tag:theconversation.com,2011:/au/topics/debt-crisis-27371/articlesDebt crisis – The Conversation2023-08-01T12:25:30Ztag:theconversation.com,2011:article/2100062023-08-01T12:25:30Z2023-08-01T12:25:30ZRate hikes may have slowed inflation in the US – but they have also heightened the risk of financial crises for lower-income nations<figure><img src="https://images.theconversation.com/files/540041/original/file-20230730-23-hvvs98.jpg?ixlib=rb-1.1.0&rect=28%2C63%2C4690%2C3077&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sri Lanka is among the countries facing the risk of debt distress.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.co.uk/detail/news-photo/street-vendor-sells-prawns-and-sea-food-at-her-kiosk-at-the-news-photo/1248858886?adppopup=true">Ishara S. Kodikara/AFP via Getty Images</a></span></figcaption></figure><p>The campaign to fight U.S. inflation by upping <a href="https://www.npr.org/2023/07/26/1190093285/fed-federal-reserve-interest-rates-borrowing-inflation">interest rates</a> has been going on for a year and a half – and its impacts are being <a href="https://apnews.com/article/covid-health-business-international-monetary-fund-sri-lanka-ab562cd9e16592e40ec8c6d842c74b7a">felt around the world</a>.</p>
<p>On July 26, 2023, the Federal Reserve announced <a href="https://www.cnn.com/2023/07/26/economy/fed-july-interest-rate-decision-final/index.html">another quarter-point hike</a>. That means U.S. rates have now gone up 5.25 percentage points over the past 18 months. While inflation is now coming down in the U.S., the aggressive monetary policy may also be having significant longer-term impact on countries across the world, especially in developing countries. And that isn’t good.</p>
<p>I <a href="https://polisci.msu.edu/people/directory/bodea-cristina.html">study how economic phenomena</a> such as banking crises, periods of high inflation and soaring rates affect countries around the world and believe this prolonged period of higher U.S. interest rates has increased the risk of economic and social instability, especially in lower-income nations.</p>
<h2>Ripples around the world</h2>
<p>Monetary policy decisions in the U.S., such as raising interest rates, have a ripple effect in low-income countries – not least because of the central role of the dollar in the global economy. Many emerging economies <a href="https://www.reuters.com/breakingviews/global-markets-breakingviews-2023-02-28/">rely on the dollar for trade, and most borrow</a> in the U.S. dollar – all at rates influenced by the Federal Reserve. And when U.S. interest rates go up, many countries – and especially <a href="https://african.business/2023/05/african-banker/interest-rates-hikes-exact-high-price-in-africa">developing ones – tend to follow suit</a>.</p>
<p>This is largely out of concern for <a href="https://www.imf.org/en/Blogs/Articles/2022/10/14/how-countries-should-respond-to-the-strong-dollar">currency depreciation</a>. Raising U.S. interest rates has the effect of making American government and corporate bonds look more attractive to investors. The result is footloose foreign capital <a href="https://theconversation.com/three-reasons-why-the-us-federal-reserve-bank-holds-the-world-in-its-hands-190936">flows out of emerging markets</a> that are deemed riskier. This <a href="https://apnews.com/article/covid-health-business-world-bank-international-monetary-fund-71aa7e9c225e973ec16a962fe6d53773">pushes down the currencies</a> of those nations and prompts governments in lower-income nations to <a href="https://african.business/2023/05/african-banker/interest-rates-hikes-exact-high-price-in-africa">scramble to mirror</a> U.S. Federal Reserve policy. The problem is, many of these countries already have high interest rates, and further hikes limit how much governments can lend to expand their own economies – heightening the risk of recession.</p>
<p>Then there is the impact that raising rates in the U.S. has had on countries with large debts. When rates were lower, a lot of lower-income nations took on <a href="https://www.aljazeera.com/features/2023/7/4/is-a-global-debt-bomb-about-to-explode">high levels of international debt</a> to offset the financial impact of the COVID-19 pandemic and then later the effect of higher prices caused by war in Ukraine. But the <a href="https://www.theguardian.com/business/2022/oct/02/high-interest-rates-paid-by-poorer-nations-spark-fears-of-global-debt-crisis">rising cost of borrowing</a> makes it more difficult for governments to cover repayments that are coming due now. This condition, called “<a href="https://www.imf.org/en/Publications/fandd/issues/2020/09/what-is-debt-sustainability-basics">debt distress</a>,” is affecting an increasing number of countries. Writing in May 2023, when he was still president of the World Bank, David Malpass estimated that <a href="https://www.wsj.com/articles/the-world-economy-needs-to-get-its-growth-back-group-of-seven-developing-countries-debt-financing-yield-curve-private-sector-innovation-4113e720">some 60% of lower-income countries</a> are in or high risk of entering debt distress.</p>
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<img alt="A man hold aloft a crate of fish." src="https://images.theconversation.com/files/540292/original/file-20230731-247744-e58okb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/540292/original/file-20230731-247744-e58okb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/540292/original/file-20230731-247744-e58okb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/540292/original/file-20230731-247744-e58okb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/540292/original/file-20230731-247744-e58okb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/540292/original/file-20230731-247744-e58okb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/540292/original/file-20230731-247744-e58okb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Mozambique is among the countries facing extra financial stress.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.co.uk/detail/news-photo/fisherman-balances-a-crate-of-fishes-on-his-head-on-news-photo/1230026981?adppopup=true">Alfredo Zuniga/AFP via Getty Images)</a></span>
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<p>More broadly, any attempt to slow down growth to lower inflation in the U.S. – which is the intended aim of raising interest rates – will have a knock-on effect on the economies of smaller nations. As borrowing costs in the U.S. increase, businesses and consumers will find themselves with less cheap money for all goods – domestic or international. Meanwhile, any fears that the Fed has pulled on the brakes too quickly and is risking recession will suppress consumer spending further.</p>
<h2>The risk of spillover</h2>
<p>This isn’t just theory – history has shown that in practice it is true.</p>
<p>When then-Fed Chair <a href="https://theconversation.com/paul-volcker-helped-shape-an-independent-federal-reserve-a-vital-legacy-thats-under-threat-128660">Paul Volcker</a> fought domestic inflation in the late 1970s and early 1980s, he did so with aggressive interest rate hikes that pushed up the cost of borrowing around the world. It contributed to <a href="https://www.bloomberg.com/view/articles/2019-12-10/paul-volcker-death-he-left-a-complicated-legacy-in-latin-america?in_source=embedded-checkout-banner&sref=Hjm5biAW">debt crises for 16 Latin American countries</a> and led to what became known in the region as the “lost decade” – a period of economic stagnation and soaring poverty.</p>
<p>The current rate increases are not of the same order as those of the early 1980s, when rates <a href="https://www.bankrate.com/banking/federal-reserve/history-of-federal-funds-rate/">rose to nearly 20%</a>. But rates are high enough to prompt fears among economists. The World Bank’s most recent <a href="https://openknowledge.worldbank.org/server/api/core/bitstreams/6e892b75-2594-4901-a036-46d0dec1e753/content">Global Economic Prospects</a> report included a whole section on the spillover from U.S. interest rates to developing nations. It noted: “The rapid rise in interest rates in the United States poses a significant challenge to [emerging markets and developing economies],” adding that the result was “higher likelihood” of financial crises among vulnerable economies.</p>
<h2>Widening the wealth gap</h2>
<p>Research <a href="https://doi.org/10.1016/j.worlddev.2021.105635">I conducted with others</a> suggests that the kind of financial crises hinted at by the World Bank – currency depreciation and debt distress – can rip the social fabric of developing countries by increasing poverty and income inequality.</p>
<p>Income inequality is at an all-time high – both within individual countries and between the richer and developing countries. The 2022 <a href="https://wir2022.wid.world/">World Inequality Report</a> notes that, currently, the richest 10% of individuals globally take home 52% of all global income, while the poorest half of the global population receives a mere 8.5%. And such a wealth gap is deeply corrosive for societies: Inequality of income and wealth has been shown to both <a href="https://doi.org/10.1017/S0043887109990074">harm democracy</a> and <a href="https://www.journals.uchicago.edu/doi/abs/10.1017/S0022381613001229">reduce popular support for democratic institutions</a>. It has also been linked to <a href="https://doi.org/10.1177/0022343313503179">political violence</a> and <a href="https://www.jstor.org/stable/4145353">corruption</a>.</p>
<p>Financial crises – such as the kind that higher interest rates in the U.S. may spark – increase the chance of economic slowdowns or even recessions. Worryingly, the World Bank has warned that developing nations face a “<a href="https://www.worldbank.org/en/news/press-release/2023/01/10/global-economic-prospects">multi-year period of slow growth</a>” that will only increase rates of poverty. And history has shown that the impact of such economic conditions fall hardest on lower-skilled low-income people.</p>
<p>These effects are <a href="https://www.investopedia.com/terms/a/austerity.asp">compounded by government policies</a>, such as cuts in spending and government services, which, again, disproportionately hit the less well-off. And if a country is struggling to pay back sovereign debt as a result of higher global interest rates, then it also has less cash to help its poorest citizens.</p>
<p>So in a very real sense, a period of higher interest rates in the U.S. can have a detrimental effect on the economic, political and social well-being of developing nations.</p>
<p>There is a caveat, however. With inflation in the U.S. slowing, further interest rate increases may be limited. It could be the case that regardless of whether Fed policy has threaded the needle of slowing the U.S. economy but not by too much, it has nonetheless sown the seeds of more potentially severe economic – and social – woes in poorer nations.</p><img src="https://counter.theconversation.com/content/210006/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Cristina Bodea does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Almost two-thirds of low-income countries are at risk of debt distress – in part because of higher borrowing costs. And that isn’t the only problem.Cristina Bodea, Professor of Political Science, Michigan State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2059242023-05-22T07:10:56Z2023-05-22T07:10:56ZThe US could default on June 1 owing to gridlock over the debt limit; Biden vs Trump polls are close<p>The <a href="https://en.wikipedia.org/wiki/2023_United_States_debt-ceiling_crisis">United States debt limit</a> is a legislative limit on the overall debt the US government can incur. As the US keeps running budget deficits, the debt keeps increasing. Congress could deal with this permanently by either repealing the debt limit, or increasing it to a very large number. </p>
<p>But instead, Congress has only increased the debt limit enough to give grace for a year or two before it needs to be increased again. The last time the debt limit was increased was December 2021.</p>
<p>The US hit the debt limit on January 19 this year. The Treasury has been taking extraordinary measures to delay a default, but these <a href="https://home.treasury.gov/system/files/136/Debt-Limit-Letter-to-Congress-Members_20230515_McCarthy.pdf">measures could fail</a> as early as June 1. While the US has never defaulted, there were debt limit crises in 2011 and 2013.</p>
<p>The main reason for the 2011 and 2013 crises was divided government – Democrat Barack Obama was president and Republicans controlled the House of Representatives. This situation is the same now, with Democrat Joe Biden as president and Republicans controlling the House. Republicans have attempted to use the debt limit to demand spending cuts.</p>
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Read more:
<a href="https://theconversation.com/a-brief-history-of-debt-ceiling-crises-and-the-political-chaos-theyve-unleashed-205178">A brief history of debt ceiling crises and the political chaos they've unleashed</a>
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<p>Republicans only hold a 222-213 <a href="https://en.wikipedia.org/wiki/United_States_House_of_Representatives">House majority</a>, and it took 15 rounds of voting for Republican Kevin McCarthy to be <a href="https://en.wikipedia.org/wiki/2023_Speaker_of_the_United_States_House_of_Representatives_election">elected House speaker</a> in early January. But right-wing Republicans won concessions from McCarthy, and the speaker decides what comes to the floor for a vote. </p>
<p>To keep the right onside, McCarthy will probably deny a vote on any debt ceiling increase that excludes major spending cuts, and such cuts would be unacceptable to Democrats.</p>
<p>Democrats had overall control of the presidency, House and Senate until January 3 when the new House started. But they made no real attempt to increase the debt limit and avert a crisis until after the 2024 presidential election. If there is a default, the failure to increase the limit will come back to haunt Democrats, the US and the world economy.</p>
<p>A weaker economy in the presidential election year of 2024 is likely to hurt Biden, so Republicans have some incentive to not compromise on the spending cuts they are demanding.</p>
<p>On April 26, Republicans passed a bill through the House of Representatives by a <a href="https://clerk.house.gov/Votes/2023199">217-215 margin</a> that would raise the debt limit in return for big spending cuts that Democrats strongly oppose. All Democrats that voted were opposed.</p>
<p>This bill has no chance of passing the Democratic-controlled Senate, and would be vetoed by Biden. But it showed that Republicans could pass their agenda. Had the House not passed this bill or something similar, there would be more pressure on Republicans to pass a “clean” debt limit increase – an increase without any spending cuts.</p>
<p>As it is, McCarthy can argue that the House has done its job, and that Democrats need to give ground on spending cuts.</p>
<p>In the last week there have been negotiations over the debt limit between Democratic and Republican leaders, but these negotiations <a href="https://www.politico.com/newsletters/playbook/2023/05/21/gop-ratchets-up-debt-ceiling-demands-00098053?nname=playbook&nid=0000014f-1646-d88f-a1cf-5f46b7bd0000&nrid=0000014e-f0ed-dd93-ad7f-f8edad790000&nlid=630318">have broken down</a> in the last two days, with both sides blaming the other for changing their positions.</p>
<p>Left-wing Democrats have <a href="https://www.huffpost.com/entry/aoc-debt-limit-14th-amendment_n_64677a7de4b0ab2b97e6e71e">been urging Biden</a> to use <a href="https://en.wikipedia.org/wiki/Fourteenth_Amendment_to_the_United_States_Constitution#Section_4:_Validity_of_public_debt">Section 4 of the 14th Amendment</a> to the US Constitution, and effectively declare the debt limit unconstitutional. However, the US Supreme Court currently has a <a href="https://en.wikipedia.org/wiki/Supreme_Court_of_the_United_States#Membership">six-to-three right-leaning majority</a>, so it’s unclear whether they would support Biden.</p>
<h2>Trump way ahead of DeSantis in Republican primary polls</h2>
<p>Republicans and Democrats will both select their presidential candidates for the November 2024 election in a series of nominating contests in each state in early 2024, at which delegates to the national conventions are elected. When we are closer to the voting in the early states, polls of those states will be useful, but for now the national polling is better.</p>
<p>Former President Donald Trump has 53.5% of the vote in the <a href="https://projects.fivethirtyeight.com/polls/president-primary-r/2024/national/">FiveThirtyEight aggregate</a> of national Republican presidential primary polls. Florida Governor Ron DeSantis trails far behind on 20.8% and no other candidate has more than 6%. Since this aggregate started in early March, Trump has steadily increased his lead over DeSantis.</p>
<p>For the <a href="https://projects.fivethirtyeight.com/polls/president-primary-d/2024/national/">Democratic primary</a>, there are polls that list many possible candidates, which indicate that Biden could face a contest if a high-profile candidate were to enter. However, Biden will easily defeat the only two other candidates who have actually entered: Robert F Kennedy Jr and Marianne Williamson.</p>
<h2>General election Biden vs Trump polls are close</h2>
<p>If Biden and Trump both win their parties’ nominations, which current polling suggests is likely, we will have a November 2024 rematch of the 2020 contest which Biden won. The <a href="https://www.realclearpolitics.com/epolls/2024/president/us/general-election-trump-vs-biden-7383.html">RealClearPolitics average</a> of national Biden vs Trump general election polls currently has Trump leading Biden 44.2-42.8%.</p>
<p>A key reason why this match-up is close is that Biden’s ratings have slumped since the beginning of his presidency.</p>
<p>In his first six months as president, Biden’s approval rating was over 50% in the <a href="https://projects.fivethirtyeight.com/biden-approval-rating/">FiveThirtyEight</a> aggregate. But since October 2021, his approval rating has consistently been below 45%, while his disapproval has been over 50%. Biden’s ratings haven’t changed much in the last few months and are currently at 52.7% disapprove and 42.4% approve (net -10.4).</p>
<p>The two potential hurdles to Biden’s re-election are the economy and his age. A debt default would make the economy far worse, and Biden will be almost 82 by the November 2024 election, though Trump will be 78.</p><img src="https://counter.theconversation.com/content/205924/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adrian Beaumont does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Treasury has been taking extraordinary measures to delay a default, but these measures could fail as early as June 1.Adrian Beaumont, Election Analyst (Psephologist) at The Conversation; and Honorary Associate, School of Mathematics and Statistics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2029002023-03-30T12:27:44Z2023-03-30T12:27:44ZCan this former CEO fix the World Bank and solve the world’s climate finance and debt crises as the institution’s next president?<figure><img src="https://images.theconversation.com/files/518289/original/file-20230329-28-7q3t3y.jpg?ixlib=rb-1.1.0&rect=0%2C21%2C4848%2C3193&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ajay Banga is expected to become the next World Bank president.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/candidate-to-head-the-world-bank-ajay-banga-gestures-as-he-news-photo/1247854109">Issouf Sanogo/AFP via Getty Images</a></span></figcaption></figure><p>Over the past two years, a drumbeat of calls for reforming the World Bank has pushed its way onto the front pages of major newspapers and the agenda of heads of state.</p>
<p>Many low- and middle-income countries – the population the World Bank is tasked with helping – are falling deeper into debt and facing growing costs as the impacts of climate change increase in severity. A chorus of critics accuse the World Bank of <a href="https://www.bmz.de/en/news/press-releases/schulze-world-bank-annual-meetings-2022-125264">failing to evolve</a> to <a href="https://home.treasury.gov/news/press-releases/jy1258">meet the crises</a>.</p>
<p>The job of leading that reform now falls to <a href="https://www.washingtonpost.com/climate-environment/2023/02/23/biden-world-bank-nomination/">Ajay Banga</a>, an Indian American businessman and former CEO of Mastercard who was nominated by President Joe Biden to replace resigning World Bank President <a href="https://www.nytimes.com/2023/02/15/climate/david-malpass-world-bank.html">David Malpass</a>. </p>
<p>Banga, <a href="https://www.worldbank.org/en/news/press-release/2023/03/30/closing-of-nominations-for-world-bank-group-president">the only candidate</a> for the job, <a href="https://www.worldbank.org/en/news/press-release/2023/05/03/ajay-banga-selected-14th-president-of-the-world-bank">was confirmed</a> by the World Bank’s <a href="https://www.worldbank.org/en/about/leadership/directors">executive directors</a> on May 3, 2023. His five-year term as president begins on June 2. </p>
<figure class="align-center ">
<img alt="Ajay Banga, wearing a traditional Sikh turban and business suit, gestures as he speaks in front of a photo of workers picking vegetables." src="https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/518305/original/file-20230329-16-80inab.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Ajay Banga is a former Mastercard CEO, past chair of the International Chamber of Commerce and an American. The U.S. is the largest World Bank shareholder, and the institution’s president has historically been American.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/candidate-to-head-the-world-bank-ajay-banga-speaks-during-news-photo/1247898595">Tony Karumba/AFP via Getty Images</a></span>
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<p>There is no shortage of advice for what Banga and the World Bank need to do.</p>
