Debt Crisis and Learning – Replying to Two Stimulating Reviews

Table of Contents

1. Introduction

2. Response to del barrio arleo’s commentary

3. Response to lienau’s commentary

4. In guise of conclusion

5. References

1 Introduction

As book editors we are very grateful to the two book reviewers and Accounting, Economics and Law: A Convivium for opening a larger than usual academic discussion on the book we have recently edited. Both reviewers, we editors, and all authors are agreed that the problem of debt crises has not been properly addressed. The usual pattern is fear when the crisis strikes and relief and (rather sooner than later) forgetting once it is over – usually at very high costs to the human rights of the debtors’ population. In his keynote speech at the University of Texas in Austin in November 2013 Yves Leterme, prime minister of Belgium when the so-called “euro-crisis” crisis struck, described “the first stage of crisis and first range of decisions” as “enormous fear amongst other members of the eurozone”, ^[1] meaning the heads of governments and states assembled there. Nevertheless, this enormous fear proved no incentive to learn.

This lack of learning by decision makers, who are not personally affected by debt crises, as the “euro-crisis” shows, and who after immense fear may even gain in importance and get new, highly paying jobs – was the priming for this book. We could say that a lot could have and had been learned from crises, but very little, if anything, has been applied by decision makers when the next crisis stuck.

New crises may be in the making. UNCTAD ^[2] warned that Southern external debt stocks more than trebled between 2000 and 2015. Crisis countries within the euro-zone or Italy are clearly not out of the danger zone. Argentina has just defaulted again. Presently, the US is eagerly lifting the not very far-going restrictions the shock of the global financial crisis of 2008 made lawmakers legislate on the financial sector. Africa is increasingly exposed to debt vulnerabilities created by bond booms and project financing. Drawing lessons from the past is probably more necessary right now than ever.

The problems evidenced by this book’s country experiences hold as long as governments are prepared – willingly, enticed by orthodox economists or forced by other governments and/or International Financial Institutions (IFI) – to cut down prudent precautions against insufficiently controlled capital mobility, ^[3] and to do anything to save speculators and other “investors” at the cost of eroding fiscal resources and, consequently, violating human rights, once the crisis has broken. This is not the only option, as especially Iceland, Korea, Malaysia, or also Argentina immediately after debt restructuring in 2005 and before the Macri’s government, show.

Analysing 14 singular country cases that have not yet received enough or proper attention – some regarded as successful, some as unsuccessful in dealing with crises – this book aims at contributing to a better understanding of the policy and legal options available to countries struggling with debt problems.

The book clearly shows that in spite of official declarations – the EU even declares human rights to be one of their essential values on which it is allegedly founded – ^[4] even the most fundamental human rights have readily and immediately be violated (literally, crises push people to commit suicide), sacrificing human rights to the lemon squeezer principle in order to extract money for creditors and speculators.

The underlying linchpin for solving debt crises is that human rights obligations – virtually all of them constitutional laws except in very few municipal laws – have to be respected not violated. As in municipal laws, human rights must become inalienable rights globally, for all people irrespective of colour, nationality, gender or race. People taking decisions (politicians, IFI-employees, judges) must become aware that human rights obligations are legal norms to be obeyed. The scope of the pacta sunt servanda is limited by human rights in all civilised nations. As long as it is not, we are no further away from barbarism than debt prisons, debt slavery, or the killing of debtors already were. The Financial Times (January 26, 2015) saw Greece forced by the Troika “to operate as a quasi slave economy”. The EU violated its own treaties, such as the EU Charter of Fundamental Rights.

The economic translation of this legal principle is that ensuring debt sustainability while safeguarding human rights and debtor protection should be the main goal of debt restructurings, just as it has established itself in virtually all domestic laws in the field of private debt. Some countries, most notably the US, even grant insolvency protection to subnational public debtors. ^[5] This is all the more urgent as politicians and decision makers have presently established a form of international legal apartheid: while indebted people’s human rights are legally protected – though not perfectly-, if a State is the one who owes, this debtor’s people go unprotected. A minimum of resources is exempt and immune, even bona fide creditors cannot attach or seize them, such as the debtor’s last winter coat in Austria. On occasion one might well question whether a mink coat should be exempt as “necessary wearing apparel” in the case of insolvency as in the US, ^[6] or whether exempting two firearms (plus amo, one has to presume) is just protecting human rights.

By contrast, people in debtor countries have to die because so much money is pressed out of them that they can no longer afford food, basic education or necessary medical drugs (Bohoslavsky, 2017). ^[7] Social devastation is “normal”, even though debtor protection has been established as a universally accepted and time tested principle. Human rights count – unless you live in a debtor country. This is one – and maybe the most important – point our book wants to make. While legal systems have evolved since the days of debt prisons and debt slavery, the generally acknowledged first best solution to debt problems continues to be refused to people in debtor countries. Clumsy attempts to emulate parts of insolvency (e. g. the Paris Club’s “comparable treatment”) skirting full proceedings exist. Predictably, success is limited.

