Who Benefits From Sovereign Debt Crises? (2/5)
Economist Jayati Ghosh continues her discussion of the 136-nation move to address sovereign debt in the context of global finance
LYNN FRIES, TRNN: Welcome to the Real News Network. I’m Lynn Fries in Geneva.
In part one of this series we reported on a resolution to tackle the kind of sovereign debt crises that have hit countries like Greece, Argentina, the Ukraine, an historic and unprecedented move on the part of the UN General Assembly. And we opened our own conversation on the issue with our guest, economist Jayati Ghosh. We pick up where we left off, first back to the UN General Assembly as Joseph Stiglitz fields questions.
SACHA LLORENTY (VOICE OF ENGLISH TRANSLATOR), CHAIR UNGA SOVEREIGN DEBT RESOLUTION COMMITTEE, BOLIVIAN AMB. TO THE UN, 2014 PRESIDING PRESIDENT OF THE G77+CHINA: From the representative of civil society, you have the floor.
ERIC LECOMPTE, EXEC. DIRECTOR, JUBILEE USA NETWORK: Thank you, Mr. Chair.. And it’s wonderful to hear your remarks, Professor Stiglitz.
My name is Eric LeCompte from the Jubilee USA network. We represent our founders and our members, which in the United States range from the U.S. Conference of Catholic Bishops to American Jewish World Service. Our members have had a unique perspective on the debate of global debt issues, specifically in terms of how debt impacts poverty. And Prof. Stiglitz, as you opened your remarks today you noted that the United Nations is the appropriate place to have this conversation as opposed to the International Monetary Fund because a global bankruptcy process deals with the very heart of the poverty debate. I think those comments are really important. At the same time this is not a group of financial ministers, and I think it’s difficult for us to understand that correlation that you are speaking of.
It’s interesting that recently at the highest levels of religious authorities and groups, there have been statements that are very similar to yours. Just two weeks ago, the Holy Father, Pope Francis, endorsed the bankruptcy process that is taking taken place here.
What I’d like to ask you to do, Prof. Stiglitz, certainly as you are aware that the World Bank now notes that 50 countries around the world are at worrying levels of debt distress, if you might be able to break it down for us and really connect the dots of what bankruptcy, what global debt policy has to do with poverty and inequality in our world. Thank you very much.
JOSEPH STIGLITZ: There are many links between debt restructuring and poverty. Some are a result, are necessary, you might say driven by the economics, but some are related to you might say underlying politics. There was no reason that the Troika, IMF, the ECB and the European Commission had to impose the excessive austerity that they imposed on Greece when they provided money. It reminds me a little bit of the debtor prisons in the UK in the 19th century. People in debtors prisons were not very good at repaying debt. And the same thing was true about the Troika economic policies. They caused Greece to go into depression, predictably. We all predicted that. And when I say a depression, Greece is in a depression. GDP went down 25% , unemployment is 25% and youth unemployment at over 50%. They have destroyed, are destroying the country. But a destroyed country is not able to repay its debts. And so it began, when the crisis began the Greek debt to GDP ratio was 110-120%. Now it’s a 170%. So the policies have made things worse and made it less likely that they’ll get repaid.
So that was bad policy. Whether it was vindictiveness, whether it was misguided judgement, I don’t want to reach a judgement about that. But what is clear, it was unnecessary and it was the wrong policy. So that was a case where the policies, the conditionalities that were accompanying the debt relief, as it was called, predictably led to substantial increases in poverty.
On the other hand, as a general proposition, whenever countries get excessive indebtedness others are less willing to lend. The domestic political economy results in a hesitancy to engage in further deficit spending. And that means that when a country has excessive debt and faces a shock, a negative shock, as Greece did and as many other countries have done, then it is more likely that the economic downturn will be that much deeper. And that will lead to more poverty. And it is in those circumstances particularly where there needs to be debt restructuring, but debt restructuring without the kind of conditionality that make the problem even worse.
