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 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, WB and OECD 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 (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, 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 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 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 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 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 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 at a low interest rate and then
lent out to Greece at a higher interest rate, thereby making a juicy profit
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 [8], 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, 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, 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
(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 [9].

Éric Toussaint

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