Twenty to thirty years of financialization means nations are much more at risk of financial and/or debt crises due to external debt obligations says Stephanie Blankenburg, Head of the Debt and Development Finance Branch of UNCTAD, explaining issues related to debt sovereign nations owe foreigners or international creditors.
July 29, 2015 Produced by Lynn Fries
TRANSCRIPT
LYNN FRIES, TRNN: Welcome to the Real News Network. I’m Lynn Fries in Geneva.
When the creditor-debtor relationship involves a sovereign state, that nation’s people and its economy are at stake. Here to talk to us about issues of sovereign debt is economist Stephanie Blankenburg who joins us in Geneva. Stephanie Blankenburg is Head of the Debt and Development Finance Branch of UNCTAD, the United Nations. Welcome, Stephanie.
STEPHANIE BLANKENBURG: Thank you.
FRIES: We’re talking about sovereign or or external debt. In other words, public debt governments owe to foreigners or international creditors. Taking recent history, say from post-World War II, talk about some cases of public debt crisis, and whether they were self-inflicted or otherwise.
BLANKENBURG: Well, it depends a bit on what you mean by self-inflicted. Because in the case of Germany, of course I might reference to Germany’s role as a state and a government plus as a people in two world wars. And especially in the second world war and the resulting, the resulting debt. So that’s relatively straightforward, it’s not a question of government versus the people, it’s a question of political processes and the responsibility for having harmed their own economy as well as the economy of other countries very substantially in the context of war.
Now, that is obviously a very specific situation. Beyond that, the question–or a broad question–is has sovereign debt been caused by public profligacy, i.e. by decision making in the public sector that has meant unsustainable spending patterns for whatever either political or economic goals there may have been, emphasis on unsustainable. Badly planned, badly managed and so on.
Or are we in a situation in which most of debt has in a very decentralized way been contracted by private entities. That can be companies, that can be households, to the extent of being exposed to a debt crisis once financial instability hits those debt contracts for, again, a number of reasons. Once that happens and there is financial instability, there might be a debt crisis. Then governments very often have to socialize a lot of the private debt in order to manage it, in order to deal with it, in order to maintain access to international financial markets for the economy as a whole, and in order to limit bankruptcies in the economy, for example.
Now, this has been the much more typical pattern of the emergence of public finance crisis in developing economies as well, of course, as in many of the affected eurozone economies in the context of the euro crisis. So that would mean it’s not a self-inflicted crisis from the point of view of the public sector. It’s a crisis that has been inflicted systematically and over the long-term by the private sector, both on the side of irresponsible borrowing as well as of irresponsible lending to private agents.
FRIES: Talk more on the point you make that for the economy as a whole governments need to maintain access to international financial markets. Give us some context of what all this means for sovereign states today.
BLANKENBURG: Well, it simply means that the access that governments have to multilateral debt, i.e.–to multilateral finance, I should say. So finance that comes either from multilateral organizations, or that comes from groups of other states, nowadays is limited. And as in other parts of the economy of the world economy, there has been a process of privatization. In particular of course in the area of finance, which means that governments in order to contract external debt will be accessing much more international financial markets, will be going in particular to bond markets at much higher interest than they would in the context of contracting multilateral debt from international organizations or from groups of other states, or even bilateral states, i.e., government-government debt.
That’s part of financialization over the last 20-30 years, and it basically means that the market for sovereign debt is now dominated by, or is at least strongly influenced by private bondholders. From a legal point of view what that means when you enter into a bond contract, you have to do this under some jurisdiction. There’s no international jurisdiction under which you can do this. And very many developing country states will allow their debt contracts to be issued under in particular U.S. and UK legislation–jurisdiction, sorry, because this reinforces investor confidence in the credibility of the process. In cases, for example, where investors otherwise would not have much confidence, say, in the Argentine legal system or the legal system of another developing country. Rightly or wrongly so, but they wouldn’t, and therefore would not acquire a bond, i.e. would not be lending to this economy.
