What can be done?

A local authority can use this website to:

1 – Identify councils to collaborate with in order to exit their LOBO loans. Based on the banks the council has debt with, they can:

• • find councils that have already exited LOBO loans with those banks and learn from their experience
  • find councils that have not yet exited their LOBO loans and collaborate for a good exit deal

2 – Based on the details provided, evaluate the legality of their LOBO loans with the support of legal and financial experts and take legal action where appropriate, alone or with other councils.

3 – Coordinate with other councils a call for an intervention from national institutions to facilitate an exit from the loans and to investigate the legal responsibilities of banks, brokers and advisors.

4 – Undertake a review of the council’s financial decisions and act where due process was not followed or decisions were not made in the public interest. This includes holding to account those who were responsible and improving processes so that failures can be avoided in the future.

5 – Involve the local community in an assessment of the legitimacy of the council’s debt, including judging if the funds were used in the best interest of residents and if servicing the debt is socially sustainable.

There is no official definition of illegitimate debt, but it can be broadly interpreted as debt that was improperly granted and is thus the responsibility of the lender and should not be repaid. Illegitimate debt is not a legal or financial term. Instead, it encompasses more broadly debt that was not incurred in the public interest and where debt servicing and repayment is detrimental to the rights of the population. A declaration of illegitimacy is therefore a political act, not a legal or financial one, though it could lead to them – like the decision to default on the debt.

Illegitimacy relates to the processes and power relations that have produced the debt in the first place and that are reinforced by it. Crucially, illegitimacy speaks of power imbalances between the lender and the borrower, whether they are economic, political, or information asymmetries.

This viewpoint counters a common assumption about financial transactions: their neutrality. Money is seen as neutral in economic theory, omitting the power that in the real world comes with it. When a borrower needs funds and enters into a contract with a lender with a balance sheet many times its size, it cannot realistically influence the contract terms. Examining the legitimacy of debt reverses the responsibility of contracting the debt from the borrower to the lender and makes it possible to hold lenders to account.

Illegitimacy can relate to:

• The contracting of debt – are the terms of the loans legitimate?
• The origin of debt – are the reasons why the debt was incurred in the first place legitimate?
• The servicing of debt – is the way the debt is being paid for legitimate?

The socio-economic context in which the debt is contracted and serviced is central to the evaluation of the legitimacy of the debt. In the case of LOBO loans we must therefore consider what it means to be servicing the debt in the current situation where council budgets, already hit by the cuts imposed by central governments in the aftermath of the financial crisis, have reached a breaking point with the pandemic.

Finally, when analysing the legitimacy of debt, it must also be considered if the funds borrowed were actually used in the public interest. 

Whether LOBO loans can be considered illegitimate or not will depend on the specific circumstances of the council and is ultimately a decision that the council and its residents need to make as part of a debt audit.

An example of a debt audit of LOBO loans is Research for Action’s citizen audit of Newham’s LOBO loans contained in the report “Debt & Democracy in Newham”.

Below are some criteria that can be used to determine whether a council’s LOBO loans can be considered illegitimate debt:

1. Illegality. LOBO loan contracts infringe the law and contain grossly unfair clauses that create excessive risk that was undisclosed to councils.
2. Power imbalance. LOBO loans result from an excessive power imbalance between too-big-to-fail banks and public institutions and were used by banks to circumvent regulation on derivatives sales. Banks and brokers not only abused information asymmetries with councils, but also were involved in rigging the rates (LIBOR and ISDAfix) the loans were pegged to.
3. Conflict of interest. Treasury management advisors (TMAs), who are hired by councils to provide independent advice, recommended LOBO loans to councils while receiving commissions from brokers arranging the loans. Brokers in turn were being paid high fees by both by the council and the banks, which is not standard brokerage industry practice.
4. Council mismanagment. In some councils administrations committed actionable breaches when taking out LOBO loans. Councils are also destroying documents related to the loans, or restricting access to them to councillors, journalists and residents.
5. Use of the funds. Councils were not obliged to specify for what purpose LOBO debt was taken on, however there is evidence that in certain cases funds were not invested to benefit the population, and may have been used to speculate in financial markets.
6. Interest vs services. Servicing LOBO debt in the context of austerity is exacerbating human rights violations for which Britain has been criticised by the United Nations.