IOU: The Debt Threat and Why We Must Defuse It. Noreena Hertz

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      What accounted for this sudden desire to lend on the part of commercial banks? As in so many geopolitical cases, you just have to follow the oil. In the wake of the Yom Kippur War of 1973, oil-producing countries perpetrated a massive hike in oil prices, sending them skyrocketing up by 400 per cent, almost overnight. The oil producers were suddenly extremely rich, and the surplus was far too much for them to be able to spend in their own countries. Furthermore, Islamic sharia law forbade the practice of usury and prevented the Arab oil producers from earning interest in their own banks. They needed somewhere else to invest their petrodollars and Western banks seemed the perfect choice.

      This meant that overnight a huge new supply of credit emerged – $333.5 billion, to be exact. 40 per cent went to banks in the US and the UK, and the remaining, but still significant, portion to banks in France, Germany and Japan.

      The banks were desperate to put this windfall to productive use. The highly competitive banking industry of that time required the recycling of funds; it was absolutely key to staying at the top. Lending the petrodollars out again was a clear money spinner. Banks benefited doubly, from the fees they charged to arrange the loans and also from the interest they would make on the loans themselves.

      But simply lending to the developed world wasn’t going to satisfy the bankers given that the demand for loans from borrowers there had failed to keep pace with the expansion of available credit. So the banks actively sought out new lending targets in the developing world, especially in those places where they felt there was an opportunity to establish a close relationship with a burgeoning economy. A market for commercial debt was created where there had not been one for decades. And once the big banks started lending, medium and smaller banks had no option but to follow suit.

      It was another round of borrow, borrow, borrow – this time courtesy of the commercial banks. ‘The banks were hot to get in,’ Jose Angel Gurria, then head of Mexico’s Office of Public Credit recalls. ‘All the banks in the US and Europe and Japan stepped forward. They showed no foresight. They didn’t do any credit analysis. It was wild. In August 1979, for instance, Bank of America planned a loan of $1 billion. They figured they would put up $350 million themselves and sell off the rest. As it turned out, they only had to put up $100 million themselves. They raised $2.5 billion on the loan in total.’ Other loans were similarly over-subscribed, and developing governments often found themselves offered more money than they had requested; that is, if they had even requested the loan in the first place.

      The commercial loan pushers soon created commercial debt junkies. Money was lent under terms that were hard to turn down. In the mid-1970s loans actually had a negative real interest rate, which meant that a borrower could pay less than they borrowed, and although the rates were variable, no one expected them to rise significantly. Unlike funds from governments, which often had strings attached such as having to be spent on imports of that country’s goods or having political colours firmly attached, these loans usually came obligation-free.

      It was easy for developing countries to rationalize their new addiction. For some, the decision to borrow more was based upon a belief that they needed to incur these commercial debts in order to ensure their country’s future development. During the 19th century, the United States went through a massive period of development, driven by a period of indebtedness to commercial banks, an example held up as a shining path for poorer countries to follow, despite the fact that many states never actually paid the loans back.

      For others, like oil-importing countries who had suffered under the particularly harsh blow of oil price hikes, it was basically a huge relief to be offered these loans. What they were being offered by other governments didn’t always suffice. As for the oilexporting countries such as Colombia, Ecuador, Mexico, Nigeria and Venezuela, the loans were a way to capitalize on their much improved financial status, at very reasonable interest rates. Likewise, African commodity exporters, seeing an increase in revenues thanks to the commodity price boom which initially accompanied the oil price increase, and anticipating a continuation of this enhanced income, were delighted to increase their level of borrowing.

      For others, the fact that these loans were being sold so hard was just too much of an allure to be able to resist. A Latin American Minister of Finance in the 1970s put it this way: ‘I remember how the bankers tried to corner me at conferences to offer me loans. They would not leave me alone. If you’re trying to balance your budget it’s very tempting to borrow money instead of raising taxes to put off the agony.’ The surplus of offers was often overwhelming. And for poor countries in general, borrowing money made sense in theory at least, providing them with the potential to address the economic plight of their citizens.

      Moreover the IMF, the World Bank, and the governments of the industrialized countries, actively encouraged the developing world to borrow from these private banks, with the World Bank preaching ‘the doctrine of debt as the path towards accelerated development.’ The IMF, too, staunchly defended the system, claiming that higher foreign indebtedness was sound policy for both lender and borrower because the higher level of investment financed by foreign borrowing would eventually be reflected in additional net export capacity. As a result, commercial loans increased at much higher rates than those from governments or multilateral institutions during this period: while loans from official sources decreased from 54 to 34 per cent between 1979 and 1981, the percentage coming from private banks rose from 25 to 30 per cent.

      Down the hatch

      And just as when governments lent out monies to serve their geopolitical interests or the interests of their domestic industries, commercial banks also turned a blind eye to how and where their money was spent. As long as the money kept on flowing, the bankers didn’t care.

      Most of the Latin American loans were granted ‘for general purposes’, like the bulk of the Ziegler Nigerian loan, rather than for specific projects. In the best cases, governments chose to use this money to invest in the structures needed to support growth. Argentina, Brazil and Mexico, for example, used some of the monies for infrastructure – roads and transportation systems and communications. More usually, the loans were used for debt servicing or supporting domestic financial policy, enabling the borrowing government to retain popular support by avoiding raising taxes, cutting jobs or increasing prices, even though such moves might have been in the long-term interest of the country and its currency. In the worst, but by no means atypical, cases, these loans were simply another type of borrowing being siphoned off by the ruling elites. Between 1974 and 1982, the external debt of Argentina, Brazil, Chile, Mexico and Venezuela grew by $252 billion (most of which was owed to banks), about a third of that money went to buy real estate abroad and into offshore personal bank accounts.

      Similar scenarios played themselves out in Africa where much of the debt simply went unaccounted for, usually the victim of false invoicing, capital flight or other techniques to send funds to ‘more secure’ havens outside the country. In an alarming number of cases, the loans went into projects that had no chance of generating the income necessary to pay the loans back. Commercial banks lent monies hand-in-hand with ECAs, for a ghostly parade of white elephants. The Inga-Shaba hydroelectric project and power transmission line in Zaire, for example, originally estimated to cost $450 million – a loan which the US Export-Import Bank guaranteed the initial bill for while commercial banks covered cost overruns – ended up costing over $1 billion, equivalent to 20 per cent of Zaire’s debt. ‘It’s taking so long,’ one US embassy official noted, ‘that a lot of the equipment they’re putting at the two ends is deteriorating.’ In fact, by the time the project was finally completed, the need for power in Zaire’s rich copper mines, the whole reason for the project СКАЧАТЬ