IS THERE A RISK OF ANOTHER MAJOR DEBT CRISIS?

RETOUR SUR LES ÉLÉMENTS DÉCLENCHEURS DE LA CRISE DE 1982

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The increase in the number of loans, the collapse of the price of raw materials, the fall in the price of a barrel of oil, the rise in interest rates, the application of neo-liberal recipes of the IMF and the World Bank, etc. These are some of the main causes that led to the outbreak of the debt crisis in the South at the beginning of the 1980s. These are also elements that we find today that make the international financial institutions say that the countries of the South are heading towards a new debt crisis. To understand the current debt phenomena, we suggest you take a look in the rearview mirror. 

THE COLLAPSE OF RAW MATERIAL PRICES 

At the end of the 1970s and until the beginning of the 2000s, the countries of the South were confronted with a sudden change: the fall in the prices of the raw materials and agricultural products they exported, which had previously been on the rise. Indeed, the vast majority of the loans were contracted in strong currencies such as the US dollar. However, and this is an essential element, the repayments must be made in the same currency as the loan, because the creditor who — for example — has lent dollars wants to get dollars back: he is absolutely not interested in Congolese francs from the DRC or any other currency from the South. During the 1970s, as their debts soared, debtor countries had to obtain more and more hard currency to pay back their creditors. To do this, they had no choice but to sell goods to those who had these hard currencies. The countries of the South have therefore had to orient their economic policies according to the expectations of economic actors located abroad, particularly in the most industrialized countries. 

Conditioned to continue making payments at all costs, the countries of the South had to export more « tropical » products or mineral resources and had to apply the « recommendations » of the North, namely, « borrow without counting the cost, the whole export will save you ». They have increased their specialization in a few commodities, on which they have become dependent, such as copper for Zambia and Chile, or bauxite for Guinea and Jamaica. In doing so, they have simultaneously put on the market an increased quantity of the same primary goods (peanuts, cocoa, coffee, cotton, minerals, oil, sugar, tea, etc.) while in the North, demand has not increased in the same proportion, due to the crisis that has arisen. The countries of the South therefore competed with each other and the prices of raw materials, including oil, whose price had risen sharply since 1973, then collapsed. The fundamental turning point came in 1981 when the price of oil fell sharply, causing the debt crisis in oil-exporting Mexico in 1982. For some raw materials, the price had already fallen a few years earlier, as in the case of the price of copper, which collapsed in 1974 and caused a payment crisis for Mobutu’s Zaire(1).

Source : 2000watts.org

From an overall perspective, this decline has been irregular, with periods of collapse followed by shorter peaks. But the average trend for the period 1977–2001 was clearly downward for all commodity categories, at an average of 2.8% per year(2). This fall reached 1.9% per year for ores and metals, with a fall of more than 5% for silver, tin and tungsten. Between 1997, the year of the severe economic crisis in Southeast Asia, and 2001, prices fell on average « by 53% in real terms […]. This means that commodities have lost more than half of their purchasing power relative to manufactured items(3) « . Furthermore, a study of the structure of world exports shows that rich countries export more than two out of three manufactured products in value, while developing countries export more than one out of two commodities. The developing countries therefore remain above all a place of harvesting and extraction, providing the raw material indispensable to a globalized economy from which they derive only a small part of the benefits. 

Source: IMF, Commodity Price System and International Financial Statistics databases. www.imf.org/

However, following the reversal of the price trend in the early 1980s, the financial situation of indebted countries became much more difficult. Not only is increasing production not enough, but it also aggravates the phenomenon of too much supply on the world market. The structural adjustment policies that followed then deprived them of the safety nets they had. 

Let’s produce what we need  and consume what we produce instead of importing it.

Thomas Sankara,
President of Burkina Faso between 1983 and 1987

THE SUDDEN INCREASE IN INTEREST RATES 

At the end of 1979, in order to get out of the crisis that hit them (like most of the most industrialized countries) and to reassert their world leadership after the bitter failures in Vietnam in 1975, in Iran (overthrow of the Shah in February 1979) and in Nicaragua (overthrow of the dictator Anastasio Somoza in July 1979), the United States began an ultraliberal shift, amplified after the accession of Ronald Reagan to the presidency in January 1981, in the wake of the government of Margaret Thatcher in the UK. Paul Volcker, head of the U.S. Federal Reserve, has decided on a sharp increase in interest rates. This means that for someone who has capital, it has suddenly become very attractive to invest it in the United States to get a better return. This was one of Volcker’s goals: to attract capital to revive the economic machine, notably through a major military-industrial program. Investors from all over the world flocked to it. One after another, European governments have followed the movement of rising interest rates in order to keep capital at home. 