2 Response to del barrio arleo’s commentary

Regarding del Barrio Arleo’s review, we understandably only differ on how much the book should have dwelt on alternatives. There is no disagreement that alternatives must be propagated. In fact, both editors and many authors have done so before, and there is a long list of publications to prove it. We just disagree on whether this should be done once more again in detail in this very book.

Alternatives are presented, though not elaborated on, and any reviewer is absolutely justified to say that (s)he would like to have more of that. In this respect people naturally differ. However, Brazil (as quoted in the review itself), Iceland (a whole case study of a successful alternative, titled “Human Rights Sensitive Approach”), Greece (admittedly a brief reference to the Raffer Proposal, citing its last publication in Guzman, Ocampo & Stiglitz eds 2017 on p.83; or pointing out regulatory failures and breaches of the law, all of these could be easily remedied if there were any political will), Ireland (brief, no doubt, but on p.162: gradual, managed exit from the euro), Grenada (Heavily Indebted Small Island Developing States – HISIDS, suggested as alternative) or Malaysia (making the point why capital control is a key tool). This is no exhaustive list, but all these, in fact all contributions, show alternatives. One may also understand authors thinking that repeating in detail proposals that have been around meanwhile for some time, even over three decades in the case of the Raffer Proposal that took human rights into account for determining sustainability in 1987, ^[8] need not be done in this book. Human rights aspects are brought up or referred to throughout the book – obviously not as detailed as the reviewer wishes. But this is the result of the decision not to repeat former work in too lengthy a way. Furthermore “What Have We Learnt” focuses by necessity more on the past than on proposals for the future.

Regarding the concern for incorporating human rights into solutions the authors and the reviewer obviously share the very same opinion: this is urgently necessary and presently by far not sufficiently put into practice. The so-called “complementary pieces” are mostly arguments and points already published – often at length – somewhere else. They are not missing because they were thought irrelevant. As known, the United Nations General Assembly approved in 2015 the “Basic Principles on Sovereign Debt Restructuring Processes” ^[9] – also quoted by del Barrio Arleo – which explicitly state that sustainability implies that sovereign debt restructuring workouts respect human rights.

Regarding the 1953 London Debt Agreement one should add that – while making “a contribution to the development of a prosperous community of nations” is written in the document – the Cold War and the fear of all Germany “going commie” were a definitely more important reason. The review also mentions their importance. ^[10] This reason – quite obviously – is no longer valid for debtor countries nowadays, as the reviewer also points out. It still was in Indonesia around 1970. Implications for contemporary (i. e. really existing) debt management must thus be strongly doubted. It might be interesting to know that Germany strongly opposed Indonesia’s getting debt relief roughly as Germany had received in London.

The argument that sovereign policy space collides with the principle of creditors’ equal treatment, when such restructurings involve foreign creditors is logically flawed. A country with enough policy space may treat domestic and foreign creditors equally, but it may not as well. Problems regarding these two groups are much rather different, e. g. different jurisdictions, protection by Bilateral International Treaties (BIT) subsuming loans under investment, forced lending domestic pension funds may have been subject to. The reviewer is definitely right, though, that balancing debtor and creditor interests is a delicate exercise. Nevertheless, it has to be done in any case of insolvency, indeed it should be done also in the case of defaults without formal insolvency proceedings – a thorny problem, even without any foreign creditors.

True, “the market risk premium does not replace the analysis of such event’s likelihood”, but spreads may signal the ongoing lenders’ perception of the expectation value of losses, along with their perception of liquidity risk and other risks related to distress in radically uncertain times. Naturally, assessing probabilities and events in the future is always subject to judgment, market sentiment and errors. Thus, there is indeed ample room for improvement, but also for subjectivity, honest or otherwise.

Regarding the addressees the reviewer is right: the insight is to be made accessible to “society as a whole”, even though policy makers are clearly and particularly addressed. No doubt, it would be interesting to see how “a more targeted reply would specifically include politicians and policy makers, that actually have the power to change the course of events” should look. These decision makers know the facts, are able to read, and have chosen to ignore facts. There are the successful examples of Iceland and Malaysia – or even Germany 1953 and Indonesia after Soekarno, but these are exceptions. Politicians and central banks prefer all too often, however, to act in their own and the interest of powerful lobbies. The bonus payments to French and German bankers were simply more important to politicians than safeguarding human rights of the Greeks. As politicians only react to public pressure – as virtually all improvements so far show – informing the public is important, counterbalancing lobbyists. The book refers to “the unwillingness of neoliberal politicians in the North to learn and to fend off damages from their constituencies and the poor” (p.274). It is “particularly worrying” that in democratic contexts … scientific knowledge” is not but “should be a pillar in policy decisions.” (p.272) We thus disagree on whether informing human rights insensitive politicians once more on what they already know would be very useful, but fully agree with del Barrio Arleo that civil society and the public at large has to be reached “in order to allow for a healthy dose of public pressure on policy makers”. As the Jubilee movement proves, pressure by an informed public is more promising, in fact the only tested and successful way so far. Waiting for politicians spontaneously to respect human rights does not sound very realistic.

