The debt system

Issue: 171

Jess Walsh

A review of The Debt System: A History of Sovereign Debts and their Repudiation, Éric Toussaint (Haymarket, 2019), £14.99

Even before the global shutdown caused by the coronavirus pandemic, the World Bank was warning that a new international debt crisis was emerging on a greater and broader scale than the 2007-8 world financial crisis.1 From 2010 to 2018, the debt to GDP ratio in so-called “emerging market developing economies” increased from 114 percent to 170 percent, the most rapid growth in the past 50 years. Big problems emerged before the pandemic even began, with countries such as Lebanon and Argentina struggling to make debt repayments in 2019.2 However, the global health emergency has accelerated the crisis; by November 2020, Zambia had become the sixth country to default on international loans that year.3

This build-up of debt is a consequence of the response to the global financial crisis of 2008 and the low growth since then. Until 2008, low and middle-income countries had actually largely managed to reduce their debt to GDP ratio after the debt crisis caused by the 1997 Asian financial crash. However, this was achieved through a programme of debt relief from international organisations and rich countries. These debt relief deals were made conditional on indebted nations embracing neoliberal structural adjustment policies, and many countries also attempted to increase their foreign currency reserves in order to prevent further crises.

The major economies responded to the global financial crisis that began in 2007 by washing the world economy in liquidity through quantitative easing and low interest rates, which paved the way for rising levels of debt. Cheap cash has stalked the planet searching for yield in a period of low growth, and consequently there have been large capital flows from advanced economies into less developed countries. In addition, Chinese capital has been pursuing, since 2008, both debt-driven growth within China and investment globally, becoming a major international creditor in its own right. The growth of sovereign debt across so-called emerging markets has been combined with the expansion of speculative domestic financial markets in some middle-income countries, most starkly in Lebanon.4 A decade ago, the global financial crisis revealed the dangers of the build-up of debt in advanced economies, especially in the United States and Britain. The debt crisis of 2020 shows that, far from this predicament being resolved, it has now spread into other parts of the global economy.

The nature of the economic shock caused by the pandemic to low and middle-income economies has been two-fold. Firstly, these countries suffered a crisis in the real economy as lockdowns were implemented, causing trade and economic activity to collapse. Secondly, they then experienced a financial shock: a dramatic and extreme reversal of capital flows as foreign investors withdrew their investments in order to put it into safe havens.

The states in the G20 group of leading economies agreed to suspend official and bilateral debt repayments for low-income countries until the middle of 2021 in order to mitigate the immediate consequences. However, private lenders were not included in this moratorium and have continued to receive repayments of £114m a day from poor countries.5 Many low-income countries spend more on sovereign debt servicing than on public services and infrastructure. Prior to its default, the Zambian government spent four times more on debt repayments than on healthcare. Increasing global inequality has fused with this crisis to leave billions of vulnerable people reliant on the informal economy, lacking access to healthcare and living in slum conditions.6

As calls for debt relief and forgiveness grow, an opportunity is being presented for the left to reframe foreign debt, exposing it as a device for reinforcing inequality in the global economy.7 The Black Lives Matter movement has opened up debates about the legacy of empire and colonialism, and foreign debt should be included in that conversation.

In this context, a historical analysis of how foreign debt came to play such a detrimental role in the development of countries in the Global South is welcome. The Debt System by Éric Toussaint, director of the Committee for the Abolition of Illegitimate Debt campaign group, attempts such an intervention. As Toussaint shows, the role of institutions such as the International Monetary Fund (IMF) and the World Bank in the second half of the 20th century—enforcing the will of free market fundamentalists worldwide and playing a central role in the global system of debt—is only part of that story. Predatory lending to newly independent states by former colonial powers in the 19th and early 20th centuries should be much more widely acknowledged.

The opening section of the book tells the story of predatory British and French lending to freshly independent states in Latin America, as well as to Greece, Egypt and Tunisia, in the 19th century. From 1820 to 1825, British capitalism experienced a period of frantic growth. British capitalists searched for high-yield investments, and newly emerging bond markets in London became a focus for speculation. London banks issued bonds on behalf of sovereign states on extremely unjust terms. For instance, bonds worth £3.2 million were issued by a London bank, Goldschmidt and Co, on behalf of the Mexican government in 1824. However:

The price paid for a £100 bond was only £58. The nominal interest rate was 5 percent; thus the bond paid a coupon of £5 each year. A yield of £5 on a £58 bond is in fact 8.6 percent… Goldschmidt and Co informed Mexico that it had sold the bonds for 58 percent, and it had collected £1.85 million. Moreover, it had deducted £750,000 in commissions and other fees. Mexico received £1.1 million, but its debt amounted to £3.2 million.8

In ways such as this, new states were saddled with extortionate debts that were highly profitable to bankers and investors. These debtor states often had little choice but to borrow more to cover payments and were thus stuck in a destructive cycle of debt and underdevelopment.

