[OPE] Eric Toussaint, Differences between 1982 and 2007-2008

From: glevy@pratt.edu
Date: Tue Feb 26 2008 - 10:17:13 EST

Socialist Project | The Bullet Differences between 1982 
Éric Toussaint 
In 1982, the external public
debt crisis of the developing countries was triggered by the combined
effects of the rise in interest rates imposed by the United States two
years earlier, and the fall in prices of raw materials, particularly oil.
The epicentre 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. 

The financial
crises of the 1990s practically only affected developing countries - there
was the Mexican crisis of 1994-1995, the Asian crisis of 1997-1998, the
Russian crisis of 1998, the Brazilian in 1999, Turkish in 2000, Argentine
in 2001-2002 and Brazilian again in 2002. Each crisis was triggered by
sudden movements of capital and speculative attacks on the currencies of
the countries concerned. Financial capital that had been directed towards
these countries before the crisis was withdrawn, causing the crisis. It
was a question of capital flight to safety, with capital being returned to
the financial centres of the North, considered more secure. 

August 2007, a financial 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 and Central Europe. For the moment, Japan has been spared as
its private finance sector, directly hit by a debt crisis over 15 years
ago, has barely had time to get started again. The Japanese crisis perhaps
led Japanese bankers to be rather more prudent than their North-American
and European counterparts[1]. The crisis in the financial system of the
North is such that capital flight to safety is operating in the opposite
direction to that of the past. Capital is being directed away from the
North towards the flourishing stock-exchanges of countries like India,
China and Brazil[2], now perceived as safe havens. The phenomenon is so
excessive that the Indian government, despite being neo-liberal, is
considering ways of discouraging this inopportune capital inflow, which
will force up the value of the Indian rupee and quite possibly flow out
again shortly if more viable financial opportunities present themselves
elsewhere in the world.[3] 

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
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
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, especially
countries which export oil, natural gas and minerals. Some agricultural
exporters have also benefited from this favourable situation. China, by
exporting manufactured goods, has accumulated impressive quantities of
foreign exchange reserves, amounting to stock of over 1,400 billion
dollars in December 2007. However, not all the developing countries are
included in this scenario; some sub-Saharan African States have seen their
situation take a turn for the worse. 

In 2007, the developing
countries together hold over 4,600 billion dollars[4] in foreign exchange
reserves while the industrialized countries hold less than a third of this
sum. How do the developing countries use their reserves? 

1.. A
considerable share (certainly over 700 billion dollars[5]) is loaned to
the United States through the purchase of Treasury bonds[6]. China lends
the United States 400 billion dollars of its reserves, emanating from its
trade surplus with them, so that the North-American economy can continue
to buy Chinese products. Many Latin-American, Asian and African countries
also lend part of their reserves to the USA. This conservative policy,
which is absurd from the point of view of the interests of the populations
concerned, is increasingly criticized. 
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[7].
These funds are known as Sovereign Wealth Funds. In order of importance,
the biggest are those of the emirate of Abu Dhabi (the amount of fund is
not published, but estimates place it between 250 and 875 billion
dollars!!), then Kuwait, China, Singapore, Russia. Libya has just created
a fund of 40 billion dollars. Venezuela created the « Fonden »
(fund for national development) in early 2007. In all, the various public
funds of the developing countries place about 2,000 billion dollars at
their disposal. Some of these public funds, such as China's National
Council for Social Security Fund - NCSSF - aim to back up the financing of
their social security system. The biggest funds buy up companies in the
industrialized countries or their shares, which is a source of anxiety for
those governments. Many of these funds have taken advantage of the crisis
faced by a number of big Western private banks since August 2007 to buy
their shares (UBS, Merrill Lynch, Citigroup,...) This is the case
particularly of the fund of Singapore (Temasek) and a number of Chinese
ones. The developing countries are now having recourse to different
policies from those adopted in the years following the oil boom of 1973.
In those days, the governments of the developing countries recycled
petrodollars by lending them to the private banks of the North and then
became indebted to those banks. Present policies are more solid, but in no
way break away from the dominant logic of capitalism. Investments are not
made in alternative non-capitalist projects, whereas they could serve as
powerful levers to set up policies reinforcing the public sector by
breaking private control over the major means of production, developing a
solidarity-based economy, and radically redistributing wealth by applying
principles of justice and equality. 
4.. The creation of a Bank of
the South. 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 governments of Venezuela, Ecuador
and Bolivia are inclined to provide themselves with an instrument to
finance economic, social and cultural policies that break with the profit
logic and which would apply the different conventions that guarantee
civil, political, economic, social and cultural rights. The operation of
the future Bank of the South has not been finalised, for example at the
level of the voting rights of the member countries or on auditing
mechanisms. The first trimester of 2008 should bring definitive answers.
On the other hand, other countries are planning to create an ALBA bank
(Bolivia, Cuba, Nicaragua, Venezuela). 
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[8]! 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 540 billion dollars
in 2006. If we only consider the servicing of the external public debt,
since this falls under the responsibility of the state budget, it
represented 280 billion dollars in 2006. Despite the fact that the
external public debt/GDP ratio is decreasing, the total volume of the debt
is continuing to rise and the amounts repaid increased once again in 2007
compared to the previous year. 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 1000 billion dollars a year which
the public authorities of developing countries have to repay for both
external and domestic public debt[9]. 

