Taxpayers' money has been used to underwrite pounds 3bn in loans to Asian countries whose economies are now collapsing. Fran Abrams, Political Correspondent, says the debts, much of which was spent on arms deals, may never be repaid.

It emerged last night that pounds 3bn, which helped to pay for the Pergau Dam deal and for the sale of Hawk jets to Indonesia, will be paid off by the Government if the ailing Pacific Rim nations default on their deals.

Figures due out next month show a total of pounds 3.2bn in loans to be repaid by Indonesia, the Philippines, Singapore, Malaysia and Thailand, all backed by official British government guarantees. More than one-third of the money was spent on British weapons, and further deals including the pounds 300m sale of 16 Hawk jets to Indonesia will still go ahead. The sale will complete a pounds 1bn order for 40 aircraft, which campaigners say have been used in occupied East Timor. Indonesia owes Britain pounds 1.8bn, pounds 800m of which is for arms, and its currency has fallen by 75 per cent against the United States dollar since last July.

The total owed is enough to pay Britain's housing bill for two years or to run all the public services in Wales for a year.

The revelation has sparked new calls for a review of export credit guarantees, which have been linked to more than one major scandal. In 1989, an arms deal with Malaysia was linked to pounds 230m in aid for the Pergau Dam plus pounds 45.8m in government guarantees. When the High Court ruled against this, export credits were granted instead. Malaysia now has more than pounds 200m in outstand- ing loans and its economy is in dire straits.

The taxpayer also underwrote the pre-Gulf War sale of arms to Iraq, which led to an inquiry by Sir Richard Scott; Saddam Hussein's regime never paid the pounds 630m bill. Nigeria, which is well behind with its payments, owes pounds 1.6bn. The outstanding debts also cover an oil refinery in Thailand, which owes pounds 150m, and power stations in the Philippines and Singapore, which owe pounds 600m and pounds 350m respectively.

Menzies Campbell, the Liberal Democrat defence spokesman, said he believed the debts would almost certainly remain unpaid. "There is a need for an urgent review of the relationship between export credit guarantees and arms export policy," he said.

A spokesman for the Export Credit Guarantee Department said: "Once you have given your guarantee you can't do much about it, but the expectation is that all that money will come in." Even if the government had to pay out, it would hope to recoup the money when the Asian economy improved.