Even before coronavirus started spreading around the world, dozens of developing counties were already close to a debt crisis.
Lebanon and Argentina have already defaulted on their debts this year; Ecuador and Zambia are on the edge. Behind them, a large group of countries could be pushed into default by the coronavirus crisis, including Angola, Tunisia and Ghana. Even rich countries like Italy face such serious debt crisis that it threatens to rip the Eurozone apart.
Before we had even heard of COVID-19, the International Monetary Fund (IMF) warned that 34 countries were at risk of debt distress.
Jubilee Debt Campaign, a group established in the late 1990s to campaign for debt cancellation for impoverished countries, suggested last May that this was an optimistic assessment. It said 31 counties were already in debt crisis, with another 82 at risk.
After all, not being able to fund healthcare because of debt repayments is a crisis, and more than 60 countries that are struggling to build a basic health system were already spending more paying their creditors than they were on healthcare.
This includes Ghana, which is due to spend almost four times more servicing external debt than on public healthcare in 2020.
Many countries face dire health emergencies even at the best of times: Burkina Faso has just 11 ventilators for 19 million citizens; Mozambique has no intensive care unit capacity at all; and Sierra Leone has only one doctor per 50,000 of its people.
That some of the world’s poorest countries are repaying vast sums year on year to rich countries, international “anti-poverty” funds – public bodies such as the IMF – and major banks, all while enduring this sort of permanent crisis, is a damning indictment on our global economy.
How can it be that only 15 years since billions of dollars of debt was cancelled for low-income countries, and 10 years since a debt crisis ripped through the developed world, we are back in the same place again?
It is not simply the impact of coronavirus that has created this debt crisis. Rather, the pandemic has exposed, once again, what a crisis-prone and unsustainable global economy we have.
The solution to this crisis will indeed have to include sweeping debt cancellation. But it will also require fundamental reform to prevent the global economy from continuing to operate as a gigantic casino.
The root cause of these crises was usually not profligate government spending on the part of indebted countries, as is so often assumed. Rather, these crises have been built into the neo-liberal economy that emerged in the late 1970s.
Under this model, economic planning is not something done by governments on the basis of meeting human needs, but is handed over to Big Finance, where major decisions are made on the basis of short-term profitability.
The global economy has become a Wild West of speculators and rent-seekers. Business is incentivised to ruthlessly shift the costs of its operations onto the public sector, the environment and future generations. Wealth is hidden offshore, making redistribution impossible.
How does such an economy continue to operate? Through debt.
Households that cannot make ends meet as wages are driven down by a global economy that has shifted wealth from the masses to the elite are households turning to credit cards or payday lenders to keep going.
Governments drained of taxes, even in rich countries, are forced to turn to the financial markets to provide healthcare and welfare to their citizens.
Debts spiral upwards. Eventually, financial markets look at the situation and realise it cannot go on. They panic, fuelling a downward spiral of economic collapse.
The 2008 global economic crash showed us how utterly chaotic and anti-social such a model is, and the devastation it drives through societies.
But even then, lessons were not learned. Governments stepped in to rescue the situation, pumping trillions of dollars into the very institutions that created the problem in the first place.
While the rest of us were paying for the crimes of these institutions through austerity imposed upon us by governments trying to “balance the books” – and, ironically, making society even less able to insulate itself from the power of these markets – financial institutions were scouring the world looking for new profits.
With interest rates close to zero in the rich world, emerging and even low-income countries became attractive prospects for these financiers. The press celebrated an “African miracle” as investment poured into the continent.
Doubtless there were individual success stories. But a huge amount of this wealth poured into commodity markets, and into providing “public-private” services and infrastructure, creating a mountain of debt in its wake.
This brings us to now: A pandemic breaks out. Panic sets in. Funds relocate their cash to developed economies as finance seeks the safety of the big economic centres. Since the start of the recent crisis there has been a $95 billion financial outflow from emerging markets – four times the outflows in the same period after the start of the 2008 global financial crisis.
The average price of commodities on international markets has fallen by 37 percent, and developing countries stand to lose nearly $800bn in export revenues.
Dollars, needed for the repayment of much sovereign debt, are in short supply and, while new borrowing is effectively free for rich governments because of ultra-low interest rates, the price has just spiralled for developing countries whose economies are judged less “safe” by markets – countries that therefore have to pay hiked interest rates to borrow. A debt crisis is inevitable.
This week, Group of 20 (G20) ministers met again to discuss the crisis. Debt cancellation was on the agenda.
Oxfam warned that failure to address this situation would set some countries back 30 years.
African leaders called for a $100bn stimulus package from G20 countries; the United Nations for an even larger $2.5 trillion COVID-19 crisis package for developing countries.
The G20 agreed that debt was a problem. But its plan falls far short of what is necessary.
For a start, the G20 is talking about a “moratorium” of debt payments for this year. The debt will remain to be paid at a later date. Creditors will lose nothing. Much of the “relief” will be taken out of aid money: effectively, impoverished countries will be paying for their own debt suspension.
Many countries that require debt relief will not get anything at all. Think of countries like Iraq and Algeria, where the collapse in oil prices is already fomenting unrest. Remember that Algeria’s bloody civil war in the 1990s was partly triggered by an oil price collapse, and you realise how much is at stake in the coming years.
What is more, there is nothing to compel the banks to join in the debt relief, which means relief could simply be diverted into payments to some of the biggest banks in the world.
We could end up with the obscene spectacle of these debts being sold and speculated on in financial centres like London, with a number of “vulture” hedge funds profiteering from the crisis.
We need debt cancellation for sure. Real debt cancellation that does not simply kick the problem down the road.
Paid for not from aid budgets, which will be desperately needed, but from, for instance, the piles of gold that institutions like the IMF are sitting on.
Debt cancellation also needs to be free of the strings routinely imposed by the IMF – strings which force countries into austerity measures and which remove their power to take exactly the sort of interventionist measures that countries need to so desperately deploy to control the markets and prevent massive outflows of wealth.
Debt cancellation is vital – it is the fastest way to free up spending space for governments. It will not be sufficient, though.
The IMF has the ability to inject large sums of money into the global economy through its reserve currency. Such a move, however, is being blocked by the richest country of all, the United States, on the grounds that Iran will benefit (along with every country in the world).
But, if we want this to be a permanent solution, and one that enables us to learn the lessons of our crisis-prone economy, we need to take this opportunity to enact structural reform.
This includes a proper international mechanism to deal with debt fairly and permanently, rather than leaving countries to stagnate in permanent crisis for decades, at the whims of creditor countries in the G20 and the IMF.
We need to hand power back to governments to intervene in their economies to constrain the irrational behaviour of markets. Right now, that includes imposing capital controls to stop the bleeding of wealth from less wealthy parts of the world.
And it means clamping down on tax dodging and allowing countries to begin funding themselves through taxation, rather than having to rely solely on borrowing to fund spending.
This is big. It requires a recognition that doing “just enough” to relieve the pressure, so we can return to the same old economy in 12 months’ time, is not just insufficient, but unrealistic.
Of course, most world leaders will not voluntarily choose this path. They benefit from the status quo ante. So it will be up to us to push them every step of the way, just as citizens and movements pushed governments after World War II to create a new international order.
When we say “no going back to business as usual” this time, we must really mean it.