As we can see, during the 1970s, real interest rates were very low, even negative. It was therefore very attractive to borrow: when this rate is negative, inflation is higher than the nominal interest rate, so the cost of borrowing is low or even zero. During this period, the costs of repaying this debt were sustainable, especially since export earnings were high — and rising. 

« The Latin American debt crisis in the 1980s
was caused by the huge increase in interest rates that resulted from Federal Reserve Chairman Paul Volcker’s restrictive monetary policy in the United States. » 

Joseph Stiglitz, The Great Disillusionment, 2002 

At the turn of the 1980s, the situation changed dramatically. Interest rates on bank loans to the South during the previous two decades were certainly low, but variable and linked to Anglo-Saxon rates (the Prime Rate(4) and Libor(5), determined in New York and London respectively). From around 4–5% in the 1970s, they have risen to 16–18% or even more at the height of the crisis, as the risk premium has become enormous. Thus, overnight, the countries of the South had to repay three times as much interest while export revenues were falling. The rules were therefore changed unilaterally by the creditor countries. On the one hand, it is the central banks of the most industrialized countries, starting with the Federal Reserve, that have unilaterally decided to raise interest rates. On the other hand, it is the most industrialized countries that have also pushed down commodity prices, notably by weakening OPEC through Saudi Arabia, their ally, and by ending the coffee cartel. The « trap » has closed on the indebted countries. The result is there: the indebted countries of the Third World have been taken over by their creditors. 

The consequences were terrible. The South had to pay back more with less income and was caught in a debt trap, unable to meet repayment schedules. He had to go back into debt to pay it back, but this time at a high price. The situation deteriorated very quickly. 

In August 1982, Mexico was the first country to announce that it was no longer able to repay. Other highly indebted countries, such as Argentina and Brazil, have followed suit. It is the debt crisis, which has shaken all the countries of the South. Even Eastern European countries were affected, especially Poland and, a little later, Yugoslavia and Romania. This debt crisis has sounded like a thunderclap. The international institutions, which are supposed to regulate the system and prevent crises, had not issued any warning message and had played it cool. 

Yet the World Bank and IMF knew the clouds were gathering and a typhoon was forming, but would not release the actual weather report for the economy. They wanted to give the big banks time to exit without damage(6). And for good reason: the new president of the World Bank was none other than the former top executive of one of the leading private banks in the United States, the Bank of America, which had been lending heavily to Mexico and the rest of Latin America. 

In sum, the debt crisis was caused by two phenomena in quick succession: 

- the very significant growth in the sums to be repaid, due to the sudden rise in interest rates decided in Washington; 

- the very significant drop in the prices of products exported by indebted countries on the world market and with which they repaid their loans, to which was added the cessation of bank loans(7).

All indebted countries in Latin America, Africa and some Asian countries such as South Korea, regardless of the government, regardless of the degree of corruption and democracy, have faced the debt crisis. 

The fundamental responsibilities lie largely with the most industrialized countries, their central banks, their private banks and their stock exchanges (Chicago, London…) which set the prices of raw materials. Corruption, megalomania and lack of democracy in the South were of course aggravating factors, but they were not the ones that triggered the crisis.

Damien Millet, Éric Toussaint, Rémi Vilain,
respectively member of CADTM France, spokesperson of CADTM International, permanent CADTM Belgium 

Notes et références
  1. Voir la brochure Á qui profitent toutes les richesses du peuple congolais. Pour un audit de la dette congolaise, CADTM, 2007, p.15.
  2. En dollars constants de 1985. CNUCED, Annuaire des produits de base, 2003, http://r0.unctad.org/infocomm.
  3. CNUCED, Le développement économique en Afrique. Résultats commerciaux et dépendance à l’égard des produits de base, Genève, 2003.
  4. Le Prime Rate est le taux interbancaire pratiqué par les banques pour les prêts à court terme qu’elles s’accordent. Il est habituellement supérieur de 3 points au taux établi par la Réserve Fédérale.
  5. Le Libor (London Interbank Offered Rate) est le taux interbancaire de la City londonienne (très proche du Prime Rate des Etats-Unis). C’est un taux moyen établi quotidiennement à partir des transactions réalisées par un panel de banques parmi les plus « représentatives ».
  6. Voir le chapitre 12 du livre d’Éric Toussaint, Banque mondiale, le Coup d’État permanent.
  7. Deux raisons à cet arrêt : 1) les banques ont désormais préféré placer leur argent aux États- Unis et dans les autres pays les plus industrialisés qui ont eux aussi augmenté leur taux d’intérêt ; 2) les banques ont commencé à craindre que l’argent qu’elles prêtaient au Sud ne soit pas remboursé à cause de la détérioration de la situation des pays endettés du Tiers-monde. Mais en stoppant les prêts, elles ont provoqué la crise qu’elles redoutaient.

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