Archive for category: #Globalsouth

BRICS countries leaders Xi Jinping, Vladimir Putin, Jair Bolsonaro, Narendra Modi, and Cyril Ramaphosa

Chinese President Xi Jinping, Russian President Vladimir Putin, then-Brazilian President Jair Bolsonaro, Indian Prime Minister Narendra Modi, and South African President Cyril Ramaphosa in 2019.

Sputnik/Alexey Nikolsky/Kremlin via Reuters

A BRICS currency would be a serious threat to the dollar, a former White House adviser said.
As members are geographically diverse and large, others would be willing to use the currency.
“The BRICS would also be poised to achieve a level of self-sufficiency in international trade that has eluded the world’s other currency unions.”

De-dollarization could become a reality as a BRICS alternative to the dollar could enjoy high prospects for success, a former White House adviser said.

Joseph Sullivan, who served as a staff economist at the White House Council of Economic Advisers during the Trump administration, wrote in Foreign Policy that a currency issued by Brazil, Russia, India, China and South Africa would pose a unique threat to the dollar’s dominance.

“It’d be like a new union of up-and-coming discontents who, on the scale of GDP, now collectively outweigh not only the reigning hegemon, the United States, but the entire G-7 weight class put together,” he said in a column published on Monday.

In recent months, discourse about de-dollarization has flourished. That’s as sanctions against Russia have exposed the danger of overdependence on the dollar, paired with growing efforts to bolster other currencies, especially the Chinese yuan.

And Brazil’s president recently reminded the world about plans for a BRICS currency based on a basket of member currencies.

A notional BRICS currency would carry key advantages over existing alternatives like bilateral deals that still result in proceeds being parked in dollar assets and have limited use with other countries, Sullivan said.

“The BRICS would also be poised to achieve a level of self-sufficiency in international trade that has eluded the world’s other currency unions,” he said. “Because a BRICS currency union—unlike any before it—would not be among countries united by shared territorial borders, its members would likely be able to produce a wider range of goods than any existing monetary union.”

Non-member countries would also have reason to use a BRICS currency because each member’s economy is large enough in their respective regions to make them sought-after partners, Sullivan said.

In addition to eroding dollar dominance in trade, a BRICS currency could weaken the greenback’s status as a reserve currency.

BRICS governments could induce their own households and companies to buy assets in the new currency with their savings and “effectively coerce and subsidize the market into existence,” he added.

Sullivan also noted that it would not spell the end to the dollar’s reign — which still accounts for 84.3% of cross-border transactions — but possibly contribute to a multi-polar regime.

In fact, some decline in the dollar’s strength could be a good thing, he writes. At the moment, the greenback’s high price costs the US jobs and lowers exports.

“Either way, the dollar’s reign isn’t likely to end overnight—but a [BRICS currency] would begin the slow erosion of its dominance,” he said.

Read the original article on Business Insider

Policymakers in the Global North have mostly responded to rising inflation by raising interest rates. That’s bad for their own workers — and it’s creating a debt crisis for many countries in the Global South.

Vendors sell products in a busy street in Accra, Ghana, on March 21, 2022. (Seth / Xinhua via Getty Images)

At the end of last year, Ghana defaulted on its debt as the government suspended payments on most debts owed to foreign creditors. Earlier in 2022, Sri Lanka also entered default as inflation sent the country’s currency tumbling, exacerbating the cost-of-living crisis as imports of essential goods like food and medicine became more expensive.

This year, Pakistan finds itself on the brink of default as the combination of high inflation and climate breakdown fueled environmental disasters devastated its economy. Pakistan’s situation is particularly worrying given the fact that the country is the world’s fifth largest by population. Other countries like Zambia and Lebanon have been in default for much longer.

High inflation and slow global growth have wracked many poor economies at the same time as rising interest rates have made debt servicing more expensive. Fifteen percent of poor countries are already in debt distress — when a country is unable to fullfil its financial obligations and debt restructuring is required — while half are in danger of entering it.

In short, the world economy is already in the midst of a sovereign debt crisis. The United Nations Conference on Trade and Development (UNCTAD) has warned that the developing world faces a “lost decade” as a result of the debt crisis, estimating that debt servicing alone will cost these states at least $800 billion.

There are, of course, notable differences in the economic and political situations of the countries currently in, or on the brink of, default. Ghana’s situation is unique in that much of its debt is owed to domestic rather than international creditors. Its default, therefore, risks creating a deep shock to the domestic financial sector, which would likely reverberate throughout the rest of its economy.

Sri Lanka, previously a golden child of international financial markets owing to its strong record of debt repayments, mismanaged its negotiations with creditors when the economic crisis became particularly acute. And countries like Pakistan and Lebanon, which is also on the verge of default, have suffered from decades of corruption and political mismanagement.

But while it is important not to insulate domestic elites from responsibility for the role they have played in exacerbating their countries’ debt crisis, it is also critical to recognize the global factors that are driving debt distress across the developing world — one of the most important being the way in which the rich word is dealing with its own economic crisis.

The inflationary crisis that began to tear through the world economy from last year is being driven by three main factors: the uneven recovery from the pandemic, the war in Ukraine, and — often forgotten — climate breakdown. These are not issues that can be solved by fiddling around with the cost of borrowing. And yet this has been policymakers’ central response.

By raising interest rates, central bankers hope to slow growth and investment, increasing unemployment and disciplining workers into accepting less pay. The idea is that, even though workers did not cause the crisis, they can be made to pay for it.

Yet across most of the rich world, real wages are failing to keep pace with inflation, meaning that most workers are facing pay cuts. If policymakers really wanted to curb inflation, they would focus on profits, which in many sectors have soared even as input costs have risen. As the political economist Isabella Weber has forcefully argued, many large companies have taken advantage of inflation to raise prices higher than their costs, pocketing the difference.

So, interest rate hikes won’t solve the inflationary crisis in the rich world. They will, however, make it much more expensive for poor countries to finance their debts. The monetary policy currently being pursued in the rich world has been designed to impoverish workers domestically, with the added bonus of impoverishing poor countries globally.

