In recent years, International Financial Institutions (IFIs) such as the World Bank have begun to realise that many Third World nations do not have sufficient funds to repay their foreign debts. As a result, IFIs have been forced to find convoluted ways of dealing with these unpayable debts while still maintaining their reputations as fiscally sound financial institutions.

For example, according to Probe International's Patricia Adams, the World Bank’s triple A bond rating depends, in part, on its refusal to write off the countless bad loans it has made to developing nations (see Patricia Adams’ Wall Street Journal article). As such, the bank has responded to the problem by offering “adjustment loans” that essentially provide debtor countries with new loans to repay those loans that are already owed – thus helping developing nations dig themselves deeper into the hole of indebtedness. More recently, the World Bank has participated in HIPC negotiations that provide debt relief in exchange for compliance with onerous structural adjustment conditions (see Rick Rowden’s American Prospect article). Relief through the HIPC initiative is financed by western countries and by multilateral institutions, including the bank itself, and thus does not threaten the World Bank’s blue chip status.

As an alternative to debt relief, the doctrine of odious debts poses a significant threat to the Multilateral Development Banks’ triple AAA ratings and is gaining popularity among heavily indebted nations. This doctrine of international law allows for debt relief with no strings attached and without resorting to “charity” from creditors.

According to the doctrine, if a debt incurred by a regime is not used in the interest of the state, and the lender is aware of this, then that debt is "odious" and is not enforceable against successor governments. In a 1982 article for the University of Illinois Law Review, lawyers for The First National Bank of Chicago warned international bankers about the possibility that debtors may invoke this doctrine in order to challenge the legitimacy of their debts. They urged bankers to describe precisely what purposes their loan proceeds can be used for and "if possible, bind the borrower by representation, warranty, and covenant to those uses." However, researchers throughout the world are now uncovering powerful evidence that not only did many banks fail to exercise such due diligence when lending to corrupt governments, they were also often fully aware of the "odious" uses of their loan funds.

Some of the most damning evidence comes from the development banks themselves. In a leaked World Bank memorandum entitled "Summary of RSI Staff Views Regarding the Problem of ‘Leakage' from World Bank Project Budgets" bank staff estimate that at least 20-30% of development budget funds to Indonesia were "diverted through informal payments to GOI [government of Indonesia] staff and politicians." The memorandum also states that World Bank controls have "little practical effect" on such corrupt practices. In April, 2000 the United States General Accounting Office issued a report, "Management Controls Stronger, But Challenges in Fighting Corruption Remain" which revealed that the World Bank did not have adequate procedures to ensure that loan funds to Indonesia were used for their intended purposes. Finally, in his paper Criminal Debt in the Indonesia Context Northwestern University professor Jeffrey Winters provides shocking insight into the World Bank's weak supervisory practices.

Winters also argues that the bank's Articles of Agreement impose a fiduciary duty on the bank to "ensure that the proceeds of any loan are used only for the purposes for which the loan was granted." He presents overwhelming evidence that the World Bank breached its fiduciary duty to Indonesia by granting loans which it knew would be used for corrupt purposes.

Many anti-corruption activists have called upon the World Bank to take more decisive action to fight corruption in its projects. This includes calls for the bank to bar corrupt companies from bidding on future World Bank projects (see Lesotho page for more details).

The International Monetary Fund (IMF) has also come under scrutiny for its role in the accumulation of Third World Debt. In July, 2001 Indonesia's Finance Minister stated that the IMF mis-diagnosed his country's condition and claimed that Indonesia paid a heavy price for such mistakes. Earlier in the day 50 legislators had signed a statement demanding the IMF cancel the country's entire debt (link to Asia Times Online article).

For more information on International Financial Institutions, please see our Argentina, Indonesia and South Africa pages.