Committee for the Abolition of Illegitimate Debt

Sushovan Dhar: As you know, the Sri Lankan government has announced a default on its debt. What do you think about this?

Eric Toussaint: The Sri Lankan government’s decision to suspend the payment of the foreign debt from Tuesday, April 12, 2022, shows how far it has stumbled. The Sri Lankan working people have been on the streets for more than a week protesting against rising prices and anti-social measures. All members of the government resigned except the fact that the Prime Minister and the President remained in office. It is important to note that the Prime Minister and the President are brothers, which is an important factor in understanding how the political system works in Sri Lanka. It is an ultra-neoliberal government, completely in favour of the interests of big business - both domestic and foreign. It is in an attempt to placate the population and also because there is not enough money left in the state coffers and in the foreign exchange reserves that the government has been forced to suspend payments.

In reality, since at least the beginning of the coronavirus pandemic, the debt payments should have been suspended in order to reallocate government spending to tackle the effects of the pandemic, protect the population from the virus and invest in the economy in order to deal with the global economic crisis accelerated by the pandemic. On the contrary, since the beginning of the pandemic, the government has been determined to continue paying off the debt. The debt has continued to mount because the government has financed with new debt a series of measures it was taking to deal with the crisis. It has also used new debt to repay old debts when, as I have just said, it should have suspended the payment of the debt.

A people’s government would have suspended debt payments on the grounds that the decision was prompted by external shocks that required the country to protect its citizens. In doing so, the government would have used arguments under international law to avoid paying 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. on arrears. Such a people’s government would have had to combine the suspension of debt repayment with an audit of the debts reclaimed to Sri Lanka and the policies pursued by the Sri Lankan political ruling classes. An audit with citizens’ participation to identify illegitimate debts and the responsibilities of senior officials and leaders in the accrual of illegitimate and unsustainable debt.

On the basis of the audit of the debt, linked to a suspension of payments, a policy of repudiation of the debt should have been pursued. This should have been done, I repeat, within the framework of a new government, since it is the current government that, by following the neoliberal logic, is responsible for the continued accumulation of illegitimate debt.

Sushovan Dhar: In the current circumstances, where foreign exchange reserves are extremely low, the government says it has no choice but to borrow from 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 . What are we to make of this?

Eric Toussaint: Let’s return to the decision made on Tuesday, April 12, and analyze it in a very critical way. Why? Well, firstly, it was taken in consultation with the International Monetary Fund (IMF) and large private creditors like BlackRock. That is, it was in the interest of the creditors that the government suspended the payment. Secondly, it announced that it would agree to pay the interest in full and that its desire was to resume payment of the debt as soon as possible.

Thirdly, the government, in negotiating with creditors, including the IMF, will seek an emergency credit to be able to guarantee the resumption of debt repayment to the IMF, to private creditors and to other creditors. So Sri Lanka will take on new debts to pay off old ones, many of which are illegitimate.

The fourth point of my criticism is that once the government enters into an agreement with the IMF, the IMF will demand fiscal austerity measures that will inevitably make the working classes pay for the adjustment effort and the budgetary austerity effort.

The government with the support of the IMF will try to obtain a reduction in the stock of debt owed to private creditors. This is usually what happens in these circumstances and it is what has happened over the last three years in Argentina. With the “help” of the IMF, the Argentine government renegotiated the debt with private creditors and obtained a very small reduction in the payments to be made. In doing so, it tried to re-legitimize the debt that was illegitimate and should not have been paid. This is what the current Sri Lankan government is about to do and therefore one can only disagree strongly with its strategy.

Sushovan Dhar : If Sri Lanka suspends payment of its debt, wouldn’t that be illegal under international law?

Eric Toussaint: I have explained what should have been done at the beginning of the coronavirus pandemic. Now let me turn to what should be done today, instead of what the government is doing. Yes, we need to suspend the debt payments. We must use a series of arguments based on international law, and the justification must not be limited to saying that we do not have enough money to pay. A government that really wants to act in the interest of the population should announce that it is suspending the payment of the debt because there are external shocks that do not depend on Sri Lanka, that reduce the income to the state coffers. External shocks force the country to suspend the payment of the debt. In such circumstances, this suspension cannot lead to an accumulation of interest on arrears, contrary to what the government says. A country like Sri Lanka has the right to suspend debt payments if there are good reasons to do so, including a fundamental change in circumstances. International law allows a country to declare itself in the suspension of payment without its creditors being able to demand the payment of interest on arrears afterwards.