Increase in the
indebtedness of private firms 
We must not lose sight of the
increasing indebtedness of private firms of developing countries. The
external debt of developing countries' private companies increased from
664 billion dollars in 2004 to 911 billion in 2006, which represents a
hike of 37%[10]. Since the raw material exporting countries are witnessing
an upturn in their fortunes, the private banks of the most industrialized
countries have multiplied their loans to these private companies. The two
private sectors which are indebting themselves most in developing
countries are the banks and the firms dealing with hydrocarbons and raw
materials. We must pay particular attention to this development: the
private banks of the developing countries borrow from the North on low
interest rates, mostly on a short-term basis, to lend this money to the
internal market at a higher rate and on a long-term basis. If the economic
situation suffers a downturn (which is likely in the coming years), we
might witness a number of bankruptcies of the private banks of developing
countries, just like the financial crises which hit Mexico in 1994-1995,
the countries of South-East Asia and South Korea in 1997-1998, Ecuador in
1998-1999 and Argentina in 2001. Today's private debt of banks might, if
we are not careful, become tomorrow's public debts. The same applies to
the sector of hydrocarbons and minerals. Private petroleum, gas and
mineral companies, take out loans in order to increase their production
capacity and profit from the current high prices of raw materials. If the
prices drop, the investments made through borrowing might not be
profitable and the debt would become impossible to repay. It is imperative
to limit and control this indebtedness. 

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. These vulture funds
have already received close to one billion USD on court decisions. Just
last April the London High Court ruled that Zambia was to pay 17 million
USD to Donegal International for a debt they had bought for only 3 million
in 1999. No less than 40 lawsuits have currently been filed against twenty
countries of the South, most of them in Africa though some in Latin
America. Eight lawsuits have been filed against the Democratic Republic of
Congo, and courts have already ruled against the Congolese State in five
of them. Here is another illustration: the U.S. Kensington Funds has filed
a case against Congo-Brazzaville for 400 million USD as payment of a debt
they bought for USD 10 million. In the current legal context it is most
likely that U.S. judges will again decide in favour of the vulture funds.

Unstable LIBOR 
The Libor (London Interbank Offered Rate)
is the interest rate at which London banks lend money to each other.
Almost all variable rate loans granted to developing countries are based
on it. Loan contracts specify that the interest owed is equal to the LIBOR
interest rate plus a given percentage, for instance, Libor + 3%. If the
Libor rate is at 4.5 %, the interest owed will be 7.5 %. Since the crisis
that started in August 2007, the Libor rate has been extremely unstable.
When banks lose their confidence in each other the Libor rate increases.
This is what happened in September when the Libor rate soared before
decreasing again. If the crisis that started in August 2007 drags on,
which is not at all impossible, the Libor rate may reach a much higher
level than the present rate. In which case the following paradoxical
situation could arise: the U.S. interest rate falls while interest rates
paid by developing countries actually increase because of an increase in
the Libor rate. Developing countries would then have to dig into their
reserves in order to pay a higher bill. Of course this is one possibility
which should not be excluded and that developing countries must consider
when making their choices. 