We have been here before. In the 1980s, when the then chair of the Federal Reserve, Paul Volcker, sent US interest rates through the roof to discipline US workers, it led to dozens of defaults in the Global South. The so-called Volcker shock laid the foundations for neoliberalism in the United States and, conveniently, it also provided the perfect pretext for imposing neoliberal policies on the Global South.

When poor countries were forced to appeal to international financial institutions for emergency lending, they received this assistance in exchange for introducing policies like privatization, deregulation, and tax cuts. The terms of these loans — referred to as structural adjustment programs — decimated many economies and permanently increased inequality in others.

Yet no lessons appear to have been learned from the debt crisis of the 1980s. As countries like Ghana and Sri Lanka have appealed to international financial institutions for assistance, they have been forced to introduce austerity policies that are likely to constrain growth for years to come.

If austerity hasn’t worked in the rich world, it’s certainly not going to work in the poor world, where significant investment in infrastructure and public services is necessary for sustainable development. In fact, forcing poor countries to cut spending at a time when vast sums of money are needed for decarbonization and climate change mitigation is likely to exacerbate both the climate crisis and global inequality.

Debt cancellation is urgently needed to deal with both the global debt crisis and the climate crisis. Rather than forcing countries to implement regressive and self-defeating austerity measures in exchange for emergency lending, new lending could be directed into investment in green infrastructure and climate mitigation — as well as protecting important carbon sinks like rainforests and tundra.

But over the long run, even debt cancellation will not be enough to close the gap between the rich and poor worlds. The reason that poor countries have been forced to take on so much new debt is that they have been kept in a position of dependence in a global economy structured to enrich the wealthy and impoverish the poor.

An extractive international financial system, regressive intellectual property rules, and enforced neoliberal policies have denied many poor countries the resources required for sustainable development.

China is, of course, the major exception to this rule. It has achieved development by ignoring the rules laid down by the Global North, protecting industry and prioritizing investment. In fact, China is now the single largest lender to many poor countries, and its attitude toward debt restructuring — influenced more by geopolitical than economic considerations — will significantly impact how this crisis is resolved.

In an optimistic scenario, poor countries would be able to take advantage of the cooling of relations between China and the West to access lending on more favorable terms. As they once did through the Non-Aligned Movement, poor states could work together to resist imperialism and achieve real debt cancellation.

In a pessimistic scenario, these countries will be caught in the middle of the new Cold War. Western lenders may refuse to negotiate with Chinese ones over how to write down the debts of poor countries, leaving these states stuck in limbo. This is exactly the situation currently faced by countries like Zambia, whose creditors have failed to come to an agreement about its debt for several years now.

One thing is for certain: the world economy can’t fully recover until the Global South debt crisis is resolved. But when it comes to debt, politics always trumps economics. What happens next will be determined by what politicians and policymakers in China and the West consider to be in their interests, rather than what is most likely to promote sustainable development.

As the Spring Meetings of the International Monetary Fund (IMF) and the World Bank began on April 10, questions emerged as to whether progress would finally be made to address the severe debt crisis that has engulfed large parts of the Global South. Ultimately, and perhaps unsurprisingly, the meetings ended without offering any real solutions to alleviate this distress, despite the IMF and World Bank’s own stark warnings of the fallout.

The scale of the crisis is staggering. Research from Debt Justice shows that external debt payments for lower income countries are set to reach the highest levels in 25 years in 2023.

A new dossier published by the Tricontinental Institute for Social Research interrogates the historical role of International Financial Institutions (IFIs), including the IMF, in perpetuating a “permanent debt crisis” in the Global South.

It does so by grounding its understanding of the crisis in the revolutionary call for a ‘United Front Against Debt’ issued in 1987 by Burkina Faso President Thomas Sankara, recognizing debt for what it is—neocolonialism.

In its World Economic Outlook report in January, the IMF warned that “the combination of high debt levels from the pandemic, lower growth, and higher borrowing costs exacerbates the vulnerabilities of these [poorer countries] economies, especially those with significant near-term dollar financing needs.”

When it comes to responding to this crisis, however, the Fund regurgitates the age-old, failed policies of austerity, albeit with new names.

The ‘silent revolution’ and the dawning of structural adjustment

According to the founding Articles of Agreement of the IMF, which were adopted with little inclusion or input from the then colonized countries, its purpose was to prevent “any short-term problems from becoming long term-crises.”

This was all in service of certain ‘primary objectives’ of economic policy, which included “the expansion and balanced growth of international trade,” the promotion of high levels of employment and real income, and the “development of productive resources.”

The way in which the Fund would provide financing changed dramatically after 1982, the year Mexico announced that it would default on its US$80 billion sovereign debt.

As the product of a ‘silent revolution’, the IMF introduced the Structural Adjustment Facility (1986) and the Enhanced Structural Adjustment Facility (1987), making financing conditional on economic reforms.

A “singular recipe was put on the table,” the dossier states, to “privatize the economy, including the state sector, commodify areas of human life that had up to that point been in the public domain, terminate any government deficit financing, and dissolve any barriers on foreign capital investment and trade.”

Tested in Bolivia, Chile, and Peru in the 1950s, this approach would be applied en masse to countries in Africa, Asia, and Latin America, at a time when they were trying to advance a New International Economic Order (NIEO) to replace an existing international system built on colonialism and capitalism.

The product of the Fund’s ‘silent revolution’, which its own chief economist likened to “financial colonialism,” pushes poorer countries into a spiral of indebtedness and poverty—a lack of capital, much of it due to colonial theft, leads countries into short-term balance of payments debt, and then, at the direction of the IMF, they cut public spending on critical services to prioritize debt payments to rich bondholders.

This is accompanied by the export of “cheapened” raw materials, the sale of public assets, and the borrowing of more money just to repay debts, all while the IMF severely undermines the ability of poorer countries to implement effective monetary and fiscal policies.

Spending on debt repayments consistently outpaces spending on public services including health and education—something which did not change during the COVID-19 pandemic.

Who is to blame, who profits?

Who must be held responsible for this crisis? A cursory glance at much of the coverage of debt across countries in Africa sees repeated mentions of “debt-trap diplomacy,” with the principal perpetrator identified as China.

Not only is the characterization of Chinese lending as a “trap” false, it obscures the reality of the present crisis—namely, as the dossier emphasizes, that the debt crisis on the continent has been mainly created by private creditors, a majority of whom are based out of rich countries like the US and the UK, through Eurobonds (or the issuance of bonds in US dollars and Euros).

