International Conjuncture. Short version

In 1982, the epicentre of the debt crisis was in the South and the first casualties were the governments of the developing countries, who suddenly found themselves owing enormous amounts in debt repayments. In August 2007, a debt crisis exploded in the North in the world’s leading economy, which so far has mainly affected private finance companies in the industrialized countries, especially in North America and in Western Europe.

The global situation has changed over the last 25 years in other ways, too:

1) History shows that between 1982 and 2004 there was a tendency for the price of raw materials to fall and the terms of exchange between industrialized and developing countries deteriorated. Since 2005, there has been a renewed sharp rise in prices.

2) Most developing countries register trade surpluses, especially China which is inundating the global markets with its manufactured goods.
3) In 1982 and the years that followed, developing countries’ foreign exchange reserves were limited. Since 2002, slowly at first and gathering pace since 2005, they have continually increased.

4) Interconnected markets have led to an increase in private debt in both the North and the South in the form of complex types of derivative products which, far from ensuring greater stability, make for more opacity and speculation. We have a vast financial system with a considerable sector based on the accumulation of debt paper that could collapse at any moment like a house of cards.

5) Internal public debt has reached all-time highs in the developing countries, while the external public debt is falling. In the USA it has increased too, although more slowly, and in Japan it remains extremely high at 185% of the GDP, according to the IMF.

6) There is an explosion of food prices worldwide.

7) There has been a frenzied acceleration of the arms race led by the United States.

8) South-South capital flows are on the increase.

9) China is making itself felt as never before in international economic and financial relations.

10) A group of Latin American countries has launched the foundations of new multilateral regional institutions, starting with a Bank of the South.
Accumulation of developing countries’ foreign exchange reserves

Since 2004, the economic situation has been characterized by the high price of raw materials and a number of agricultural products. This has allowed a large number of developing countries to increase their export revenues and accumulate significant foreign exchange reserves.
How do the developing countries use their reserves?

1) A considerable share (certainly over 900 billion dollars) is loaned to the United States through the purchase of Treasury bonds |1|

2) A significant number of governments have taken the opportunity to make early repayments of their debts to the IMF, the World Bank, the Paris Club and private bankers.

3) Some have created development funds, into which they can place some of their foreign reserves, in view of financing social and infrastructure projects such as buying up companies in the industrialized countries. These funds are known as Sovereign Wealth Funds.

Massive increase in domestic public debt

A recent development which also has to be considered is that the domestic public debt is increasing rapidly. In 1998 the internal and external debts were equal; in 2006 the domestic public debt exceeded the external debt by a factor of three |2|
! This phenomenon is very important: from now on, it is no longer possible to measure the level of debt of developing countries solely on the basis of the external debt.

The weight of public debt repayments

The latest figures published by the World Bank indicate that servicing the external public and private debts by developing countries amounted to 523 billion dollars in 2007 |3|
. If we only consider the servicing of the external public debt, since this falls under the responsibility of the state budget, it represented 190 billion dollars in 2007. Despite the fact that the external public debt/GDP ratio is decreasing, the total volume of the debt is continuing to rise. More ominously, if we include servicing the domestic public debt, which also falls under the state’s responsibility, it is the astronomical sum of more than 800 billion dollars a year which the public authorities of developing countries have to repay for both external and domestic public debt. |4|
.

Increase in the indebtedness of private firms

We must not lose sight of the increasing indebtedness of private firms of developing countries.

Vulture funds descend upon weaker countries

Vulture funds are private investment funds that buy up large portions of the debt of a poor country on the secondary market, at a very low rate, in order to sue the country and obtain the face value of the debt they hold, plus late penalties.

Increase in South-South lending and the growing role of China

Private and public Banks in some developing countries (China, Brazil, India, Malaysia, South Africa) grant more and more loans to governments or companies in other developing countries. These countries also try to sell their goods and services to other developing countries. The more vulnerable countries may thus fall into a new kind of dependence that will not necessarily be any better than the current one towards industrialized countries. In order to avoid this happening, South-South loans must be part of a more general process aiming at mutual empowerment.

The Bank of the South: the first step towards a new international financial architecture

Since December 2007, the Bank of the South is on track, even though all the choices have yet to be concluded at the time of writing this text. Its founders (Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay, Venezuela) want to finance their regional integration and social projects. The governments of Brazil and Argentina argue for a neo-developmentalist project of regional expansion of capitalist enterprises, based on the model of European integration where the interests of big capital dominate. The operation of the future Bank of the South has not been finalized, for example at the level of the voting rights of the member countries or on auditing mechanisms. On the other hand, other countries have created an ALBA bank (Bolivia, Cuba, Nicaragua, Venezuela).

ICSID

Since May 2 2007, Bolivia is no longer a member of the ICSID, the International Centre for the Settlement of Investment Disputes, an organ of the World Bank. It is very important to convince other governments to do the same.

Integral Debt Audit

Ecuadorean government has created the CAIC in July 2007. Project of new constitution includes permanent debt audit process.

We must demand the cancellation of illegitimate public debts, whether internal or external, so as to free up new resources to meet human development, which forcibly requires that human rights be respected. This is why initiatives concerning debt auditing are essential.