Are we heading for another debt crisis? If so, what should we be doing?

7 December 2016 by Duncan Green

Just when you thought life couldn’t get more retro (Leonard Cohen on the radio, post-Brexit trade negociations, impending nuclear war), here comes another debt crisis. Probably. Had a good briefing from some key wonks in Development Finance International and the Jubilee Debt Campaign, two small but vital watchdogs that play a vital role in maintaining capacity on important issues when they drop down the policy agenda a bit – see JDC’s recent paper on Ghana’s debt, or DFI’s work on government spending in poor countries. Such outfits can sound the alarm with some authority when they spot bad stuff coming down the line, which is what they were doing with us last week.

They see another debt crisis for the poorest countries, albeit with a few differences compared to last time (the 90s and 00s). Debt service Debt service The sum of the interests and the amortization of the capital borrowed. as a percentage of government spending in low and low-middle income countries is up to an average of 27% of total government revenue, which is a pretty severe burden on cash-strapped countries that really need to spend on schools, hospitals, infrastructure etc.

Triggers for the current squeeze include some similar factors to the last time: the commodity price crash has starved governments of revenues with which to service their loans, especially in countries that have failed/been unable to diversify out of commodity dependence. Potential rising dollar 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.
could add to the pressure (and the retro feel).

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Main differences this time around are:

- Much greater role for domestic debt, i.e. governments borrowing from their citizens, or in their own currencies, often at much higher 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 than for international loans
- Greater role for international bonds – lots of governments have entered bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. markets, partly to send signals of their market friendliness: issuing international bonds has become the modern version of setting up a national airline – a symbol of national pride.

The rich countries have contributed by switching aid from grants to loans, encouraging Private Public Partnerships (which load future debt service onto governments) and generally pushing private sector solutions and ‘financial deepening’ in a pretty undiscriminating way. Cue lots of banks and other lenders spotting big profits and piling in.

Some of the sources of vulnerability to crashes are also familiar: there is still no agreement on a way for countries to restructure their debts along the lines of private sector bankruptcy proceedings; as the debt burden rises, lenders are once again starting to do circular lending – issuing new loans that are just used to service old ones, allowing countries to maintain the appearance of keeping up with their repayments but at the cost of spiralling debt with few benefits to local citizens.

Many in 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.
and World Bank World Bank
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, 180 members in 1997), 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.
are concerned and are revising their ways of looking at debt levels to take more account of domestic debt and PPPs. The IMF even warned strongly about rapidly growing debt burdens during its recent Annual Meetings. But some in the multilateral development banks and aid agencies are heavily invested in PPPs as a solution for infrastructure financing, and are reluctant to accept that they have been fuelling the problem.

So if debt campaigners are going to scale up, get back on the Jubilee 2000 horse etc, what might debt-campaigners-2work?

The first issue is to get the debt problem on the agenda – that means bearing witness, killer facts on how much health care and education is being eaten up by debt service payments. Support from influential economic journalists like Larry Elliott also helps. Developing country governments are reluctant to sound the alarm for fear of precipitating just such a crisis, so in their absence maybe get some irreproachable global authority figures to say there’s a problem (the Pope? Gordon Brown? Kofi Annan?)

Another challenge is to start thinking through the responses at national level. It’s all very well pissing off international markets, but the politics of alienating your middle class creditors by restructuring your domestic debt can be very toxic – witness the El Barzón movement which led to the ousting of a 70 year ruling party in Mexico in the mid 90s. One potential ally is the many CSOs that have got involved in budget monitoring and accountability work, who could form the core of a revived interest in debt. Another is parliaments in developing countries that want to hold their governments to account.

Intellectually the far greater level of policy interest in inequality should help to focus minds, as debt exacerbates inequality by giving large profits and interest payments to the wealthier, but loading the burden of crises onto the poor through spending cuts), and taxation (as an alternative to debt).

What would help is a clear narrative on what we are for, as well as what we are against – what constitutes responsible lending/borrowing, and where has it taken place? In terms of lending, UNCTAD UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.
and CSOs have proposed some clear guidelines, and some governments have been more responsible by continuing to provide grants and very cheap loans to poorer countries. On the borrowing side, Ethiopia and Rwanda have borrowed somewhat more wisely , building up the economy without racking up very high debt service – human rights advocates aren’t going to like that, so any others?

In terms of old-school ‘problem/solution/villain’ campaigning, PPPs and Vulture Fundsprovide some handy villains, and deserve a good kicking.

But one thing that’s changed since the 1990s is that domestic civil society is calling the shots far more these days. CSOs in Mozambique and Ghana reportedly don’t just want debt cancellation – they want to make sure the crisis leads to greater levels of transparency and accountability, rather than simply letting off a ‘bunch of crooks’.

There’s also a challenge for any Northern campaign, when supporters say ‘didn’t we already fix this?’

There are two answers to this – one that we didn’t fix the system which leads to rapid debt growth, just the symptoms of debt crisis, and two that many of the countries affected now are different from those which were “fixed” before (as previous debt relief went to only the poorest and most indebted countries).

Finally, there will be crises, and those constitute ‘critical junctures’ for a campaign – how campaigners prepare in advance, and respond to those crises will be decisive.

Anyone else thinking about this?



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