<p>The <a href="https://www.cfr.org/backgrounder/what-does-g20-do">G-20</a> recently <a href="https://www.dt.mef.gov.it/en/attivita_istituzionali/rapporti_finanziari_internazionali/banche_sviluppo/revisione_indipendente/">issued a report</a> urging the World Bank and the other multilateral development banks to loosen their lending restrictions to get more money flowing to countries in need. A commission led by economists <a href="https://www.lse.ac.uk/granthaminstitute/publication/finance-for-climate-action-scaling-up-investment-for-climate-and-development/">Nicholas Stern and Vera Songwe</a> called for a rapid, sustained investment push that prioritizes transitioning to cleaner energy, achieving the <a href="https://sdgs.un.org/goals">U.N. sustainable development goals</a> and meeting the needs of increasingly vulnerable countries. </p>
<p>African ministers of finance will soon come out with their own “to do” list for the World Bank, and India’s minister of finance just pulled together <a href="https://www.devdiscourse.com/article/business/2368216-india-has-been-talking-about-how-multilateral-institutions-need-reform-sitharaman">an expert group</a> to consider World Bank reform.</p>
<p>Banga will walk into the job with these and many other to-do lists. Yet he will inherit a corporate culture that makes the World Bank Group <a href="https://documents1.worldbank.org/curated/en/099845101112322078/pdf/SECBOS0f51975e0e809b7605d7b690ebd20.pdf">too inwardly focused</a> and <a href="https://www.csis.org/analysis/us-treasury-secretary-janet-l-yellen-addresses-evolution-development-finance-csis">too slow to respond</a>.</p>
<p>I have <a href="https://fletcher.tufts.edu/people/staff/rachel-kyte">worked for the World Bank Group</a> and with it from the outside. I see four key roles – four “C’s” – that Banga will need to master from the outset. From his <a href="https://www.washingtonpost.com/climate-environment/2023/02/23/biden-world-bank-nomination/">track record</a> and his reputation for deep thoughtfulness, I am confident that he can.</p>
<h2>1) Act as a CEO and get the entire World Bank Group house in order.</h2>
<p>The World Bank Group <a href="https://www.worldbank.org/en/who-we-are">is a conglomerate</a> with four balance sheets, three cultures and four executive boards, plus a dispute resolution arm.</p>
<p>Lending to low- and middle-income countries is just part of its role. The World Bank Group also <a href="https://www.worldbank.org/en/who-we-are/ibrd">provides technical assistance</a> across all areas of economic development and invests in and provides <a href="https://www.miga.org/">risk insurance</a> to <a href="https://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/about+ifc_new">encourage companies to invest</a> in projects and places they might otherwise consider too risky. Its ability to mobilize private-sector finance and stretch every dollar is crucial for meeting the world’s development and climate adaptation and mitigation needs.</p>
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<figcaption><span class="caption">How the World Bank operates.</span></figcaption>
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<p>Banga will need to set clear goals for each part of the World Bank Group and get them working more effectively to help the world achieve its goals.</p>
<h2>2) Assume the mantle of collaborator in chief to take on the debt and climate crises.</h2>
<p>Many of the World Bank Group’s <a href="https://www.worldbank.org/en/about/annual-report/our-work">client countries</a> are facing both mounting debt and rising costs from climate change. </p>
<p>The high <a href="https://developmentfinance.un.org/fsdr2022">cost of borrowing</a> can hamper developing countries’ ability to invest in needed infrastructure to grow and protect their economies, and they fear being locked out of global trade as the United States’ green subsidies in the <a href="https://theconversation.com/big-new-incentives-for-clean-energy-arent-enough-the-inflation-reduction-act-was-just-the-first-step-now-the-hard-work-begins-188693">Inflation Reduction Act</a> and Europe’s border carbon tax may make it <a href="https://theconversation.com/as-us-eu-trade-tensions-rise-conflicting-carbon-tariffs-could-undermine-climate-efforts-198072">more difficult for them to compete</a>.</p>
<p>The <a href="https://gisbarbados.gov.bb/download/the-2022-barbados-agenda/">solutions</a> to cascading problems like these cannot be managed by one institution. However, the current multilateral development bank system – the World Bank Group and the <a href="https://www.cgdev.org/publication/regional-development-banks-abcs-ifis-brief">regional development banks</a> – is disjointed at best <a href="https://www.adb.org/sites/default/files/publication/156240/adbi-wp385.pdf">and competitive</a> at worst.</p>
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<p>In the past, the leaders of the development banks, the International Monetary Fund and the World Trade Organization have cooperated, more or less, depending on crises and personalities, and can move fast when they need to.</p>
<p>During the global financial crisis of 2008 and 2009, for example, the then-heads of the World Bank and the WTO hurried to <a href="https://www.wto.org/english/res_e/reser_e/ersd200916_e.pdf">develop trade finance facilities</a> to support banks in developing countries as capital fled to the U.S. and Europe. It took intense diplomacy to push wealthy countries and institutions to get money out the door <a href="https://www.reuters.com/article/financial-trade/update-2-global-trade-finance-gap-widens-as-recession-bites-idUSLI4771620090318">to shore up businesses and trade</a>. Success was measured not in months but in days.</p>
<p>The new president of the World Bank will need to support more radical collaboration among development financial institutions, including pooling capital and talent, to help respond quickly to countries’ needs.</p>
<p>It won’t be easy. Institutional rivalries run deep. But with <a href="https://www.reuters.com/business/us-expects-bidens-nominee-ajay-banga-be-elected-world-bank-chief-2023-03-29">budgets tight</a>, there is growing clarity that there is no choice – <a href="https://theconversation.com/how-putins-war-and-small-islands-are-accelerating-the-global-shift-to-clean-energy-and-what-to-watch-for-in-2023-196925">the capital that is already in the system</a> is the closest at hand and can be deployed to better effect if the institutions are willing to adapt.</p>
<h2>3) Be a convener.</h2>
<p>Overhauling how international finance works will require everyone to be on board – development banks, central banks, regulators, investment banks, pension funds, insurance companies and private equity.</p>
<p>Banga and <a href="https://www.imf.org/en/About">International Monetary Fund</a> Managing Director <a href="https://commission.europa.eu/persons/kristalina-georgieva_en">Kristalina Georgieva</a> can settle institutional differences and present a coordinated face to private investors and the <a href="https://clubdeparis.org/en/communications/page/permanent-members">major lending countries</a>, including China – which has emerged as <a href="https://www.devex.com/news/china-is-owed-37-of-poor-countries-debt-payments-in-2022-world-bank-102463">the biggest holder</a> of developing country debt – to speed up support to struggling countries.</p>
<p>On other issues, such as <a href="https://www.iucn.org/our-work/nature-based-solutions">nature-based solutions to climate change</a>, building resilience and economic inclusion, the World Bank Group can bring its significant resources and skills, including data analysis, to global conversations that it has been painfully absent from for the past four years.</p>
<h2>4) Be a champion for the most vulnerable.</h2>
<p>The world’s most vulnerable people are the World Bank Group’s ultimate beneficiaries. For those living on the front line of biodiversity loss and climate impacts, such as extreme heat, drought and flooding, the current international financial system is proving inadequate.</p>
<p>The World Bank Group’s management incentives are still too oriented to lending approved by the board, not the outcomes of that lending, advice and assistance.</p>
<p>Throughout its history, World Bank leaders have been able to make <a href="https://www.wto.org/english/res_e/reser_e/ersd200916_e.pdf">rapid changes</a> to better help vulnerable countries when they stay close to the needs of their ultimate beneficiaries and the goals that the world has set.</p>
<p>The next president faces turbulent times. Banga’s careful listening on his campaign tour signals that he <a href="https://www.ft.com/content/7f1046cc-10fe-4a29-a92b-f0955761477b">understands the complexity</a>. It’s an extraordinary moment in the <a href="https://www.cfr.org/backgrounder/world-bank-groups-role-global-development">history of the institution</a>, with sky-high expectations of what one leader needs to do.</p>
<p><em>This article, originally published March 30, 2023, has been updated with Banga’s approval to become World Bank president.</em></p><img src="https://counter.theconversation.com/content/202900/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rachel Kyte served in several roles at the World Bank Group from 2000 to 2015.</span></em></p>It’s a crucial time for the World Bank, with growing calls for reform and sky-high expectations of what one leader needs to do. A former World Bank official explains the challenges ahead.Rachel Kyte, Dean of the Fletcher School, Tufts UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2024962023-03-28T01:44:23Z2023-03-28T01:44:23ZDon’t let financial shame be your ruin: open conversations can help ease the burden of personal debt<figure><img src="https://images.theconversation.com/files/517807/original/file-20230327-28-t0byzo.jpg?ixlib=rb-1.1.0&rect=212%2C24%2C5177%2C3612&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>Nearly <a href="https://www.ipsos.com/en-nz/19th-ipsos-new-zealand-issues-monitor">two-thirds of New Zealanders</a> are worried about the cost of living, and a quarter are worried about <a href="https://www.canstar.co.nz/wp-content/uploads/2023/03/Consumer-Pulse-Report-NZ-2023-Final-4.pdf">putting food on the table</a>. But the <a href="https://visionwest.org.nz/food-hardship-part-one/">shame</a> that can come with financial stress is preventing some people from seeking help. </p>
<p>According to a recent survey, a third of New Zealanders were not completely truthful with their family or partners about the state of their finances, and 12% <a href="https://www.stuff.co.nz/business/money/129477493/financial-infidelity-research-finds-kiwis-hiding-debts-from-their-partners">actively hid their debt</a>. This shame and worry about money can spill over into <a href="https://www.nzherald.co.nz/bay-of-plenty-times/news/concerns-buy-now-pay-later-schemes-could-fuel-addiction-as-kiwis-spend-17b-last-year/VOV3VIDIG2MZBGJEGPMLGWDMJI/">addiction</a>, <a href="https://www.newsroom.co.nz/i-had-serious-concussion-bad-credit-and-15000-debt-abuse-survivor">violence</a> and <a href="https://corporate.dukehealth.org/news/financial-strains-significantly-raise-risk-suicide-attempts">suicide</a>. </p>
<p>Considering the effect of financial stress on our wellbeing, it is clear we need to overcome the financial stigma that prevents us from getting help. We also <a href="https://www.apa.org/topics/money/family-financial-strain">owe it to our kids</a> to break the taboo around money by communicating our worries and educating them on how to manage finances better. </p>
<h2>The burden of growing debt</h2>
<p><a href="https://www.stuff.co.nz/business/money/300817697/mortgage-pain-homeowners-facing-repayment-hikes-of-up-to-900-a-fortnight">Ballooning mortgage repayments</a> are compounding the financial distress of many New Zealanders. At the beginning of 2023, an estimated 11.9% of home owners were behind on loan payments, with more than <a href="https://www.rnz.co.nz/news/business/485045/data-shows-430-000-new-zealanders-behind-in-credit-repayments-in-january">18,400 mortgagees in arrears</a>. </p>
<p>Given the <a href="https://www.treasury.govt.nz/publications/an/an-21-01-html">majority of household wealth</a> in New Zealand is in property, our financial vulnerability is closely linked to the ebbs and flows of the <a href="https://content.knightfrank.com/research/84/documents/en/global-house-price-index-q2-2021-8422.pdf">second most overinflated property market</a> in the world. </p>
<p>There are also cultural reasons for growing financial distress. Many households have taken on significant debt to “<a href="https://www.stuff.co.nz/business/7616361/Keeping-up-with-the-Joneses">keep up with the Joneses</a>” and to pursue the quintessential <a href="https://www.interest.co.nz/property/99890/westpac-commissioned-survey-suggests-many-new-zealanders-still-pine-quarter-acre">quarter-acre dream</a>. Social comparison and peer pressure act as powerful levers contributing to problem debt and over-indebtedness. </p>
<p>The average household debt in New Zealand is more than <a href="https://tradingeconomics.com/new-zealand/households-debt-to-income">170% of gross household income</a>. That is higher than the United Kingdom (133%), Australia (113%) or Ireland (96%). </p>
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<h2>The rise of problem debt</h2>
<p>And we are digging a deeper hole. Over the past year, <a href="https://www.rnz.co.nz/news/business/485045/data-shows-430-000-new-zealanders-behind-in-credit-repayments-in-january">demand for credit cards increased by 21.7%</a>. The use of personal debt such as personal loans and deferred payment schemes <a href="https://www.nzherald.co.nz/business/demand-for-personal-credit-rises-arrears-also-up-as-cost-of-living-bites/YCEM74CII5FQBPJXO3UOG4Y3GY/">is also climbing</a>. There is a real risk this debt could become problem debt. </p>
<p>Problem debt can have severe and wide-reaching consequences, including <a href="https://theconversation.com/over-300-000-new-zealanders-owe-more-than-they-own-is-this-a-problem-173497">housing insecurity</a>, <a href="http://www.socialinclusion.ie/publications/documents/2011_03_07_FinancialExclusionPublication.pdf">financial exclusion</a> (the inability to access debt at affordable interest rates), <a href="https://www.tandfonline.com/doi/full/10.1080/07409710.2012.652016?journalCode=gfof20">poor food choices</a> and a plethora of <a href="https://bmcpublichealth.biomedcentral.com/articles/10.1186/1471-2458-14-489">health problems</a>. </p>
<p>Yet, the hidden <a href="https://spssi.onlinelibrary.wiley.com/doi/10.1111/sipr.12074">psychological</a> and <a href="https://link.springer.com/article/10.1007/s11205-008-9286-8">social cost of financial distress</a> remains often unspoken, overlooked and underestimated. </p>
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Read more:
<a href="https://theconversation.com/how-financial-stress-can-affect-your-mental-health-and-5-things-that-can-help-201557">How financial stress can affect your mental health and 5 things that can help</a>
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<p>Even before the pandemic, <a href="https://www.scoop.co.nz/stories/BU1909/S00616/research-shows-financial-stress-impacts-mental-wellbeing.htm">69% of New Zealanders were worried</a> about money. The share of people worrying about their financial situation was higher for women (74%), and particularly women aged 18-34 (82%). It is no coincidence that the latter are particularly at risk of problem debt through so-called <a href="https://acfr.aut.ac.nz/__data/assets/pdf_file/0008/691577/Gilbert-and-Scott-Study-2-Draft-v10Sept2022.pdf">“buy now, pay later” schemes</a>. </p>
<p>The stigma of financial distress extends beyond the vulnerable and the marginalised in our society. A growing number of <a href="https://www.rnz.co.nz/news/political/467417/middle-income-families-hoping-for-help-in-budget-as-rising-costs-sting">middle-class New Zealanders </a> are quietly suffering financial distress, isolated by financial stigma and the taboos around discussing money. When pressed, one in two New Zealanders would rather <a href="https://www.scoop.co.nz/stories/BU2203/S00384/research-shows-wed-rather-talk-about-politics-than-our-finances.htm">talk politics over money</a>. </p>
<h2>Time to talk about money</h2>
<p>Navigating financial distress and <a href="https://digitalcommons.law.seattleu.edu/cgi/viewcontent.cgi?article=2526&context=sulr">stigma</a> can feel overwhelming. Where money is a taboo subject, it may feel safer to withdraw, maintain false appearances, be secretive or shun social support. </p>
<p>This tendency to avoid open discussions and suffer in silence can lead to <a href="https://loneliness.org.nz/lonely/at-home/financially-struggling/">feelings of isolation</a> and contribute to <a href="https://theconversation.com/how-financial-stress-can-affect-your-mental-health-and-5-things-that-can-help-201557">poor mental health</a>, such as depression, anxiety and emotional distress. </p>
<p>Sadly, the trauma of living in financial distress can also <a href="http://irep.ntu.ac.uk/id/eprint/39442/1/1307565_Wakefield.pdf">break up families</a>. Losing the symbols of hard-gained success and facing the prospect of a reduced lifestyle can be tough. It often triggers feelings of personal failure and self doubt that deter us from taking proactive steps to talk openly and seek help. </p>
<p>But what can families do to alleviate some of this distress? </p>
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<h2>Seek help</h2>
<p>First, understand that <a href="https://www.ft.com/content/86767aac-98e0-4dae-8c5a-d3301b030703">you are not alone</a>. Over 300,000 New Zealanders <a href="https://theconversation.com/over-300-000-new-zealanders-owe-more-than-they-own-is-this-a-problem-173497">owe more than they earn</a>.</p>
<p>Second, seek help. There are many services that help people work through their financial situation and formulate a plan. In the case of excessive debts, debt consolidation or <a href="https://goodshepherd.org.nz/debtsolve/">debt solution loans</a> may help reduce the overall burden and simplify your financial situation. </p>
<p>For those struggling with increasing interest on their mortgages, reaching out to your bank early is critical. During the 2008 recession, banks in New Zealand <a href="https://www.beehive.govt.nz/release/banks-exchange-letters-crown-support-distressed-mortgage-borrowers">worked with customers</a> to avoid defaulting on mortgages, including reducing servicing costs, capitalising interest and moving households to interest-only loans. It is essential to understand that the <a href="https://www.stuff.co.nz/life-style/homed/real-estate/130677426/are-we-on-the-brink-of-a-wave-of-mortgagee-sales">banks do not want mortgagees to fail</a>, and that options exist. </p>
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Read more:
<a href="https://theconversation.com/are-you-financially-literate-here-are-7-signs-youre-on-the-right-track-202331">Are you financially literate? Here are 7 signs you're on the right track</a>
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<p>To help future generations avoid debt traps, we need open communication about money – also known as “<a href="https://link.springer.com/article/10.1007/s10834-020-09736-2">financial socialisation</a>”. This includes developing values, sharing knowledge and promoting behaviours that help build <a href="https://files.eric.ed.gov/fulltext/EJ1241099.pdf">financial viability and contribute to financial wellbeing</a>. </p>
<p>The lessons about handling money from family and friends are crucial for <a href="https://www.frontiersin.org/articles/10.3389/fpsyg.2020.02162/full">improving our children’s financial capability</a>, helping them be <a href="https://www.fsc.org.nz/it-starts-with-action-theme/growing-financially-resilient-kids">more financially resilient</a> and better able to survive the stresses we are experiencing now – and those <a href="https://www.stuff.co.nz/business/money/300836616/heres-how-much-household-costs-are-expected-to-increase">yet to come</a>.</p><img src="https://counter.theconversation.com/content/202496/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matt Raskovic is also a visiting professor at Zhejiang University in China and is also Vice-President Administration at the Academy of International Business (AIB). </span></em></p><p class="fine-print"><em><span>Aaron Gilbert receives funding from Te Ara Ahunga Ora (Retirement Commission).</span></em></p><p class="fine-print"><em><span>Smita Singh does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Personal debt in New Zealand is growing. But instead of hiding the true extent of what we owe, New Zealanders should be talking about how we got here – and what needs to change.Matevz (Matt) Raskovic, Associate Professor of International Business & Strategy, Auckland University of TechnologyAaron Gilbert, Professor of Finance, Auckland University of TechnologySmita Singh, Senior Lecturer International Business, Strategy & Entrepreneurship, Auckland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1921192022-10-26T09:35:43Z2022-10-26T09:35:43ZThe whole world is facing a debt crisis – but richer countries can afford to stop it<figure><img src="https://images.theconversation.com/files/491024/original/file-20221021-24-e2k7rw.jpg?ixlib=rb-1.1.0&rect=98%2C26%2C5883%2C3332&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/low-interest-rate-economic-recession-stock-1461426560">Shutterstock/Immersion Imagery</a></span></figcaption></figure><p>Countries across the world are drifting towards a <a href="https://www.imf.org/en/Blogs/Articles/2021/12/15/blog-global-debt-reaches-a-record-226-trillion">debt crisis</a>. Economic slowdowns and rising inflation have increased demands on spending, making it almost impossible for many governments to pay back the money they owe. </p>
<p>In normal times, those countries could simply take on new debt to replace the old debt. But international conditions have made it much more difficult to do this. </p>
