2% of the investment today. Countries freed from debt could invest more in the much-needed self-determined socio-ecological transformation. According to the IPCC 2022 report, half of humanity already lives in areas under existential threat. This requires fast and decisive action.

History teaches us how intelligent debt policy works: February 27, 2023 marks the 70th anniversary of the cancellation of debt for the Federal Republic of Germany. This step made a decisive contribution to the reconstruction of our heavily war-torn country. The London Debt Agreement of Feb. 27, 1953, closely integrated the young Federal Republic into the Western defense alliance during the age of bloc confrontation. The cancellation of debt by the Allies was therefore not done out of charity, but out of clear strategic self-interest.

This anniversary clearly shows that debt cancellation is possible and can contribute to solving global problems 6. Currently, we are headed full-speed towards a climate catastrophe that will radically change our societies.

You, Mr. Nagel, can make a decisive contribution to actively and positively shaping the changes that are now necessary.

With regards,

the KoalaKollektiv

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Supportet from:

1 https://www.brettonwoodsproject.org/2020/04/frackings-false-hope-why-fossil-fuels-wont-help-to-repay-argentinas-national-debt/; https://www.eurodad.org/a_tale_of_two_emergencies_the_interplay_of_sovereign_debt_and_climate_crises_in_the_global_south;

2 Siehe Bericht “Climate Change and the Cost of Capital in Developing Countries” von SOAS University of London. https://eprints.soas.ac.uk/26038/1/ClimateCostofCapital_FullReport_Final.pdf

3 Siehe Svartzman & Althouse (2022). Greening the international monetary system? Not without addressing the political ecology of global imbalances. Review of International Political Economy. y, DOI: 10.1080/09692290.2020.1854326

4 Zu Erfahrungen aus der HIPC Initiative, siehe de Bruijn & Rehbein (2011), Biti et al. (2016), Caliari (2020).

5 Ein detaillierter Vorschlag hierzu wird in einem Bericht namens “Debt Relief for a Green and Inclusive Recovery, a proposal” von der Heinrich Böll Stiftung, dem Global Development Policy Center der Boston University, und dem Centre for Sustainable Finance at SOAS University of London beschrieben.

6 Siehe Fresnillo, I. (2022). A tale of two emergencies. The interplay of sovereign debt and climate crisis in the global south. Retrieved from https://d3n8a8pro7vhmx.cloudfront.net/eurodad/pages/1945/attachments/original/1610462143/debt-and-climate-briefing-final.pdf?1610462143