Toussaint argues that, during periods of growth and accumulation, creditors—at first, wealthy individuals, and then financial institutions—put cash into foreign government bonds as a speculative investment, seeking greater yields. When a crisis breaks out, as in the so-called Panic of 1826, creditors stop the flow of capital that debtor countries often need to service their debts. Simultaneously, debtor nations find their economies hurt by a decline in trade.

Toussaint highlights the collusion of ruling classes in the wealthiest states, alongside the emerging capitalist classes of debtor countries, in the story of sovereign debt. Rulers in debtor countries have 0ften preferred running up huge state debts rather than implementing progressive taxation in order to fund economic development. Frequently, they have also become creditors to their own governments. The inequality between countries that is exacerbated by public debt has also served to solidify inequality between the classes within the debtor nations themselves. This fact invites a class-based understanding of sovereign debt rather than just an inter-state one.

During the era of empire, the creation of markets for British manufactured goods through the imposition of “free” trade often went hand in hand with usurious debt agreements. Toussaint argues that local ruling classes colluded with the British in this project. The British worked with wealthy landowners, the clergy, former colonists and other elite groups that did not invest in domestic manufacturing and thus were not threatened by the implementation of “free” trade.

Along with imposing subservience in the wake of direct colonial rule, former colonial powers also used “gunboat diplomacy” to ensure they could prevent poorer countries developing economic self-sufficiency. For example, Paraguay embarked on a project of self-sufficient national economic development from 1810 to 1865, beginning under the rule of José Gaspar Rodgríguez de Francia. This was violently brought to an end by an alliance of Argentina, Brazil and Uruguay, forged by Britain, which forced open the Paraguayan economy. This culminated in the Paraguayan War, which reduced the country’s population by 80 percent.

Later chapters of the book focus on debates surrounding the “doctrine of odious debt”, describing the legal frameworks within which a debt can be declared void and repudiated by a debtor country. Toussaint questions the adequacy of the framework, first formalised by Russian lawyer Alexander Nahum Sack in 1927. Sack was primarily concerned with whether changes of regime following revolutions and putsches meant that the new government was responsible for the debts incurred by the outgoing one.

Toussaint has worked as an adviser to countries facing debt crises and has been involved in negotiations with debtors and the IMF, notably Ecuador in 2007 and Greece in 2015. He uses these experiences to inform his strategy of working with debtor countries to conduct audits of public debts in order to ascertain whether there are illegitimate or “odious” debts on their books. This approach has been useful in providing ammunition to build mass movements that support these governments’ demands over debt. However, later chapters of The Debt System also point to other successful strategies in the history of debt repudiation.

When Mexico and Russia witnessed revolutions in the early 20th century, they both had success in repudiating debts. In Russia’s 1905 Revolution—the “dress rehearsal” for 1917—the St Petersburg Soviet issued a warning to the creditors of the Russia’s autocratic regime not to expect repayment if the Tsar was toppled. Its statement read:

The government is on the brink of bankruptcy. It has reduced the country to ruins and scattered it with corpses… The government has used the capital obtained by foreign loans to build railways, warships and fortresses and to store up arms. For many years the government has spent all its state revenue on the army and navy. There is a shortage of schools. Roads have been neglected. The government has pilfered the savings banks, and handed out deposits to support private banks and (often entirely fictional) industrial enterprises. Taking advantage of the absence of any control of the state finances, the government has long been issuing loans that far exceed the country’s means of payment. With these new loans it is covering the interest on old ones… Only a Constituent Assembly can halt this financial ruin. At the present time the government is behaving within the frontiers of its own country as though it were ruling conquered territory. We have therefore decided not to allow the repayment of loans that the government contracted while it was clearly and openly raging war against the entire people.


The Soviet of Workers’ Deputies.9

The Tsarist regime contracted many more loans between 1905 and 1917, including those used to finance Russia’s disastrous involvement in the First World War. After the 1917 Revolution, the Bolshevik-led government refused to recognise the debt piled up by the Tsar, attracting the wrath of the world’s ruling classes. The debt remains unpaid.

