This article was written by Bodo Ellmers, Policy and Advocacy Manager – Debt and Financial Reforms. Eurodad, European Network on Debt and Development
Ten years after the last crisis began, global debt levels are higher than before, and debt vulnerabilities are increasingly hard to manage. That’s why activists all over the world are standing up to call for fundamental reforms of the financial sector.
From bank crises to sovereign debt crises
Greece was the first country where the financial sector disaster caused a nation’s bankruptcy. Also in this case, the financial sector lobby successfully convinced policy-makers that a bailout was necessary to avoid the economic Armageddon. Instead of writing off the unsustainable debts mainly owed to French, German and British banks in a comprehensive debt restructuring, Greece was ‘persuaded’ to pay off the banks, using official loans from other EU Member States through the Greek Loan Facility, the International Monetary Fund (IMF), and later the new EU bail-out funds – the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). Ninety-five per cent of the bailout loans officially taken out by the Greek state were used to pay off creditors, mostly private banks. This practice was repeated in four other EU countries – Ireland, Portugal, Spain and Cyprus. Ireland originally planned to follow the Icelandic example – which was to refuse to bail out the private banks – but was forced by the European Central Bank to go the bailout way.
The people are paying the price
The financial crisis that started in the financial sector had a massive impact on the real economy, and on the living conditions of actual people. The recession that followed wiped out US$4 trillion of global GDP, industrial production in Europe dropped by 20 per cent in the first year of the crisis, and in some countries, it still has not fully recovered. The International Labour Organization (ILO) has calculated that 61 million workers lost their jobs, and the Food and Agriculture Organization of the UN (FAO) observed a surge of people suffering from hunger by 100 million.
The impact on people living in the worst bailout countries has been particularly harsh. In order to relieve the financial sector from the need to adjust, the burden has been put on the people through brutal austerity and adjustment policies imposed through loan conditionality. Greece has been forced to cut public spending so substantially that the country lost 25% of its GDP – a quarter of the economy has thus been wiped out. Wages overall have fallen; minimum wages in Greece have been reduced substantially; labour rights have been slashed; public services have been cut; and the welfare system has been diminished.
For the affected countries, the last decade has been a “lost decade”; a whole generation of young people has become a “lost generation”. Young Greeks, Portuguese and Spaniards have had to leave their countries by the millions in search of jobs in more fortunate places across Europe. While job markets now are slowly recovering, the crisis has been used for a neo-liberal transformation. Formal employment has been replaced by trabajo basura, as the Spaniards call it – trash jobs without any security or rights.
The next crisis and new debt vulnerabilities
What the policy response to the crisis did not do is to address the underlying causes of the crisis. The world economy is now more highly leveraged than ever. According to the IMF’s Fiscal Monitor 2018, worldwide debt now stands at $164 trillion, equal to 225 per cent of global GDP, and up from a previous record of 213 per cent in 2009. All country groups have been affected: developed economies’ public debt has risen to 106.9 per cent of GDP in 2017, the highest level in times of peace. Things do not look better in the private sector. Corporate debt has surged to a record level of $66 trillion globally.
The quantitative easing policies that central banks in the global north have implemented to relieve private banks from pressure has unleashed a tsunami of speculative capital flows to the global south. It has triggered a lending boom that has pushed poor countries into a new debt trap. The IMF reports that only one in five low-income countries (LICs) can now be considered to be at low risk of debt distress. The positive impact of the Heavily Indebted Poor Countries initiatives since the 1990s has been undone. The developing countries’ debt crisis has already returned to many parts of the global south, and it will be even more difficult to manage than the last crisis. The creditor landscape has become ever more complex, and even low-income countries have started to use innovative financial instruments such as Eurobonds or collateralised loans – mortgaging their future export revenue. These loans are extremely difficult to restructure.
Innovations in financial regulation have been insufficient. While the European Commission is proud to report, for example, that it has put forward more than 50 major files for financial regulation in response to the crisis, these have largely been missing the point. No debt resolution mechanism has been introduced to reduce debt when needed, to deleverage the economy and to address debt crises in a sustainable manner. Attempts at United Nations level to create such a mechanism have not been fruitful either. Instead, irresponsible banks can still rely on being bailed out if they get into trouble.
Indeed, the fact that the banks were bailed out has allowed for business as usual and can be seen as one of the main reasons why a more substantial change or transformation in the financial system has not taken place. While the consequences of a non-bailout certainly would have been severe, it is perhaps what the world needed to wake up and take action.
Urgent action is needed in particular to protect vulnerable developing countries. Just as the 10th anniversary of the crisis looms, the currencies of Argentina and Turkey have crashed, indicating the arrival of a new emerging market crisis. Private corporations and banks in these countries have borrowed heavily in foreign currency and now foreign investors are pulling out their money. If no international solution is found to prevent debt crises, developing countries should at least start with unilateral measures, such as effective capital controls against speculative flows, or by introducing caps on foreign currency lending.
Ten years after the collapse of Lehman Brothers, the financial industry continues to hold citizens and whole nations hostage.
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