For instance, shortly after Zambia obtained its first sovereign credit rating in 2011, it issued two Eurobonds in 2012 and 2014. Within three years, Zambia’s external debt soared by 300%. Between 2010 and 2020, the stock of Eurobond debt of countries in ‘sub-Saharan’ Africa had shot up by 322%, far exceeding debts incurred from multilateral and bilateral (other countries) sources. Africa’s total Eurobond debt in 2020 stood at US$135 billion.

This in turn also exposes the failures of existing mechanisms to address the debt crisis, including the G20’s Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatments.

The DSSI expired in 2021 with little success, given that it only applied to official multilateral and bilateral creditors. The Common Framework is plagued by similar problems, including an emphasis on official credit, all of which works against providing urgent debt relief, or even restructuring.

While countries have been forced to make brutal cuts to public spending, private lenders have stood to make up to 250% in profits.

Building emancipatory alternatives for the Third World

Countries across the Global South are in the midst of fiscal crises. While the COVID-19 pandemic and subsequent global supply chain disruptions over the past year have exacerbated these conditions, they are “fundamentally a result of an unsustainable build-up of sovereign debt in the last decade, fuelled by cheap credit from Western economies and encouraged by international financial institutions,” argues the Collective on African Political Economy (CAPE).

As desperate countries continue to turn to the IMF, claims that the institution has in any way reformed away from austerity do not hold up to scrutiny.

Even when the IMF claims to be protecting populations through what it calls ‘Social Spending Floors’, analysis shows that for every $1 that governments were told to keep for social spending, the IMF directed them to cut $4 from the state budgets.

How is it that countries approach the IMF time and again and nothing changes?

“The reason is that IMF assistance has never confronted the structural factors that have continued to consign many countries to the ranks of the poor,” CAPE emphasizes. “The IMF, as the archetypical Northern institution, is duty bound to maintain and entrench this status quo,” the development of the North at the cost of the underdevelopment of the South, as articulated by revolutionary thinkers such as Walter Rodney.

Blaming economic crises on government corruption and mismanagement in the Global South—which may not be entirely untrue—also tends to be rooted in colonial tropes that open up poorer countries to forms of intervention not seen in the Global North, where such problems are similarly prevalent.

Meanwhile, the “IMF conditionality rarely confronts the fact that state capacity and autonomy have been eroded in Africa largely as a result of the tax dodging practices of transnational corporations,” CAPE highlights.

All of this points to the urgent need to develop alternative, “emancipatory” frameworks and institutions for the Third World.

Some crucial immediate steps have been presented in ‘A Plan to Save the Planet’, including the invalidation of historical debts, the seizure of assets held in illicit tax havens, the building of progressive tax codes including taxes on wealth and inheritance, reforming domestic banking structures, and curbing speculative financial activity.

At the international level, this involves measures to prevent capital flight, a robust wealth tax collection system, pro-labor distribution policies, and the prevention of dollarization, which as CAPE has highlighted, acts as a “strong lever of IMF conditionality.” Building alternatives also includes investments and financing from institutions that do not impose structural adjustment, local currency central bank swap arrangements, ceilings on interest rates charged by commercial and multilateral lenders, and advancing regional trade and reconciliation mechanisms.

Read the dossier: Life or debt: the stranglehold of neocolonialism and Africa’s search for alternatives

The post Sovereign debts, colonial roots: IMF and the engineering of a ‘permanent crisis’ in Africa appeared first on Peoples Dispatch.

One of the great social processes of our time has been the process of decolonisation. Hundreds of millions of people in the continents of Africa, Asia, and Latin America fought for centuries against the imposition of colonial rule against their sovereignty and their dignity. These struggles come from a range of political positions, such as those led by political forces that wanted to restore earlier forms of political sovereignty (including monarchies) and by political forces that wanted to establish modern forms of national states and belonging. More

The post Marxism and Colonialism: An Interview with Vijay Prashad appeared first on CounterPunch.org.

Martin Guzman, Argentina’s former Minister of Economy, explains how the role of power should be central to economic research – especially when it comes to sovereign debt.

Over half of all developing countries in the world are either currently in, or headed toward debt distress.

People are waking up to discover that another international debt crisis of enormous proportions looms on the horizon of a scale not seen since the early 1980s, after which Latin America and Africa slogged through a “lost decade.” Implosions of this magnitude can wipe out years of progress in health, education, and social stability. Yet not many people understand why and how this is happening.

As a new crisis gains momentum, economist Martin Guzman, former Minister of the Economy of Argentina and co-president of Columbia University’s Initiative for Policy Dialogue offers his perspective on what has gone wrong and what can be done to address it. In his view, you can’t understand debt crises without confronting the power dynamics at play.

Lynn Parramore: What has happened to suddenly create this alarming situation?

Martin Guzman: What we are seeing is a looming debt crisis in the Global South. A series of events led us into this situation. I’ll distinguish three critical ones.

To understand debt dynamics in the Global South, it’s always essential to look at what happens with monetary policies in the North.

The first event critical to understanding this looming debt crisis took place a decade and a half ago. The response to the U.S. financial crisis entailed a massive creation of liquidity through quantitative easing. That liquidity became global, as is always the case in a world economy with capital mobility. In a world of zero interest rates, there was a “search for yield,” a peculiar concept that involves searching for compensation above global market rates. In a competitive market, that would, of course, imply a particular choice of risk and return that would not mean a higher risk-adjusted return.

We saw a significant number of countries having access, for the first time, to international credit markets, but at rates that acknowledged risks. This was the case in African nations that were borrowing at 8-10% interest rates when the treasury bonds from advanced economies were yielding rates close to zero — and in some cases even negative. Countries that formerly had been part of the group of Highly Indebted Poor Countries (HIPCs), such as Ghana or Zambia, both now suffering a debt crisis, managed to place bonds abroad, but at high rates.

We also had countries re-accessing international credit markets. The most notable case was Argentina in 2016. After the end of a long dispute in the U.S. courts with the vulture funds, which, included 15 years of exclusion from international private credit markets, it began to borrow again at average rates (in U.S. dollars) of 7%. This was happening when the global interest rates were still close to zero.