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. Loans by Chinese public banks to Africa have soared. In
2004-2006 Chinese banks lent two billion USD to developing countries for
oil and gas development and production.[11] India, South Africa and Brazil
as well as China are on the lookout for raw materials, which accounts for
their banks granting more loans in order to back up supplies. 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

The Bank of the South: the first step towards 
a new international financial architecture 
It is all the more
essential to develop a new international institutional architecture which
would include the WB and IMF being replaced by democratic institutions.
The IMF and the WB will eventually overcome their ongoing crisis if
developing countries do not rapidly develop new alternative financial
instruments. Indeed were there to be a new financial crisis in developing
countries, we can be sure that the IMF would be straight back in the lead
as last resort creditors. Even though they have been weakened, these two
institutions are still implementing their neo-liberal agenda. 

Developing a new architecture will require the creation and
reinforcement of South-South regional integration processes: setting up
one or several Banks of the South that will have to coordinate their
efforts, devising counter-trade mechanisms among developing countries that
are based on solidarity.[12] Such mechanisms are already producing
interesting results in Latin America and the Caribbean, for example a
marked improvement in the field of health care, energy security
(Petrocaribe), education and information (Telesur). 

We must
also continue to 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. 

are witnessing a new phase of history. While nefarious practices continue,
at the same time alternatives are beginning to emerge which empower the
oppressed. These embryonic alternatives need all the support they can get.
The time is ripe to reinforce and radicalize them, since the developing
countries are in a position of strength compared to the industrial
countries. Local ruling classes want to use the situation to buttress
their own capitalist projects which can take the form of regional trade
integration (the Chiang Mai agreement in East Asia or Mercosur in South
America) but in a context that favours the pursuit of maximum private
profits. Peoples and governments who want real change cannot be content
with such projects; they can go further by taking advantage of this
historic opportunity - an opportunity for emancipation not to be missed.

-- Notes -- 

(1) That said, the economic situation
of Japan is particularly depressed. In the second quarter of 2007, the GDP
had fallen by 1.2% when annualized. At the same time, investment spending
fell back by 4.9%, while household consumption only progressed by 0.3%;
yet these two items are the principal motors of growth. The Nikkei index
on the stock-exchange has nose-dived. Salaries are stagnating and
unemployment is up. Projected growth for the whole of 2007 was 1.7% but
this will depend on the success of the exports which are pulling the
economy this year. 

(2) See the extended report on this subject
in the Financial Times, 18 October 2007. 

(3) The Thai
government had already taken steps to control capital movement in 2006 for
the same reasons. 

(4) The value of foreign exchange reserves
is calculated in dollars, the main international currency of foreign
exchange reserves, although in fact, the reserves are also made up of
other currencies: euros, yens, sterling, Swiss francs.Worldwide reserves
for 2007 are 2/3 in dollars. ¼ in euros and the rest in other
strong currencies. (See Bank for International Settlements, Annual Report
2007, Bale, p.97) 

(5) Estimation of the author. It is not
unlikely that the amount is much higher but it is very difficult to obtain
a precise number since the majority of central banks do not disclose how
their reserves are divided. 

(6) See the critical analysis of
this policy in "Bank of the South, International Context and
Alternatives" Sept 2006. 

(7) This is the case of
Venezuela, Russia, China. The Norwegian government has done the same thing
to maximize the returns on petroleum. (See Bank for International
Settlements, ibid, p. 104.) 

(8) World Bank, Global Development
Finance 2007, Washington DC, p. 46. 

(9) According to the
calculations of the author. Neither the World Bank nor the other IFI
provide reliable data on the reimbursement of the domestic public debt.
The basis of the calculations is the following: according to the World
Bank, in 2006, the internal public debt was three times higher than the
external public debt. In 2006, the interest rate for the internal public
debt of developing countries was generally higher than the interest rate
for the external public debt. Since the repayment of the external public
debt of developing countries amounted to about 280 billion dollars in
2006, we can estimate that the total repayment on the external and
internal public debts exceeded the sum of 1000 billion dollars in 2006. In
2007, the amounts repaid were greater than those of 2006. 

World Bank, Global Development Finance 2007, Washington DC, Tables, All
Developing Countries 

(11) World Bank, Global Development
Finance 2007, Washington DC, p. 44. 

(12) See the kind of
trading developing between Bolivia, Venezuela and Cuba in 2006-2007, for
instance in the fields of hydrocarbons, technology transfer, health care
and education. 

Éric Toussaint is the President of CADTM

Translated by Vicki Briault, Judith Harris, Christine
Pagnoulle and Diren Valayden in collaboration with Elizabeth Anne. 

Originally published on the Committee for the Abolition of Third
World Debt (CADTM) website. 

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