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The Big Question: Why do we get into debt?

Updated Friday, 14th January 2005

The question of debt is never far from the news. The Big Question asks 'Why do people, companies and countries get into debt in the first place?' 

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We often hear that the level of personal debt - that is, the amount of money that we as individuals owe to banks and credit card companies - is at record levels, especially in the rich industrialised countries. But developing countries also have a problem. Many developing governments are indebted to the rich world and are paying back debts that they can't afford.

Neither a borrower nor a lender be? Eric Porter as Polonius, an early form of a debt counsellor from Hamlet Copyrighted  image Icon Copyright: BBC Eric Porter as Polonius - 'Neither a borrower nor a lender be...'

 

 

 

Sue Brandford

 

 

 

 

First, what is debt?
"Debt is an amount of money, or other property, that's owed by one person - usually a bank in our present society - or an organisation, a credit company or even a country, and it is borrowed by another person and then owed to the former owner", explains Susan George, from ATTAC, an international organisation that works with developing countries on debt and other issues.

Susan George "Debt comes into being through a process which we all know as credit, and it really is the creation of money, because you are going to use what you have borrowed to do something productive with it", says Susan. "That's the only way you'll be able to pay it back", she says.

And how long has credit been around?
"I think it probably goes back as long as people have traded, and it has always been a question of confidence. You would give credit to those with whom you were going to trade regularly", finishes Susan George, for whom debt is a valuable invention.

So, how can debt be a good thing?
Modern money lending started in the city of London three hundreds years ago. Credit from banks in London made the industrial revolution possible, and still today credit helps innovative and enterprising people to turn their dreams into reality.

David Wallwark, for instance, borrowed money he didn't have to create a soft drinks company, Feel Good Drinks.

"Me and a couple of colleagues used to work for a big soft drinks company, and we decided we'd like to get out of there and create a business of our own", tells David. "We put every penny of our own money in the business, but we needed more money to make it work, so we went and found some investors, we went and found some people who would lend us money."

Even though some other colleagues called them crazy, David Wallwark and his partners spent six months without paying themselves anything and putting all their own money into the business.

Eight months later, the company was created and they now sell their drinks to 7,000 retailers. So, in his case, debt was a good thing. He had a plan, he knew how much money he would need and, most important, how to pay it back. Debt was part of his strategy for creating a highly valuable asset.

What are the problems, then?
The problem is when you borrow money but don't use it productively. Rule number one is that you should invest it, not simply spend it. Britain has one of the highest levels of personal debt in the world: almost two trillion dollars, which means that every British adult has a personal debt of more than US$ 30,000. Altogether, this debt is worth more than everything the British economy produces in an entire year.

"It starts to affect absolutely everything", says Dumle, a young Nigerian who lives in England and got himself into trouble with debt.

"I would say my debt problems started when I went to university, because up to that point I had been very cushioned and well supported by my parents", explains Dumle. "I continued to live a certain lifestyle as if nothing had changed financially. I just continued and was quite oblivious to what was accumulating", he says.

So, good debt has to be debt under control. At a personal level, we have to recognise that to pay back our debts we may have to reorganise our lives, make sure that we don't spend more than we earn, and that we have the means to pay back whatever we borrow.

And what happens when countries get in debt?
In 2001 Argentina's debt became so big that the country actually went bankrupt. In many ways, it wasn't Argentina's fault. To fight the problem of inflation, it tied its currency, the peso, to the US dollar, as recommended by the International Monetary Fund.

It helped to control the inflation, but soon Argentina began to import more than it exported. To cover the difference, the government borrowed more and more from foreign banks and institutions. In the end, despite being a relatively rich country, Argentina could not pay her debts .

The consequences were drastic; unemployment surged and there were mass demonstrations. The country had four presidents in less than a month. Three years later, unemployment is still high in Argentina and the crisis is not fully over, even though the Argentinian economy is much calmer .

The French Finance Ministry, home to the Paris Club Is it possible to have the debt forgiven?
For some time it's been accepted that really poor countries, such as some African nations, don't have to pay back all their debts. Unlike Argentina, though, most of their debts are with governments, and not with private banks. The Paris Club - where representatives from the world's richest countries meet - is where debt forgiveness is negotiated.

The group takes into consideration outside factors that can affect a country's economy and tries to find and co-ordinate sustainable solutions to the payment difficulties experienced by debtor nations.

Jean-Pierre Jouyet "In 1999, the treatment was improved for the heavily indebted poor countries and now they can have up to 90% of their debt forgiven", says Jean-Pierre Jouyet, chairman of the Club. "A big group of African countries have achieved that now", says Jouyet.

And is it enough?
For many campaigners, no, it's not enough.

"We have to look at what the collective action has been across the group of the world's richest countries, the G7 nations, and also the World Bank and the IMF, which they effectively control", says Ashok Sinha, from the Jubilee Debt Campaign . "Now, if we look at the totality of action since then, we're in a position where only 10% or 12% of the un-payable debts of the 50 poorest countries in the world have actually been cancelled."

"Yes, there has been progress, but it's not at the level we'd like to see".

This edition of The Big Question was presented by Sue Brandford and first broadcast on 15th January 2005.

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