<p>As a result, some of <a href="https://bondvigilantes.com/blog/2020/01/can-africas-wall-of-eurobond-repayments-be-dismantled/">those approaching</a> repayment deadlines will simply not be able to meet them. <a href="https://www.bbc.co.uk/news/world-61028138">Sri Lanka</a> and <a href="https://www.theguardian.com/world/2022/sep/16/zambia-debt-lenders-urged-to-cancel">Zambia</a> have already missed payments, throwing both countries into an <a href="https://www.worldbank.org/en/news/press-release/2022/10/06/debt-restructuring-and-implementation-of-deep-reforms-critical-for-sri-lanka-s-economic-stabilization">economic tailspin</a>, and offering perhaps a preview of impending global problems. </p>
<p>One of the main reasons for this worrying scenario is that countries across the world are essentially compelled to borrow money in US dollars or Euros, and keep foreign currency reserves for future debt payments. </p>
<p>But those reserves face other vital demands. They are needed to <a href="https://www.ft.com/content/bee3f1c7-4b7b-432b-ad35-6f506d173516">purchase oil</a> and other imports, and well as maintaining the <a href="https://markets.businessinsider.com/news/currencies/dollar-vs-yen-won-japan-korea-currency-wars-market-intervention-2022-9">credible value</a> of their domestic currency.</p>
<p>Unfortunately for many emerging economies, the reserves they hold are simply not enough to cover all of these demands – especially after energy prices soared when Russia invaded Ukraine. </p>
<p>At the same time, foreign currencies have become more expensive to buy because the <a href="https://theconversation.com/three-reasons-why-the-us-federal-reserve-bank-holds-the-world-in-its-hands-190936">US Federal Reserve</a> and the European Central Bank are raising interest rates. Sri Lanka reportedly has no reserves left, while Pakistan is said to be operating on a <a href="https://www.reuters.com/markets/asia/how-worried-should-we-be-about-pakistans-economy-2022-09-30/">month-to-month basis</a>.</p>
<p>Countries usually issue new bonds (think of them as <a href="https://theconversation.com/how-bonds-work-and-why-everyone-is-talking-about-them-right-now-a-finance-expert-explains-191550">tradeable IOUs</a>) to roll over old debt, a process that works just fine – until it doesn’t. In July 2022, no emerging countries <a href="https://www.wsj.com/articles/low-income-nations-turn-to-risky-bank-loans-11659399411">issued any new bonds</a>, indicating that investors are alarmed by the risk of low currency reserves, and are no longer interested in lending to them. </p>
<p>China too has <a href="https://www.wsj.com/articles/china-belt-road-debt-11663961638">scaled back its lending</a> since the beginning of the pandemic to limit its exposure to global risk. So without bond markets or China, countries are turning to alternative sources of credit. </p>
<p>Kenya and Ghana for example, <a href="https://www.wsj.com/articles/low-income-nations-turn-to-risky-bank-loans-11659399411">recently took out</a> bank loans to alleviate budget shortfalls. And while the precise terms of these loans are not known, banks usually demand higher interest rates and shorter repayment periods, which may only add to a country’s financial stress levels. </p>
<p>Other countries are turning to some of the oil-rich gulf states currently profiting from high energy prices. Egypt and Pakistan have <a href="https://www.wsj.com/articles/gulf-states-rich-from-oil-spread-influence-with-financial-lifelines-11663143410">received loans</a> from Saudi Arabia, the United Arab Emirates (UAE) and Qatar, while Turkey has also borrowed from the UAE. These loans may be welcome lifelines, but they also <a href="https://www.tandfonline.com/doi/abs/10.1080/09692290.2018.1455600">create opportunities</a> for richer countries to effectively buy influence and generate dependency. </p>
<p>Overall then, a multitude of factors are working against some of the world’s poorest and indebted countries. If a global debt crisis does ensue, expect <a href="https://www.sciencedirect.com/science/article/pii/S0304393207000323?casa_token=kVhblVUZmJsAAAAA:S8qDvYdtbLAkDaPW8X2J_w0Ij2sPYzE_QBd-A3LKiibOlJVrSeplV31Hu1QlMMMPF95DknmxZaM">political turmoil</a> to follow. </p>
<p>Sri Lanka’s default prompted wide spread <a href="https://www.bbc.co.uk/news/world-61028138">protests</a>, forcing the president to resign. And <a href="https://www.sciencedirect.com/science/article/abs/pii/S0014292116300587">research shows</a> that extremist parties perform better after a financial crisis.</p>
<h2>Liquidity and transparency</h2>
<p>But it is not too late for the international community to help avoid such a scenario. </p>
<p>First off, the US and the EU should slow down their interest rate hikes. These US and EU rate hikes slow economic growth around the world, as <a href="https://www.reuters.com/markets/rates-bonds/un-agency-warns-recession-linked-imprudent-policy-decisions-report-2022-10-03/">the United Nations warned</a>, and they are draining countries’ foreign currency reserves. </p>
<p>It is also not clear that these interest rate hikes are addressing domestic inflation problems. If wealthier countries wish to lower inflation without igniting a global debt crisis, they should lower the trade barriers that artificially raise prices. For example, both the US and EU levy tariffs on imported agricultural products, which increase the price of food for their consumers. </p>
<figure class="align-center ">
<img alt="Oil plant." src="https://images.theconversation.com/files/491046/original/file-20221021-18-dnas7u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/491046/original/file-20221021-18-dnas7u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/491046/original/file-20221021-18-dnas7u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/491046/original/file-20221021-18-dnas7u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/491046/original/file-20221021-18-dnas7u.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=490&fit=crop&dpr=1 754w, https://images.theconversation.com/files/491046/original/file-20221021-18-dnas7u.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=490&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/491046/original/file-20221021-18-dnas7u.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=490&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Oil prices are depleting reserves.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/saudi-price-war-oil-market-prices-1667830870">Shutterstock/Corona Borealis Studio</a></span>
</figcaption>
</figure>
<p>Second, the International Monetary Fund (IMF) should drop or at least soften the austerity requirements linked to its emergency lending. For example, Zambia’s <a href="https://www.imf.org/en/News/Articles/2022/08/31/pr22297-imf-executive-board-approves-new-extended-credit-facility-arrangement-for-zambia#:%7E:text=The%20IMF%20Board%20approves%20SDR%20978.2%20million%20%28about,foster%20higher%2C%20more%20resilient%2C%20and%20more%20inclusive%20growth.">new IMF deal</a> requires lower government subsidies on fuel and food at a time when prices are increasing. These policies are politically unpopular and encourage countries to seek help from China and oil-rich states instead. </p>
<p>Those countries that are compelled to borrow from the IMF face the risk of emboldening extremist political elements. Now is not the time to push orthodox fiscal requirements that are questionable in their effectiveness. Instead, the IMF should prioritise global liquidity during these difficult economic conditions. </p>
<p>Finally, China should take a leading, transparent role in debt negotiations. Many of the countries facing debt problems owe money to China, a process often shrouded in secrecy. </p>
<p>We know, for instance, that China has agreed to participate in restructuring negotiations in Zambia but has not done the same in Sri Lanka. China has provided emergency loans and debt relief to Pakistan and Argentina, though the effectiveness or extent of this aid is unknown. </p>
<p>A more transparent approach would reduce uncertainty in global markets and allow other creditors to coordinate with China. While China’s lending has not been transparent up until this point, more clarity would benefit China’s overseas investments as well as the global debt market. </p>
<p>Time is running out before many debt distressed countries face repayment day. Debt <a href="https://academic.oup.com/isq/article-abstract/59/3/587/1814886">problems are contagious</a>, as was seen with the Latin American debt <a href="https://journals.sagepub.com/doi/abs/10.1177/0094582x8901600105?casa_token=iEhEBTHeHsYAAAAA:gsScEPlFsA1fqwOWqa4DV5GOvoNkV-k7it2O-9aFnxHNmmy9YnbzOoIGhx-Hai6NK0htRUvNNCXr">crises of the 1980s</a>, the <a href="https://muse.jhu.edu/article/17036/summary?casa_token=oFCyylA4ILMAAAAA:KyX2bn0v1QcK5-0v61jcSESuaePxklLBkB4O53edVcI_QYI3P3EyGVopJDTjNUUp9g48LoumoA">Asian financial crises</a> of the 1990s, and the <a href="https://www.annualreviews.org/doi/abs/10.1146/annurev-polisci-051215-023101">Eurozone debt crises</a> of the 2010s. The global community should work together to avert another global economic spiral, and help millions of people avoid needless suffering.</p><img src="https://counter.theconversation.com/content/192119/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Patrick E. Shea does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Debt is becoming unaffordable.Patrick E. Shea, Senior Lecturer in International Relations and Global Governance, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1895702022-08-31T10:05:09Z2022-08-31T10:05:09ZChina has waived the debt of some African countries. But it’s not about refinancing<figure><img src="https://images.theconversation.com/files/481575/original/file-20220829-22-ljs9ny.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Chinese president Xi Jinping addressing the China-Africa Summit via a video link from Beijing on 17 June 2020. </span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/june-17-2020-chinese-president-xi-jinping-chairs-the-news-photo/1220782532?adppopup=true">Huang Jingwen/Xinhua via Getty Images</a></span></figcaption></figure><p>In mid-August, China’s Ministry of Foreign Affairs surprised the world with a <a href="https://twitter.com/Chinamission2un/status/1560394350361776130?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1560394569446989828%7Ctwgr%5E27018487452d760cb02bb7c5e6fe673a0923a51c%7Ctwcon%5Es2_&ref_url=https%3A%2F%2Fmultipolarista.com%2F2022%2F08%2F20%2Fchina-forgives-debt-africa%2F">series of announcements</a>. Wang Yi, Beijing’s most senior diplomat, promised extensive debt relief for some of the world’s poorest countries. The announcement was made at the ministerial meeting of the <a href="https://www.econstor.eu/bitstream/10419/248242/1/sais-cari-bp01.pdf">Forum for China Africa Cooperation</a>. </p>
<p>In addition to increasing food assistance to the continent, Wang committed to <a href="https://www.voanews.com/a/china-cancels-23-loans-to-africa-amid-debt-trap-debate-/6716397.html">no longer demanding repayment</a> of concessional loans that in the recent past had reached maturity, but which 17 African states had failed to pay off. </p>
<p>Outstanding balances on loans mostly extended by China’s Ministry of Commerce (or, less frequently, The Export-Import Bank of China) are thus slated to be <a href="https://www.pinsentmasons.com/out-law/news/china-to-forgive-23-belt-and-road-loans-to-17-african-countries">cancelled</a>.</p>
<p>Details about beneficiaries and credit lines are still to be released. But from an African standpoint this was welcome – if somewhat expected – news. </p>
<p>Wang’s proclamation was timely in light of the <a href="https://sdgpulse.unctad.org/debt-sustainability/">growing sense of a looming debt crisis</a> that threatens many developing countries. This includes a number on the African continent. Combined private and public external debt of African states more than quintupled between 2000 and 2020. Chinese public and private lenders <a href="https://www.reuters.com/world/africa/african-states-private-debts-three-times-that-owed-china-2022-07-11/">accounted</a> for 12% of the continent’s US$696 billion external debts in 2020. </p>
<p>The continent’s <a href="https://www.brookings.edu/wp-content/uploads/2019/04/africa_sovereign_debt_sustainability.pdf">average debt-to-GDP ratios exceeded 50%</a> prior to the pandemic. The most recent Africa Economic Outlook from the African Development Bank expects Africa’s <a href="https://www.afdb.org/en/documents/african-economic-outlook-2022">debt-to-GDP ratio to be 70% this year</a>. As of February 2022, 23 African countries were either in debt distress or at risk of it. </p>
<p>The recent economic meltdown and toppling of the <a href="https://www.nytimes.com/2022/05/14/world/asia/sri-lanka-rajapaksa.html">Rajapaksa family regime in Sri Lanka</a> rattled countries from Ghana to South Africa. The events stoked fears that panicked markets might question the solvency of African sovereigns next. </p>
<p>Ghana and South Africa are particularly worried about a vicious cycle of downgrades by the rating agencies, and rising trade imbalances. Other fears include worsening pressures on domestic currencies and chances of bondholders seeking to exit African markets. These would accelerate financial instability.</p>
<p>Africa will take whatever relief it can get under such circumstances.</p>
<p>The last time China forgave debt in Africa, at the end of 2020, it wrote off <a href="http://www.sais-cari.org/debt-relief">US$113 million</a> for various countries. This points to the need not to overstate the debt forgiveness.</p>
<h2>Geopolitics</h2>
<p>Beijing’s announcement was largely already priced into the strategy of many African central banks. Chinese interest-free loans are frequently cancelled. And it’s widely understood that when China extends such credit lines, they are rarely ever fully paid back. </p>
<p>Beijing certainly was not counting on the likes of Burundi, Congo or Mozambique to service these debts. And it has <a href="https://nairametrics.com/wp-content/uploads/2020/06/WP-39-Acker-Brautigam-Huang-Debt-Relief-2.pdf">regularly rescheduled loans to African sovereigns</a> worth billions in the last 20 years. </p>
<p>In addition, the impact of China’s latest move on Africa’s overall debt profile is likely to be limited. Beijing’s gesture will not reduce the increase in sovereign yields (interest on bonds). It will also not ease the downward pressure on exchange rates that so many African states have been <a href="https://www.economist.com/middle-east-and-africa/2022/04/30/debt-repayment-costs-are-rising-fast-for-many-african-countries">experiencing in the last year</a>.</p>
<p>This does not mean, however, that Wang Yi’s vows were not newsworthy. For some individual countries, this round of Chinese cancellations might have an impact. Most of Africa’s debts to China are owed by five states – Angola, Ethiopia, Kenya, Nigeria and Zambia. Any scrapping of outstanding balances could usefully help rebalance their liabilities away from an overdependence on Beijing.</p>
<p>For Africa’s very poorest countries – say, Madagascar or Niger – cancellations of even US$50 million would make a meaningful difference to their ability to pay for basic services. </p>
<p>But on the whole, the political significance of the latest developments is likely to be greater than their financial impact. </p>
<p>This is poignantly illustrated by the fact that Beijing’s debt relief proposals were accompanied by much fanfare, contrary to previous cancellations. This reflects the pressure China feels it is under in the <a href="https://www.econstor.eu/bitstream/10419/222271/1/1702649938.pdf#page=42">international debt debate</a>. </p>
<p>The Trump administration accused China of ensnarling developing countries by extending credit to debtors Beijing knows lack the solvency to pay it back. As (former) US vice-president Mike Pence <a href="https://trumpwhitehouse.archives.gov/briefings-statements/remarks-vice-president-pence-administrations-policy-toward-china/">put it</a> in 2018</p>
<blockquote>
<p>China uses so-called ‘debt diplomacy’ to expand its influence … offering hundreds of billions of dollars in infrastructure loans to governments from Asia to Africa to Europe and even Latin America.</p>
</blockquote>
<p>Such “debt traps” are deliberately being created so China can force poor African states to vote with it in the UN General Assembly, support its positions on Taiwan or acquire valuable real estate in Africa that can be converted into military bases. Or so the narrative goes. </p>
<p>The Biden administration has been less direct in its allegations of Chinese debt trap diplomacy. But it too has put Beijing on the defensive by accusing it of <a href="https://www.voanews.com/a/archive_yellen-says-concerned-debt-relief-could-aid-chinese-lenders/6206878.html">holding African states over a barrel through its creditor power</a>.</p>
<p>In addition, <a href="https://blogs.lse.ac.uk/africaatlse/2022/08/01/how-the-us-china-rivalry-is-undermining-efforts-to-address-africas-debt/">flagship initiatives of the World Bank and the International Monetary Fund</a> have been strongly shaped by allegations about <a href="https://www.heritage.org/global-politics/report/chinese-corruption-africa-undermines-beijings-rhetoric-about-friendship-the">China’s encouragement of parallel public finance accounting</a> and its <a href="https://www.piie.com/sites/default/files/documents/pb21-10.pdf">reluctance to accept Paris Club conventions</a> for facilitating debt restructurings. </p>
<p>Despite the fact that African liabilities to private creditors – especially bondholders – have <a href="https://www.tandfonline.com/doi/full/10.1080/00396338.2022.2078054">grown much more rapidly</a> in the last decade than debts owed to Beijing, the international perception is one of singular Chinese intransigence in helping to resolve Africa’s resurgent indebtedness.</p>
<h2>Beijing tries to push back</h2>
<p>China’s public relations problem thus has real world consequences and leaves it in a quandary. Although Foreign Minister Wang <a href="https://www.fmprc.gov.cn/eng/zxxx_662805/202208/t20220819_10745617.html">condemned</a> a “zero-sum Cold War mentality” in his comments accompanying the promised debt relief for 17 African countries, his rebuttal too was clearly intended to score some geopolitical gains.</p>
<p>His desire to manoeuvre China out of the defensive position it finds itself in has also been evident in Beijing’s <a href="https://www.wsj.com/articles/zambia-restructuring-offers-clues-on-chinas-willingness-to-ease-debts-of-poor-countries-11659198874">recent concessions to help recurrent defaulter Zambia</a> restructure its liabilities. Chinese concessions played a key role in reaching a <a href="https://worldview.stratfor.com/article/what-zambian-debt-talks-could-mean-chinese-borrowers-africa">debt agreement for Zambia</a> that potentially sets a precedent for how Beijing could work with other lenders on similar assistance for other countries. The Zambian deal was done under the <a href="https://www.imf.org/en/About/FAQ/sovereign-debt#Section%205">G20 Common Framework for Debt Treatments</a>, which also requires an International Monetary Fund programme to receive effective relief. </p>
<p>This mix of concessions and pushback is contextualised by the fact that the sense of inevitable Chinese ascendancy that in the last decades accompanied Beijing’s overtures on the continent has somewhat faded in recent years. The scaling down of the ambitions of Xi Jinping’s Belt and Road Initiative (including <a href="https://www.scmp.com/news/china/diplomacy/article/3163576/end-line-chinas-big-belt-and-road-funding-africa">much reduced credit lines for African states</a> as Beijing prioritises domestic objectives) has perplexed many on the continent. So did the <a href="https://chinaglobalsouth.com/2021/12/01/surprise-that-china-did-not-commit-more-of-its-imf-special-drawing-rights-allocation-to-africa/">earlier decision</a> to only allocate to Africa US$10 billion in special drawing rights through the International Monetary Fund, while China has little obvious use for its quota of US$38 billion.</p>
<h2>Ignoring African priorities</h2>
<p>Wang Yi’s announced cancellation of loan balances that were unlikely to be serviced in full anyway therefore appears at this moment to be a low-cost political move for China to reaffirm its deep ties with African sovereigns and emphasise mutual goodwill. In the short term, that might be the case. </p>
<p>But fundamentally, Beijing’s decision does little to alter Africa’s growing indebtedness. Amid geopolitical posturing by China and the US, there is still little sign that global powers or the international financial institutions will finally tackle the <a href="https://www.tandfonline.com/doi/full/10.1080/00396338.2022.2078054">systemic drivers of the resurgence in African debt</a>. In that sense, China’s recent announcement is, unfortunately, business as usual.</p><img src="https://counter.theconversation.com/content/189570/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Harry Verhoeven does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The latest cancellation reflects the pressure China feels it’s under in the international debt debate.Harry Verhoeven, Senior Research Scholar at the Center on Global Energy Policy, Columbia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1414782020-06-26T07:24:27Z2020-06-26T07:24:27ZSouth Africa’s new budget cushions the coronavirus blow – but only briefly<figure><img src="https://images.theconversation.com/files/344070/original/file-20200625-33515-1vyskl3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Parliament will almost certainly rubber-stamp Finance Minister Tito Mboweni's supplementary budget</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>The <a href="http://www.treasury.gov.za/documents/national%20budget/2020S/speech/speech.pdf">adjustment budget</a> tabled by South Africa’s finance minister, Tito Mboweni, this week is less an adjustment than a new budget. That was necessitated by three things: a collapse in economic activity, a large decline in tax revenue collection, and the need to increase the money allocated to departments and programmes linked to the government’s COVID-19 response.</p>
<p>The adjustments to the 2020 budget partly cushion the initial blow of the COVID-19 pandemic and the government’s lockdown. But the relief is only temporary and measures to contain the growth in debt will bite hard in years to come. Some cried wolf about austerity budgets in South Africa after the global financial crisis in 2008 before they were actually a reality. In 2021, the wolf will likely be at the door.</p>
