Global Crisis and Current debt scenario

9 December 2010 by Eric Toussaint


Colombo – Sri Lanka
9-11 December 2010
South Asian CADTM Workshop:
“Global Crisis and Current debt scenario” 

I. The debt of developing countries and developed countries

First: which countries are we talking about? What is the size of their debt?
We are talking about the countries designated as developing countries by international bodies such as the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
, WB World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.

http://www.oecd.org/about/membersandpartners/
in the following regions: Latin America, Africa, Middle East, Asia excluding Japan and South Korea, Eastern Europe.

Size of the debt:

- External public debt of all developing countries: US $ 1,380 billion
- External public debt of Sub-Saharan Africa: approx. US $ 129 billion
- External public debt of Latin America + Caribe: approx. US $ 412 billion
- External public debt of South Asia: approx. US $ 159 billion
- External public debt of France: US $ 1,200 billion (this only includes the debt of the central government) [1]
- External public debt of Spain: US $ 318 billion
- External public debt of the USA: US $ 3,500 billion (total internal and external debt of all public administrations in the US: approx. US $ 15,000 billion)

Another notion: total external debt, i.e. the sum of external public and private debt, in relation to GNI (Gross National Income).

- External debt of Latin America in relation to GNI: approx. 40%
- External debt of South Asia in relation to GNI: approx. 21% [2]
- External debt of Pakistan in relation to GNI: approx. 29%
- External debt of Sri Lanka in relation to GNI: approx. 38%
- External debt of India in relation to GNI: approx. 19%
- External debt of Ireland: 979% of GNI
- External debt of Spain: 169% of GNI
- External debt of Portugal: 233% of GNI
- External debt of Greece: 162% of GNI
- External debt of Germany: 148% of GNI
- External debt of the United States: 100% of GNI
- External debt of Great Britain: 400% of GNI

II. A context favourable to developing countries

The present context is favourable to developing countries from several standpoints, due to three factors that are engendering a dangerous lack of concern, if not euphoria, on the part of their governments, whether they be right, centre or left leaning:

As regards the public debt:

- 1) low interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
(0% for Japan, 0.25% for the US, 1% for Eurozone, etc.) enable developing countries to refinance their external debt in the North, plus lower risk premiums relative to each country. In addition, for certain very indebted poor countries, the effects of debt cancellation by the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

, the World Bank, the IMF, etc. are beginning to genuinely ease the burden of debt servicing. The problems of these countries are far from being solved, but the burden of debt repayment is lighter. Note, however, that this relief is compensation for pursuing the neo-liberal policies dictated by the IMF and the World Bank.
- 2) The rise in prices for raw materials (as from 2003) increases the revenues of exporting countries, and at the same time boosts their hard currency reserves, thus facilitating repayment of their external debt (which they repay in hard currency).
- 3) Out of the huge amounts of liquid assets moving around the world, significant capital flows are temporarily channelled into the stock markets of emerging countries.
=> Overall, the external public debt of developing countries is slightly increasing but this trend is presented as sustainable by the governments and the IFI’s. For all developing countries the external public debt went up from US $ 1,335 billion in 2007 to US $ 1,380 billion in 2008 (= + 3,3%).

As far as South Asia is concerned, the external public debt went up from US $ 144 billion in 2007 to US $ 159 billion in 2008 (= + 10 %).

As far as Pakistan is concerned, the external public debt went up from US $ 36 billion in 2007 to US $ 39,4 billion in 2008 (= + 10 %).

As far as India is concerned, the external public debt went up from US $ 70 billion in 2007 to US $ 79 billion in 2008 (= + 12 %).

As far as Sri Lanka is concerned, the external public debt went up from US $ 11,9 billion in 2007 to US $ 12,6 billion in 2008 (= + 6 %).

But we should note that up to now we have only taken into account the external public debt, which is indeed increasing. The situation is much more worrying if we take into account total public debt, because internal public debt is also on the rise and at a much faster pace. The result: the burden of servicing public debt in relation to the State budget is in many cases identical to or worse than what it was several years ago. But because the governments of the South, the World Bank and the IMF place emphasis on the external debt, the situation at first glance seems well under control.

