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

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СКАЧАТЬ the mines for the Zaire government had tapped their own sources of external finance, as well as locally available hydroelectric power, to keep themselves afloat.

      In Togo, a combination of export credits and a loan syndicated by German commercial banks was used to build a steel mill. When the Togolese government realized that no iron ore was available to start production, it ordered the German technicians to dismantle an iron pier located at the port – a pier that had been constructed by Germany prior to WWI and which still functioned well. Once the steel mill had exhausted the pier as a feedstock, it closed down.

      And, once again, dictators, tyrants and military juntas were bankrolled by Western money. In Argentina, the debt contracted by the military dictatorship between 1976 and 1983 (the vast majority of which was commercial) went from $7.9 billion up to $45.1 billion. With half of the money lent by commercial banks between 1976 and 1983 remaining abroad, often with the knowledge of the lending banks themselves. In Brazil, it was also the military that contracted most of the roaring commercial debt – jumping from $3.9 billion in 1968 to $48 billion in 1978. In 1970s Africa, the corrupt Mobutu ran up $579 million of commercial debt.

      How did these loans make it through the banks’ due diligence? Investigations the banks carried out before they made their loans ranged from the minimal to the actively negligent. A loan is said to have been granted to Costa Rica in 1973 on the basis of a single Time magazine article on the country. Chase Manhattan and many other banks tried to lend to countries which were already in default to them: when Chase offered Bolivia a new loan in 1976, for example, it did so in complete disregard of the fact that it was a creditor on another loan for which Bolivia was already in default. Mexico was offered additional loans even though it had already committed 65.5 per cent of its export revenues to paying debt service charges, which indicated a pre-existing level of commitment that was already very high and extremely difficult to service. And many bankers making the loans just didn’t know what they were doing. As one of the bank executives involved in the negotiations said at the time, ‘I am far from alone in my youth and inexperience. The world of international banking is now full of aggressive, bright but hopelessly inexperienced 29-year-old vice presidents with wardrobes from Brooks Brothers [and] MBAs from Wharton or Stanford.’

      Inexperienced they might have been, but they were sure making money. A Salomon Brothers’ report, published in 1976, revealed that the 13 largest US banks had quintupled their earnings from $177 million to $836 million during the first half of the 1970s, with a significant share coming from developing country loans. By 1976, Citibank was earning 72 per cent of its income abroad, Bank of America 40 per cent, Chase 78 per cent, First Boston 68 per cent, Morgan Guaranty 53 per cent and Manufacturers Hanover 56 per cent. In the 1970s, Banque National de Paris, one of the world’s largest banking houses, profited more from its various African affiliates than from its extensive branch network in France. Nigeria alone came to account for up to 20 per cent of the bank’s after-tax earnings in the late 1970s.

      All this lending appeared to have no potential downside at all. Walter Wriston, former president of Citibank and perhaps the greatest recycler of them all, famously said during the wild lending period, that there was no danger in foreign lending because ‘sovereign nations do not go bankrupt.’ This was a maxim which essentially became the rallying cry for a whole generation of bankers. Lending, lending and more lending was held up as a huge achievement: ‘It was the greatest transfer of wealth,’ Wriston said, ‘in the shortest time and with the least casualties in the history of the world…[it is] something to be proud of. It was a terrifically difficult thing to do. We did it. It was also hard to-put the guy on the moon. We did that.’

      And this was the accepted position. ‘We reject the view that international lending activities of American banks are posing grave risks to the American economy or the banking system,’ said C Fred Bergsten, Assistant Secretary of the Treasury for International Affairs, when he testified in 1977 before the House Banking Committee. ‘We believe to the contrary, that they have been remarkably successful in playing a vital role in helping to finance an unprecedented level of international trade, capital flows and payments imbalances – and that they continue to enjoy such success.’

      To some extent, this exuberance was understandable. Countries such as Argentina, Brazil, Nigeria and Mexico had natural resources and enough trade to cope, at least initially, with a certain degree of indebtedness. Interest rates were low, which meant that servicing the debts should have been manageable in theory. Countries which could not pay back their debts were just given even more new loans to pay off the old ones. And even if countries couldn’t service these loans, bankers believed that when push came to shove they would be bailed out, that geopolitical interests would as ever hold sway.

      ‘Banks who lend too much too fast know there will be a bailout, no question about it,’ the officer of a large New York City bank said at the time. ‘They scoff at bankers who create large loan loss reserves and those who in general are more conservative. They know that come the revolution in Mexico, or wherever, their banks will have the highest earnings and pay the highest dividends, and that they personally will receive the highest bonuses.’

      Those who did recognize the precariousness of the situation and advised caution were viewed as doomsayers. The late Senators Frank Church of Idaho, Clifford Case of New Jersey and Jacob Javits of New York criticized the Ford and Carter administrations’ ‘laissez-faire approach to petrodollar recycling’ and warned that the American taxpayer would ultimately have to pay the price for the banks’ lax lending. They were ignored. ‘As a loan officer,’ an ex-banker who did his share of lending at the time said, ‘you are principally in the business of making loans. It is not your job to worry about large and unwieldy abstractions, such as whether what you are doing is threatening the stability of the world economy.’

      But the bankers should have worried.

      If they had studied their history books, they would have realized that the path they were taking was neither new nor safe. Since its independence from Spain and Portugal in the 1820s, Latin America, for example, had gone through several cycles in which it had borrowed extensively, seen long periods of economic expansion, and then in the inevitable post-boom stagnation, found itself unable to service its debt obligations. In 1827, almost every Latin American government had defaulted on its debt. And this had happened again in 1873. The defaults of 1930 had been no anomaly.

      And at the end of the 70s the merry-go-round which enabled banks to keep on lending to Latin America and elsewhere, once again came to a screeching halt.

      The morning after

      In 1979, the Shah of Iran was deposed, an event shortly followed by the Iran-Iraq war. A second oil price hike occurred, with the price of oil more than doubling within two years. This put pressure on the economies of oil importing countries and created further demand for credit which, in turn, created a new boost of lending. On the other side of the ledger, the added costs stretched the ability of borrowing countries to service the debt they had already contracted. In developed countries, the hikes caused prices of many consumer goods to rise, which triggered inflation.

      To curb inflation, industrial countries, led by the US, raised interest rates. There was an enormous global recession. The markets for developing countries’ products shrank, which meant that these countries’ capacity to pay back debts drastically diminished. Developing countries that СКАЧАТЬ