Third World Quarterly, May 28, 2013
“Colonialism is back,” Cambridge economist Ha-Joon Chang began a November 25 column in The Guardian of London, going on to note that
Alexis Tsipras, the leader of [Greece’s] opposition Syriza party, said last week that his country was becoming a “debt colony”. A couple of days later, Hernán Lorenzino, Argentina’s economy minister, used the term “judicial colonialism” to denounce the US court ruling that his country has to pay in full a group of “vulture funds” that had held out from the debt restructuring that followed the country’s 2002 default.
Chang notes that with companies, clear rules exist which limit the potential of holdout creditors to disrupt a debt restructuring process, but “Unfortunately, no mechanism like this exists for countries, which is what has made sovereign debt crises so difficult to manage.” One need only look at recent headlines about Argentina for examples. Back when Argentina’s economy was doing well, Argentine bond-holders took a risk — and lost when a financial crisis hit and Argentina was forced to devalue its currency. Now, the holdout owners of Argentine debt are like an angry poker player who loses fairly but demands his money back anyway.
Some of the old Argentine debt is held by the vulture funds which Lorenzino mentions, who have put Argentina’s holdover debt back in the news in a big way. The “Libertad,” an Argentine navy ship, was detained in Ghana in October “under a court order sought by NML Capital Ltd, an affiliate of the investment firm Elliott Management,” as Reuters reported. Elliott Management is what is known as a “vulture fund,” and is run by billionaire Paul “The Vulture” Singer and counts the Romneys among its investors. Vulture funds make a practice of buying up bad – i.e. inherently cheap – debt and using a variety of tactics (in this case, 17th Century-style piracy) in order to pressure the debtor into paying back as much of the original value of the debt as possible.
As Center for Economic and Policy Research (CEPR) Co-Director Mark Weisbrot has explained in various research papers and op-eds, Argentina has enjoyed considerable economic success over the past 10 years in large part because it decided to temporarily default on its debt as a necessary step toward jump starting its economic recovery after a financial crisis and almost four years of recession. In 2005, Argentina negotiated with its creditors, with about 75 percent agreeing to accept 35 cents on the dollar for their Argentine bonds. It was the minority who refused to go along with the deal who continue to make trouble, now “risking not just an end to Argentina’s recovery but a fresh round of turmoil in the global financial market,” according to Chang.
The Argentine government’s actions essentially broke the power of the IMF and changed the power dynamic between international financial institutions and developing countries. In the years since, Brazil paid off its debt to the IMF and Paris Club early; the Bolivian government of Evo Morales quickly told the IMF it had no need for an IMF agreement; and the Correa administration in Ecuador conducted a debt audit and determined that some $3.2 billion of its debt was illegitimate and would not be paid.
Current debt crisis poster-child Greece, these economists and others argue, could do much worse than follow Argentina’s example and prioritize jobs and tackling hunger and poverty over paying interest to its debtors. This is, as Chang writes
because they cannot officially go bankrupt, countries face a stark choice. Either they default and risk exclusion in the international financial market [Argentina’s example] …or they have to opt for a de facto default, in which they pretend that they have not defaulted by making full repayments on their existing loans with money borrowed from public bodies, like the International Monetary Fund and the EU, while trying to negotiate debt restructuring.
The problem with this solution is that, in the absence of clear rules, the debt renegotiation process becomes lengthy, and can push the economy into a downward spiral.
Greece fits the pattern of countries that continually set themselves up for more pain by following the diktats of the IMF and – even worse in Greece’s case – the European Central Bank and European Commission. These institutions have continually demanded harsh austerity – slashing wages, keeping unemployment high, cutting public spending – but such polices are pro-cyclical. They inhibit economic growth and set Greece up to require yet another “bail out.” While the IMF has been more reasonable than the ECB, and while it did recommended economic stimulus in some cases during the recent global recession, CEPR found that 31 of 41 of its country agreements in 2009 contained pro-cyclical monetary or fiscal policies. The IMF’s advice was more likely to prolong the economic downturn in these countries than to help.
To take another example, Jamaica’s debt burden is the highest in the world, even more than Greece, resulting in a decade of negative per-capita GDP growth. But even after the country was hit by Hurricane Sandy and suffered over $60 million in damages (some 2 percent of non-interest government expenditure), as my colleague Jake Johnston recently pointed out in a blog post, the IMF continues to insist on austerity for Jamaica.
What is the lesson here for crisis-hit developing countries? Play hardball with your creditors and you may be able to grow yourself out of a slump. But continue to follow the advice of large creditors and their enforcers — the IMF, ECB and so on — and you may find yourself trapped in a nasty debt cycle for a long time to come.