3 Response to Lienau’s commentary

The second reviewer, Odette Lienau, puts her finger very precisely on the one most important issue: how to transpose facts and information into politics. After asking and commenting on who should learn and how effective such learning process is likely to be, Lienau comes right to the point: “Is Learning Enough?” Here she is in complete agreement with authors and editors. She rightly points out that it is the privilege of a review to indulge in questions. She asks the most important and urgent questions. This is very welcome, as it is sure to bring discussion forward. There is nothing better a book could hope for.

Well, the “we” is all of us as written in the book however, regarding political decisions not all of us are relevant, and unfortunately, those relevant for policy decisions are usually not keen to act upon things learned. After asking this pertinent question Lienau herself answers with no, also quoting from the book where attention is drawn to the fierce resistance of those benefitting from the status quo. Thus the no – or rather the unwillingness to take things learned properly into account – is limited to decision makers, the powers that presently be. The editors agree with her: in the book’s last Chapter the editors conclude that decision makers have learned very little, and that scientific knowledge has not been made the pillar of policy decisions. Thus, she is also right – learning alone is not enough. As the so-called eurocrisis -which has never been a crisis of the euro currency- proves, decision makers are not unlikely to know what they are doing. They are doing it all the same for self-serving reasons. Thus, pure logic or facts are for those perpetrators no real argument. Not least important, the “eurocrisis” could and has been used to roll back democracy within the EU further – as inter alia Greece clearly shows. ^[11] Not to forget – this has happened in Southern debtors too, and much more often than in Northern countries. Human rights are of no concern to decision makers eager to shield speculators and themselves, though otherwise claiming human rights to be the foundation and basis of their actions (or specifically of the EU). So far no or little if at all disagreement – Lienau is unfortunately right: learning alone is not sufficient to overcome political and economic interests, as the book proves. This is an important point in need of being stressed.

Also if one single decision maker or country actually learned and tried to act upon that “solo” this is often likely to go nowhere. Not always, though, as examples in the book such as Iceland, Malaysia, Ecuador, or Argentina prove. There is space for better policies, but domestic decision makers must have the will to use it. Often the situation – it must be admitted – is so adverse that there is no choice.

Again, Lienau puts her finger on a well-known problem. Domestic elites often do not want to resist such international pressure. “Some stakeholders benefiting from the current situation see no reason for change” as the editors state (p.272). Learning alone would usually not help. There are quite a few cases where domestic decision makers have used the IMF to achieve their own goals (such as passing deregulatory labour law reforms) or even have egged the IMF on to demand more than necessary in order to advance their very own interests.

This is precisely why the book – as quoted by Lienau – points out that there is “fierce resistance” by those powerful actors benefitting from the status quo. The book thus – may be this could have been done more clearly by the editors – recommends transparency and public pressure.

4 In guise of conclusion

Historically, improvements have always been achieved due to pressure by NGOs, notably the Jubilee Movement. Heavily Indebted Poor Countries Initiative (HIPC) and HIPC II are but two – though important – examples. While, e. g. it was posited that multilateral debts cannot be reduced, these debts now miraculously can get haircuts (cf Multilateral Debt Relief Initiative – MDRI in particular). Nothing is written in stone in social sciences. Laws against so-called “vulture funds” were only enacted because of and after public pressure. ^[12] The book’s information has been made available to everyone, but it needs actions by NGO, civil society – or however one should like to put it – to force decision makers to do the right thing, to respect human rights in debtor countries, making human life count, even if this means to do so in debtor countries, thus honouring their own laws regarding human rights, which decision makers have routinely violated. Such pressure needs and has always needed facts and good arguments – it is this book’s intention to provide them. Thus, while a book can only provide arguments and facts these can and should form the basis upon which to act once they are available. Like human rights defenders usually say, truth is always compelling, so that making the point that lessons can and should be learned on how to handle debt crises is somehow sowing a seed for a better future for all and not only for creditors and speculators.

In March 2019, the United Nations Human Rights Council approved the “Guiding Principles on Human Rights Impact Assessments of Economic Reforms”, ^[13] which explicitly elaborate on why and how human rights should be taken into account in debt sustainability analysis, debt restructurings and economic policy responses to economic and financial crises. However, as the 2015 United Nations Resolution above proves, this does not automatically trigger necessary changes. People have to realise that legal tools exist, voted into law by their own States(!), and that successful crisis solutions safeguarding human rights exist as well. This would help them to present sound economic and legal arguments forcing decision makers to fulfil their human rights obligations. Briefly, we absolutely agree with both reviewers that informing civil society is necessary and crucial.