G20: is there a solution for the debt?

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By MICHAEL ROBERTS*

The G20 hopes only to survive at the expense of poor countries and their people. It will choose to increasingly puncture the value produced by the workers of the world as a whole.

This weekend, the G20 leaders' summit is taking place – not physically, of course, but via video. Proudly based in Saudi Arabia – a well-known bastion of democracy and civil rights! – it will bring together G20 leaders who will focus on discussing the impact of the COVID-19 pandemic on the world economy.

As is well known, leaders are alarmed by the huge increase in government spending generated by the sharp drops in production. Well, this happened and is happening because the main capitalist governments were forced to spend more to soften the impact of the crisis on companies, big and small, and even on the working population in general. IMF estimates say that the combined fiscal and monetary stimulus provided by advanced economies amounted to about 20 percent of the sum of their gross domestic products.

Middle-income countries in the developing world have not been able to do the same, but they still have a combined response equal to 6 or 7% of GDP, according to the IMF. For poorer countries, however, the reaction was much more modest. Together, they injected expenses equal to just 2% of their national production to face the pandemic. Either way, this left economies much more vulnerable to a prolonged recession, which could potentially drive millions of people into poverty.

The situation has become more urgent as the suffering brought on by the pandemic crisis has started to be felt more acutely. Zambia this week became the sixth developing country to default or restructure its debts in 2020. Others may follow suit as economic costs are expected to rise due to the spread of the virus – even if there is some good news about potentially suitable vaccines.

O Financial Times published the following comment on its pages: "some observers feel that even large developing countries such as Brazil and South Africa, which are part of the G20 group of large nations, may face serious challenges in obtaining finance in the next 12 to 24 months”.

So far, very little has been done by G20 governments to prevent or alleviate the future disaster associated with the debt as a whole. In April, Kristalina Georgieva, the managing director of the IMF, said that the external financing needs of emerging markets and developing countries would be on the order of“Trillion Dollars”. The IMF itself has provided $100 billion in emergency loans. The World Bank has set aside $160 billion to lend over the next 15 months. Despite this, the World Bank itself estimates that “low- and middle-income countries will henceforth need between US$175 billion and US$700 billion per year”.

The only coordinated innovation was the suspension of debt service, which was announced in April by the G20. This measure allowed 73 of the world's poorest countries to postpone their payments. But pausing payments is not a solution – because the debts remain weighing. And even if the G20 governments agreed to further relaxation, private creditors (banks, pension funds, hedge funds and bond watchdogs) continued to bluntly demand the return of loans.

In advanced economies and some emerging market economies, central bank purchases of government debt helped keep interest rates at historic lows and supported government borrowing. In these economies, the fiscal response to the crisis was massive. In many heavily indebted emerging markets and low-income economies, however, governments have had limited room to increase borrowing, which has hampered their ability to scale up support to those hardest hit by the crisis. These governments now face difficult choices. For example, by 2020, government debt will reach over 480% of its revenue in the 35 eligible sub-Saharan African countries.

Even before the pandemic broke out, global debt was reaching record levels. According to the International Institute of Finance (IIF), in “mature” markets, debt already exceeded 432% of GDP in the third quarter of 2020, an increase of more than 50 percentage points from one year to another. The total global debt will have reached US$ 277 trillion at the end of the year, that is, something like 365% of the world's GDP.

Much of the increase in total debt among so-called developing economies has occurred in China, where state-owned banks have expanded their lending. “Parallel bank” loans increased because local governments carried out large infrastructure projects using both credit and land sales, especially the former when the latter were not proving to be sufficient.

Many “Western” experts consider that, as a result, China is heading towards a major default crisis. And that this will seriously harm the Beijing government, as well as the Chinese economy as a whole. It should be noted, however, that these predictions were made in the last two decades. Despite rising debt levels in China, such a crisis does not seem likely.

First, China, unlike other large and small emerging economies with high debt, has a massive foreign exchange reserve of US$3 trillion. Second, less than 10% of its debt was owed to foreigners, unlike countries like Turkey, South Africa and much of Latin America. Third, the Chinese economy is booming. It recovered from the pandemic crisis much faster than the other G20 economies, which remain in crisis this year.

Furthermore, if any bank or finance company fails (and some have failed), the state banking system and the state itself will support them; they will always be ready to pay the bill or induce a “restructuring” to take place. Now, the Chinese state has the power to restructure the financial sector – and this was shown in the recent blockade of the planned launch of Jack Ma's bank. At any serious sign that China's financial and real estate sector is getting “too big to fail,” the government can and will act vigorously. That's why it's a safe bet that there will be no financial meltdown. However, this image does not apply to the rest of the G20 countries.

And what is even more important, the increase in debt globally has not only occurred in public sector accounts, but also in private sector balance sheets, especially with regard to corporate debt. Companies around the world increased their debt levels while interest rates were low or even zero. The big tech companies did it to hoard cash, buy back shares to boost their price or to merge, but the smaller companies, where profitability had been low for a decade or more, did it just to keep their heads above their heads. water. This last group has become more and more formed by zombie companies (that is, in which profits are not enough even to cover debt interest). This is a situation that points to possible defaults and these will occur as soon as rates interest rates rise.

What can be done in the face of this situation? One solution offered is to give more and more credit. At the G20, IMF officials and other stakeholders will push not only for an extension of debt payment deferrals, but also for a doubling of the IMF's credit firepower through the issuance of Special Drawing Rights (SDRs). .This is an international form of money distinct from gold money; it is actually a fiat currency made up of a basket of major currencies such as the dollar, euro and yen, which is issued only by the IMF.

