Is there a debt crisis in the South and what is recommended by the CADTM?

26 January by Eric Toussaint , Maxime Perriot




Maxime Perriot: In an article published in December 2023 you claimed in the wake of a World Bank 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.

report that “developing countries” were trapped in a new debt crisis, yet the Financial Times and other sources point out that in the first two weeks of 2024 several so-called developing countries managed to easily refinance their debt. What is actually the situation?

The three developing countries that managed to sell sovereign bonds all produce oil and gas

Éric Toussaint: The three countries that managed to easily sell sovereign bonds are Saudi Arabia, Mexico and Indonesia. As they produce oil and gas they benefit from the high prices of fossil fuel and do not belong to the category of countries that are directly impacted by the debt crisis. As we know, Saudi Arabia is the leading global oil exporter. [1]
And if they manage to easily sell their bonds, it is because they offer a higher return than that of the debt bonds of countries of the North. Mexico just succeeded in selling $7,500 million worth of bonds by offering a rate that is 2% higher than that of the US and 4% higher than that of Germany. As investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
and private banks in the North can rely on large quantities of financial 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. , they are ready to buy bonds of countries of the South offering guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). in kind (such as large deposits of raw materials) and in a position to propose higher rates than in the economies of the North. Let us add that at the end of 2023, return on US bonds had become slightly lower, which made investing in bonds offering a higher yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. all the more attractive.

Maxime Perriot: Those three countries are thus not representative of the situation of many countries?

Mexico was able to finance itself at 6% at the beginning of 2024, while Egypt, Turkey and Zambia had to promise around 25% if they wanted to sell bonds on the financial markets today.

Éric Toussaint: Indeed those three countries are not representative of the category of countries facing an acute crisis.
Moreover the Financial Times itself acknowledges that Saudi Arabia and Mexico are exceptions: “However, this year’s 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. sales appear to show that markets are open only to governments with at least investment-grade credit ratings such as Saudi Arabia and Mexico. Countries with junk ratings, such as single B, may continue to find it almost impossible to access borrowing this year, say investors, leaving them unable to refinance looming maturities except at risky double-digit rates that would rapidly worsen their payment burdens.” (10 January 2024, https://www.ft.com/content/8b8b4733-83b9-40f0-88d6-28235e458f34)

While Mexico could finance itself in early 2024 at 5% over 5 years, 6% over 12 years because its rating is good and it sells oil, buyers of Egyptian debt want a yield of 27.4% on 10 year bonds, those of Turkey’s debt expect 26.6%, those of Zambia’s 25.5%, of Kenya’s 8.2%, Uganda’s 16%, Pakistan’s 15.4%, and Sri Lanka’s 14%. [2] As shown in the article you mentioned earlier, most countries in Sub-Saharan Africa who during a decade up to the 2020s could sell their sovereign bonds on financial markets cannot do so any more since the Central Banks of countries of the North decided to raise 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.
sharply. It should be remembered that, without consulting the countries of the South, the US 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
, the European Central Bank ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html
and the Bank of England have raised 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 sharply since 2022, which has had a harmful contagion effect on the countries of the South.

Because of such high rates a number of countries can no longer access international financial markets and depend on public lenders 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
, the World Bank and regional banks. They also use complementary sources of financing. They raise money on the domestic market by offering very high rates that are “sustainable” since they are paid in local currencies. Another possibility is to renegotiate loans with China, which has become a major lender. In some cases, countries such as Saudi Arabia also grant loans to keep allied countries and trade partners afloat. Saudi Arabia lends to Pakistan, India to Sri Lanka.

Maxime Perriot: So there really is a debt crisis underway?

About a hundred countries find it more and more difficult to refinance their debt and are pressured by the IMF reduce their social expenditures

Éric Toussaint: Yes indeed. About a hundred countries find it more and more difficult to refinance their debt and are pressured by lenders such as the IMF and the WB to reduce their social expenditures.

As stated by economist Michael Roberts, in reference to the Oxfam report published on 15 January to coincide with the Davos summit (https://www.oxfam.org.au/wp-content/uploads/2024/01/INEQUALITY-INC-Oxfam-Report-2024.pdf), “Entire countries are facing bankruptcy, with the poorest countries now spending four times more repaying debts to rich creditors than on healthcare. Three-quarters of the world’s governments are planning austerity-driven public sector spending cuts —including on healthcare and education— by $7.8 trillion over the next five years.” (http://www.cadtm.org/Davos-and-the-melting-world-economy)

While the crisis situation has not so far resulted in more countries defaulting, it is because the IMF (and to a lesser extent the World Bank) on the one hand and China on the other do their utmost to prevent the crisis from becoming general. Governments of the North also extend bilateral loans. These are not acts of kindness: the lenders are protecting their own interests. Widespread suspensions of payment would not benefit them. They prefer to keep countries afloat by granting new loans or by allowing indebted countries to defer payments or even suspend them on a temporary and negotiated basis. By keeping countries afloat, payments continue, even if in some cases they are temporarily reduced.

Maxime Perriot: You focus on public lenders such as the IMF, the WB, China, industrialized countries. What about private lenders?