The second critical event was Covid-19. The pandemic led to increases in global debt as countries saw their tax revenues drop and a need for increased spending. For advanced economies, this did not have sustainability consequences but mostly intergenerational consequences: future generations would pay off debts that were contracted today. But for several countries in the Global South, this situation created immediate debt distress.

The last blow was the war in Ukraine, which made inflation the top concern for economic authorities all over the world. The response from advanced economies’ central banks featured interest rate hikes and the undoing of quantitative easing — what’s been called “quantitative tightening.” This means less and more expensive liquidity.

Central banks have their own mandates, and they don’t consider the international spillovers of their actions. For the Global South, it becomes more difficult to roll over debts—and in many cases, it becomes unsustainable. With no access to credit markets to refinance the debts, paying them down would imply destabilizing economic and social dynamics, meaning deeper recessions, more unemployment, and more inflation.

These outcomes show how the policies of a few powerful nations have significant repercussions for the rest of the world.

LP: In what ways does this looming debt problem differ from what happened in 2008 and the famous debt problems of the 1980s, often said to have led to a “lost decade” in many parts of the world?

MG: There are similarities as well as important differences between what is going on now and the 1980s. In both cases, the troubles were preceded by a period of growing global liquidity that was then abruptly reversed. In the 1970s, the oil price shocks led to massive trade surpluses for oil-exporting countries and deficits for the oil-importing ones. Those surpluses were the basis of the loans extended to the deficit countries. In 1981, the Fed responded to inflation by increasing interest rates up to a peak of 20%. Today, the Fed has also abruptly increased rates, but not as much. In both cases, contractionary monetary policies in advanced economies created troubles elsewhere.

The first key difference is that the 1980s debt crisis included distress in a different group of economies than we see now. Most of Eastern Europe was in crisis—first Poland, then Romania, Hungary, and Yugoslavia requested IMF financing at the beginning of the decade. And it hit large economies of Latin America, including Brazil and Mexico. The IMF lending reached what for the time were record amounts, and those funds were used to bail out private creditors.

The second key difference with respect to the 1980s is the composition of creditors and the size of their exposure. Back then, international private financing to sovereign countries came mostly in the form of commercial bank loans. Bank exposures, especially from the U.S. and Japan, were so large that a wave of sovereign defaults in Latin America would have created a financial crisis in those two advanced economies and almost surely it would have turned into a global crisis.

I witnessed something interesting years ago while teaching at the Trento Summer School, an amazing academic school for Ph.D. students created by the great Swedish economist Axel Leijonhufvud. In his lecture, a retired former economist of the NY Fed who was in charge of the Euro-dollar syndicated loan market and dealt with the debt crisis in Latin America from that position, explained to us very candidly that the American banks were so exposed that the U.S. government had to exercise its foreign policy for the region so as to make sure there would not be a wave of defaults in the countries from that region. They did so for the entire decade, which was as long as it took to get to a point at which accepting some losses would not bankrupt the system. We had Latin American economists in the audience who had been involved in policymaking in their countries during that decade. They had seen firsthand how being deprived of foreign exchange led to a lost decade for growth and in some cases hyperinflation, like in Argentina. I remember the gloomy faces. When governments borrow in foreign currency, they must be aware that the resolution of sovereign debt crises is a geo-political process. That was true in the 1980s and it’s true now, although the composition of creditors and associated geopolitics is different today.

The events of the 1980s changed the international financial system and set the stage for bonded debt as the main source of international private financing to sovereigns. This takes us to the third key difference: the universe of private creditors is more fragmented today and more complex to coordinate. This also means that the relations between debtors, private creditors, and official creditors are different.

With bonded debt, restructurings may also involve disputes with holders of derivative contracts, arbitration award holders, and other categories of what we should call “claimants of state resources” rather than creditors.

The last decade and a half has featured a significant increase in the incidence of new official bilateral creditors, referred to as the ‘non-Paris club creditors’ as opposed to the established group of major creditor countries which have coordinated their dealings with debtor countries for nearly 70 years, meeting regularly in Paris. This new group has China as the major player but also includes other emerging official creditors such as India, South Africa, and Saudi Arabia.

This all means that the group of debtors in situations of vulnerability, the exposure of the international financial system, and the group of creditors are all different now than in the 1980s. As a consequence, the current crisis will likely be less systemic, but it will be bad for those countries that suffer from it. The solution will require a distribution of debt write-downs among classes of creditors that are interacting for the first time in history and have competing interests.

For resolving countries’ debt crises, neither then nor now is there a multinational system for debt restructuring. This is a massive deficiency of the international financial architecture—not a casual one, but a result of international power relations.

LP: You studied international economics for years in your scholarly life. Then you were asked to actually lead negotiations with your country’s creditors. How have these two experiences affected your understanding of the international debt problem? Any special insights that helped from academic theory?

MG: When tackling a sovereign debt crisis as a policymaker, there are two key issues that must be clearly defined.

First, what kind of debt restructuring operation would be consistent with the goal of restoring debt sustainability, meaning restoring conditions for implementing an economic policy plan that is conducive to economic recovery and sets conditions for sustained progress?

Second, you need a view of the power dynamics at play, both internationally and domestically. Every sovereign debt restructuring is a political process that involves conflict, as there are distributional consequences from those processes. There are also efficiency implications that may not fall only on individual stakeholders; those broader processes not only affect how the pie is distributed but also the size of the pie that will be divided among the debtor and its creditors.

Understanding technical issues helps. A critical stone of every debt restructuring process is the debt sustainability analysis that identifies whether the debt is sustainable, and, if the answer is negative, computes the amount of relief necessary to restore sustainability. You need to grasp both the theory and the practice of debt sustainability analysis to craft an appropriate strategy.

Consider the case of Argentina’s 2020 debt restructuring. In 2018, after two years of massive borrowing in foreign currency, mostly under New York law, the country lost access to international credit markets again. The government immediately resorted to the IMF, which, with the political support of the Trump administration, provided the largest loan in the history of the institution. A USD 50 billion loan was approved, then increased to USD 57 billion, of which almost USD 45 billion was disbursed until the IMF stopped when the previous Argentine president lost in the primary elections of 2019 —another hint that the loan was political in nature. (For the record, the newly elected President Fernandez made it clear immediately after taking office that the government did not want to increase its debt with the IMF, and hence would not seek to receive the additional USD 12 billion that had been approved.)