The IMF has issued SDRs in past crises and its proponents say it should do so again now. But the proposal was vetoed by the US last April. “Issuing SDRs means giving unconditional liquidity to developing countries,” said Stephanie Blankenburg, head of the Unctad division that deals with debt and development finance. To conclude: “If the advanced economies cannot agree to this, the entire multilateral system is practically bankrupt.”

Is this true? Does more debt (sorry, more “credit”) piled on top of the existing mountain really provide a solution? Even in the short term? Why don't G2 leaders agree to eliminate poor countries' debts, and why don't they insist that private creditors do the same?

Of course, the answer is obvious. This would mean huge global losses for bondholders and banks alike, possibly giving rise to a financial crisis in advanced economies. At a time when governments are facing huge budget deficits and public debt levels well above 100% of GDP, they would have to generate a mega bailout of banks and financial institutions, as the debt burden of emerging countries reaches its peak. your limit.

Recently, the former chief economist of the BIS (Bank for International Settlements), William White, was asked in an interview about what to do in this situation. White, a long-time member of the Austrian school of economics, attributes capitalism's crises to "excessive" and "uncontrolled" credit expansions - not to any inherent contradictions in the capitalist mode of production. Now, according to him, this happens because institutions such as central banks extrapolate, corrupt the “perfect” functioning of money markets and, thus, interfere in the excessive creation of money and in the setting of interest rates that differ from “natural rates”.

In other words, White puts the cause of the impending debt crisis at the doorstep of central banks. “They have followed the wrong policies for the past three decades, which has led to ever-increasing debt and ever-increasing instability in the financial system.” He continues: “My point is: central banks create the instabilities, so they have to bail out the system during the crisis and thus create even more instabilities. They keep shooting themselves in the foot.”

There is some truth to this analysis. As even the Federal Reserve admitted in its latest report on financial stability in the United States, issuing money has gone too far. There was a $7 trillion increase in G7 central bank assets in just eight months, in contrast to a $3 trillion increase in the year following the collapse of Lehman Brothers in 2008. The FED admitted that the world economy was in trouble before the pandemic and that it needed more credit injections: “after a long global recovery from the 2008 financial crisis, the prospects for growth and corporate earnings weakened in early 2020 and became more uncertain”.

If, on the one hand, the credit injections generated a “fall in financial costs, thus reducing debt burdens”, they also encouraged a greater accumulation of debt. As a result, there has been a decline in asset quality, as well as lower credit underwriting standards; well, this “meant that companies were increasingly exposed to the risk of an economic slowdown or an unexpected rise in interest rates. Investors therefore became more susceptible to sudden changes in market sentiment and a tightening of financial conditions in response to shocks.”

In fact, central bank injections helped postpone the problem, without definitively solving it: “The measures taken by central banks were aimed at restoring market functioning, but did not address the underlying vulnerabilities that caused markets to amplify the remaining stress. The financial system remains vulnerable to another liquidity strain, as the underlying structures and mechanisms that gave rise to the turmoil are still in place.”

So a lot of credit has been accumulated and the only solution now is to generate more credit.

White advocates other solutions. He states: “There is no way to return to any form of normalcy without dealing with outstanding debt. This is the elephant in the room. If we agree that the politics of the last thirty years have created an ever-increasing mountain of debt and growing instabilities in the system, then we need to deal with that.”

He offers “four ways to get out of debt that tends to become delinquent. The first: families, companies and governments can try to save more to pay off their debts. Now, we know that this leads to the Keynesian paradox of parsimony, that is, it causes the economy to fall and even collapse. So this path leads to disaster.” Therefore, the path of “austerity” is closed.

The second way: “you can try to get out of outstanding debt through stronger real economic growth. But we know that huge outstanding debt impedes real economic growth. Of course, we should try to increase potential growth through structural reforms, but this is unlikely to be the magic bullet.” White then says that this second way cannot work if productive investment is too low because the debt burden is too low. very high.

What White leaves out of his analysis is the low level of profitability of currently existing capital. Lo and behold, this prevents capitalists from investing productively with the extra credit available. By “structural reforms,” White means laying off workers, replacing them with technology. It also consists in destroying what remains of labor rights and conditions. It might work, he says, but he doesn't think it will be implemented to a sufficient degree by governments.

White continues: “That leaves two paths remaining: higher nominal growth – i.e. higher inflation – or an attempt to get out of default by restructuring and canceling part of the debt.” Higher inflation globally may well be an option; Keynesian policies and modern monetary theory could produce it. If the debt is paid off in real terms, this lowers most people's standard of living. But if it is paid in nominal terms, it affects the real value of loans made by banks. In this second case, debtors gain at the expense of creditors and workers.

White, being a good neo-Austrian economist, opts for debt relief. “It is this path that I would strongly advise. Address the problem, try to identify the bad debts and restructure them as neatly as you can. But we know how extremely difficult it is to bring creditors and debtors together to resolve this cooperatively. Our current procedures are completely inadequate.” In fact, as the IMF and the G20 do not have any “structure” to follow this path. These leading institutions do not want to bring about a financial crash and a deeper drop in output by “liquidating” debt, as was proposed by US Treasury officials during the Great Depression of the 1930s.

Instead, the G20 could agree to extend the plan to defer payments due, but not cancel any debts. It will probably also not be willing to expand the DES fund. Instead, he hopes only to survive at the expense of poor countries and their people. It will choose to increasingly puncture the value produced by the workers of the world as a whole.

*Michael Roberts is an economist. Author, among other books, of The Great Recession: A Marxist View.

Translation: Eleutério Prado

Originally published in The Next Recession, on 20/11/2020

 

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