What is Debt Relief?

Published by Thomas Herold in Economics, Investments, Laws & Regulations

'Debt Relief' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Debt relief refers to the effective reorganizing of any form of debt so that the indebted party experiences at least some debt forgiveness. This could be complete or partial relief of debt from a large or even overwhelming burden. It is possible for it to take a wide range of scenarios. Relief might be offered in the form of lowering the aggregate principal in whole or in part. It might also be accomplished through lengthening the loan term or reducing the total interest rate and payments of loans which are due.

Debt relief also relates to debt forgiveness in order to stop the growth of the principal or at least to slow it down. This can be done for groups ranging from individual people to companies or multinational corporations to entire nations. From the days of the ancient world up to the 1800s, it primarily pertained to individual and household debt. This especially meant freeing of slaves from indebtedness or forgiving agriculture debts.

In the last years of the 1900s, the use of the phrase changed to cover mostly debt of the Third World. This began with the skyrocketing debt from the Latin American Debt Crisis that included such countries as Mexico and Argentina. By the early years of the 2000s, the phrase had greater application to individuals in wealthy countries that had been ravaged by housing and credit bubbles.

Debt relief in the 20th century came to apply to nations after the devastating effects of the First World War. Those debt payments from the allies of the United states were suspended in the dark depths of the Great Depression from 1931. Finland was the only country to repay these debts in full. Germany also received debt relief of its war reparation burdens from the United States, Britain, and France with the Agreement on German External Debts in 1953. This represented one of the first large scale applications of debt relief on an international scale.

By the 1990s, debt relief had become an urgent need for those under-developed nations which were heavily in debt. This became a mission in the 1990s for a number of Christian organizations, Non Governmental Organizations focused on development, and others partners who worked in an enormous coalition which called itself Jubilee 2000. As part of the campaign to push for debt forgiveness and relief, there were demonstrations at meetings like the G8 Summit in Birmingham, England in 1998. This helped the agenda for debt relief to reach the radar of international organizations like the World Bank and IMF International Monetary Fund as well as Western developed nations’ governments.

It actually became public policy through an initiative called the HIPC Heavily Indebted Poor Countries program. This initiative started out in order to offer consistent help in the form of debt relief to those most impoverished nations of the world. It worked strenuously to make certain that the money donated went for reduction of poverty and did not get siphoned off to infrastructure or military buildup programs.

This World Bank-supervised project involved conditions which were much like those accompanying loans from the World Bank and IMF International Monetary Fund. They mandated strict structural reforms that often involved privatizing public utilities including electricity and water. The prospective nations had to institute Poverty Reduction Strategies and demonstrate substantial macroeconomic stability for minimally a year.

In order to cut inflation, there were nations goaded into reducing their expenditures on important sectors such as education and health. The World Bank may have deemed the HIPC protocols a triumph for the twin goals of poverty and debt reduction, but many scholars and analysts offered significant criticisms of the program.

Despite critiques though, the HIPC became extended through the MDRI Multilateral Debt Relief Initiative. After the Gleneagles G8 meeting of 2005 in July, the wealthy creditor nations signed on to the MDRI. This provided full, complete elimination of all HIPC countries’ multilateral debts which they owed to the IMF, World Bank, and African Development Bank.

Free Download (No Signup Required) - The 100 Most Important Financial Terms You Should Know!
This practical financial dictionary helps you understand and comprehend the 100 most important financial terms.

The term 'Debt Relief' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.