Against the background of low global interest rates and huge investment needs in the Global South, all relevant institutions from the International Monetary Fund to the most important think tanks warn about the build-up of new sovereign debt crises in Asia, Africa, Latin America and the European periphery. Some of the countries that recently received debt relief are already in crisis again. For many countries, the eighties were a lost development decade due to the protraction of the debt crises. There is a risk that lost development decades repeat themselves and that people are further forced to leave their countries out of destitution, given that there is still no coherent mechanism to solve sovereign debt crises in a fast and sustainable way.
In July 2017, the group of the 20 economically most powerful countries in the world will meet in Germany to discuss matters of global financial stability. This meeting offers a great opportunity to create the conditions for fair solutions to sovereign debt crises. However, we do not want to leave this to chance!
With the campaign “Debt20: development needs debt cancellation – now!”, we ask the German government as the G20 presidency in 2017 to acknowledge the threat of the new sovereign debt crises in the Global South and support the creation of a comprehensive and rule-of-law-based sovereign debt workout mechanism.
To achieve this erlassjahr.de will make the voices of the Debt20 heard during the G20 Summit of the Heads of State and Government on 7 and 8 July 2017 in Hamburg.
During the meeting of the meeting of G20 finance ministers and central bank governors in Baden-Baden we already showed that a debt cut is necessary.
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Though the (German) G20 presidency has a huge influence over the summit’s agenda, it cannot design neither the agenda nor the outcome on its own. This is why we invite people from inside and outside G20 member countries to join us.
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The voices of the Debt20
The G20’s decisions on rules for the world economy have a huge impact on the future and the living conditions of people world wide, even those in non-G20 countries. Global debtor-creditor-relationships are no exception. Before the G20, the exclusive industrialised country club of the Group of 8 negotiated the rules under which critically indebted countries could receive debt relief in exceptional cases. Affected countries had no or minimal influence on either the standard-setting process or the implementation through the Paris Club or the multilateral debt relief initiative for heavily indebted poor countries. Accordingly, debt cancellations were protracted, inconsistent and insufficient.
This must not be repeated. Thus, we want to ensure that the voices of those affected by G20 decisions receive their attention. The Debt20 represent a broad range of voices from critically indebted countries: academics, bishops, government representatives and activists. They come from countries, which are already in deep crisis or are heading towards it. Other countries have such a dramatic or special debt history, that their experiences should not be forgotten. The Debt20 are no more legitimized than the G20, but they have something to say, which should better be heard.
The campaign demand
Jubilee Germany demands from the G20 that they stop ignoring the voices of the affected and acknowledge, in their communiqués, the threat that the looming new debt crises in the Global South poses to the attainment of the globally agreed sustainable development goals. The G20 successfully ignored the threat of unresolved and protracted debt crises for too long. The current Chinese G20 presidency finally made the beginning and addressed the need of a new deal on debt.
We ask the G20 that they support the creation of a comprehensive and rule-of-law-based sovereign debt workout mechanism.
More Information on the new debt crises
In the early 1980s most countries in the Global South slid into what was then called the “debt crisis of the third world”. For years they paid more to their Northern creditors than their economies could actually sustain and financed this resource drain by taking out ever more fresh loans from these same creditors. As a result, the miserable living conditions failed to improve, and experts called this era “a lost decade on development”. If one looks at the key characteristics of the global economy of the time, one finds a stunning amount of similarities with the situation in 2015/6.
Extremely low interest rates
In order to finance the economic recovery in Europe the European Central Bank presently floods capital markets with almost interest-free loans. This over-supply of capital largely prevents investors from making substantial profits in Europe. Consequently many of them turn to sovereign bonds of poorer countries, which still offer rates between 5 and up to 15 percent. This abundant offer of relatively cheap capital implies a strong temptation for governments to plug deficits not by savings and efficiency gains but by cheap loans. As a result the overall debt of all developing countries has risen sharply: From US-$ 3,665bn in 2010 to US-$ 5,393bn at the beginning of 2015. This is exactly how the 1980s debt crisis was brought about: The “petrodollars”, which had accumulated in the Middle East after the first rise in oil prices in the 1970s, was channelled into the Western Banks, interest rates fell thanks to the sudden over-supply of capital, and investors boarded plans with suitcases full of many, paying visits to the Latin American and African dictators of the time.
Only a few states managed to develop and diversify their economies since the 1980s. Many continue to depend on just a few mineral or agrarian export commodities. If those commodities’ prices slump, like presently happens due to the reduced demand in China, state income decreases and is often replaced by loans. The same vicious cycle can also be triggered by natural catastrophes such as droughts in Eastern Africa or hurricanes in the Caribbean.
Despite many efforts by civil societies and support from international organizations, democracy and the rule-of-law have not progressed every where. The democratic revolutions of the 1990s have got stuck in many countries. Or they have even been reversed into renewed authoritarian regimes or something even worse, like in Egypt or Syria after the Arabic Spring. And like the kleptocrats during the era of the cold war, today’s authoritarian rulers like to take out loans from foreign creditors, in order to buy loyalty or finance repression. Their Western creditors, in turn, trust that the repayment of their claims will be secured by repressions and/or the starving of the population, if necessary.
The Debt Boomerang
While ordinary people in the indebted countries certainly are the most affected by such crisis, we have got something to lose, too, if we allow our banks and funds and even our governments to relentlessly collect their claims from poor countries. The consequences may indeed hit us like a boomerang: The over-exploitation of nature in order to finance the debt service threatens the global environment and heats up the atmosphere. People who have been deprived of any perspective towards a life in dignity, look for their fortunes elsewhere, and ideally follow the money that has been collected from them. The impoverishment of states and societies fuels social conflict, and thus provides a rich harvest to aggressive political and military movements, seeking to recruit among the young. And finally, all kinds of drug-related and other criminal activities blossom, where governments are prevented from regulating their banking and finance sectors under pressure from structural adjustment programs.
The fatale role of the International Financial Institutions
Financing the ongoing debt service of low income countries, which are factually bankrupt, is the business model of the International Monetary Fund (IMF). By the end of the 1980s more than forty countries worldwide were already technically bankrupt. However, their debt was not cancelled. Instead the IMF and the World Bank provided fresh funds, which allowed the debtors to continue servicing their debts to banks and governments in the Global North. In the end, the International Financial Institutions themselves, were the most important creditors to the poorest countries. In return for their ongoing support, they then demanded harsh austerity measures at the expense of the poorest. Huge parts of the populations were pushed into misery through such programs. Ever since, many evaluations of those structural adjustment programs have led to some improvements but not yet to any paradigm shift. To the contrary: The same upward-redistribution pattern has been enforced by the IMF, as a part of troika, in Greece – thus, turning the Greek crisis into a full catastrophe.
No exit here
Like thirty years ago there is still no orderly process for sovereign insolvency. An insolvent state still has to negotiate with each of its creditor groups individually: with governments, that have provided trade guarantees or development aid in the “Paris Club cartel”; with the multitude of sovereign bondholders individually, and the International Financial Institutions, which continue to be most important creditors to the poorest countries, do not negotiate at all, but want their money back at any cost. There is no legally established or at least informally accepted procedure, through which debtor and creditors could quickly and jointly reach a solution that would be acceptable to everybody. As a result, negations tend to drag on: Senegal negotiated fourteen times in the Paris Club, before a big part pf the debt was ultimately cancelled. Grenada most recently was more than two years in default, before creditors committed to some half-hearted debt relief.
Yea, who does not learn from history is condemned to repeat it.
Santayana, American philosopher 1863-1952