For an end to the debt crisis

January 4, 2011

Eric Toussaint is president of the Committee for the Abolition of Third World Debt (CADTM). At the organization's recent conference in Colombo, Sri Lanka, he delivered the following presentation on the global debt crisis.

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 International Monetary Fund (IMF), World Bank (WB) and Organization for European Economic Cooperation (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: $1.38 trillion
External public debt of Sub-Saharan Africa: approximately $129 billion
External public debt of Latin America and the Caribbean: approximately $412 billion
External public debt of South Asia: approximately $159 billion
External public debt of France: $1.2 trillion (this only includes the debt of the central government) [1]
External public debt of Spain: $318 billion
External public debt of the U.S.: $3.5 trillion (total internal and external debt of all public administrations in the U.S.: approximately $15 trillion)

An impoverished slum in Ghana
An impoverished slum in Ghana

Another notion: total external debt, i.e. the sum of external public and private debt, in relation to Gross National Income (GNI).

External debt of Latin America in relation to GNI: approximately 40 percent
External debt of South Asia in relation to GNI: approximately 21 percent [2]
External debt of Pakistan in relation to GNI: approximately 29 percent
External debt of Sri Lanka in relation to GNI: approximately 38 percent
External debt of India in relation to GNI: approximately 19 percent
External debt of Ireland: 979 percent of GNI
External debt of Spain: 169 percent of GNI
External debt of Portugal: 233 percent of GNI
External debt of Greece: 162 percent of GNI
External debt of Germany: 148 percent of GNI
External debt of the United States: 100 percent of GNI
External debt of Great Britain: 400 percent of GNI

II. A context favorable to developing countries

The present context is favorable 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, center or left-leaning:

As regards the public debt: 1) low interest rates (0 percent for Japan, 0.25 percent for the U.S., 1 percent 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 neoliberal 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, the U.S. 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 channeled 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 $1.34 trillion in 2007 to $1.38 trillion in 2008 (+3.3 percent).

As far as South Asia is concerned, the external public debt went up from $144 billion in 2007 to $159 billion in 2008 (+10 percent).

As far as Pakistan is concerned, the external public debt went up from $36 billion in 2007 to $39,4 billion in 2008 (+10 percent).

As far as India is concerned, the external public debt went up from $70 billion in 2007 to $79 billion in 2008 (+12 percent).

As far as Sri Lanka is concerned, the external public debt went up from $11.9 billion in 2007 to $12.6 billion in 2008 (+6 percent).

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 U.S. 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 U.S. 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, Eric 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. 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 U.S. Federal Reserve abruptly increased interest rates from October 1979 (see above).

Then, toward the end of the 1980s, the public finances situation again deteriorated. The cause: the "fiscal counter-reform" in favor of companies and high-income sectors, leading to a reduction in tax revenues, compensated on the one hand by an increase in indirect taxation (value added tax), 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 percent in Spain, 74 percent in Portugal and 47 percent in Greece).[6] German and French bankers alone hold 48 percent of Spanish debt bonds, (24 percent with French banks), 48 percent also of Portuguese debt bonds (French banks alone hold 30 percent!) and 41 percent of Greek debt bonds (the French banks lead with 26 percent!).[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 number one, 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 neighbor, went to Athens to propose a 20 percent 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 eight measures concerning public debt (cf. the four-page paper mentioned above, available online), 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 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 for a mere $1 billion. The government department in charge of public finance thus saved about $2.2 billion in debt stock, to which one must also add the $300 million 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 U.S.).

2) Recourse by the states to "sovereign acts." One normally thinks of the U.S., 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, Argentina, after having suspended the repayment of debt, finally renegotiated it in March 2005 at 45 percent of its value.

The country, thanks to this non-payment of debt, was able to revive growth (8 percent annual growth rate from 2003-2007). Argentina still has a $6 billion 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 World Bank tribunal for the settlement of investment disputes). Bolivia began taking such initiatives in 2007.

3) The Bank of the South, launched in 2007 by seven South American countries (Argentina, Bolivia, Brazil, Ecuador, Paraguay, Uruguay, Venezuela) but which is not yet in operation (see the interview given by Éric Toussaint with the daily Swiss newspaper Le Courrier on October 16, 2010).

Translated by Judith Harris and Francesca Denley.


1. OECD, Central Government Debt: Statistical Yearbook 2000-2009, p. 31.
2. In 2008.
3. The Chinese authorities appear to have understood the risks, and have ordered Chinese banks to increase the ratio of capital to loans granted. But we must be careful when we talk about China's domestic indebtedness. If we consider China's external accounts, we see that this country is one of the world's biggest creditors, and the top creditor to the United States, holding nearly 900 billion dollars in Treasury bonds, according to official figures for 2010.
4. C. Lapavitsas, A. Kaltenbrunner, G. Lambrinidis, D. Lindo, J. Meadway, J. Michell, J.P. Painceira, E. Pires, J. Powell, A. Stenfors, N. Teles "The Eurozone Between Austerity and Default," September 2010.
6. C. Lapavitsas and... p. 8.
7. C. Lapavitsas and... p. 10.

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