<p>The treasury predicts that revenue will be R1.1 trillion instead of R1.4 trillion – R300 billion less than projected in February this year. Proposed spending is now R40 billion more than in the February budget, although R7 billion of this is debt-service costs. The headline result is that the main budget deficit – the gap between government’s income and spending – will balloon to be 14.46% of gross domestic product instead of the planned 6.8%. </p>
<p>The government intends to cover part of that by borrowing about US$7 billion from multilateral institutions like the <a href="https://www.iol.co.za/news/politics/new-development-bank-provides-sa-with-1bn-covid-19-loan-49684714">New Development Bank</a> and the <a href="https://www.reuters.com/article/us-health-coronavirus-safrica/south-africa-says-over-4-billion-available-from-imf-world-bank-to-fight-covid-19-idUSKCN2261ZE">International Monetary Fund</a>. But that will finance less than half of the R344 billion increase in the borrowing requirements. This means more conventional borrowing at a time when the costs of doing so, after <a href="https://www.businesslive.co.za/bd/opinion/2020-04-07-sa-can-move-from-junk-status-to-comeback-kid-by-doing-the-right-things/">recent credit downgrades</a>, are high.</p>
<p>The scale of the changes renders the country’s annual budget tabled in February redundant by normal standards, along with much of parliament’s interrogation of those proposals in subsequent months. From the onset of the lockdown it was clear that this would be the case. So parliament could, and should, have played a more proactive role by, for example, facilitating public engagement with the treasury on fiscal options for responding to the effects of the pandemic and lockdown.</p>
<p>The legislature’s lacklustre approach will mean that, <a href="https://theconversation.com/south-africa-needs-a-functioning-parliamentary-budget-office-nows-the-time-to-fix-it-117555">as has been the case in non-crisis periods</a>, the minister’s proposals will almost certainly be rubber-stamped with no substantive public consultation or influence. And that is particularly egregious given the serious implications for all South Africans of the dramatic worsening of the country’s finances since February. </p>
<h2>Lockdown froze economic activity</h2>
<p>The collapse in economic activity at the root of this is the result of both the pandemic itself and the government’s response. Fear of the virus and basic measures such as social distancing, travel restrictions and limits on gatherings would have had a significant impact on economic activity anyway. But the lockdown is arguably the larger factor. It stopped most economic activity by decree. And that is also why the government is now moving hastily <a href="https://www.reuters.com/article/us-health-coronavirus-safrica/south-african-president-says-lockdown-to-ease-from-june-1-idUSKBN2300PQ">to ease it</a>, even as the rate of new infections <a href="https://www.iol.co.za/news/south-africa/confirmed-covid-19-cases-in-sa-rise-to-111-796-with-103-more-deaths-49851343">increases</a>.</p>
<p>The budget indicates that R142 billion has been allocated to COVID-19 measures – approximately 9% of total spending. That includes a R41 billion increase in social grants, which is lower than the originally announced R50 billion. As indicated by the bigger picture, most of this is not new spending. About R110 billion comes from various forms of reallocation from other, previously planned government expenditure areas. The full details of how such re-allocations happen, and the possible consequences for public service delivery of the associated trade-offs, will likely only be available after the fact.</p>
<p>Reduced economic activity has meant reduced tax collection. The fall in revenue is worsened by tax relief measures to cushion businesses and employees from the effect of the lockdown restrictions and broader economic downturn. The bigger consequence of this is that the ratio of national debt to GDP, which was already unprecedentedly high and repeatedly above targets, will increase to 81.8% instead of 65.6%. The treasury states its intention to get this under control through a series of measures that will be announced in the medium-term budget policy statement in October and the 2021 budget.</p>
<p>One dimension of those proposals will seek to raise an extra R40 billion of tax revenue. Strangely, however, the adjusted budget includes no proposals to increase taxes on the minority of individuals who will maintain high, stable incomes in the current year. </p>
<p>So despite rhetoric that sacrifices will need to be made, there appears to be little appetite to increase the contributions to government’s efforts from the most well-off in society during the pandemic. This group includes the politicians and officials making these decisions.</p>
<h2>Debt crisis looms</h2>
<p>The budget proposals seek to emphasise the need for future, drastic action with projections showing that national debt under a scenario of “public finance as usual” will increase to 106% of GDP over the next few years. </p>
<p>Historical precedent suggests that the chances of a developing country avoiding a debt crisis at that level of debt for any sustained period of time are very low. </p>
<p>However, there were already few substantive ideas for changing the pre-pandemic outlook. It’s therefore doubtful that the treasury has the ability to come up with ideas in the face of an even more dire situation. There has been a great deal of talk about the need for “structural reforms”. But those that have been placed on the table <a href="https://theconversation.com/budget-shows-treasury-is-desperately-short-of-ideas-to-fix-south-africas-economic-woes-132544">don’t hold up to close scrutiny</a>. Instead, they are simply the most recent manifestation of a view that privatisation of various kinds is some kind of panacea for state failure.</p>
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Read more:
<a href="https://theconversation.com/budget-shows-treasury-is-desperately-short-of-ideas-to-fix-south-africas-economic-woes-132544">Budget shows treasury is desperately short of ideas to fix South Africa's economic woes</a>
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<p>In reality, the kinds of sweeping governmental, social and economic changes required to change the country’s trajectory have for some time been outside the scope of what a treasury should, or is capable of, determining. South Africa has not come to terms with that and so there is little ability to conceive of alternative approaches, never mind adopt them.</p><img src="https://counter.theconversation.com/content/141478/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Seán Mfundza Muller receives funding from a European Union-funded project, "Putting People back in Parliament", led by the Dullah Omar Institute (University of the Western Cape), in collaboration with the Parliamentary Monitoring Group, Public Service Accountability Monitor (Rhodes) and Heinrich Boell Foundation (South Africa). He also receives funding from the Council on Higher Education for research into the effects of recent higher education policy decisions. He is affiliated to the Johannesburg Institute for Advanced Study and the Public and Environmental Economics Research Centre (University of Johannesburg), regularly making inputs to Parliament oversight of the national budget, advising civil society groups on public finance matters and consulting for private sector organisations on an ad hoc basis. The views expressed are his own.</span></em></p>National Treasury is incapable of coming up with the sweeping governmental, social and economic changes required to dig South Africa out of its economic hole.Seán Mfundza Muller, Senior Lecturer in Economics, Research Associate at the Public and Environmental Economics Research Centre (PEERC) and Visiting Fellow at the Johannesburg Institute of Advanced Study (JIAS), University of JohannesburgLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1198892019-07-18T11:58:27Z2019-07-18T11:58:27ZBetting on speculative geoengineering may risk an escalating ‘climate debt crisis’<figure><img src="https://images.theconversation.com/files/282704/original/file-20190704-51312-1v5vsr8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Vladi333 / shutterstock</span></span></figcaption></figure><p>The opening of the Oscar-winning film The Big Short, a comedy-drama on the global financial crisis of 2007-2008, begins with a <a href="https://quoteinvestigator.com/2018/11/18/know-trouble/">famous quote</a>: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”</p>
<p>This phrase captures one of the main <a href="https://doi.org/10.1080/08913810902952903">reasons</a> why the US housing bubble popped in 2008, triggering the worst economic recession since the 1930s. The movie portrays an eccentric hedge fund manager discussing the idea of betting <em>against</em> subprime <a href="https://www.investopedia.com/terms/m/mortgage_bond.asp">mortgage bonds</a>. The investment bankers, at first, reply politely: “Those bonds only fail if millions of Americans don’t pay mortgages. That’s never happened in history.”</p>
<p>But it happened. And as a consequence, many people worldwide have suffered severely, and the enduring effects still haunt us, politically and economically, even <a href="https://www.penguin.co.uk/books/56199/crashed/9781846140365.html">a decade later</a>.</p>
<p>In a new paper published in <a href="https://doi.org/10.1080/14693062.2019.1623165">Climate Policy</a>, we argue that a similar tragic “debt crisis” could unfold for climate change. The “debt” would be measured in <a href="https://www.cicero.oslo.no/en/carbonbudget-for-dummies">excess carbon emissions</a>, which will keep accumulating until we reach net-zero. In this scenario, the bankers are those who assume that the debt will be paid back by removing carbon from the atmosphere. </p>
<p>But such a bet will be necessary if we recklessly embark on the strategy of reducing emissions slowly and removing carbon later, while in the meantime using speculative technology to block out heat from the sun. Among climate scientists and policy analysts, this is the so-called temperature “overshoot and peak-shaving” scenario.</p>
<h2>‘Overshoot and peak-shaving’</h2>
<p>In December 2015, the world adopted the <a href="https://theconversation.com/five-things-you-need-to-know-about-the-paris-climate-deal-52256">Paris Agreement</a> and pledged to limit global temperature rise well below 2°C – if not 1.5°C – above pre-industrial levels. Despite that, global CO₂ emissions continue to <a href="https://doi.org/10.1038/d41586-018-07585-6">rise</a>.</p>
<p>The slow and uneven pace of global emissions reductions is increasing the likelihood of <a href="https://doi.org/10.1126/science.316.5826.829b">“overshoot” scenarios</a>, in which warming will temporarily exceed 1.5 or 2°C, but will later fall to the target temperature through the large-scale deployment of <a href="https://www.carbonbrief.org/explainer-10-ways-negative-emissions-could-slow-climate-change">negative emissions technologies</a>. These remove CO₂ from the atmosphere by, for example, planting trees or scrubbing it through chemical filters and burying it deep underground.</p>
<p>But the world would still need to adapt to the <a href="https://doi.org/10.1038/nclimate3179">impacts of increased warming</a> during the overshooting period. Because of this concern, the idea of so-called “<a href="https://doi.org/10.1098/rsta.2016.0454">peak-shaving</a>” has also emerged among some scientists who want to avoid such an overshoot by temporarily using solar geoengineering.</p>
<p><a href="https://www.carbonbrief.org/explainer-six-ideas-to-limit-global-warming-with-solar-geoengineering">Solar geoengineering</a> means dimming sunlight itself. In theory, the Earth could be cooled very quickly by, for example, spraying sulphate aerosols in the upper atmosphere.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=443&fit=crop&dpr=1 600w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=443&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=443&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=557&fit=crop&dpr=1 754w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=557&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/282694/original/file-20190704-51305-14pi6y3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=557&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Small particles in the upper atmosphere could reflect a few percent of incoming solar radiation.</span>
<span class="attribution"><a class="source" href="https://en.wikipedia.org/wiki/File:SPICE_SRM_overview.jpg">Hughhunt</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The concept of an “overshoot and peak-shaving” scenario is therefore based on the temporary use of solar geoengineering, combined with large-scale deployment of negative emissions technologies.</p>
<p>In this scenario, the two technologies are in a mutually dependent relationship – solar geoengineering is used to keep the temperature down for the time being, while negative emissions technologies are used to reduce atmospheric CO₂ to the point where solar geoengineering is no longer needed. </p>
<h2>Emissions debt and temperature debt</h2>
<p>But this <em>assumed</em> reciprocity may not work as intended. Here, the notion of debt is useful. As the sociologist <a href="https://doi.org/10.1111/1467-954X.12442">Lisa Adkins</a> suggests, the logic of debt rests on a promise to pay (back) in the future. In this sense, both overshooting and peak-shaving can be seen as acts of “borrowing” or “creating debt”.</p>
<p>Overshooting avoids reducing carbon emissions today by effectively borrowing emissions from the future (creating “emissions debt”), with a promise to pay back that debt later through negative emissions technologies.</p>
<p>Peak-shaving is borrowing global temperature (creating “temperature debt”) through the temporary use of solar geoengineering to cancel excess warming until the point when no further borrowing, of either sort, is needed.</p>
<p>In such an outcome the world will take on a double debt: “emissions debt” and “temperature debt”.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=221&fit=crop&dpr=1 600w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=221&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=221&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=278&fit=crop&dpr=1 754w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=278&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/282757/original/file-20190704-51262-f0xf2r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=278&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Emissions debt results from the near-term excess of CO₂ emissions in the overshoot compared to the non-overshoot scenario, while temperature debt results from the temporary masking of warming committed by excess emissions above the target temperature.</span>
<span class="attribution"><span class="source">Asayama & Hulme</span></span>
</figcaption>
</figure>
<h2>The analogy with housing loans</h2>
<p>The fact of being indebted may not sound so bad. (Almost everyone has a debt of some kind in their everyday life, right?) But the key question is: can we duly pay off this “climate debt”? How credible is the promise?</p>
<p>Here, the analogy with housing loans is most useful for properly rating the riskiness of such debt repayment.</p>
<p>Given that overshoot allows slow rates of emissions reductions by “promising” that delays can be compensated later through carbon removal, this looks a bit like borrowing an adjustable-rate <a href="https://www.investopedia.com/terms/s/subprime_mortgage.asp">subprime mortgage</a> loan. Peak-shaving, on the other hand, is more like borrowing <a href="https://www.investopedia.com/terms/s/secondmortgage.asp">additional loans</a> for “home improvement”, which maintains house values – (keeps global temperature constant during the overshooting period). </p>
<p>Since most negative emissions technologies are still <a href="https://theconversation.com/why-we-cant-reverse-climate-change-with-negative-emissions-technologies-103504">speculative</a> or under development, overshoot should be rated like a <em>subprime</em> loan with a high risk of default. Just as American homeowners weren’t able to keep paying their mortgages after all, so negative emissions technologies may never be an effective enough way to take carbon out of the atmosphere.</p>
<p>This doesn’t sound like a secure, feasible investment. The failure to keep the overshoot promise of later repayment would lead to endless peak-shaving. Solar geoengineering would become an ongoing necessity – an unpayable massive “climate debt” accumulating year-by-year.</p>
<h2>Framing matters — let’s not blind ourselves</h2>
<p>Concerns over crossing so-called “tipping points” – paving the way toward a “<a href="https://theconversation.com/hothouse-earth-heres-what-the-science-actually-does-and-doesnt-say-101341">hothouse Earth</a>” – may push some people towards accepting overshooting and peak-shaving. But because this is a <em>speculative</em> scenario, it matters how we <a href="https://doi.org/10.1080/17524030903529749">frame</a> it. </p>
<p>Some scientists say that solar geoengineering is like a <a href="https://www.seas.harvard.edu/news/2019/03/finding-right-dose-for-solar-geoengineering">drug to lower high-blood pressure</a> – an overdose is harmful, but a “well-chosen” and limited dose can lower your risks, helping you have a healthier life.</p>
<p>They suggest that solar geoengineering is not a substitute for cutting emissions but a <a href="https://doi.org/10.1098/rsta.2016.0454">supplement</a> for containing global temperature increases. But this works only if negative emissions technologies are rolled out very swiftly on a massive scale.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/blocking-out-the-sun-wont-fix-climate-change-but-it-could-buy-us-time-50818">Blocking out the sun won't fix climate change – but it could buy us time</a>
</strong>
</em>
</p>
<hr>
<p>The housing loans analogy sheds light on an important assumption that is implicitly built into such a scenario, namely that overshooting is simply like borrowing money (for example, a mortgage) and that people pay back mortgages. This was also the unquestioned assumption in the run up to the US housing market crisis and it created the <a href="https://doi.org/10.1093/rfs/hhp033">systemic failure</a> to notice the growing risk of the bubble bursting.</p>
<p>We shouldn’t fool ourselves into believing that a similar “debt crisis” will not happen for managing the risk of climate change. Beware the dubious promises of “overshoot and peak-shaving” technologies – they may well turn out to be risky subprime loans.</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=140&fit=crop&dpr=1 600w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=140&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=140&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=176&fit=crop&dpr=1 754w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=176&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/263883/original/file-20190314-28475-1mzxjur.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=176&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p><em><a href="https://theconversation.com/imagine-newsletter-researchers-think-of-a-world-with-climate-action-113443?utm_source=TCUK&utm_medium=linkback&utm_campaign=TCUKengagement&utm_content=Imagineheader1119889">Click here to subscribe to our climate action newsletter. Climate change is inevitable. Our response to it isn’t.</a></em></p><img src="https://counter.theconversation.com/content/119889/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shinichiro Asayama receives funding from the Japan Society for the Promotion of Science, Grants-in-Aid for JSPS Research
Fellow (17J02207). </span></em></p><p class="fine-print"><em><span>Mike Hulme does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The world economy collapsed when homeowners couldn’t repay subprime mortgages. We’re now making a similar bet on ‘repaying’ carbon emissions.Shinichiro Asayama, Visiting Scholar at Department of Geography, University of CambridgeMike Hulme, Professor of Human Geography, University of CambridgeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1014662018-08-13T13:29:43Z2018-08-13T13:29:43ZTurkey’s lira crisis: ‘economic war’ sees Erdoğan look east for new allies<p>Global markets are on edge once again, this time thanks to the Turkish lira. It crashed more than 15% against the US dollar, euro and pound sterling on August 10 and continued to fall when markets reopened after the weekend on August 13. </p>
<p>The latest trigger was Donald Trump’s <a href="https://twitter.com/realDonaldTrump/status/1027899286586109955">announcement</a> that he would double import tariffs on Turkish steel and aluminium. But the lira has been falling consistently over the past year as markets fear for the president’s increasing control over the economy.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1027899286586109955"}"></div></p>
<p>With their mammoth depth and reach, global currency markets reflect big shifts to new economic and political realities. Sterling dropped by more than 10% when it became clear that <a href="https://theconversation.com/brexit-shock-has-caused-a-sterling-crash-of-historic-proportions-heres-just-how-bad-it-is-for-the-pound-62191">the UK had voted to leave the EU</a> in June 2016. Currency markets can also hasten these shifts, for example in 1992 when <a href="https://www.theguardian.com/business/2012/sep/13/black-wednesday-20-years-pound-erm">the UK crashed out of Europe’s fixed currency regime</a>, the Exchange Rate Mechanism, after sustained runs on sterling in currency markets. </p>
<p>The lira crisis therefore – at the very least – reflects the political and economic turmoil taking place in Turkey. It could also play a key role in shifting the country from relying on the West to aid its economic development and turning east to Russia and China for growth and investment.</p>