So in that sense, governments clearly are much more exposed to the vagaries of international financial markets, the developing country governments in particular. There are always two sides to the coin. It does often mean that they of course can have very often rapid access to a lot of international finance. There is what then is in retrospect often referred to as irresponsible lending. So it can mean that for example, access by governments to finance that they think they require can be fast, can be quick. But of course, the liabilities that result from this can be much more complex, much more difficult to resolve than would be the case under some kind of multilateral process.
FRIES: Before we get into the multilateral story, talk more on structural challenges facing governments as they contract sovereign debt.
BLANKENBURG: On the side of the structural problem, we are looking at economies that operate at relatively low levels of productivity compared to the leading economies in the world economy, and that have to undergo very, very long-term, very profound transformations of the way in which their economies are organized, on the way in which they are often–social sectors are organized as a consequence, their other institutions are organized, the administration is organized. These are very, these are mega-processes of change.
Now, those have to be financed. And that means that there is an enormous finance need, enormous finance requirement. The more risky financing of this process is, the more likely are we going to have destabilizing crisis. And if a crisis hits you–let me put it another way. If you have a crisis that hits your dairy sector, you will have a lot of small dairy farms, a dairy farm here or there might be affected. That’s not going to affect your overall economy. If that crisis hits a very large steel factory, or you get this wrong then that may affect your overall economy. So if you are dealing with these mega-transformation processes and you enter into a phase of financial instability, it can have very, very big effects on that transformation process. It’s not just a simple growth process. It means changing the whole of society and not just the whole of the economy.
Now, clearly the finance need for that, as I said, is enormous. And it will come from many sources. So that’s one aspect of it. The other aspect is of course that we have governments in places even in developing countries that may or not use the resources they do have access to for the purpose of this overall transformation, and they may do so more or less effectively. So we can run into problems also because governments engage in spending patterns that are not necessarily helpful to that transformation.
And finally we have a whole world outside that transformation process in any particular developing country that determines very largely how money is lent. And the more of this money that is being lent comes from multiple private sources who themselves are all part of that big casino that is the international financial market, the less stable that finance will be.
FRIES: And what then if a debtor country runs into trouble, and needs to get its international creditors around a table? Do more difficulties lie ahead?
BLANKENBURG: Yes. I mean there’s certainly, certainly what countries that contract sovereign debt, sovereign external debt, face up to these days is an extremely fragmented system. So there are a number of institutions that deal with debt between states as well as between–as with debt between states and private creditors and that these are different institutions. Plus there are also direct debt negotiations between governments without any intermediary between governments and private creditors. And those private creditors can of course be multiple creditors. They can be financial institutions. They can be other forms of private companies. They can even in principle be private individuals. All of this multitude of creditors has to be organized by the governments themselves, or there are a few international ad-hoc arrangements they can use, such as the London Club or the Paris Club, for example. Of course, the IMF can get involved.
So there are multilateral elements of international organizations dealing with aspects of external debt of sovereign countries. Plus, then, a number of ad-hoc arrangements to deal with this too, as well as private creditors. So this is basically, it’s a chaotic system.
So this is why I said before, what we really need is multilateral processes both for the financing of these mega-transformation processes as well as for dealing with situations where crisis, financial crisis, debt crisis, has happened as they inevitably will under such quite demanding circumstances.
FRIES: Thank you, Stephanie. Talk more about that next. We’re going to take a short break and be right back with economist Stephanie Blankenburg.
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Dr Stephanie Blankenburg is Head of the Debt & Development Finance Branch in the Division on Globalization and Development Strategies at UNCTAD in Geneva. Prior to joining UNCTAD in 2015, Stephanie Blankenburg was Senior Lecturer in Economics in the Department of Economics at the School of Oriental and African Studies (SOAS), were she taught and researched on global economic policy issues, industrial policy, advanced macroeconomic theory and topics in the history of economic thought. Dr Blankenburg previously was Director of Studies and College Teaching Officer at St Edmund’s College, Cambridge University (UK) , and held a Junior Research Fellowship at the ESRC Centre for Business Research in the Faculty of Applied Economics, Cambridge University (UK).
Originally published at TRNN
