Foreign debt in the G-20: Waiting for Godot

A small light of hope flared up at the meeting of the G-20 Finance Ministers in Baden-Württemberg, Germany, held in March this year. It was precisely at the well-known casino in Baden-Baden—a highly symbolic site for the occasion, too—where the Finance Ministers of the G-20 talked about a referential scheme, the Operational Guidelines for Sustainable Finance, which people hoped would serve as a way to regulate the granting of loans. Yet, the explanation of its scope was half-hearted and superficial, and it was expected that more insights into this proposal would be provided at the Hamburg summit.

Vanished from the G-20 Agenda

None of that happened in the Hanseatic city shaken by turmoil during the recent G-20 meeting. The issue of foreign debt virtually disappeared from the official agenda.

Historically, foreign debt has been and still is an instrument of domination used by the major powers.

This is not a topic without importance. Foreign debt is a major issue. It is not new. It is looking back on a long history. And apparently, it might once again be an active part of a new international crisis. At present, this issue critically affects 116 countries all over the world, according to the annual report of the German organization Erlassjahr.de (link in German). In 89 of these countries, the situation has deteriorated even more in the last year. The countries affected are not only those of the South. Countries missing on the list are EU countries like Greece, and even Japan, one of the most indebted countries of the planet.

As far as the poorest countries are concerned, this situation can mainly be explained—apart from the respective local causes—with the prevailing international financial system itself, where historically, foreign debt has been and still is an instrument of domination used by the major powers.

We can’t ignore the structural problems

We know about the misery and the poverty, as well as the environmental havoc caused by foreign debt crises and the policies of the International Monetary Fund in its attempt to solve them. An emblematic case is the last serious and major foreign debt crisis in Latin America with its painful social, environmental and even economic consequences which was not overcome by the adjustment measures stipulated in the Washington Consensus such as fiscal austerity, the flexibilization of labour, trade opening, privatization etc. This crisis was overcome thanks to the boom of the commodity prices. And it is also known that despite this boom, foreign debt increased again in an accelerated and irresponsible way, leading once again to a critical situation in many of these countries, when the raw material prices dropped again.  

This is not new. In the course of the history of finance, it has occurred time and again that countries took out loans, experienced a boom, declined, stopped paying, and eventually became creditworthy again… Life continues, causing serious damage to many societies and to nature itself.

Over indebtedness has not been understood adequately yet, and solving it should be a priority on the global political agenda.

This points to a serious structural problem of the international financial system: The lack of a mechanism to solve debt crises in an orderly, fair and democratic way which all countries facing a debt crisis have access to. It is alarming that, in spite of all the accumulated experience in this area, no concrete steps have been taken to tackle this problem and that the remedies applied to solve the crisis have been similar every time and everywhere.

Solutions must come from the G-193

The essence of the problem of over indebtedness has not been understood adequately yet, and this is why it has not been solved. This should be a priority on the global political agenda, both to the benefit of the debtors and the good-faith creditors (if they still exist).  

"We need a legal framework which can be structured around the idea of the International Board of Arbitration for Sovereign Debt, integrated into the United Nations system itself, embedded into an International Financial Code and go along with the creation of a World Central Bank to curb the monopolistic abuse of few currencies controlled by few powers." 

On the one hand, what is needed are political solutions like, for example, the London Agreement from February 27, 1953, which solved in a definite and comprehensive manner the issues of Germany’s debts from post-war years and from the war itself, and like the Marshall Plan. But above all, we need a legal framework which can be structured around the idea of the International Board of Arbitration for Sovereign Debt proposed by Oscar Ugarteche and the author of these lines himself (1).

The basic elements of this proposal were already discussed a few times in the Plenary of the United Nations, without the support of the major powers, as was to be expected. This Board, integrated into the United Nations system itself, should be embedded into an International Financial Code and go along with the creation of a World Central Bank—without the participation of the World Bank and the IMF—to curb the monopolistic abuse of few currencies controlled by few powers, another among the causes of the serious international financial and monetary distortions.

To expect that this challenge will be addressed by the G-20 means to be naïve. The G-20 constitutes some kind of global government of the most powerful countries, interested in defending their privileges. In fact, one should keep in mind that the G-20 is legitimated exclusively by the dominance of some few powers, the G-4: The United States, China, Russia, the European Union.

The fundamental solutions will have to come from the G-193, that is, from the United Nations themselves. ###

Notes:

1.Oscar Ugarteche and Alberto Acosta, “Global Economy Issues and the International Board of Arbitration for Sovereign Debt (IBASD)”, El Norte - Finnish Journal of Latin American Studies No. 2, (December 2007).

Alberto Acosta is Ecuadorian economist, former President of the Constitutional Assembly and former Minister of Energy and Mining.

http://www.elnorte.fi/archive/2007-2/2007_2_elnorte_ugarteche.pdf