<h2>Crisis and contagion</h2>
<p>The underlying economic cause for the crisis is simply a lack of confidence in Turkey’s economy. Inflation is spiralling (currently <a href="https://tradingeconomics.com/turkey/inflation-cpi">more than 15%</a>), Turkish companies are saddled with foreign debt and the country has one of the world’s largest current account deficits in proportion to its economic output, heightening fears of a debt crisis. </p>
<p>As an open economy since the late 1980s, Turkey has attracted significant international capital flows. These flows, some of which are highly mobile and short term, also expose Turkey to sudden stops and reversals when international investors fear the worst. The recent history of globalisation in developing countries is full of such crises, including the 2000-01 Turkish <a href="https://economics.rabobank.com/publications/2013/september/the-turkish-2000-01-banking-crisis/">banking and currency crisis</a>. It was the aftermath of that crisis that brought Recep Tayyip Erdoğan and his AK party to power. </p>
<p>As of August 2018, Turkey has an <a href="http://databank.worldbank.org/data/download/site-content/IDS-2018.pdf">external debt</a> of US$406 billion, US$99 billion of which is short term. What worries foreign banks and markets is the exposure of some European banks, as direct investors in the Turkish banking sector. According to estimates, this amounts to more than <a href="https://www.cnbc.com/2018/08/10/european-officials-reportedly-concerned-about-exposure-to-turkey.html">US$138 billion</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=391&fit=crop&dpr=1 600w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=391&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=391&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=491&fit=crop&dpr=1 754w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=491&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/231675/original/file-20180813-2897-197sbdg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=491&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Turkish lira to the US dollar.</span>
<span class="attribution"><a class="source" href="https://www.xe.com/currencycharts/?from=TRY&to=USD&view=1M">xe.com</a></span>
</figcaption>
</figure>
<p>Should private Turkish debtors, who owe around 75% of Turkey’s external debt, fail to service their share as a result of the nosediving lira and creditors’ unwillingness to lend any more hard currency, the European financial system might have to absorb significant losses. This is similar to what happened during <a href="https://www.reuters.com/article/us-europe-banks/europes-banks-bleed-from-greek-debt-crisis-idUSTRE81M0LT20120223">the Greek debt crisis</a>.</p>
<h2>Political decisions</h2>
<p>None of these debt figures have emerged overnight. What transforms them into a currency and debt crisis is ultimately political. The presidential election in June gave Erdoğan unprecedented control over all branches of the state and he has made his intention to interfere with the economy <a href="http://eprints.lancs.ac.uk/82573/1/SSRN_id2856691.pdf">clear</a>.</p>
<p>Since the new presidential system came into effect, international investors have been trying to understand where Erdoğan would steer the Turkish economy. The signals so far, including Erdoğan’s appointment of his son-in-law as the minister in charge of the economy, suggest a new period of “Erdoğanomics”. This includes a mix of high government spending, politically repressed interest rates <a href="https://theconversation.com/turkeys-currency-turmoil-and-upcoming-election-what-you-need-to-know-97477">and runaway inflation</a>. Such a heady mix has caused a <a href="https://www.marketwatch.com/story/cost-to-insure-turkish-debt-spikes-as-turkey-teeters-on-brink-of-currency-crisis-2018-08-10">surge in Turkey’s risk premium</a>.</p>
<p>The worsening political relationship between Turkey and the US does not help. Over his 16-year rule, Erdoğan has rallied his supporters on a number of occasions against <a href="https://theconversation.com/why-did-turks-react-so-strongly-against-anti-erdogan-coup-62643">real</a> and purported threats to his rule. He is once again defiant against Western economic and political actors, whom he accuses of striving to destabilise Turkey under his rule, this time via the runs on the Turkish lira. </p>
<p>This defiance seems to have consolidated Erdoğan’s domestic power, but given the country’s considerable economic reliance on Western banks and markets, the country is now more vulnerable than ever to a currency and debt crisis of its own making. Freeing Turkey from this difficult corner will be a feat. If and when Erdoğan achieves it, Turkey will probably have shifted a considerable part of its economic and political allegiances, <a href="https://www.reuters.com/article/us-turkey-currency-erdogan/turkey-is-a-target-of-economic-war-erdogan-says-idUSKBN1KW08U">from the West to the East</a>, with both Russia and China potential future allies in what Erdoğan <a href="https://www.bloomberg.com/news/articles/2018-08-12/lira-extends-retreat-as-turkey-heads-toward-a-financial-crisis">has called</a> an “economic war”.</p><img src="https://counter.theconversation.com/content/101466/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Emre Tarim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>President Erdoğan is accusing the West of striving to destabilise Turkey.Emre Tarim, Lecturer in Behavioural Sciences, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/924712018-03-19T10:38:10Z2018-03-19T10:38:10ZRecent stock market sell-off foreshadows a new Great Recession<figure><img src="https://images.theconversation.com/files/210667/original/file-20180315-104676-j2vnia.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">An ice sculpture titled 'Main Street Meltdown' melts near Wall Street.</span> <span class="attribution"><span class="source">AP Photo/Frank Franklin II</span></span></figcaption></figure><p>In early February, concerns about inflation and rising interest rates sent global financial markets into a frenzy, <a href="https://www.npr.org/sections/thetwo-way/2018/02/05/583325123/stocks-extend-losses-with-dow-dropping-more-than-300-points-at-the-open">prompting the biggest single-day drop</a> ever in the Dow Jones Industrial Average. Stocks have since recovered some of their losses.</p>
<p>A similar episode occurred exactly 10 years earlier, <a href="https://blogs.cfainstitute.org/investor/2017/01/31/the-ars-debacle-the-forgotten-crisis-of-2008/">though few may remember</a>. In February 2008, the failure of an obscure market precipitated a <a href="https://blogs.cfainstitute.org/investor/2017/01/31/the-ars-debacle-the-forgotten-crisis-of-2008/">similar selling frenzy</a>. At the time, this sell-off went mostly unrecognized as a harbinger of something worse because the stock market quickly recovered. </p>
<p>Just as the world shouldn’t have been complacent in 2008, we shouldn’t rest easy today. Both events are proverbial dead canaries in a coal mine. </p>
<p>That’s because they have something else in common. Both stemmed from worries that rising borrowing costs would hurt debt-burdened consumers, the housing market and ultimately the U.S. economy.</p>
<p>Our soon-to-be-published research shows that the same problems that led to the biggest financial market meltdown since the Great Depression are alive and well today. </p>
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<h2>2008’s canary in a coal mine</h2>
<p>In the mid-2000s, the U.S. economy <a href="http://www.washingtonpost.com/wp-dyn/content/article/2007/01/31/AR2007013100422.html?referrer=email">seemed to be riding high</a>, but two key problems lurked below the surface: excessive household debt and a housing bubble.</p>
<p>Part of the first problem was that real, <a href="https://fred.stlouisfed.org/series/MEHOINUSA672N">inflation-adjusted household incomes were actually lower</a> than they had been in the late 1990s. To maintain living standards, Americans took on more debt thanks to <a href="https://fred.stlouisfed.org/series/FEDFUNDS">relatively low borrowing costs</a> and weak underwriting standards among lenders. <a href="https://www.newyorkfed.org/microeconomics/hhdc.html">Total household debt soared</a> more than 50 percent, from a little over US$8 trillion in 2004 to $12.69 trillion by 2008. </p>
<p>That brings us to the second problem. Most of that was mortgage debt. The housing bubble pushed it to the point <a href="http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/son2008.pdf">that it was unsustainable</a> as housing prices outstripped incomes, leading banks to come up with <a href="https://www.theguardian.com/business/2007/sep/30/5">ever creative ways</a> to lend people money they ultimately couldn’t pay back. </p>
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<p>At around the same time, the Federal Reserve began to lift interest rates, from 2004 to 2006, making credit more expensive. This reduced consumer spending as more of households’ falling real incomes went to repay debt, thus <a href="https://fred.stlouisfed.org/series/GDP">slowing economic growth</a> and the housing market. </p>
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<p>To <a href="http://keenomics.s3.amazonaws.com/debtdeflation_media/2007/03/SteveKeenDebtReportNovember2006.pdf">some observers</a>, it was only a matter of time before an economic recession or worse. </p>
<p>Among the first significant signs that things were seriously amiss came from the <a href="http://www.mondaq.com/unitedstates/x/60418/securitization+structured+finance/AuctionRate+Securities+Bidders+Remorse+A+Primer">auction rate securities</a> market, which was worth about $330 billion at its peak in 2008. Auction rate securities are essentially packages of mortgages, student loans and other medium- to long-term debt. Back in 2008, broker dealers held weekly <a href="https://www.investopedia.com/terms/d/dutchauction.asp">Dutch auctions</a> at which these short-term securities changed hands and interest rates were set after a bidding process. <a href="https://www.barrons.com/articles/SB121159302439419325">Credit-rating agencies gave them</a> their <a href="https://www.investopedia.com/terms/a/aaa.asp">super-safe ranking of AAA</a>. </p>
<p>Investors <a href="https://blogs.cfainstitute.org/investor/2017/01/31/the-ars-debacle-the-forgotten-crisis-of-2008/">liked them</a> because they were paid a much higher rate than other short-term securities with AAA ratings. Because they could be sold quickly to investors, borrowers could get loans more easily. </p>
<p>But on Feb. 7, 2008, the <a href="https://fas.org/sgp/crs/misc/RL34672.pdf">market began to seize up</a>. It started when the big investment banks, responsible for ensuring the market had plenty of “liquidity” by purchasing the securities if demand was weak, backed away because a growing number of households couldn’t repay their debts and this was beginning to squeeze their bottom lines. </p>
<p>This spooked investors, who sensed something was wrong. By the end of the month, there were no auctions, and billions of dollars in securities were frozen. The auction rate securities market remains closed to this day. </p>
<p>Within months of its February seizure, the broader market had moved on, as the Dow Jones Index reached the year’s peak by May. Yet the event sent ripples throughout the economy as investors continued to avoid mortgage-related assets. </p>
<p>By September 2008, when investment bank Lehman Brothers collapsed because of problems with these securities, the Great Recession was in full swing. </p>
<h2>Deja vu?</h2>
<p>Fast forward to today. </p>
<p>The economy has mostly recovered from the financial crisis, the <a href="https://data.bls.gov/timeseries/LNS14000000">unemployment rate has dropped</a> from 10 percent in 2009 to 4.1 percent in January and <a href="https://fred.stlouisfed.org/series/MEHOINUSA672N">real median household income surged</a> to a record at the end of 2016. </p>
<p>Good news, right? </p>
<p>Our new research shows that these rosy-looking stats conceal the same two related problems as 10 years ago: excessive consumer debt (relative to income) and unaffordable housing.</p>
<p>First, debt and income. After falling in the aftermath of the Great Recession, debt is once again reaching new highs. Especially worrisome, nonmortgage household debt (student loans and credit cards) has soared at a rapid pace and <a href="https://www.newyorkfed.org/microeconomics/hhdc.html">is now 41 percent above</a> its previous peak in 2008. We estimate that the resulting interest payments on nonmortage household debt have reduced living standards of the typical household by 3.1 percent since 2008. That either lowers consumption or prolongs the vicious cycle of more and more household debt. </p>
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<p>But things are even worse than this. Income data ignore <a href="http://www.pewresearch.org/fact-tank/2017/05/05/its-becoming-more-common-for-young-adults-to-live-at-home-and-for-longer-stretches/">recent demographic shifts</a>, such as more multi-generation households and college students living with their parents longer. We adjusted household income by family size because more people living together requires more money to attain the same living standards. Our data show this has lowered average living standards by 3.3 percent. This is on top of the 3.1 drop due to greater interest payments on nonmortgage debt.</p>
<p>Second, although there is no great housing bubble today, the fundamental problem is the same as 10 years ago – people with average incomes cannot afford to buy and live in an average priced home. Low interest rates helped the housing market recover, but <a href="https://www.usatoday.com/story/money/2017/07/25/u-s-home-prices-reach-record-high-6th-straight-month/507808001">also helped drive prices to record highs</a>. </p>
<p>Just like before the 2008 crisis, incomes <a href="https://www.cnbc.com/2018/03/13/economist-home-prices-are-increasing-twice-as-fast-as-income-growth.html">have not kept pace</a> with home prices. Too many people cannot afford to buy a home. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=403&fit=crop&dpr=1 600w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=403&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=403&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/210997/original/file-20180319-31602-1tgo5lb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Dark days ahead?</span>
<span class="attribution"><span class="source">Sunny Boy/Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Storm clouds brewing</h2>
<p>So what does this all mean? </p>
<p>Home prices and consumer debt are again at record highs, and the Fed has been steadily raising benchmark borrowing costs for over a year now. The central bank <a href="https://www.cnbc.com/2018/01/30/fed-will-be-forced-to-raise-rates-more-rapidly-than-expected-cnbc-fed-survey.html">is expected</a> to accelerate the process because the recent tax cut is likely to cause inflation to rise, requiring the Fed to lift interest rates to cool things down. This will hurt the housing market, pushing more homeowners underwater and making it harder for them to pay their mortgages and repay other debt.</p>
<p>At the same time, incomes have only grown modestly and, as our research shows, average American households have 6 percent to 7 percent less spending power than they did a decade ago, before the global financial system collapsed. Something will have to give. Households can take on more debt to maintain their living standards for a short while, or they can significantly reduce their spending. </p>
<p>In either case, the U.S. economy is primed for another recession. We believe it’s not a question of if. It’s a question of when.</p><img src="https://counter.theconversation.com/content/92471/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The collapse of an obscure corner of the financial market a decade ago foreshadowed the Great Recession. The stock-market swoon in February should offer a similar warning.Steven Pressman, Professor of Economics, Colorado State UniversityRobert H. Scott III, Professor of Economics & Finance, Monmouth UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/874282017-11-14T21:11:10Z2017-11-14T21:11:10ZNobody is going to bail out Venezuela<p><em>Leer <a href="http://theconversation.com/china-rusia-y-el-fmi-compiten-para-rescatar-financieramente-a-venezuela-86599">en español</a>.</em></p>
<p>Venezuela, the South American country convulsed by <a href="https://theconversation.com/inside-venezuelas-economic-collapse-80597">economic</a> and humanitarian catastrophe, has <a href="http://money.cnn.com/2017/11/14/news/economy/venezuela-debt-default-sp/index.html">defaulted</a> on some of its debt after missing an interest payment due in October. </p>
<p>Even as investors meet in Caracas to discuss restructuring <a href="http://americasquarterly.org/content/what-make-venezuelas-last-minute-debt-negotiations">US$60 billion in foreign debt</a>, the country is in urgent need of <a href="https://www.nytimes.com/roomfordebate/2016/06/28/how-to-save-venezuela/venezuela-needs-international-assistance-to-recover">international financial assistance</a>. </p>
<p>Yet few nations are rushing in to aid the ailing country. Under the authoritarian regime of Nicolás Maduro, Venezuela is <a href="https://www.reuters.com/article/us-venezuela-politics-region/venezuela-called-dictatorship-by-peru-condemned-by-new-bloc-idUSKBN1AO2NL">isolated</a> in Latin America, and the <a href="https://www.reuters.com/article/us-usa-venezuela-sanctions/trump-slaps-sanctions-on-venezuela-maduro-sees-effort-to-force-default-idUSKCN1B5216">United States</a>, <a href="http://www.international.gc.ca/sanctions/countries-pays/venezuela.aspx?lang=eng&_ga=2.177192485.1698760013.1510071967-449799799.1508254687">Canada</a> and the <a href="http://www.reuters.com/article/us-venezuela-politics-eu/eu-readies-sanctions-on-venezuela-approves-arms-embargo-idUSKBN1DD0UN?il=0">European Union</a> have all imposed sanctions against Venezuelan officials. Maduro has at times suggested he would not even accept <a href="https://www.wola.org/analysis/venezuela-humanitarian-crisis-aid/">humanitarian aid</a>. </p>
<p>Still, no indebted nation is totally alone in this world. As a financial analyst, I know there are always international players who see opportunity in the problems of others. And for Venezuela, my home country, all hope of a bailout rests with China, Russia and the International Monetary Fund. </p>
<p>Will they do anything to help?</p>
<h2>Venezuela’s debt: By the numbers</h2>
<p>Before exploring a possible Venezuela rescue, it is useful to understand how the country’s debt became such a burden. </p>
<p>In 1998, the year before the late Hugo Chávez came into power, Venezuela <a href="http://www.independent.co.uk/news/long_reads/how-venezuela-went-from-the-richest-economy-in-south-america-to-the-brink-of-financial-ruin-a7740616.html">was rich</a>. It produced roughly 60 barrels of oil per inhabitant per year. By late 2017, my projections – based on data compiled from Venezuela’s <a href="http://www.ine.gov.ve/evitalesjsp/evitales.html">National Statistics Institute</a> and BP’s <a href="https://www.bp.com/content/dam/bp/en/corporate/pdf/energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-full-report.pdf">World Energy Report 2017</a> – show that production will have dropped to 20 barrels per capita. That’s a 66 percent drop in 20 years. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=395&fit=crop&dpr=1 600w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=395&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=395&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=496&fit=crop&dpr=1 754w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=496&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/194617/original/file-20171114-26426-4er2ac.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=496&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Oil output per capita in Venezuela has dropped significantly in the past several decades.</span>
<span class="attribution"><span class="source">Henkel Garcia/BP Statistical Review of World Energy 2017/National Statistics Institute</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Even as output steadily shrank, Chávez benefitted from relatively high oil prices, which allowed him to boost revenue from petroleum exports. And as oil sales rose, so did <a href="https://www.economist.com/news/finance-and-economics/21720289-over-past-year-74-venezuelans-lost-average-87kg-weight-how">government expenditures</a>, as well as imports of food and other goods. </p>
<p>Eventually, excess spending took a toll on Venezuela’s <a href="http://www.imf.org/external/np/fin/tad/exportal.aspx?memberKey1=1050&date1key=2017-09-30&category=SDRNET">international reserves</a>. Rather than cut expenditures and imports, the Chávez regime <a href="https://fred.stlouisfed.org/tags/series?t=venezuela">piled up foreign debt</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/194626/original/file-20171114-26429-10u0f9q.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">As exports (US$ per capita) rose, so too did government spending and imports.</span>
<span class="attribution"><span class="source">Banco Central de Venezuela, FRED (Federal Reserve Bank of St. Louis), National Statistics Institute and Econométrica IE, C.A.</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Then, in late 2014, international oil prices began to plunge. Today, <a href="http://especiales.prodavinci.com/deudaexterna/">estimates indicate that</a> Venezuela’s public sector debt tops $184.5 billion, including $60 billion in foreign debt, though the <a href="http://www.bcv.org.ve/c2/indicadores.asp">Venezuelan Central Bank</a> claims it’s much lower.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/194627/original/file-20171114-26465-1ga8tcj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Venezuela’s foreign public debt, in US$ million, is at an all-time high.</span>