Since 2022 private lenders have mostly attempted to get their former loans repaid and have reduced the number of bonds they buy and of loans they grant

Éric Toussaint: Private lenders grant loans in two ways: they either buy sovereign bonds issued by countries of the South (this is what we call the bond market Bond market A market where medium-term and long-term capital is lent/borrowed in the form of bonds. Bonds are creditor stakes issued by companies or States. ); or in the case of banks they grant a loan and sign an agreement with the concerned country (or with private companies in the South that receive a bank loan).
It was noticed that since 2022 lenders have mostly attempted to get their former loans repaid and have reduced the number of bonds they buy, and in the case of banks, of loans they grant.
As explained in the article you mentioned, in its report published in December 2023 the WB acknowledges that in 2022 private lenders began to turn off the tap on loans to developing countries, while pushing as hard as they could to get as many repayments as possible. According to the WB, new loans granted by private lenders to public authorities in developing countries have fallen by 23% to 371 billion dollars, their lowest level in ten years. Conversely, those same lenders collected $556 billion in repayments. This means that in 2022, they brought in $185 billion more in repayment than they gave out as loans. Still according to the World Bank, this is the first time since 2015 that private lenders have received more than they injected in developing countries.

Maxime Perriot: Can the situation get worse in 2024?

Renegotiating repayments to China is one of the many obstacles faced by an increasing number of countries

Éric Toussaint: Yes, the situation can get worse, since a number of countries must repay large amounts they borrowed at a time when interest rates were low. Let us take the case of Kenya. In the same article in the Financial Times we read, “Kenya’s $2bn bond maturing in June will be seen as a litmus test this year. Nairobi has signalled that it will resort to development bank loans to buy back a portion of the debt rather than seek to refinance in the market. East Africa’s biggest economy issued the bond at rates of 6-7 per cent in 2014, during an era of near-zero US interest rates that pushed investors into a global hunt for high-yielding assets.” Kenya will probably find a solution, but at what rate? Ethiopia, a neighbouring country, suspended its debt payment in 2023. Zambia has still not been able to resume repayment.

It will be quite difficult for Egypt, since according to the Financial Times it must repay $30 billion in external debt in 2024. To be able to make this repayment, Egypt will certainly have to call on the IMF again for additional loans, but this may not be enough.

Renegotiating repayments to China is one of the many obstacles faced by an increasing number of countries. Indeed, over the past ten years China has increased its loans to countries of the South and granted five- to seven-year delays before repayment. Many loans must now be repaid, which means that the situation of a number of countries with a debt to China will get worse. It must also be taken into account that a large share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of the loans granted by China were variable-rate loans indexed on international interest rates (mainly referring to Libor LIBOR
London Interbank Offered Rate
An average rate calculated daily, based on transactions made by a group of representative banks. There are several LIBORs for some ten different currencies and some fifteen duration rates, from one day to twelve months.
). As a consequence of the increase in interest rates by the central banks of Western industrial creditors, the interest rates of China’s loans are sharply increasing. China is ready to renegotiate schedules, but not interest rates. So the situation may well get worse.

Maxime Perriot: What does the CADTM recommend?

According to international law, governments have a right to suspend payment on the legal ground of “fundamental change in circumstances.”

Éric Toussaint: The CADTM recommends that governments of indebted countries protect themselves by suspending debt payment, as is their right under international law. Indeed, they can point to the fundamental change in circumstances brought about by external shocks from the North, in particular the unilateral decision by the central banks of North America and Western Europe to radically raise interest rates. Among factors inducing a fundamental change of circumstances, we can also mention the impact of the invasion of Ukraine on the prices of fuel and foodstuffs. While countries of the South have no responsibility for that, they pay the consequences. In case of fundamental changes of circumstances and external shocks, there is no obligation to continue to honour a loan contract and to repay the debt.

Suspension of payment must be combined with an audit of the debt with active citizen participation. The objective of such an audit is to identify what parts of the debt are illegitimate, odious, illegal and/or unsustainable and must therefore be cancelled.

Maxime Perriot: A devil’s advocate could say: "Countries of the South have contracted fixed-rate loans with the obvious obligation to refinance them when they mature. Nobody ever guaranteed that 10 years later, interest rates would still be at such low levels. Anyway everybody knew that they were bound to increase.”

Éric Toussaint: We should answer to this argument put forward by creditors: why then, while everybody knew that rates would rise, did you lend so massively to countries you knew were fragile and exposed to external shocks such as a rise in interest rates imposed by the North? You must shoulder the risks you took; lenders have a duty to check the ability to repay of the countries to which they lend. You haven’t done so, and you only have yourselves to blame if those countries have to suspend payment in order to face their responsibilities to their own populations.

The fact that creditors lend at a higher rate to countries of the South is accounted for precisely by the “risk” of not being repaid, since those countries are more fragile. When a country cannot repay, creditors ought assume the risks they have taken.

I should also point out that interest rates on loans granted by China are very often variable.

Translated by Christine Pagnoulle and Snake Arbusto


Footnotes

[1Contrary to what is claimed by the Financial Times, Saudi Arabia is not a developing country or an emergent economy, but is among the so-called developed countries. Indeed according to the WB, Saudi Arabia is in the category of high income economies, as are Western European countries, Canada and the US (see https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups ).

[2The yearly yield of sovereign bonds of many countries is accessible at http://www.worldgovernmentbonds.com/spread-historical-data/

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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