In December 2019 we took office and I became the country’s Minister of Economy. We immediately began to address the debt crisis. We had conducted a debt sustainability analysis that indicated that foreign-currency public debt was unsustainable and that a debt restructuring with a significant cut in scheduled payments was a necessary condition for restoring growth. At the time, the economy was in freefall.

A debt sustainability analysis is supposed to anchor expectations. But in the context of vested interests, in which the stakes are on the order of dozens of billions of dollars, lobbying is intense and may be highly effective to delegitimize the analysis produced by a debtor government, even if it’s based on state-of-the-art theoretical and empirical literature and has the recognition of top international experts. So I asked the IMF to conduct an analysis of debt sustainability. It was supposed to provide guidelines that could anchor expectations both for creditors and for the domestic political system.

The initial response from a part of the IMF staff was puzzling. Some said we can’t do it because your country is not under an IMF-supported program (the previous program had completely failed and had already been dismissed, a failure that was recognized years later, in 2022, by the IMF Staff in its ex-post Program Evaluation), and so we cannot know what the policy parameters that need to feed the debt sustainability analysis will be. That was just a ridiculous stance to me. My response was that we are a sovereign nation, and as such we could provide the information on what policies we were going to implement, even if the country was not under an IMF-supported program. There were some discussions, and I even flew to Washington D.C. from the G-20 meetings in Saudi Arabia in February 2020 to move forward in what was looking like a negotiation on doing a debt sustainability analysis—which should be the right of any member of the IMF. Finally, the IMF management made the decision to produce a “technical analysis of debt sustainability” at our request. It was remarkably similar to the one produced by Argentina’s government.

Creditors didn’t like it. They complained a lot. Some creditors explicitly told me that the staff at the U.S. Treasury Department was telling them not to pay attention to the IMF document. In that context, it was hard to anchor creditors’ expectations, but there was a very important sense in which the IMF analysis of debt sustainability helped: it aided us in dealing with what I would call a “domestic political economy” problem, meaning that our own domestic political system, for different reasons, was not prepared to face a tough negotiation and there were signals to creditors that the government would not be willing to remain in a situation of default, even if that entailed a very bad deal. Having the IMF say what they said on Argentina’s debt unsustainability strengthened the power of the negotiating team to deal with the internal pressures. It’s not easy for some domestic constituencies to be placed to the right of the IMF.

LP: In what ways do you think economic theory and legal practice are changing in response to the forces you mention above?

MG: Canonical sovereign debt models have a hard time accounting for or explaining the facts on sovereign debt defaults, restructurings, and returns. The standard economic literature on sovereign debt doesn’t incorporate a fundamental dimension for understanding sovereign debt dynamics: power.

A recent paper by Josefin Meyer, Carmen Reinhart, and Christoph Trebesch, “Sovereign Bonds since Waterloo,” analyzes data on ex-post returns of sovereign debt—which accounts for losses associated with defaults and restructurings— since Napoleon’s defeat at Waterloo in 1815—an event that marks a wave of creation of sovereign nations—and finds evidence that sheds light on how the system actually works: the average real ex-post returns from foreign-currency denominated government bonds significantly outperform the U.S. or U.K. bonds by an order of magnitude of 400 basis points on average, and in most Latin American countries the margin is even larger. For instance, the average real ex-post return of Argentina’s bonds over the last 140 years is more than 500 basis points higher than a U.S. treasury bond, even accounting for all the defaults.

What explains this? One possible explanation is that private creditors are risk averse, hence models that assume that they are risk-neutral or that risks are sufficiently diversified can’t explain this result. I don’t find this explanation very plausible, because in such a case we should observe that less risk-averse creditors or those who are better at managing risk become the bond “marginal buyers.” To me, that evidence suggests that there are rents, and that has to do with the way the system works. It’s the way power shapes the system – something that the economics literature has not explored in depth. In other words, power in the system readjusts the returns in favor of the creditors.

The role of power should be a central part of a research agenda in economics in general, and for sovereign debt specifically.

When it comes to practice, there has been an evolution related to power dynamics, as I described before. Let me highlight two issues that matter for the practice of sovereign debt crisis resolution today.

The first one is related to creditor coordination. We still do not have anything remotely close to a bankruptcy framework for sovereigns, so negotiations happen in the context of an international non-system. Since the end of the Bretton Woods system, we have seen bad outcomes when it comes to resolving debt crises. The current non-system produces incentives that delay the initiation of restructurings, and when they are done, they generally come with insufficient relief to allow the countries to restore growth. The literature refers to this problem as the “too little and too late” syndrome.

Top experts have been demanding the creation of a multinational system for sovereign debt restructuring for a long time. The 2009 Stiglitz’s Report for the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System is clear in this respect and anticipates the troubles that we are seeing. In 2001, even the IMF pushed a Sovereign Debt Restructuring Mechanism proposal. While it would have been difficult for debtor countries to accept a creditor as the judge, the initiative did not gather the shareholders’ support, or at least the support of the IMF’s main shareholder, which would have had to take it to Congress for a vote that would allow a change in the IMF Articles of Agreement.

The latest progress for coordinating private bondholders was the endorsement of enhanced collective action clauses that make it easier to act without unanimity from creditors and makes vulture funds’ holdout behavior less profitable in expectation. These measures helped but weren’t nearly enough to guarantee effective restructurings. We tested them for the first time in Argentina’s 2020 restructuring.

The second issue that merits mention relates to the IMF. A few days ago, on April 3rd, Columbia University’s Initiative for Policy Dialogue hosted a roundtable of experts on sovereign debt at the Columbia Business School. The roundtable was joined by representatives of debtor countries, the U.S. Treasury Department, China, private creditors, the IMF, and academics and practitioners. We had some very insightful discussions. Debtor countries were complaining that when the IMF produces a debt sustainability analysis, it remains secret until the IMF’s Executive Board approves the IMF-supported program. Most of the policymakers do not know that they can make all the information publicly available—they are nudged or pressed not to do it. As member countries, they could request the IMF to perform a debt sustainability analysis as technical assistance and get it published even if there are no negotiations towards an IMF-supported program. Countries could also make public all the memorandums that constitute the IMF-supported programs before they are taken to the Executive Board for approval. That’s how things should be done. Societies should have a chance for public scrutiny of deals between a government and the IMF staff that have massive consequences for their development.