Secondly, an audit of the debts should absolutely be carried out. We must audit the debts issued on the international markets. The holders of these debts must be forced to come forward by a sovereign decision of Sri Lanka. Therefore, the secrecy of the identity of the holders of securities should not be accepted. The audit must also cover the debts claimed by the International Monetary Fund and the 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.

. Here it is absolutely clear that the policies recommended by these two institutions are largely responsible for the accumulation of illegitimate debts and the application of an economic model that has led the country and the people to disaster. It is very clear that the IMF and other international bodies support the country’s corrupt, authoritarian authorities, which are in place because they serve the interests of domestic and foreign big business. China, India, and Washington are so far in favour of keeping this regime in place because it serves the interests of foreign capital and big foreign powers. The local ruling class, which is largely parasitic, also wants the regime to remain in place. This regime does not respect democratic rules, implements anti-social policies and faces clear popular discontent.

The debt audit must be carried out with the participation of social movements. It must result in determining which part of the debt is illegitimate and should not be paid. Generally, the commentators of the Sri Lankan situation, the mainstream press, say that the situation is dramatic because the value of Sri Lankan securities is falling very sharply on the secondary debt market. The secondary debt market is where the holders of Sri Lankan sovereign debt Sovereign debt Government debts or debts guaranteed by the government. , which could be BlackRock and other 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. , but also banks, are selling or buying them back. Sri Lankan securities are currently selling at a discount, if I am well informed, of around 60%. Contrary to the idea that the mainstream media is trying to convey, the fact that there is a very large discount on Sri Lankan securities is not at all bad news for the Sri Lankan people or for the working classes. What it does show is that bondholders are worried. They are not sure whether the government will be able to continue to repay the debt, and so this is a good time to cause an even greater fall in the value of the bonds because it would allow a new government to buy back these bonds on the secondary market Secondary market The market where institutional investors resell and purchase financial assets. Thus the secondary market is the market where already existing financial assets are traded. at a very low price while the payment is suspended. This is what the government of Ecuador did in 2008-2009 and it was beneficial for the country and for the people.

Sushovan Dhar: What is the way out of this debt trap for Sri Lanka or any other country?

Eric Toussaint : What I have just said is in contradiction to the strategy of the government. The government wants to get a loan from the IMF to resume debt payments to the bondholders and sit down at the negotiating table with them and ask them to reduce the value of the bonds by 10 to 20 per cent when it could be reduced by 80 per cent which would be much better for the country. If Sri Lanka resumes payments with the money that the IMF will lend it, the bondholders will be in a strong position. Whereas if Sri Lanka does not take the IMF money and remains sovereign, if it refuses the austerity policies that the IMF is about to mandate, if it continues the suspension of debt payments, it would be in a strong position to demand the bondholders to sell their bonds back to the government at an 80% discount. This is the kind of policy that was followed by Ecuador in 2008 and that resulted in a victory for Ecuador in 2009. There, Ecuador had bought back these securities with a 70% discount but they had bought back on the secondary market part of the securities with an 80% discount, so the discount had been very important. Given the severity of Sri Lanka’s situation, with this suspension of payment, they could get a very large write-off on the securities. But I don’t think that’s possible with the current President and Prime Minister: they are not at all ready to apply this kind of measure, so the question is not just what measures to take, it’s who can take these measures? It is a question of popular mobilization. The popular classes should give themselves a new legitimate government and this new government should apply a policy that is totally in line with the interests of the overwhelming majority of society.

If this does not happen in the short to medium term, Sri Lanka will be faced with a debt burden that will increase because of the new loan from the IMF and other loans that Sri Lanka is taking from India, China or other creditors. So Sri Lanka, following the policy of the Prime Minister and the President of the Republic, is going to sink into a permanent and vicious cycle of indebtedness. The adverse effects of the neo-liberal policy will further deepen the fragility of its economy and worsen the living conditions of the majority of the people.

Sushovan Dhar: What do you think of the position taken by around a dozen Sri Lankan economists who claim to be independent ?

Eric Toussaint : This group of around a dozen economists who call themselves independent have published an op-ed in the Sri Lankan press explaining their vision of what should be done and all the points that are indicated correspond exactly to the type of policies demanded by the International Monetary Fund and the World Bank. One can take their proposals point by point, analyze the agreements made with the various countries, including Sri Lanka, with the IMF and observe that the measures proposed by these so-called independent economists are precisely in line with the nefarious policies that the International Monetary Fund wants.

What these economists propose is also perfectly in line with the interests of the big private creditors, moreover, they suggest calling upon private firms specialized in debt restructuring. These private firms work on behalf of large private creditors and are not at all in the interest of the people who live in the countries forced to pay illegitimate debts. Thus, these private firms offer no safeguards in defending the interests of the people of Sri Lanka.