This economic situation is fragile since it relies on factors beyond the control of the developing countries:

1. The growth of one of these countries is playing a decisive role and will continue to do so. This country is China, the industrial plant of the world and the largest importer of raw materials. China’s constant high rate of raw material imports keeps prices for these products at a high level. If China’s orders for raw materials should drop, there is a real risk that prices will decline or plummet. Several factors can endanger current growth, all related to an eventual decline in Chinese demand: stock market speculation in China, with the market seeing considerable fluctuations; the growth of a real estate bubble which is taking on alarming proportions – linked to an exponential indebtedness within Chinese borders as doubtful debts explode [3]. All of this can lead to a weakening of the Chinese banking system which is essentially public in nature. We may see several bubbles bursting in China (a stock market crisis and a real estate crisis leading to a financial market Financial market The market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. crash, as happened in the US in 2007-2008 and in Japan in 1990). It is difficult to foretell what the consequences could be for the rest of the world, including the developing countries. What is probable, and what must be borne in mind, is that if China’s growth rate declines, there is a high risk that prices for raw materials will fall.

2.Interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rates will eventually go up again: banks have access through the central banks to a very inexpensive resource (low interest rates). With these vast liquid assets, they lend, but in limited proportions, to companies that invest in production, and to households that consume. The huge remainder is used to speculate: on raw materials, on public debt securities or loans to third parties (industrial corporations that speculate rather than invest in production). The central banks in the most industrialized countries know that new bubbles are forming, and that to reduce the liquid assets in circulation they should increase their interest rates. But they hesitate, because if they do increase interest rates there will be a new risk of banks collapsing. They are also anxious to avoid increasing the cost of repaying the public debt. Hence the current procrastination. It’s a choice between plague or cholera: if interest rates remain low, new bubbles will form and inflate to alarming proportions. If interest rates increase, these bubbles will burst all the more quickly.
If rates increase, speculation on raw materials will decline (because the liquidities Liquidities The capital an economy or company has available at a given point in time. A lack of liquidities can force a company into liquidation and an economy into recession. available for such speculation will dry up), thus leading to a decrease in raw materials prices.
To sum up, if interest rates rise, the developing countries will be strapped: higher debt servicing combined with a decline in hard currency income due to a drop in raw materials prices (see previous point). In this case the developing countries are likely to be in the same situation they were in during the 1980s: the rise in interest rates decided on by the US Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
at the end of 1979 (and adopted by the other central banks in the most industrialized countries) triggered a brutal increase in debt repayments by developing countries that themselves were affected by plummeting raw materials prices (note that raw materials prices were on a downslide from 1981 to 2003).

3. Finally, the capital flows going to the trading Market activities
trading
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
floors of emerging countries may suddenly go elsewhere, thus destabilizing the economies of these countries.

III. The debt in the North

For this part of the workshop, Éric Toussaint drew on a report by Research on Money and Finance , a group of economists including Costas Lapavitsas, a professor at London University [4]. This 72-page report, which addresses among other issues the debt of Greece, Portugal and Spain, is a mine of information and ideas. Eric Toussaint also mentions a 4-page paper by CADTM on the subject [5].

A historical recap: the debt began to reach high levels in the North in the 1980s. After the first oil crisis and the economic crisis of 1973-1975, governments in the North attempted to re-boost the economy through public expenditure. The debt exploded when the US Federal Reserve abruptly increased interest rates from October 1979 (see above).

Then towards the end of the 1980s, the public finances situation again deteriorated. The cause: the “fiscal counter-reform” in favour of companies and high income sectors, leading to a reduction in tax revenues, compensated on the one hand by an increase in indirect taxation (VAT), and on the other hand by greater recourse to borrowing.

The crisis which began in 2007 and above all the way in which governments bailed out the private banks made the public finances situation even worse.

In countries like Great Britain, Belgium, Germany, The Netherlands and Ireland, governments spent considerable amounts of public money to bail out the banks. In the near future, the Spanish government will no doubt do likewise by bailing out savings banks made virtually bankrupt by the real estate crisis. Ireland is literally buried in debts originating from several big private banks that the government nationalized without recovering the cost of the bailout from the shareholders.