It’s peculiar that the IMF wants the programs to be “owned” by the country, but the institution doesn’t have a preference for transparency. If you want the people to own the program, you should allow the people to see the program.

In 2022 in Argentina, immediately after we reached a deal with the IMF’s staff to refinance the $45 billion debt borrowed in 2018-2019, all the memoranda were submitted to the National Congress. In 2020 I presented a bill that makes Congressional approval mandatory for having any financing program with the IMF. It was passed in 2021 almost unanimously. This was the first country to adopt a legal framework of this kind, and I believe others would do well in doing the same.

Speaking last week on the sidelines of the Russian-Indian Strategic Partnership for Development and Growth Business Forum in Indian capital New Delhi, the Deputy Chairman of Russian State Duma Alexander Bobakov announced that BRICS states (Brazil, Russia, India, China, and South Africa) were working towards the creation of a new currency.

The bloc’s members have made key moves away from the US-dominated international trade and financial system. “The transition to settlements in national currencies is the first step. The next one is to provide the circulation of digital or any other form of a fundamentally new currency in the near future,” Babakov said.

He further claimed that “readiness to realize this project” will be indicated at the upcoming BRICS summit, to be held in August in Durban, South Africa.

While further details of this landmark project are yet to be fully revealed, it is already clear that its scope will be significant. The current BRICS countries already account for 40% of the global population and one-fourth of the global GDP. The alliance is now set to expand with Iran and Saudi Arabia having initiated the formal process to join. Over 10 other countries, including Egypt, Algeria, the UAE, Mexico, Argentina, and Nigeria, have also expressed interest in joining the bloc.

Babakov added that the new currency would be based on a strategy that “does not defend the dollar or euro,” and will be pegged to the value of not just gold but also “other groups of products, rare-earth minerals, or soil.”

The first part of this process, namely trade in national currencies, is already well underway. On March 29, China and Brazil—the world’s second largest economy and Latin America’s biggest economy, respectively—announced that they will conduct bilateral trade in their local currencies, the Chinese yuan (unit of Renminbi) and the Brazilian reais, bypassing the US dollar.

China is Brazil’s biggest trade partner, with bilateral trade reaching US$150 billion in 2022. China’s currency, the Renminbi (RMB), has also become Brazil’s second-largest international reserve currency.

Watch: China and Brazil strike deal to ditch US dollar

In January, another major step away from the US-dominated global financial system came in the form of an agreement between Iran and Russia to connect their interbank messaging systems—the SEPAM and the SPFS—and bypass the US-dominated SWIFT banking communication and transfer system.

Iran has been locked out of the SWIFT system as part of the wide-ranging sanctions that the US has imposed against the country since 2018. Several Russian banks were subsequently also cut-off from SWIFT after the Ukraine war broke out.

While the creation of an alternative system to counter dollar dominance, or, more broadly, “monetary cooperation” in the face of US dominance had been discussed among the BRICS states for years, the blanket sanctions imposed on Russia by the US and its allies gave further impetus for countries to move in this direction.

“After confiscating tens of billions of dollars in reserves and assets from countries like Iran, Venezuela, and Afghanistan, the seizure by the US and the EU of more than $300 billion of Russia’s reserves, triggered a global alert, reaffirming the urgency of alternatives to the dollar’s dominance,” said Marco Fernandes, a researcher at the Tricontinental Institute for Social Research, as quoted by Global Times.

The agreement between Russia and Iran would go around West-imposed economic sanctions, undermining a key tool by which the US seeks to coerce other countries and maintain its hegemony—a fact not lost on its government officials.

An end to U.S. siege warfare is the nightmare of right extremists like Marco Rubio: “We won’t have to talk about #sanctions in five years because there will be so many countries transacting in currencies other than the #Dollar that we won’t have the ability to sanction them”. pic.twitter.com/AGOX0i26Yg

— tim anderson (@timand2037) April 2, 2023

According to State Duma Chairperson Vyacheslav Volodin, the ruble and rial already account for over 60% of the mutual trade settlements between Russia and Iran.

These countries are not alone; Russia and China have also been working towards connecting their banking communication systems. However, the US has threatened to expel Chinese banks from SWIFT if this proceeds.

Nevertheless, both Russia and China have reaffirmed their commitment to advancing bilateral trade in their national currencies, and this was reiterated at their joint summit in March:

“We should continue promoting settlements in national currencies, and expand the reciprocal presence of financial and banking structures in our countries’ markets…At this stage, two-thirds of payments under trade deals between our countries are made in rubles and yuan,” Russian President Vladimir Putin said.

He also highlighted that trade between Russia and China had increased by over 30% in the past year and was expected to reach US$200 billion in 2023. Putin also expressed support for the use of the Chinese yuan in transactions between Russia and its partners in Asia, Africa, and Latin America—where China is already the largest trade partner for many of the countries.

While the US dollar continues to play an outsized role in the international financial system, including serving as the leading global reserve currency, the use of the yuan has increased over the past few years, accounting for 7% of global foreign exchange trades. It has also become the fifth largest payment as well as reserve currency, and the third largest in trade settlements.

The US’ dominance has been further challenged as oil producing countries, including Iran and, particularly, Washington’s long time ally Saudi Arabia announced that they will consider selling oil in currencies other than the dollar.

Following the inaugural China-Gulf Cooperation Council (GCC) Summit in 2022, China had announced that it would continue to import crude oil and Liquefied Natural Gas (LNG) from GCC countries and conduct trade settlements in oil and gas using the yuan. On March 28, China carried out its first purchase with cross-border settlement in yuan for LNG sourced from the UAE.

The growing trend towards seeking alternatives to reduce dollar dependence, including trade in local currencies, is also being deliberated upon by regional organizations, including the Association of Southeast Asian Nations (ASEAN).

Earlier this year, Brazil and Argentina also proposed to work towards creating a common currency, called the “SUR”, to enhance regional trade and financial exchanges while reducing reliance on the US dollar.

