Vantha and her family used to earn around US$ 60 a week – This amount was just enough to pay the rent and bills ($12), food ($27), education ($12 a month = $3 a week), their debts instalment ($10) and other essential expenses (health, transportation, phone…). With the covid crisis, their income has dropped to $20 a week – at best… some expenses are gone (transportation), some have skyrocketed (phone as children learn online) and some have stayed the same: food, bills and debts… Vantha is good at budgeting, good at cooking with less, good at growing vegetables, good at cutting expenses as much as she can. But with $20 a week, the debt instalments now eat up half their income.
The bank has offered to restructure their debts. Restructuring the debt means that they will take a new loan to pay back their existing debts… it does not solve the problem: for months, Vantha and her husband have not earned an income – this income will never exist – there is no reason why after the crisis, they will earn three times their previous income to make up for the gap. Still, the debt will be the same, and even higher as interest will pile up especially if the new loan is at a higher rate.
Why should the debtor take the full burden of the crisis? Why cannot the economic impact of the lockdown be shared more equally? Debt cancellation has to be talked about. It is one solution – even if creditors don’t like it. For millions of families – millions of Vanthas, all over the globe, who work in the informal economy, there is no way they can pay back debts – paying back will mean even less food, no money for soap, or for health. Besides, debt restructuring or refinancing (new loan to pay existing loan) will just make the crisis linger for years and years as the debtors will not be able to recover any purchase power, and will drag these debts for many years. In old Mesopotamia, every seven or ten years, the State declared a “clean slate” and all non-commercial (i.e. personal) debts were cancelled (source: D. Graeber: Debt, the first 5,000 years, published in 2011).
Financial institutions need to seriously consider cancelling the debts of the poorest – they have the capacity to work out their finances and absorb and cover the losses. Full stop.