So what I’m arguing is that we need frameworks for debt restructuring. And frameworks for debt restructuring that are not accompanied with the kinds of conditionalities that lead to the enormous social costs that we’ve seen in the Greek program and we saw East Asia and we saw in Argentina and we’ve seen over and over again.
FRIES: We now continue to part two of our conversation with our guest, economist Jayati Ghosh. Jayati Ghosh is a professor of economics, and chair of the Center for Economic Studies at Jawarharlal Nehru University in New Delhi. Welcome.
JAYATI GHOSH: Thank you. It’s a pleasure to be here.
FRIES: In part one you talked about a typical debt cycle, when countries borrow for growth, for investment. In completing that debt cycle are able to pay what they owe because their income is rising. Talk now about situations when that’s not the case.
GHOSH: Debts often are just so large that they can never be repaid. And I think it’s important to realize how that happens, because you know when people say today that Greece has borrowed so much, that’s not true. Actually, Greece didn’t borrow that much. Or in the debt crisis of the 1980s when people said Brazil and Argentina have borrowed $80 million worth, and so on. It wasn’t true. The original debt was, let’s say, $40 billion. But they couldn’t repay it, so it got rescheduled.
Now, what does rescheduled mean? It means that the interest that you owe is added back on to the principle. So the debt you had that was $40 billion next year is maybe $50 billion, because the interest you haven’t paid is put back into principle and it’s compounded. Now, supposing you still can’t pay because the global condition is terrible or you have domestic problems, whatever. Then that $50 [billion] will become $60 [billion], $70 [billion]. So when Greece ended up with $80 billion in 1982, that’s because it had originally borrowed about $45 billion. It’s a compounding of the original debt that was made.
Now, what happened to Germany was that it, after the first world war when it lost the war, it had to pay massive reparations. The Allied powers demanded massive reparations. And of course–.
FRIES: That was the Treaty of Versailles.
GHOSH: That’s right. And it had to repay that, and it could only do so by borrowing. And this became a terrible cycle where they could not repay, so the debt is compounded. And then it became a huge debt burden which looks much larger than it really is, even from the point of view of the creditor, if you see what I mean. The only way to deal with that is to restructure it, which basically means to reduce it.
FRIES: Talk about the issue of bankruptcy for a nation.
GHOSH: Well you know, the trouble with bankruptcy when it comes to a sovereign is that you cannot apply the same standards that you often apply to, let’s say, companies. In the case of companies, when you go bankrupt or when you have, you file for bankruptcy proceedings, then what typically happens is that you’re given a certain time when it’s called a standstill, where you don’t have to repay any interest of your existing debt. You’re allowed to borrow more to just get your company back into function and make it work again. And after a period of time, say a year or two years, if you still can’t repay and if you still are not in a position to make, to survive, then you really have to close down. You have to liquidate. And then your assets get sold among all the different investors.
Now, obviously you cannot liquidate a country. You can’t say, disappear into the sea, Greece, although I’m sure some Europeans probably think that at the moment. You cannot liquidate a country, and that’s why it’s critical to recognize that sovereign debt mechanisms have to have certain qualifying criteria. That is, you cannot say we are going to take all your assets and divide them up, and benefit from that in return for our debt. You have to take a reasonable position that allows for the fact that creditors also were irresponsible when they kept lending. That much of the actual debt is not real debt, it’s just accumulated interest, which is being compounded every year. That much of the impact that this will have will be on citizens of the country who may not be responsible for what happened. Who certainly do not have decision-making power over how the cuts will be made and where they will be affected. And who will suffer unnecessarily and in a way that will deprive them of their rights, gut the most essential types of public spending and so on.
You can’t have that kind of situation, not only because it’s politically unviable but because it really makes no economic sense.
FRIES: Let’s talk more about that in part three of our conversation. Please join us as we continue our series in the next segment. Jayati Ghosh, thank you.
GHOSH: You’re welcome.
FRIES: And thank you for joining us on the Real News Network.
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