Not only is the BRICS bloc seeking to move away from dollarization in matters of trade and finance, it has also attempted to provide an alternative to the US-dominated Bretton Woods institutions, the International Monetary Fund (IMF) and the World Bank, in the form of the New Development Bank (NDB).

At present, aside from the five BRICS countries, Egypt, the UAE, and Bangladesh are also members of the NDB.

One of the reasons to set up the NDB, South Africa’s Foreign Minister Naledi Pandor told Sputnik, was to seek an alternative to the dollar-based payments architecture: “The systems currently in place tend to privilege very wealthy countries and tend to be really a challenge for countries, such as ourselves, which have to make payments in dollars which costs more in terms of our various currencies.”

The post Towards de-dollarization: BRICS advances alternative to US-dominated financial system appeared first on Peoples Dispatch.

As humanity has surpassed the 8 billion people milestone, it is more important now than ever to talk about population. What will we do if we continue to grow at exponential rates? What are ethical, viable strategies to decrease population?

“First off, let me get this straight, discussing addressing overpopulation does not mean discussing killing people. The goal is actually to prevent it.” – Dr. Jane O’Sullivan

Current world population in January 2023: 8 billion

The current rate of population growth is around 80 million people per year. There are over 8 billion people on the planet, the last billion added in less than the last 12 years.

The Earth’s first billion people milestone took from the beginning of human history until the 1800s to be achieved. Then, due to the industrial revolution, humanity reached the second billion mark by 1930 (taking only 130 years), reached the third billion in 1960 (only took 30 years), then reached the fourth billion by 1974 (only took 14 years), and the fifth billion by 1987 (only took 13 years). We hit 6 billion in 1999 (which took 12 years) and hit 7 billion in 2011 (which took about 12 years). At the current growth rate, the world population will reach 9 billion by 2037 and 10 billion by 2057.

The growth rate is declining, but not at a fast enough rate to combat the exponential compound growth. The growth rate was 2% in the 1970s. Now it is 1.05%. Any growth rate above 1% means we are still adding more people to the planet every year.

What is overpopulation?

Overpopulation is a human population in numbers high enough to cause environmental deterioration, impaired quality of life, or population crash.

Why is overpopulation an issue?

Overrun natural resources can only lead to death by starvation, conflict, and disease, and the only viable alternative is voluntary restraint on human births.

What is carrying capacity?

Carrying capacity is defined as the maximum population of a species that an area will support without undergoing deterioration.

Paul R. Ehrlich and other scientists estimate the world’s optimum population for carrying capacity (at a comfortable standard of living – editor’s note) to be less than two billion people – 6 billion fewer than on the planet today. “But the longer humanity pursues business as usual, the smaller the sustainable society is likely to prove to be. We’re continuously harvesting the low-hanging fruit, for example by driving fisheries stocks to extinction” – Paul Ehrlich says.

How do we revert population overshoot to a sustainable population level?

Geologist Art Berman explains population overshoot this way: “Overshoot means that humans are using natural resources and polluting at rates beyond the planet’s capacity to recover. The main cause of overshoot is the extraordinary growth of the human population made possible by fossil energy. Concerns about overshoot and population raised more than 40 years ago were dismissed. Climate change has captured public awareness more recently although many doubt that it is an emergency. Overshoot is more difficult to dispute; it destroys rainforests, leads to the extinction of other species, the pollution of land, rivers, and seas, the acidification of the oceans, and the loss of fisheries and coral reefs. People understandably want to know the solutions. Overshoot is the problem we must address. Any plan that includes continued growth is doomed to fail.”

What can we do? Jane O’Sullivan outlines the two options for addressing population overshoot – increase the Earth’s carrying capacity or decrease population.

Increasing Earth’s carrying capacity

We are already doing this by (a) using fewer natural resources per person, or (b) increasing productivity by finding more ways to use resources. This only defers the problem and creates collateral damage.

Decreasing population numbers

If we talk about this now, the hope is to increase our options for solutions. One of the biggest challenges to facing overpopulation head-on and discussing a decreasing population are the stigmas and myths associated with reducing human population numbers. An elaborate set of myths has emerged in opposition to reducing population levels. These myths may prevent even environmentalists from viewing overpopulation as an issue. Jane O’Sullivan elucidates on the following six myths that make inaction a virtue.

Myth 1 – The human population is stabilizing, and birth rates are decreasing

Truth – Birth rates started declining in the 1970s-90s due to family planning, but not low enough. The number of mothers is still increasing faster than family planning is decreasing the birth rate. We are still having more births per year than ever before. The total fertility rate has decreased, but as fertility decline has slowed to a trickle, the number of total births has continued to increase.

Myth 2 – China is the only one with the problem and they used cruel methods (one-child policy)

Truth – Family planning programs have helped many countries successfully reduce births through voluntary means, including China, before the one-child policy.

Myth 3 – Poverty causes population growth, therefore development is the best contraceptive

I.e., family planning is unnecessary and inefficient as long as there is development.

Truth – If this was true, we would see the population decline as development increases. However, it is the decrease in fertility rates that drove economic development, not the other way around. This myth is therefore “correlation implying causation” in the wrong direction. The poorest countries could lower their population by family planning just as quickly as rich countries if they choose to prioritize it.

Countries of families with four or more children, on average, have the lowest level of development; in families with 3 children or fewer the level goes up by some degree, and with two or fewer children development soars. The current focus should be on expanding provisions for teachers, doctors, equality, etc. instead of just giving people what they need.

Myth 4 – Educating girls is the key to ending population growth

Truth – Another indirect approach that excludes a discussion on the benefit of small families and ending population growth. Educating girls helps but not much unless it is also flanked by family planning efforts. Family planning has a stronger effect on women regulating their fertility, decreasing the fertility gap between the educated and uneducated, and with family planning, girls are more likely to stay in school.

Myth 5 – Population growth is good for the economy

Truth –This makes people poorer as shown under Myth #3.

Myth 6 – Population growth in poor nations does not matter because of their “tiny carbon footprint”

Truth – Population growth is a greater threat than climate change. The best way for anyone to decrease their carbon footprint is to have one less kid.

Therefore, family planning is the most economical way to a sustainable future.

What action can each of us take?