<span class="attribution"><span class="source">Venezuelan Central Bank</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>To service this debt, the government must pay $16 billion to $20 billion a year through at least 2022. Shouldering that huge expense has meant slashing imports, causing <a href="https://www.washingtonpost.com/news/global-opinions/wp/2017/06/01/venezuelas-hunger-crisis-is-for-real/?utm_term=.6b50fe00b919">food</a> and medicine shortages. As a result, almost <a href="http://rpp.pe/mundo/venezuela/venezuela-el-54-de-los-ninos-padece-desnutricion-noticia-1073023">54 percent of Venezuelan children are malnourished</a>. </p>
<p>To ensure its citizens’ basic well-being, Venezuela must be able to import, on average, $1,000 a year per inhabitant – or roughly $33 billion a year. My data show it’s currently bringing in about half that. </p>
<h2>No Chinese largess</h2>
<p>As an oil producer, Venezuela’s desperation rouses geopolitical interests. </p>
<p>Venezuela owes <a href="http://www.businessinsider.com/russia-and-china-are-propping-up-maduros-regime-in-venezuela-2017-9">$28.1 billion to China and $9.1 billion to Russia</a>, its main creditors. In recent years, both countries have been eager to prop up the Maduro regime, with little concern for its authoritarian tendencies. </p>
<p>China, at least publicly, has remained decidedly mum on <a href="http://www.el-nacional.com/noticias/mundo/afp-venezuela-mas-lejos-una-salida-crisis-tras-comicios_208008">Venezuela’s political crisis</a>. According to a spokesperson from the Chinese Ministry of Foreign Affairs in October, Beijing “believe[s] that the government of this country is able to appropriately handle its domestic affairs within the law, maintaining stability and prosperity.” </p>
<p>So far, though, Chinese financial institutions have not further opened their coffers. They have, however, granted <a href="http://www.petroguia.com/pub/article/pdvsa-ahorra-6725-millones-en-2016-y-2017-al-postergar-despachos-china-por-dos-a%C3%B1os">Venezuela a grace period of at least 18 months to pay off the debt</a> it owes them. This modest concession gives the government a bit of breathing room.</p>
<p>China has also allowed Venezuela to use shipments of crude <a href="https://www.theguardian.com/world/2013/mar/26/china-latin-america-resources-concern">to pay off some of its debt</a>, revealing China’s main interest in Venezuela: its oil.</p>
<p>But, in my view, Venezuela shouldn’t count on Beijing for significant additional financial help. For China to issue new loans, insiders have told me, Maduro’s government would have to show clear signs of fiscal discipline. Nothing indicates it is <a href="http://especiales.prodavinci.com/deudaexterna/">capable of that</a>. </p>
<p>I believe a more likely next step is that Venezuela will bring in much-needed cash by selling off existing <a href="https://oilprice.com/Energy/Crude-Oil/Venezuelas-Oil-Fire-Sale-To-Benefit-Russia-China.html">stakes in oil companies and resource-extraction ventures it co-owns with China</a>.</p>
<h2>Putin to the rescue?</h2>
<p>Russia has been somewhat more generous with Venezuela, and its geopolitical interests here are clear. </p>
<p>The Kremlin benefits from having <a href="https://news.vice.com/story/russia-is-using-cheap-oil-to-undermine-the-u-s-around-the-world">a trustworthy ally on this side of the world</a> – especially one that is avowedly anti-U.S. and ranked as the <a href="https://www.eia.gov/beta/international/data/browser/#/?pa=00000000000000000000000000000000002&c=ruvvvvvfvtvnvv1vrvvvvfvvvvvvfvvvou20evvvvvvvvvvvvuvo&ct=0&tl_id=5-A&vs=INTL.57-1-AFG-TBPD.A&vo=0&v=H&start=2014&end=2016">11th-largest oil producer worldwide</a>. </p>
<p>Plus, Russia already has many oil interests in the country, including <a href="http://www.pdvsa.com/index.php?option=com_content&view=article&id=7167:pdvsa-inauguro-base-operacional-perforosven-en-la-faja-petrolifera-del-orinoco-hugo-chavez&catid=10:noticias&Itemid=5&lang=es">joint exploration projects with Petróleos de Venezuela</a>, the state-owned oil company. </p>
<p>Indeed, Russia and its state-funded oil venture, Rosneft, have already helped the country <a href="https://www.nytimes.com/2017/10/29/business/energy-environment/russia-venezula-oil-rosneft.html?_r=0">avoid default at least twice</a>, providing Caracas with $10 billion in financial assistance. In an Oct. 29 New York Times article, oil expert <a href="https://www.nytimes.com/2017/10/29/business/energy-environment/russia-venezula-oil-rosneft.html?_r=0">Francisco Monaldi said</a> Russia is “the only country that can toss Venezuela a lifeline.” </p>
<p>In my opinion, even its public declarations defending Venezuela’s politics are <a href="http://www.eluniversal.com/noticias/politica/rusia-considera-inaceptables-sanciones-contra-venezuela_675578">more incisive</a> than China’s. Russia’s Foreign Ministry has called international sanctions against Venezuela “unacceptable.”</p>
<p>Still, thus far, Russia has <a href="https://www.nytimes.com/2017/11/08/business/energy-environment/russia-venezuela-debt.html">agreed only to restructure its bilateral debt with Venezuela</a>. While the terms weren’t disclosed, I don’t believe anything like a real bailout is on offer.</p>
<h2>Last resource</h2>
<p>This could lead Venezuela to its last resort: the <a href="http://www.imf.org/external/index.htm">International Monetary Fund</a>. In my opinion, this global lender would be the most appropriate source of a bailout. </p>
<p>Neither China nor Russia is willing or able to offer the huge sum Venezuela needs to stay afloat, at least $30 billion. Nor is any country likely to match the super-low 2 percent interest rate that the <a href="http://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/20/33/Stand-By-Arrangement">IMF offers to emerging economies in crisis</a>. </p>
<p>Bondholders typically look askance at this type of financial assistance. Countries receiving support from the IMF and other multilateral lenders are generally “<a href="https://www.project-syndicate.org/commentary/ricardo-hausmann-and-miguel-angel-santos-pillory-the-maduro-government-for-defaulting-on-30-million-citizens--but-not-on-wall-street">advised to renegotiate foreign debt</a>,” which can leave investors with empty pockets.</p>
<p>And today, Venezuela has no official relationship with the organization. The Chávez administration <a href="https://www.youtube.com/watch?v=wVs5TB0xEPU">loved to disparage the IMF</a>, saying it should “close down” or “vanish.” </p>
<p>Even so, there are signs that the IMF is <a href="https://www.ft.com/content/3908e5c0-b19b-11e7-a398-73d59db9e399">sketching out a possible rescue plan</a> for the country. Bank officials have <a href="https://es.panampost.com/sabrina-martin/2017/10/25/rescate-economico-para-venezuela/">expressed concern</a> with both Venezuela’s humanitarian crisis and the possible spinoff effects of its economic collapse on other Latin American economies. </p>
<p>Since the multilateral organization is unlikely to bail out the current regime – which has previously <a href="https://www.telesurtv.net/news/Maduro-rechaza-que-la-derecha-negocie-a-Venezuela-con-el-FMI-20151015-0065.html">rebuked its possible intervention</a> – the IMF probably hopes to work with some future transition government that’s more democratic and open to international aid. If so, help may be a long time coming.</p><img src="https://counter.theconversation.com/content/87428/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Henkel García is the director of Econométrica IE, C.A., a Venezuelan economic analysis firm.</span></em></p>China, Russia and the International Monetary Fund are among those contemplating a Venezuela bailout. But help for this debt-stricken nation seems far from assured.Henkel Garcia U, Finance Instructor, Professional Studies Extension Programme, Universidad Católica Andrés BelloLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/845592017-09-26T00:15:33Z2017-09-26T00:15:33ZPuerto Rico’s bankruptcy will make hurricane recovery brutal – here’s why<p>The United States had already seen its share of disasters, from back-to-back hurricanes that <a href="http://money.cnn.com/2017/09/10/news/economy/hurricane-irma-harvey-economic-damage/index.html">devastated Texas, Florida and the U.S. Virgin Islands</a> to roaring <a href="http://www.fresnobee.com/news/local/article174930986.html">wildfires in the West</a>. </p>
<p>Then, after battering the rest of the Caribbean, Hurricane Maria left the island of Puerto Rico facing a <a href="http://www.slate.com/blogs/the_slatest/2017/09/24/devastation_from_hurricane_maria_set_puerto_rico_back_nearly_20_to_30_years.html">humanitarian crisis</a>. About a dozen people died in the Sept. 21 storm and the island <a href="http://wnep.com/2017/09/21/hurricane-maria-rips-caribbean-leaves-puerto-rico-powerless-for-months/">was plunged into darkness</a>. </p>
<p>Now, some 3.4 million Puerto Ricans – which is to say, 3.4 million American citizens – are confronting life without electricity, gas, cellular service and, in <a href="https://news.vice.com/story/this-is-what-hurricane-maria-did-to-puerto-rico">many cases</a>, a home.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"910732033407713281"}"></div></p>
<p>After a decade of fiscal decline and a <a href="https://www.bloomberg.com/news/articles/2017-05-11/puerto-rico-debt-donnybrook-kicks-off-with-squabble-over-default">May 2017 bankruptcy</a>, Puerto Rico has become exceptionally vulnerable to disasters like Maria. As both a policy analyst and the daughter of Puerto Rican immigrants, I’m concerned about how austerity-related reforms are now threatening the survival of not just my family there but everyone on the island.</p>
<p>Though <a href="http://caribbeanbusiness.com/expert-straying-from-food-security-plan-could-be-dangerous-for-puerto-rico/">food insecurity</a>, <a href="https://www.nytimes.com/2017/06/25/business/dealbook/virgin-islands-debt-payment-pensions.html?mtrref=undefined&gwh=B9621124CF9573F94907D3DDFA50AF6C&gwt=pay">poor health care</a> and <a href="http://www.metro-magazine.com/management-operations/article/715438/how-puerto-rico-transformed-transit-and-its-planning-process">resource-starved public transit</a> all predate the hurricane, the result of both damaging U.S. policy and deepening financial crisis, these three problems will dramatically complicate Puerto Rico’s recovery.</p>
<h2>Food insecurity</h2>
<p>Because Puerto Rico <a href="https://nifa.usda.gov/announcement/puerto-rico%E2%80%99s-secretary-agriculture-visits-nifa-addresses-food-security-issues">imports over 85 percent</a> of its food, food security on the island has always been fragile. The U.S. territory has been <a href="https://www.cbsnews.com/news/hurricane-maria-puerto-rico-imposes-rationing-of-basic-supplies/">rationing supplies</a> since Hurricane Irma in early September, but according to Puerto Rico’s former secretary of agriculture, it may have just <a href="http://www.pbs.org/newshour/bb/how-to-solve-puerto-ricos-looming-food-crisis-eat-local-farmers-say/">one month’s worth of food on hand</a>. </p>
<p>Puerto Rico’s main port <a href="http://abc7ny.com/weather/aid-begins-to-flow-to-hurricane-ravaged-puerto-rico/2448839/">reopened Sept. 23</a>, allowing 11 ships to begin arriving with aid and resources, including clean water and food. Even so, distributing supplies across the 3,515-square-mile island will prove difficult on roadways <a href="http://abc7ny.com/weather/aid-begins-to-flow-to-hurricane-ravaged-puerto-rico/2448839/">damaged by flooding, debris and downed power lines</a>. </p>
<p>Puerto Rico’s food supply is also uncertain given that several islands from which it imports food, <a href="https://www.nytimes.com/2017/09/24/us/puerto-rico-hurricane-maria-agriculture-.html?mcubz=1">including the Dominican Republic, Dominica and St. Martin</a>, were also hit hard. And if the island goes without power for <a href="https://www.vox.com/science-and-health/2017/9/23/16354564/puerto-rico-hurricane-maria-electricity-relief-dam-breaking">up to six months</a>, the shelf life of the meat, vegetables, fruit and other staples of the <a href="https://ohioline.osu.edu/factsheet/HYG-5257">traditionally fresh Puerto Rican diet</a> will be awfully short. </p>
<p>This is the U.S. territory’s second food shortage in recent years. When a Puerto Rico-bound cargo vessel, El Faro, <a href="https://www.usatoday.com/story/news/nation/2016/12/14/last-moments-aboard-doomed-el-fargo-ship-help-me-m-gone/95416214/">sank during Hurricane Joaquin</a> in 2015, residents spent <a href="http://caribbeanbusiness.com/expert-straying-from-food-security-plan-could-be-dangerous-for-puerto-rico/">months in strife</a> as the government struggled to develop a plan that ensured everyone had enough to eat.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/187451/original/file-20170925-22354-1f6v0vx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/187451/original/file-20170925-22354-1f6v0vx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/187451/original/file-20170925-22354-1f6v0vx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/187451/original/file-20170925-22354-1f6v0vx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/187451/original/file-20170925-22354-1f6v0vx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/187451/original/file-20170925-22354-1f6v0vx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/187451/original/file-20170925-22354-1f6v0vx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The National Guard distributes food and water to Puerto Ricans.</span>
<span class="attribution"><span class="source">AP Photo/Carlos Giusti</span></span>
</figcaption>
</figure>
<p><a href="https://www.nytimes.com/2017/09/24/us/puerto-rico-hurricane-maria-agriculture-.html?mcubz=1">Prior to World War II</a>, Puerto Rico actually had an agricultural economy, producing and exporting sugar cane, tobacco and citrus fruits. But, post-war industrialization and <a href="http://www.npr.org/sections/thesalt/2017/05/13/527934047/how-puerto-rico-lost-its-home-grown-food-but-might-find-it-again">growing stigma around farm work</a> led to a downturn. Today, the island can’t feed its populace <a href="http://www.laht.com/article.asp?CategoryId=14092&ArticleId=342325">or compete with developed countries’ agribusiness and cheap prices</a>.</p>
<p>In response, Puerto Rico has made an effort to grow domestic food production, <a href="http://www.pbs.org/newshour/bb/how-to-solve-puerto-ricos-looming-food-crisis-eat-local-farmers-say/">which has increased 24 percent</a> in the past five years. But Maria’s winds and floodwaters demolished these gains in bananas, plantains, coffee, dairy and corn production. Roughly 80 percent of Puerto Rico’s crop value just <a href="https://www.nytimes.com/2017/09/24/us/puerto-rico-hurricane-maria-agriculture-.html?mcubz=1">vanished over night</a>, a loss of approximately US$780 million. </p>
<h2>Poor health care</h2>
<p>Puerto Rico had poor health care before Hurricanes <a href="http://www.post-gazette.com/news/nation/2017/09/25/Hurricanes-may-compel-even-more-Puerto-Rico-residents-to-flee-to-the-mainland-officials-warn/stories/201709250039">Irma</a> and Maria, but the storms will exacerbate this desperate situation, too. Ravaged by <a href="http://thehill.com/policy/finance/278656-house-democrats-no-health-care-cuts-for-puerto-rico">austerity</a>, hospitals and other health care facilities saw their budgets cut by 15 percent from 2011 to 2015. Countless public clinics across the island closed during the past year, while <a href="https://www.nytimes.com/2017/06/25/business/dealbook/virgin-islands-debt-payment-pensions.html?mtrref=undefined&gwh=B9621124CF9573F94907D3DDFA50AF6C&gwt=pay">four hospitals have filed for bankruptcy</a>. </p>
<p>The island is also short on health care professionals, with 72 percent of Puerto Rico’s 78 municipalities deemed “<a href="https://www.urban.org/sites/default/files/publication/87011/2001050-puerto-rico-health-care-infratructure-assessment-site-visit-report_1.pdf">medically underserved</a>.”</p>
<p>This deficient system will face grave challenges in providing medical care to Puerto Ricans injured during and after the storm. Serious cuts and broken bones are extremely <a href="https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4910155/">common following hurricanes, as are heat-related and infectious illnesses</a>.</p>
<p>Loss of power may also lead to the worsening of illnesses for residents with such <a href="https://www.newscientist.com/article/mg23531444-300-thousands-likely-to-be-killed-by-hurricane-irmas-deadly-legacy/">chronic conditions</a> as diabetes, heart disease, psychiatric disorders and HIV whose medications require refrigeration. My own abuela (grandmother), a diabetic who began having mild cardiac episodes last year, is one Puerto Rican among thousands in this situation. </p>
<p>These domestic barriers to medical care are magnified by the <a href="http://www.salon.com/2017/09/22/republicans-will-face-bernie-sanders-in-cnn-health-care-debate/">ongoing debate</a> around health care in the U.S. Even though Puerto Rico residents are more likely to be <a href="https://www.urban.org/sites/default/files/publication/87016/2001051-environmental-scan-of-puerto-ricos-health-care-infrastructure_1.pdf">poor, elderly and diagnosed with a chronic illness</a> than the general population, caps to Medicaid reimbursements <a href="http://www.npr.org/sections/health-shots/2016/03/03/468907162/puerto-ricos-growing-financial-crisis-threatens-health-care-too">have forced</a> several hospitals on the island to cut services, close wings, leave positions unfilled and reduce employee hours and pay. </p>
<p>In the wake of this natural disaster, <a href="https://apnews.com/f6949137af1e4b389879f39ed6a05b78?utm_campaign=SocialFlow&utm_source=Twitter&utm_medium=AP">experts expect</a> Puerto Rico’s hospitals to be overburdened, especially in San Juan and other metropolitan areas, where most medical facilities are located. In recent days, Gov. Ricardo Roselló has resorted to retweeting information about which hospitals are open and receiving patients.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"912387078385741825"}"></div></p>
<h2>Transportation shortages</h2>
<p>Many Puerto Ricans will not be able to reach help, though. Upwards of 45 percent of the population <a href="https://qz.com/125654/puerto-rico-is-living-an-impoverished-debt-nightmare-reminiscent-of-southern-europe-or-detroit/">lives in poverty</a> and <a href="https://ipfs.io/ipfs/QmXoypizjW3WknFiJnKLwHCnL72vedxjQkDDP1mXWo6uco/wiki/Puerto_Rico_Metropolitan_Bus_Authority.html">an estimated 35,000 riders</a> depend daily on public transit to get around.</p>
<p><a href="http://www.metro-magazine.com/management-operations/article/715438/how-puerto-rico-transformed-transit-and-its-planning-process">With a limited budget, an aging infrastructure and too few vehicles</a> to support the island’s population, however, the transit authority has been struggling to meet needs. The agency <a href="https://cms.dot.gov/transition/fta-top-policy-issues">underwent austerity-related budget cuts in 2015, operating at a deficit</a> until, finally, in May 2017, it <a href="https://www.bloomberg.com/news/articles/2017-06-26/puerto-rico-tells-trustee-not-to-cover-payment-on-highway-bonds">filed for bankruptcy</a>. </p>
<p>This history has complicated evacuation efforts. Locals were puzzled at the “<a href="http://nypost.com/2017/09/19/puerto-rico-warns-evacuate-or-die-as-maria-approaches/">leave or die</a>” warnings sent to Isabela residents on Sept. 23 when a large crack in the <a href="https://www.nytimes.com/2017/09/23/us/guajataca-dam-puerto-rico.html">Guajataca dam</a> threatened to flood surrounding areas. How, exactly, were they supposed to leave? And how could they get out on roadways long since rendered impassable? </p>
<p>As rescue and recovery efforts continue, transportation shortages have effectively left many residents <a href="http://abc7ny.com/weather/aid-begins-to-flow-to-hurricane-ravaged-puerto-rico/2448839/">reachable only by helicopter</a>. </p>
<p>People across the island are already suffering the consequences. One family – <a href="http://www.latimes.com/nation/la-na-puerto-rico-landslide-20170924-story.html">Irees Gonzalez Collazo, 74, and her two sisters</a>, Carmen, 73, and Sara, 72, of Utaudo municipality – exemplifies the cascading effect of this tragedy. All three women had immobilizing health complications and, unable to evacuate, were killed on Sept. 24 when a mudslide buried the home where they rested. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/187452/original/file-20170925-17462-1y6qn7b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/187452/original/file-20170925-17462-1y6qn7b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/187452/original/file-20170925-17462-1y6qn7b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/187452/original/file-20170925-17462-1y6qn7b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/187452/original/file-20170925-17462-1y6qn7b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/187452/original/file-20170925-17462-1y6qn7b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/187452/original/file-20170925-17462-1y6qn7b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Even if Puerto Rico’s transit system was up and running, buses would be hard-pressed to get around the island.</span>
<span class="attribution"><span class="source">AP Photo/Carlos Giusti</span></span>
</figcaption>
</figure>
<h2>An American humanitarian crisis</h2>
<p>If the situation in Puerto Rico seems dire, <a href="https://www.nytimes.com/2017/09/22/world/americas/hurricane-maria-donate-charity.html">that’s because it is</a>. People on the island will face seemingly insurmountable problems in nearly every aspect of their lives for months to come. </p>
<p>The Trump administration, which has thus far <a href="https://www.washingtonpost.com/local/trump-ignores-puerto-ricos-devastation-to-tweet-about-the-nfl/2017/09/25/0bf4ad68-a1e1-11e7-ade1-76d061d56efa_story.html?utm_term=.500a4704e03a">demonstrated a notable lack of concern for the island</a>, could provide some urgent disaster relief by responding Gov. Rosselló’s request for increased aid for <a href="http://www.chicagotribune.com/news/nationworld/ct-puerto-rico-hurricane-maria-20170924-story.html">law enforcement and transportation</a>, among other basic needs.</p>