The Mexican Revolution, which broke out in 1910, did not break with capitalism. However, the new governments formed in the wake of the revolution were responsive to popular pressure. A fraught and extended negotiation took place between the cartel of foreign banks that held Mexican debt and the Mexican state between 1921 and 1942. The threat of further destabilisation meant the Mexican Congress was able to resist making debt repayments to foreign creditors. The election of the progressive Lázaro Cárdenas in 1934, amid a further wave of strikes and struggle, was followed by implementation of social reforms. Mexican debts were suspended, assets such as railways and the oil industry were nationalised, and there was a programme of land reform. In 1942, the debt repudiation was finally accepted by Wall Street bankers at the insistence of the US president, Franklin D Roosevelt, who needed the support of Mexico as he entered the Second World War.

These revolutions presented profound challenges to the existing order—not just to the ruling classes of their own countries but also to the leading circles of the global capitalist system. The progressive forces at the centre of them found success in framing debt and foreign capital as exploitative and oppressive.

The Greek sovereign debt crisis that followed the 2007-8 crisis provides recent evidence of the continuing relevance of these arguments. The Greek economy experienced a “sudden stop”—a crisis produced by a reversal of capital flows—in 2010. The government was left with a mountain of debt at a moment of economic contraction. The radical left Syriza party came to power in 2015 in a wave of struggle and popular resistance to the austerity imposed by the previous governments in collusion with the so-called Troika—the European Central Bank, European Commission and the IMF. The new government had a popular mandate to stand up to the creditors, suspend debt payments and reverse austerity. The response from the creditors was to discipline the Syriza government by strangling Greek banks, cutting off liquidity. Ultimately, the government signed another disastrous bailout deal that was conditional on continuing austerity.

The alternative to this betrayal would have been a confrontation and break with the structures of the European Union, nationalising the banks and putting them under democratic control. In Toussaint’s view, however, the Syriza government should have turned to a people’s audit to challenge the legality of the Greek debt rather than taking a more confrontational approach. Toussaint has elsewhere been extremely critical of the Syriza leadership and their actions in this period, but his solutions overlook the potential of the mass of Greek workers to provide a counterweight to the power of the Troika.10

Although providing a great deal of useful historical detail, The Debt System falls short of providing the full analysis and arguments needed by activists fighting a new round of debt obligations. Toussaint’s focus on legal frameworks for such battles, which occupies much of the middle section of the book, interestingly describes the debates taking place in this arena. However, he provides insufficient ammunition to confront international financial interests seeking to protect their assets and enforce their debt claims. As the historical examples show, our focuses have to be on exposing debt as a tool used by capital for ensuring economic compliance and building a mass movement that can challenge the hegemony of global capitalist institutions.

Jess Walsh is a member of the Socialist Workers Party in South London.


1 Kose, Nagle and others, 2020.

2 Cornish, 2019; Stubbington, Smith and Mander, 2019.

3 Suffee, 2020.

4 Alexander, 2020.

5 Jubilee Debt Campaign, 2021.

6 Davis, 2020.

7 Stiglitz, 2020; Jones, 2020.

8 Toussaint, 2019, p28.

9 Toussaint, 2020.

10 Toussaint, 2017.


Alexander, Anne, 2020, “Behind the Lebanese Apocalypse”, International Socialism 168 (autumn),

Cornish, Chloe, 2019, “Lebanon’s Creditors Adopt Crash Position as Default Risk Worsens”, Financial Times (15 November).

Davis, Mike, 2020, “C’est La Lutte Finale” Progressive International (April),

Jones, Claire, 2020, “The Calls for Sovereign Debt Relief are Mounting”, Financial Times (14 April).

Jubilee Debt Campaign, 2021, “UK Companies Driving Debt Crises in Poor Countries” (21 February),

Kose, M Ayhan, Peter Nagle, Franziska Ohnsorge and Naotaka Sugawara, 2020, Global Waves of Debt: Causes and Consequences (World Bank Group),

Stiglitz, Joseph, 2020, “World Must Combat Looming Debt Meltdown in Developing Countries”, Guardian (14 April),

Stubbington, Tommy, Colby Smith and Benedict Mander, 2019, “Argentina Begins to Restructure $101bn of Debts”, Financial Times (30 August).

Suffee, Zak, 2020, “Zambia’s Debt Default”, Jubilee Debt Campaign (17 November),

Toussaint, Eric, 2017, “Yanis Varoufakis’s Account of the Greek Crisis: A Self-Condemnation—Part Three. How Tsipras and Varoufakis Turned Their Backs on Syriza’s Platform”, Verso blog (19 September),

Toussaint, Eric, 2019, The Debt System: A History of Sovereign Debts and their Repudiation (Haymarket).

Toussaint, Eric, 2020, “Russia: Origin and Consequences of the Debt Repudiation of February 10, 1918”, Committee for the Abolition of Illegitimate Debt (15 February),