1. Discuss smaller family sizes with your partner, family, and friends – how do we aim for birth rates lower than two children per couple?

2. Share information about the environmental impacts of population growth with friends and family. Advocate for action to reduce and reverse population growth.

3. Reassess concerns about aging – how can we shift away from worshipping eternal youth, to accepting and valuing the entire life cycle?

4. Celebrate population decline – what are possible depopulation dividends?

5. Support organizations and efforts that support family planning and women’s education.

Damien Carrington, an environmental editor at The Guardian, interviewed Prof. Paul Ehrlich about the solutions:

“The solutions are tough,” Ehrlich says. “To start, make modern contraception and backup abortion available to all and give women full equal rights, pay, and opportunities with men. Focus on overconsumption and equity issues. Specifically women’s rights and the explicit countering of racism.”

Ehrlich also says that an unprecedented redistribution of wealth is needed to end the over-consumption of resources, but “the rich who now run the global system – that hold the annual ‘world destroyer’ meetings in Davos – are unlikely to let it happen…Too many rich people in the world is a major threat to the human future, and cultural and genetic diversity are great human resources…It is a near certainty in the next few decades, and the risk is increasing continually as long as the perpetual growth of the human enterprise remains the goal of economic and political systems. As I’ve said many times, ‘perpetual growth is the creed of the cancer cell’.”

If cultural and genetic diversity are great human resources, how can the rich and the poor come together across the world to solve this issue?

Anne and Paul Ehrlich expand on their “vision for a cure”:

“Rich white people love to hold meetings to discuss the ‘population problem’ which always ends up focusing on the very real demographic difficulties of those with darker skin tones, especially people who live in Africa and Latin America. But isn’t it really time for the poor people of the world, especially those not in need of tanning beds, to extend a helping hand to the major villains of the destruction of humanity’s life-support systems? Could they not hold an educational conference in Washington, D.C. to explain why civilization is going down the drain, to the per-capita most environmentally destructive giant nation on the planet? Leaders from the “South” could both organize the event and supply experts to educate the wealthy and middle class on their ethical responsibilities and ways to meet them. We envision learning sessions on topics such as:

Avoiding the second child.
The population problem beyond numbers: inequality and waste of talent.
Are borders ethical?
Population shrinkage for politicians.
GDP shrinkage for economists.
Do Trump and his colleagues prove that the lighter your skin, the lighter your brain?
Citizens United: It’s time for euthanasia for corporations.
Redistribution and survival.
Disbanding “Murder Incorporated”: gun manufacturers and big pharma.
How to end plastic production.
The historical contributions of the global South to the food enjoyed by the North.
How biodiversity loss is accompanied by the loss of human cultural diversity.
We know our populations are growing too fast; how to help us help ourselves?
Why anti-abortion laws kill poor women.

You can doubtless think of others. The possibilities are endless”.

References:

Berman, Art. The Climate-Change Trip to Abilene. July 13, 2022. https://mahb.stanford.edu/library-item/the-climate-change-trip-to-abilene/

Carrington, Damien. Interview with Paul Ehrlich: Collapse of civilization is a near certainty within decades. July 9, 2020. https://www.theguardian.com/cities/2018/mar/22/collapse-civilisation-near-certain-decades-population-bomb-paul-ehrlich

Ehrlich, Anne H.; Ehrlich, Paul R. Overpopulation In America -And Its Cures. November 14, 2019. https://mahb.stanford.edu/blog/overpopulation-america-cures/

O’Sullivan, Jane. The tenth presentation at the Delivering the Human Future Conference. Titled: The Future of the Human Population. March 21, 2021. https://www.youtube.com/watch?v=shUNJPLpXpQ

Population Statistics. https://www.worldometers.info/world-population/

Erin Brown is a licensed mental health, marriage, and family therapist in Jacksonville, FL. She is trained in EMDR (eye movement desensitization and reprocessing), Play Therapy, and the Gottman Method Couples Therapy. She received her specialist’s degree at the University of Florida. Erin feels honored to be on the board of Family Foundations of Northeast Florida, Inc., which serves to help maximize the potential of individuals and families in Northeast Florida to lead better lives.

The MAHB Blog is a venture of the Millennium Alliance for Humanity and the Biosphere. Questions should be directed to joan@mahbonline.org

The post A Brief on Overpopulation – Why it matters and what you can do about it appeared first on MAHB.

Banking turmoil has driven up spreads on sovereign bond yields over US Treasuries to levels that impair ability to raise funds

The US dollar still dominates debt markets, but some niche-sounding data suggests things could be set to shift

Armored vehicle is seen as Russia-Ukraine war continues in Chasiv Yar, Bakhmut, Donetsk Oblast, Ukraine on March 16.

Anadolu Agency/Getty Images

Sovereign defaults are at a record high, with 14 default events since 2020, Fitch said.
That’s compared to 19 such events between 2000 and 2019, according to the ratings agency.
Default events are also taking 107 days on average to resolve, up from 35 days in 2000, Fitch added.

Sovereign defaults have jumped exponentially in the last three years, according to a Fitch Ratings report published Wednesday.

Since 2020, 14 such events occurred across nine countries, compared to the prior two-decade span between 2000 and 2019 that saw 19 defaults across 13 different countries.

The surge in defaults comes as sovereign borrowing ramped up, with the median general government debt-to-GDP ratio climbing to 48% pre-Covid from 31% in 2008, helped by easier access to the eurobond market and financing from China.

“Against this backdrop, frontier markets with limited buffers were poorly placed to cope with the severe shocks from the pandemic and the impact of Russia’s invasion of Ukraine on food and energy prices, global inflation and the subsequent abrupt tightening in monetary policy,” Fitch said.

Currently, Belarus, Lebanon, Ghana, Sri Lanka and Zambia are in default. Other countries that underwent such events since 2020 include Argentina, Ecuador and Suriname, as well as Ukraine.

Meanwhile, Russia faced its own default last year, after Western sanctions limited its ability to pay back investors.

Default events are also taking longer to resolve, particularly due to a lack of coordination between Chinese stakeholders, in addition to China’s demand for multilateral debt within restructuring efforts.

While it took around 35 days to resolve a delinquency event in 2000, the average duration now takes around 107 days since 2020. Slower restructurings lead to higher financing costs, Fitch added.