<p>The U.S. Congress could also play a role in the territory’s longer-term recovery. <a href="https://www.brookings.edu/research/keeping-our-promesa-what-the-u-s-can-do-about-puerto-ricos-fiscal-crisis/">Increasing the island’s Medicaid funding</a>, for example, would save lives in this critical time and free up some of the territory’s scarce funds for other purposes. </p>
<p>While <a href="http://www.chicagotribune.com/news/nationworld/ct-puerto-rico-hurricane-aid-ryan-20170925-story.html">FEMA picked up the pace of aid</a> five days after the storm, few Puerto Ricans <a href="http://www.chicagotribune.com/news/nationworld/ct-puerto-rico-hurricane-maria-20170924-story.html">anticipate that they’ll see</a> the kind of “historic” federal disaster relief sent to <a href="https://www.fema.gov/news-release/2017/09/22/historic-disaster-response-hurricane-harvey-texas">Texas</a> and <a href="http://www.wptv.com/news/region-c-palm-beach-county/fema-encourages-homeowners-to-apply-as-soon-as-possible">Florida</a> after hurricanes Harvey and Irma. </p>
<p>Fortunately, Puerto Rico has a culture of resilience. Since the storm, residents have stepped up to <a href="http://www.latimes.com/nation/la-na-puerto-rico-landslide-20170924-story.html">help</a>, <a href="https://www.local10.com/weather/hurricane/humanitarian-crisis-grows-in-puerto-rico-after-hurricane-maria">feed</a> and <a href="http://www.chicagotribune.com/news/nationworld/ct-puerto-rico-hurricane-maria-20170924-story.html">shelter</a> one another. If the U.S. federal government won’t save Puerto Rico, we Puerto Ricans will.</p><img src="https://counter.theconversation.com/content/84559/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lauren Lluveras does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Hurricane Maria has left 3.4 million Puerto Ricans facing shortages of food, health care and transit, an American humanitarian crisis fueled by the US territory’s May 2017 bankruptcy.Lauren Lluveras, PhD candidate in African & African Diaspora Studies, The University of Texas at AustinLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/807852017-07-31T21:30:57Z2017-07-31T21:30:57ZIs Congress’ plan to save Puerto Rico working?<figure><img src="https://images.theconversation.com/files/180397/original/file-20170731-22126-nju9vc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Puerto Ricans are increasingly fed up with austerity. </span> <span class="attribution"><span class="source">AP Photo/Danica Coto</span></span></figcaption></figure><p>A year ago, Congress <a href="https://www.congress.gov/bill/114th-congress/house-bill/5278/text">cobbled together a plan</a> to try to save Puerto Rico from its US$123 billion debt and pension crisis without costing American taxpayers a penny. </p>
<p>The law, signed by former President Barack Obama on June 30, 2016, effectively steered Puerto Rico into bankruptcy-like proceedings in federal court to prevent a massive default, while saddling the commmonwealth with an oversight board to ensure it put its fiscal house in order.</p>
<p>Though the vote was bipartisan, critics called it a “Band-Aid” that would do little to solve Puerto Rico’s core problems: unsustainable debt that has kept the country mired in recession for almost a dozen years. As Democratic Sen. Bob Menendez, the plan’s fiercest foe, put it: </p>
<blockquote>
<p>“Mark my words: if we don’t seize this opportunity to address this crisis in a meaningful way, we’ll be right back here in a year from now picking up the pieces.”</p>
</blockquote>
<p>So a year later, have his words proven prescient? Or has the law – known by the acronym PROMESA – lived up to <a href="https://juntasupervision.pr.gov/index.php/en/home/">its promise</a> to “create the necessary foundation for economic growth and to restore opportunity to the people of Puerto Rico”?</p>
<p>The <a href="https://juntasupervision.pr.gov/index.php/en/home/">Financial Oversight and Management Board</a> that Congress established to manage Puerto Rico’s finances released its first progress report on July 31. At Hunter College’s Center for Puerto Rican Studies, we’ve also been <a href="https://centropr.hunter.cuny.edu/education/puerto-rico-crisis-timeline">keeping score</a>, as well as tracking the <a href="https://centropr.hunter.cuny.edu/events-news/events/conferences/puerto-ricopuerto-ricans/diaspora-summit/unfolding-humanitarian">human side of the crisis</a>. </p>
<h2>Out of options</h2>
<p>Before Congress passed the <a href="https://www.congress.gov/bill/114th-congress/house-bill/5278/text">Puerto Rico Oversight, Management and Economic Stability Act</a> (PROMESA), the Caribbean island – located about 1,000 miles southeast of Miami – had run out of options. </p>
<p>The end of a <a href="https://www.law.cornell.edu/uscode/text/26/936">federal tax exemption</a> for U.S. companies to build factories in Puerto Rico <a href="https://taxfoundation.org/tax-policy-helped-create-puerto-rico-s-fiscal-crisis/">precipitated the crisis</a>, while the global financial meltdown in 2008 made it a <a href="https://theconversation.com/puerto-ricos-long-fall-from-shining-star-to-the-greece-of-the-caribbean-43097">whole lot worse</a>. Shut out of the credit markets after its debt <a href="http://www.reuters.com/article/munis-puertorico-ratings-idUSL2N0LC1F820140207">was downgraded</a> to “junk,” a government default loomed.</p>
<p>While U.S. municipalities can declare bankruptcy via <a href="http://www.investopedia.com/terms/c/chapter9.asp">Chapter 9</a>, <a href="https://www.bloomberg.com/view/articles/2015-07-08/puerto-rico-s-colonial-power-struggle">Congress in 1984 excluded Puerto Rico</a> from seeking its relief for reasons that still <a href="https://www.bloomberg.com/view/articles/2015-12-03/bankruptcy-was-option-for-puerto-rico-before-congress-goof">elude most analysts</a>, including me.</p>
<p>But with PROMESA, Puerto Rico got the breathing room for debt restructuring it so desperately needed. To judge the law’s effectiveness, however, we must determine how far it’s come in resolving the commonwealth’s three key problems: too much debt, a budget that bleeds red and – most importantly – jump-starting a battered economy. </p>
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<h2>A mountain of debt</h2>
<p>One of the primary goals of PROMESA was to steer negotiations with creditors and eventually lead to a restructuring of $74 billion in <a href="http://www.aafaf.pr.gov/assets/planfiscal13demarzo2017.pdf">crushing debt</a> and $49 billion in <a href="http://www.reuters.com/article/us-puertorico-debt-budget-idUSKBN18R3C8">unfunded pension obligations</a>. </p>
<p>In May, Puerto Rico formally <a href="https://www.nytimes.com/2017/05/03/business/dealbook/puerto-rico-debt.html?_r=0">filed for bankruptcy</a> under the special court process PROMESA created, the first time a U.S. state or territory has done so. This will allow the island to significantly reduce how much it must pay its creditors – such as mutual funds, hedge funds and individual Puerto Ricans and Americans – and retirees to whom it owes pensions. Ultimately, a New York federal judge will determine who gets what. </p>
<p>Puerto Rico will also have to <a href="http://www.reuters.com/article/us-puertorico-debt-lawsuit-idUSKBN17Y0G3">fend off several lawsuits</a> filed by creditors and bond insurers, some of which allege the debt-cutting plans violate the U.S. Constitution.</p>
<p>The seven-member Financial Oversight and Management Board should be commended for being sensible toward the need to restructure the island’s unsustainable debt levels. That process, so far, is working as intended but is far from conclusive.</p>
<h2>Balancing the budget</h2>
<p>That brings us to fiscal policy and the budget. </p>
<p>In October 2016, the Financial Oversight and Management Board <a href="http://www.reuters.com/article/us-puertorico-oversight-deficit-idUSKBN1491ZB">revealed</a> that Puerto Rico faced a $67.5 billion budget gap through 2026. In March, it <a href="https://www.nytimes.com/2017/03/13/business/puerto-rico-debt-crisis-oversight-board.html">approved a plan</a> submitted by Gov. Ricardo Rosselló to narrow the gap by about $40 billion over a decade by, among other things, cutting health care, reducing certain pension benefits by 10 percent and putting government employees on furlough.</p>
<p>Simply put, punishing austerity seems unavoidable, particularly as the population continues to decline, which makes the fiscal problem worse by reducing tax revenue. About 500,000 people <a href="https://centropr.hunter.cuny.edu/sites/default/files/PDF_Publications/State%20of%20Puerto%20Ricans-promo%202017.pdf">have left the island</a> since the crisis began, according to my center’s research.</p>
<p>That’s because <a href="http://www.pbs.org/newshour/bb/amid-new-austerity-measures-push-puerto-rico-restructure-debt/">austerity is already sinking deep</a> into the lives of Puerto Ricans. Funding to schools, hospitals and other essential services <a href="https://www.forbes.com/sites/debtwire/2017/03/22/puerto-rico-oversight-board-appears-doomed-to-recycle-failed-austerity-schemes/#1fa0656d2479">has been severely cut</a>, more than 150 schools have closed and teachers, doctors and scientists are part of the island’s exodus heading for the mainland. </p>
<p>The plan also calls for a sharp drop in debt payments to creditors – to about 25 cents on the dollar – until the bankruptcy court rules on final amounts. Yet, despite progress on debt restructuring, the Financial Oversight and Management Board has become the face of austerity. Public opinion, at times hopeful, has given way to a <a href="https://www.thenation.com/article/students-are-now-leading-the-resistance-to-austerity-in-puerto-rico/">growing chorus</a> of voices against austerity, protests and other forms of resistance to the undemocratic nature of the Financial Oversight and Management Board. </p>
<h2>The bigger challenge: Growing the economy</h2>
<p>Unfortunately, the fiscal plan’s austerity will make it harder to achieve the most important goal: sustainable economic growth. </p>
<p>Puerto Rico has endured a <a href="http://www.gdb-pur.com/economy/statistical-appendix.html">debilitating economic recession since 2006</a>, the year the tax incentive for U.S. companies ended, driving <a href="https://data.bls.gov/timeseries/LASST720000000000003">unemployment as high as 17 percent</a> (it’s currently 10 percent) and poverty to <a href="https://www.census.gov/programs-surveys/acs/library/keywords/prcs.All.html">about 46 percent</a>. It is estimated that up to <a href="http://www.univision.com/puerto-rico/wlii/noticias/pobreza/el-84-de-los-ninos-en-puerto-rico-vive-en-la-extrema-pobreza">84 percent of children live in poverty areas</a>. </p>
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<p>The austerity in the plan, based on the government’s own projections, is <a href="https://www.nytimes.com/2017/03/13/business/puerto-rico-debt-crisis-oversight-board.html">expected to reduce economic growth</a> of <a href="http://www.aafaf.pr.gov/assets/planfiscal13demarzo2017.pdf">2 to 3 percentage points annually</a> over the next five years. </p>
<p>With numbers like these, one would think that Congress would be hard at work devising urgent economic development measures to rapidly boost growth. Unfortunately, this has not happened. Congress has yet to act on a report prepared by a <a href="https://www.finance.senate.gov/imo/media/doc/Bipartisan%20Congressional%20Task%20Force%20on%20Economic%20Growth%20in%20Puerto%20Rico%20Releases%20Final%20Report.pdf">bipartisan task force</a> it set up as part of PROMESA, which laid out several key recommendations, such as shoring up Medicaid, extending the earned income tax credit to the island and supporting business development. The Financial Oversight and Management Board, in its report, <a href="https://juntasupervision.pr.gov/wp-content/uploads/wpfd/50/597eb4ede89ad.pdf">also encouraged Congress</a> to do more to stimulate Puerto Rico’s economy. </p>
<p>As for the Financial Oversight and Management Board and Puerto Rico’s government, not a single major economic development project has been presented to the board, even though PROMESA explicitly gives it power to <a href="https://www.congress.gov/bill/114th-congress/house-bill/4900/text#toc-HED24BE2EF47B4B8FAD4E70068F621883">fast-track “critical infrastructure” projects</a> that create jobs and jump-start the economy. </p>
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<span class="caption">Puerto Rico Gov. Ricardo Rossello celebrates the results of a referendum on statehood in June.</span>
<span class="attribution"><span class="source">AP Photo/Carlos Giusti</span></span>
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<h2>Growing into a state?</h2>
<p>The issue is now getting tangled up in Puerto Rico’s separate (and controversial) <a href="http://www.pbs.org/newshour/bb/congress-steps-puerto-rico-reignites-statehood-debate/">bid for statehood</a>. </p>
<p>In a <a href="http://www.cnn.com/2017/06/09/us/puerto-rico-statehood-vote-2017/index.html">recent referendum</a> plagued by poor turnout, Puerto Ricans voted to become the 51st state, which some argue is necessary to resolve its fiscal woes because it’ll lead to a lot of benefits. The General Accounting Office estimated that parity in federal programs will add up to <a href="http://thehill.com/blogs/congress-blog/civil-rights/203131-with-gao-report-momentum-builds-for-puerto-rican-statehood">$10 billion in transfers to the island</a>. But <a href="http://thehill.com/latino/340568-puerto-rico-faces-off-with-bondholders-over-statehood">bondholders and others are objecting</a> to Congress’ consideration of statehood until the debt crisis is over. </p>
<p>They’re right about one thing: The likelihood that Congress would consider granting statehood to a bankrupt state or as a solution to the economic challenge via some kind of bailout is slim to say the least. For advocates of statehood, as it is for advocates of other political status options, the surest way to advance their cause is a revival of Puerto Rico’s economy. </p>
<p>Restructuring the debt and balancing the budget are important steps in that direction, but austerity alone will not solve the problem, just as <a href="https://www.theguardian.com/business/2016/may/27/austerity-policies-do-more-harm-than-good-imf-study-concludes">it hasn’t in Greece</a>. Puerto Rico cannot simply cut its way to solvency. It needs growth.</p>
<p>And to that end, Puerto Rico’s government could begin planning economic initiatives with the private sector, while Congress could act on the task force report, modest steps that could help the island get back on its feet. The <a href="https://centropr.hunter.cuny.edu/research-education/research/data-center/research-briefs/health-insurance-coverage-among-puerto">data clearly show</a> that it will only become a lot more expensive and politically sensitive. </p>
<p>In fact, solving the economic and fiscal crisis, while mitigating the impact of austerity on the most vulnerable populations, might be the most certain pathway to (finally) solving the political status question.</p><img src="https://counter.theconversation.com/content/80785/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Edwin Meléndez does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A year after Congress passed its plan to fix Puerto Rico’s US$123 billion debt and pension crisis, little has changed for the lives of Puerto Ricans.Edwin Meléndez, Professor of Urban Affairs and Planning and Director of the Center for Puerto Rican Studies, Hunter CollegeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/796372017-07-19T06:43:57Z2017-07-19T06:43:57ZWhat’s the deal with the debt ceiling? 5 questions answered<figure><img src="https://images.theconversation.com/files/178736/original/file-20170718-20055-g52qx7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ceilings are overrated. </span> <span class="attribution"><span class="source">AP Photo/J. Scott Applewhite</span></span></figcaption></figure><p><em>Editor’s note: The U.S. government <a href="http://www.cnbc.com/2017/03/27/there-is-no-debt-ceiling-crisis-at-least-for-now.html">maxed out</a> its credit card in March and has been moving money around ever since to avoid running out of cash. But very soon we will reach the limits of this financial sleight of hand, and Congress will have to either raise the <a href="https://www.treasury.gov/initiatives/Pages/debtlimit.aspx">debt ceiling</a> – currently about US$19.8 trillion – or suffer the consequences. Economist Steve Pressman explains why we have a ceiling and why it’s time to get rid of it.</em> </p>
<h2>1. What is the debt ceiling?</h2>
<p>Just like the rest of us, governments must borrow when they spend more money than they receive. They do so by issuing a bond or IOU with a promise to repay and make regular interest payments. Government debt is the total sum of all this borrowed money.</p>
<p>The debt ceiling, which <a href="https://www.senate.gov/CRSpubs/d2c8f833-9796-4b3e-9462-6b1755ef463d.pdf">Congress established</a> a century ago, is the maximum amount the government can borrow. In other words, it’s the limit on the national credit card. </p>
<h2>2. How much has the US government borrowed and from whom?</h2>
<p>Currently, <a href="https://fred.stlouisfed.org/series/GFDEBTN">U.S. government debt</a> is $19.8 trillion, a tad more than the <a href="https://fred.stlouisfed.org/series/GDP">size of our economy</a>. </p>
<p>Around one-third of this money the government actually owes itself. The Social Security Administration, which has accumulated a surplus since it was first set up in the 1930s, has invested all of this extra money in government bonds and <a href="https://www.ssa.gov/cgi-bin/investheld.cgi">currently owns $5 trillion worth</a>. Separately, the Federal Reserve <a href="https://fred.stlouisfed.org/series/TREAST">holds about $2.5 trillion</a> in U.S. Treasuries. </p>
<p>The rest is considered public debt. As of March, <a href="http://ticdata.treasury.gov/Publish/mfh.txt">foreign countries, companies and individuals</a> own $6 trillion of U.S. government debt. Japan and China are the largest holders with $1.1 trillion each. The rest is owed to U.S. citizens and businesses, as well as state and local governments. </p>
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<h2>3. Why is there a debt ceiling?</h2>
<p>Before 1917, Congress would authorize the government to borrow a fixed sum of money for a specified term. When each loan expired, the government could not borrow again until authorized to do so.</p>
<p>That changed with the Second Liberty Bond Act of 1917, which <a href="https://www.federalreservehistory.org/essays/liberty_bonds">created the debt ceiling</a>. This allowed for a continual rollover of debt without congressional approval of every loan. </p>
<p>Congress approved this measure because it enabled then-President Woodrow Wilson to spend the money he deemed necessary to fight World War I without waiting for often-absent lawmakers to act. Congress, however, did not want to write the president a blank check, so it limited borrowing to $11.5 billion, requiring legislation for any increase. </p>
<p>During the subsequent century, the debt ceiling <a href="https://fas.org/sgp/crs/misc/RL31967.pdf">has been increased many times</a>, including 78 <a href="https://www.treasury.gov/initiatives/Pages/debtlimit.aspx">since 1960 alone</a>. The last change occurred in March 2015, when Congress decided to suspend the limit for two years. When that <a href="http://wric.com/2017/03/19/debt-limit-goes-back-into-effect-at-level-near-20-trillion/">legislation expired</a> on March 16, 2017, U.S. debt stood at $19.8 trillion, which became the new limit. </p>
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<h2>4. How has the government paid its bills since then without incurring new debt?</h2>
<p>The U.S. government generally spends more than it takes in (<a href="https://www.thebalance.com/current-u-s-federal-budget-deficit-3305783">$440 billion more in fiscal year 2017</a>), yet since March 16 it can no longer borrow more money to make up the difference. It can spend only cash on hand. As a result, Treasury Secretary Steven Mnuchin has used “<a href="https://www.budget.senate.gov/imo/media/doc/Debt-Limit%20Extraordinary%20Measures%20BB030917.pdf">extraordinary measures</a>” to conserve cash.</p>
<p>For example, he <a href="https://www.treasury.gov/initiatives/Documents/Description_of_Extraordinary_Measures_2017_03_16.pdf">stopped funding retirement programs</a> for government employees so the money can be used to meet other obligations without breaching the debt limit. The expectation is that once the debt ceiling is raised, the government will make up for underfunding employees’ plans.</p>
<p>These measures, along with the annual surge in tax payments in April that gave the federal government a <a href="https://www.fiscal.treasury.gov/fsreports/rpt/mthTreasStmt/mts0417.pdf">$182 billion surplus</a> for that month, have enabled the government to pay its other bills. As of July 17, the Treasury <a href="https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=w&fname=17071700.txt">had $201.4 billion in cash</a>. </p>
<p>But it is not clear how long this money will last. Expenditures and revenues fluctuate considerably, and $200 billion can disappear in weeks.</p>
<p>The <a href="https://bipartisanpolicy.org/blog/bpc-narrows-x-date-forecast-to-early-to-mid-october/">Bipartisan Policy Center</a> and the <a href="https://www.cbo.gov/system/files/115th-congress-2017-2018/reports/52837-debtlimit.pdf">Congressional Budget Office</a> estimate that the U.S. will run out during the first two weeks of October, although they warn the country’s coffers could be empty earlier. With Congress scheduled to take a <a href="https://www.senate.gov/artandhistory/history/common/generic/News_August_Recess.htm">recess in August through Labor Day</a>, something must be done soon.</p>
<p>When the cash is gone, decisions will have to be made about who gets paid and who doesn’t. Government employees or contractors may not get paid in full. Loans to small businesses, exporters or college students may stop. These actions will all lower spending and slow economic growth.</p>
