3.3.4.5 The Power of Lenders
The power of lenders over borrowers enables them to apply restrictions to the borrower’s activities throughout the life of the loan.
The money in the financial system remains the property of the lenders. The borrower only has the use of the money and doesn’t own it. This tilts the power relationship in favour of the lender, whereas in other markets the negotiating parties are in a more nearly equal relationship. This is significant in two ways from a governance perspective:
● The lender can apply continued governance over the behaviour of the borrower. In the case of companies, shareholders can play an important part in corporate governance.
● The lender can place conditions on the borrower which are particularly significant when the borrower is a government, because the conditions may be politically very onerous.
The power of lenders to impose harsh conditions in international financial markets has been seen as politically illegitimate by people in the debtor countries. For example, as reported by the BBC during the Eurozone crisis in June 2011: Greece protest against austerity package turns violent.
This page is intended to form part of Edition 4 of the Patterns of Power series of books. An archived copy of it is held at https://www.patternsofpower.org/edition04/3345.htm.