On another front, thanks to the huge liquidities made available to them by the central banks in 2007-2009, the banks of Western Europe (in particular German and French banks) granted huge loans (mainly to the private sector but also to the public authorities) in countries of the EU periphery, such as Spain, Portugal and Greece (the bankers considering there was no risk there), with the result that the debt of these countries increased sharply, especially private debt (remembering that the private debt/total external debt ratio is 83% in Spain, 74% in Portugal and 47% in Greece) [6]. German and French bankers alone hold 48% of Spanish debt bonds, (24% with French banks), 48% also of Portuguese debt bonds (French banks alone hold 30%!) and 41% of Greek debt bonds (the French banks lead with 26%!) [7].

While social spending by States of the EU is in no way the cause of increased public debt, it is nevertheless social budgets that will suffer first from austerity measures.
Growing public debt is used as an argument by present governments to justify the adoption of new austerity plans.

In the North we keep hearing that public debt is problem no. 1, while in the majority of countries, it is private debt that is the problem. This enormous debt contracted by private companies will be tomorrow’s public debt if we are not on our guard.

The Greek crisis :

Many loans for Greece were granted in order to finance the purchasing of military equipment from France and Germany, increase household consumption on credit or to promote indebtedness amongst private businesses. After the crisis broke out, the military-industrial lobbyists managed to ensure that the defense budget was only slightly reduced whilst the PASOK government slashed social spending budgets. And yet, at the peak of the Greek crisis at the beginning of the year, Recep Tayyip Erdogan, the prime minister of Turkey, a country which has tense relations with its Greek neighbour, went to Athens to propose a 20 % reduction in the military budget of the two countries. The government did not seize the lifeline it had been offered. It was pressurized by the French and German authorities who wanted to promote their arms exports. One must also add to this the many loans made by mainly French and German banks to private businesses and to the Greek authorities in 2008-2009. These banks borrowed from the European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
at a low interest rate and then lent out to Greece at a higher interest rate, thereby making a juicy profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. in the short term. They were not worried about whether the debtors could pay back the loaned capital in the medium term. Private banks are therefore greatly responsible for the excessive debt. The loans made by European Union member States and the IMF to Greece do not serve the interests of the Hellenic people; rather they are used to reimburse German and French banks which, due to their risky loan policy, have put themselves in danger. Furthermore, they have violated the social rights of the Greek population. For this reason, these loans must be considered odious.

IV. The alternatives

1. CADTM has proposed 8 measures concerning public debt (cf. the 4-page paper mentioned above, http://www.cadtm.org/Together-to-impose-a-different ), the central theme of which is the unilateral moratorium on debt which is based on an audit of public debt, carried out under citizen control. When CADTM recommends a default on payment, we know what we are is talking about. We were part of a debt auditing committee in Ecuador, implemented since July 2007. We noted that several loans were granted in violation of basic rules. In November 2008, the new power based itself on our report and suspended the repayment of the debt in the form of bonds which were due to mature, some in 2012, others in 2030. Finally the government of this small Latin American country came out the victors of a test of strength against the North American banks which owned the Ecuadorian debt bonds. The government redeemed bonds worth 3.2 billion dollars for a mere billion. The government department in charge of public finance thus saved about 2.2 billion dollars in debt stock Debt stock The total amount of debt , to which one must also add the 300 million dollars of annual interest which, since 2008, is no longer being paid. This gives the government new financial resources to increase social spending in the health and education sectors, and provide aid to the poorest.
An audit of this kind serves to demonstrate the legitimacy or illegitimacy of the debt (the historic concept of “odious debt” with historic precedents, such as the Iraqi debt, cancelled in 2004 at the demand of the US).

2. Recourse by the States to “sovereign acts”. One normally thinks of the US, of Israel, etc.

There are, however, recent examples, in particular in Latin America, of sovereign acts which resist domination by IFIs, by private creditors or by dominating countries:

- The aforementioned example of the unilateral suspension of debt repayment by Ecuador.
- CADTM cites the example of Argentina which refused to repay the debt between 2001 and 2005, pointing out the responsibility of the creditors. Thanks to the unilateral moratorium on debt bonds for a sum of 100 billion dollars, Argentina, after having suspended the repayment of debt, finally renegotiated it in March 2005 at 45 % of its value. The country, thanks to this non-payment of debt, was able to revive growth (8% annual growth rate from 2003 to 2007). Argentina still has a 6 billion dollar debt to settle with the Paris Club. Since December 2001, it has made no repayments to the member States of the Paris Club, with no ill effects. The Paris Club represents the interests of the industrialized countries and does not want to kick up a fuss over Argentina’s non-repayment of debt for fear that other countries will follow its example. It is worth noting that nowadays Argentina is part of the G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). , and is far from being marginalized, despite its unilateral sovereign acts.

Condemned by the IFIs, some countries have notified these institutions that they no longer recognize their decisions or arbitrations, which is a good thing. For example, in 2009, Ecuador denounced 21 bilateral investment treaties and notified the World Bank that it no longer recognizes the ICSID ICSID The International Centre for the Settlement of Investment Disputes (ICSID) is a World Bank arbitration mechanism for resolving disputes that may arise between States and foreign investors. It was established in 1965 when the Washington Convention of that year entered into force.

Contrary to some opinions defending the fact that ICSID mechanism has been widely accepted in the American hemisphere, many States in the region continue to keep their distance: Canada, Cuba, Mexico and Dominican Republic are not party to the Convention. In the case of Mexico, this attitude is rated by specialists as “wise and rebellious”. We must also recall that the following Caribbean States remain outside the ICSID jurisdiction: Antigua and Barbuda, Belize, Dominica (Commonwealth of) and Suriname. In South America, Brazil has not ratified (or even signed) the ICSID convention and the 6th most powerful world economy seems to show no special interest in doing so.

In the case of Costa Rica, access to ICSID system is extremely interesting: Costa Rica signed the ICSID Convention in September, 1981 but didn’t ratify it until 12 years later, in 1993. We read in a memorandum of GCAB (Global Committee of Argentina Bondholders) that Costa Rica`s decision resulted from direct United States pressure due to the Santa Elena expropriation case, which was decided in 2000 :
"In the 1990s, following the expropriation of property owned allegedly by an American investor, Costa Rica refused to submit the dispute to ICSID arbitration. The American investor invoked the Helms Amendment and delayed a $ 175 million loan from the Inter-American Development Bank to Costa Rica. Costa Rica consented to the ICSID proceedings, and the American investor ultimately recovered U.S. $ 16 million”.

https://icsid.worldbank.org/apps/ICSIDWEB/Pages/default.aspx
(the WB tribunal for the settlement of investment disputes). Bolivia began taking such initiatives in 2007.

3. The Bank of the South, launched in 2007 by 7 South American countries (Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay, Venezuela) but which is not yet in operation (see the interview given by Éric Toussaint with the daily Swiss newspaper Le Courrier on October 16 2010 http://www.lecourrier.ch/index.php?name=NewsPaper&file=article&sid=447171 or http://www.cadtm.org/Du-Venezuela-a-l-Equateur-des  ).

Translated by Judith Harris and Francesca Denley




Footnotes

[1OECD, Central Government Debt: Statistical Yearbook 2000-2009, p. 31

[2In 2008

[3The Chinese authorities appear to have understood the risks, and have ordered Chinese banks to increase the ratio of capital to loans granted. But we must be careful when we talk about China’s domestic indebtedness. If we consider China’s external accounts, we see that this country is one of the world’s biggest creditors, and the top creditor to the United States, holding nearly 900 billion dollars in Treasury bonds, according to official figures for 2010.

[4C. Lapavitsas, A. Kaltenbrunner, G. Lambrinidis, D. Lindo, J. Meadway,
J. Michell, J.P. Painceira, E. Pires, J. Powell, A. Stenfors, N. Teles “THE EUROZONE BETWEEN AUSTERITY AND DEFAULT”, SEPTEMBER 2010 http://www.researchonmoneyandfinance.org/media/reports/RMF-Eurozone-Austerity-and-Default.pdf

[6C. Lapavitsas and… p. 8.

[7C. Lapavitsas and… p. 10.

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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