<p>One difficult choice would be whether to prioritize foreign owners of our debt or first honor domestic obligations (including American bondholders). <a href="http://www.nationalreview.com/article/271329/constitutional-nonsense-debt-john-berlau">Some argue</a> we’re legally obligated to pay all debt holders first, or that doing this <a href="http://thehill.com/blogs/floor-action/house/298767-house-approves-debt-ceiling-contingency-plan">is more important</a> than paying other bills, but <a href="http://www.dorfonlaw.org/2011/07/obligation-is-debt-that-must-be-paid.html">most</a> <a href="http://www.npr.org/2013/10/07/229856550/in-a-debt-crisis-u-s-may-have-to-decide-payment-priorities">people</a> contend that all creditors need to be treated equally. </p>
<p><a href="http://www.pbs.org/newshour/bb/politics-july-dec13-debtceiling_10-03/">Some pundits</a> have claimed that a government default would have dire economic consequences – soaring interest rates, markets in panic and an economic depression. But such fears are overblown, not because an actual default wouldn’t be catastrophic, but because once markets start panicking, Congress would likely end the game of chicken they are playing with the debt ceiling – just as <a href="http://www.nytimes.com/2013/10/17/us/congress-budget-debate.html">it did in 2013</a>. And even if it technically defaulted, the immediate turmoil would be so severe that Congress would swiftly act to reverse the damage. </p>
<p>Mnuchin <a href="https://www.washingtonpost.com/news/wonk/wp/2017/06/09/u-s-readying-plans-and-backup-plans-if-debt-ceiling-isnt-raised-soon-mnuchin-says/?utm_term=.a8819c467d5f">has said</a> he has “plans and backup plans” to find cash and enable the government to pay its bills, for at least a little while longer. For example, the U.S. could sell off some of its <a href="https://www.fiscal.treasury.gov/fsreports/rpt/goldRpt/current_report.htm">$11 billion in gold</a> or even shut down temporarily, which it also did in 2013.</p>
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<span class="caption">We could always sell some of the gold at Fort Knox, though $11 billion wouldn’t get us very far.</span>
<span class="attribution"><span class="source">AP Photo/Barry Thumma</span></span>
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<p>This would buy Congress a little more time to act – or react to the plunging stock market that results. That’s what happened in August 2011 when <a href="http://money.cnn.com/2011/08/05/news/economy/downgrade_rumors/index.htm">Standard & Poor’s downgraded Uncle Sam’s AAA credit rating</a> for the first time ever after brinkmanship over the debt ceiling. Congress quickly caved and raised it. </p>
<p>I expect the same to happen this year. Some Republicans will want to hold the line on spending, while Democrats (required to overcome a filibuster in the Senate) will likely push for more. In the end, they’ll do what they always do – perhaps after Wall Street gives them a push – and kick the can a few more miles down the road. </p>
<h2>5. Is there a better way to deal with our debt?</h2>
<p>The U.S. is one of <a href="https://www.investmentfrontier.com/2013/10/08/7-countries-with-debt-ceilings-or-limits">very few countries with a debt ceiling</a>. Other governments operate effectively without it. </p>
<p>We can too. Having a debt ceiling is actually dysfunctional. It makes it harder for the Treasury to pay bills when they come due.</p>
<p>The best solution would be to just scrap the ceiling. Congress already approved the spending and the tax laws that require more debt; it shouldn’t have to approve the additional borrowing as well. </p>
<p>It is also worth remembering that the original debt ceiling was put in place because Congress could not meet quickly and approve any needed spending to fight a war. In 1917, when cross-country travel was by rail, requiring days to get to Washington, this made some sense. Today, not so much.</p><img src="https://counter.theconversation.com/content/79637/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Steven Pressman does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The US government reached the limits of its borrowing capacity in March and is fast approaching the point at which it will no longer be able to pay all its bills. What’s the big deal?Steven Pressman, Professor of Economics, Colorado State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/794752017-06-30T01:04:50Z2017-06-30T01:04:50ZFrom public good to personal pursuit: Historical roots of the student debt crisis<figure><img src="https://images.theconversation.com/files/176124/original/file-20170628-31318-1k59itt.png?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Has student debt changed because the purpose of education has changed?</span> <span class="attribution"><span class="source">John Collier/Library of Congress, Ermolaev Alexander/Shutterstock.com</span></span></figcaption></figure><p>The <a href="https://berniesanders.com/issues/its-time-to-make-college-tuition-free-and-debt-free/">promise of free college education</a> helped propel Bernie Sanders’ 2016 bid for the Democratic nomination to national prominence. It reverberated during the <a href="https://www.youtube.com/watch?v=Vk4imizwSlA">confirmation hearings for Betsy DeVos</a> as Secretary of Education and <a href="http://money.cnn.com/2017/04/04/pf/college/bernie-sanders-tuition-free-college/index.html">Sanders continues to push the issue</a>.</p>
<p>In conversations among politicians, college administrators, educators, parents and students, college affordability seems to be seen as a purely financial issue – it’s all about money.</p>
<p>My <a href="http://tadamtransnationalhistory.com">research</a> into the historical cost of college shows that the roots of the current <a href="https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#49139fbd5dab">student debt crisis</a> are neither economic nor financial in origin, but predominantly social. Tuition fees and student loans became an essential part of the equation only as Americans came to believe in an entirely different purpose for higher education.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/176111/original/file-20170628-31335-exg1la.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/176111/original/file-20170628-31335-exg1la.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/176111/original/file-20170628-31335-exg1la.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/176111/original/file-20170628-31335-exg1la.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/176111/original/file-20170628-31335-exg1la.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/176111/original/file-20170628-31335-exg1la.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/176111/original/file-20170628-31335-exg1la.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Students took to the streets to protest their debt burdens as part of Occupy Boston in 2011.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/campusgrotto/6235272007">CampusGrotto/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<h2>Cost of a college degree today</h2>
<p>For many students, graduation means debt. In 2012, more than <a href="https://studentloanhero.com/student-loan-debt-statistics/">44 million Americans</a> (14 percent of the total population) were still paying off student loans. And the average graduate in 2016 left college with more than $37,000 in student loan debt.</p>
<p>Student loan debt has become the <a href="https://www.nytimes.com/2017/05/17/business/dealbook/household-debt-united-states.html">second-largest type of personal debt</a> among Americans. Besides leading to <a href="https://doi.org/10.1016/j.socscimed.2014.11.027">depression and anxiety</a>, student loan debt slows down economic growth: It <a href="http://www.asa.org/site/assets/files/3793/life_delayed.pdf">prevents young Americans</a> from buying houses and cars and starting a family. Economist <a href="https://www.federalreserve.gov/econres/alvaro-mezza.htm">Alvaro Mezza</a>, among others, has shown that there is a negative correlation between <a href="https://dx.doi.org/10.17016/FEDS.2016.010">increasing student loan debt and homeownership</a>.</p>
<p>The increase in student loan debt should come as no surprise given the increasing cost of college and the share that students are asked to shoulder. <a href="http://www.chronicle.com/interactives/statesupport">Decreasing state support for colleges</a> over the last two decades caused colleges to raise tuition fees significantly. From 1995 to 2015, tuition and fees at 310 national universities ranked by U.S. News <a href="https://www.usnews.com/education/best-colleges/paying-for-college/articles/2015/07/29/chart-see-20-years-of-tuition-growth-at-national-universities">rose considerably</a>, increasing by nearly 180 percent at private schools and over 225 percent at public schools.</p>
<p>Whatever the reason, tuition has gone up. And students are paying that higher tuition with <a href="https://studentloanhero.com/student-loan-debt-statistics">student loans</a>. These loans can influence students’ decisions about <a href="http://www.hamiltonproject.org/papers/major_decisions_graduates_earnings_growth_debt_repayment/">which majors to pick</a> and <a href="https://qz.com/680954/millennials-please-dont-waste-your-money-on-graduate-school/">whether to pursue graduate studies</a>.</p>
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<h2>Early higher education: a public good</h2>
<figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/176122/original/file-20170628-1009-1bsghsu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/176122/original/file-20170628-1009-1bsghsu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=438&fit=crop&dpr=1 600w, https://images.theconversation.com/files/176122/original/file-20170628-1009-1bsghsu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=438&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/176122/original/file-20170628-1009-1bsghsu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=438&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/176122/original/file-20170628-1009-1bsghsu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=551&fit=crop&dpr=1 754w, https://images.theconversation.com/files/176122/original/file-20170628-1009-1bsghsu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=551&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/176122/original/file-20170628-1009-1bsghsu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=551&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Stanford University crew team, between 1910-1915. Stanford was founded on the principle of providing a free education. The university did not start charging students tuition until 1920.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/library_of_congress/2889448163">Library of Congress</a></span>
</figcaption>
</figure>
<p>During the 19th century, college education in the United States was offered largely for free. Colleges trained students from middle-class backgrounds as high school teachers, ministers and community leaders who, after graduation, were to serve public needs.</p>
<p>This free tuition model had to do with perceptions about the role of higher education: College education was considered a public good. Students who received such an education would put it to use in the betterment of society. Everyone benefited when people chose to go to college. And because it was considered a public good, society was willing to pay for it – either by offering college education free of charge or by providing tuition scholarships to individual students.</p>
<p>Stanford University, which was founded on <a href="https://founders.stanford.edu/stanford-history">the premise of offering college education free of charge to California residents</a>, was an example of the former. Stanford did not charge tuition for almost three decades from its opening in 1891 until 1920.</p>
<p>Other colleges, such as the College of William and Mary, offered comprehensive tuition scholarship programs, which covered tuition in exchange for a pledge of the student to engage in some kind of service after graduation. Beginning in 1888, William and Mary provided <a href="https://books.google.com/books?id=RBUSAAAAYAAJ&pg=PA454">full tuition scholarships</a> to about one third of its students. In exchange, students receiving this scholarship pledged to teach for two years at a Virginia public school.</p>
<p>And even though the cost for educating students rose significantly in the second half of the 19th century, college administrators such as Harvard President <a href="http://www.harvard.edu/about-harvard/harvard-glance/history-presidency/charles-william-eliot">Charles W. Eliot</a> insisted that these costs should not be passed on to students. In a letter to <a href="https://en.wikipedia.org/wiki/Charles_Francis_Adams_Jr.">Charles Francis Adams</a> dated June 9, 1904, Eliot wrote, “I want to have the College <a href="https://books.google.com/books?id=hxpvsfxjfMAC&pg=PA22">open equally</a> to men with much money, little money, or no money, provided they all have brains.”</p>
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<h2>College education becomes a private pursuit</h2>
<p>The perception of higher education changed dramatically around 1910. Private colleges began to attract more students from upper-class families – students who went to college for the social experience and not necessarily for learning.</p>
<p>This social and cultural change led to a fundamental shift in the defined purpose of a college education. What was once a public good designed to advance the welfare of society was becoming a private pursuit for self-aggrandizement. Young people entering college were no longer seen as doing so for the betterment of society, but rather as pursuing personal goals: in particular, enjoying the social setting of private colleges and obtaining a respected professional position upon graduation.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/176114/original/file-20170628-12666-1xsr7sj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/176114/original/file-20170628-12666-1xsr7sj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=866&fit=crop&dpr=1 600w, https://images.theconversation.com/files/176114/original/file-20170628-12666-1xsr7sj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=866&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/176114/original/file-20170628-12666-1xsr7sj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=866&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/176114/original/file-20170628-12666-1xsr7sj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1089&fit=crop&dpr=1 754w, https://images.theconversation.com/files/176114/original/file-20170628-12666-1xsr7sj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1089&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/176114/original/file-20170628-12666-1xsr7sj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1089&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">John D. Rockefeller was instrumental in bringing about the modern day reality of college tuition and student loans.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:John_D._Rockefeller_1885.jpg">The Rockefeller Archive Center</a></span>
</figcaption>
</figure>
<p>In 1927, John D. Rockefeller began campaigning for charging students the full cost it took to educate them. Further, he suggested that students could shoulder such costs through student loans. Rockefeller and like-minded donors (in particular, <a href="https://catalog.hathitrust.org/Record/001974372">William E. Harmon</a>, the wealthy real estate magnate) were quite successful in their campaign. They convinced donors, educators and college administrators that students should pay for their own education because going to college was considered a deeply personal affair. Tuition – and student loans – thus became commonly accepted aspects of the economics of higher education.</p>
<p>The shift in attitude regarding college has also become commonly accepted. Altruistic notions about the advancement of society have generally been pushed aside in favor of the image of college as a vehicle for <a href="https://thechoice.blogs.nytimes.com/2012/02/02/why-go-to-college-at-all/">individual enrichment</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/176116/original/file-20170628-3154-1p3kb3r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/176116/original/file-20170628-3154-1p3kb3r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=288&fit=crop&dpr=1 600w, https://images.theconversation.com/files/176116/original/file-20170628-3154-1p3kb3r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=288&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/176116/original/file-20170628-3154-1p3kb3r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=288&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/176116/original/file-20170628-3154-1p3kb3r.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=362&fit=crop&dpr=1 754w, https://images.theconversation.com/files/176116/original/file-20170628-3154-1p3kb3r.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=362&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/176116/original/file-20170628-3154-1p3kb3r.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=362&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Dartmouth College students carving canes on campus in the early 1920s. In the early 20th century, as more students from upper-class families began attending college for the social – rather than educational – experience, many colleges began the practice of charging tuition.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Dartmouth_College_campus_-_students_carving_canes_on_the_Senior_Fence.jpg">Council of the Alumni of Dartmouth College</a></span>
</figcaption>
</figure>
<h2>A new social contract</h2>
<p>If the United States is looking for alternatives to what some would call a <a href="https://www.sanders.senate.gov/download/collegeforallsummary/?inline=file">failing funding model for college affordability</a>, the solution may lie in looking further back than the current system, which has been in place since the 1930s.</p>
<p>In the 19th century, communities and the state would foot the bill for college tuition because students were contributing to society. They served the common good by teaching high school for a certain number of years or by taking leadership positions within local communities. A few marginal programs with similar missions (<a href="https://www.goarmy.com/rotc.html">ROTC</a> and <a href="https://www.teachforamerica.org/">Teach for America</a>) still exist today, but students participating in these programs are very much in the minority.</p>
<p>Instead, higher education today seems to be about what college can do for you. It’s not about what college students can do for society.</p>
<p>I believe that tuition-free education can only be realized if college education is again reframed as a public good. For this, students, communities, donors and politicians would have to enter into a new social contract that exchanges tuition-free education for public services.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/176112/original/file-20170628-31297-ftmsl6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/176112/original/file-20170628-31297-ftmsl6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/176112/original/file-20170628-31297-ftmsl6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/176112/original/file-20170628-31297-ftmsl6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/176112/original/file-20170628-31297-ftmsl6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/176112/original/file-20170628-31297-ftmsl6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/176112/original/file-20170628-31297-ftmsl6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Students from UC Davis working on a environmental restoration project in 2013. Could a tuition-free, service-oriented approach be the future of higher education?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/goodlifegarden/10842803016">Jonathan Su/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure><img src="https://counter.theconversation.com/content/79475/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Thomas Adam received funding from the Friends of the Princeton University Library, the Rockefeller Archive Center, the Washington University Libraries Department of Special Collections, and the State Historical Society of Iowa.</span></em></p>About 44 million Americans are still paying off student loan debt. But it didn’t always used to be this way. As the perceived purpose of a college education changed, so too did the way we pay for it.Thomas Adam, Professor of Transnational History, University of Texas at ArlingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/635362016-08-15T15:09:30Z2016-08-15T15:09:30ZHow African countries can break the cycle of debt dependency<figure><img src="https://images.theconversation.com/files/133825/original/image-20160811-11006-12nookd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Key to the implementation of the ambitious 17-point <a href="http://www.un.org/sustainabledevelopment/sustainable-development-goals/">Sustainable Development Goals</a> (SDGs) is the question of how the <a href="https://www.youtube.com/watch?v=gLy9TKctfz0&feature=youtu.be">estimated cost</a> of between U$614 billion and $638 billion that will be required annually will be financed. </p>
<p>The United Nations Conference on Trade and Development has produced a <a href="http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1567">report</a> assessing the relationship between Africa’s capacity to finance the 15-year SDGs and maintaining debt sustainability. The report ignores critical deficiencies in the approach to the continent’s development agenda.</p>
<p>The report highlights the fact that official development aid alone will be inadequate to sustain the development needs of the continent. Instead, it recommends a three-pronged approach: </p>
<ul>
<li><p>up-scale the use of domestic debt that is market oriented to supplement external debt and development aid; </p></li>
<li><p>use complementary financing such as private-public partnerships and diaspora remittances; and </p></li>
<li><p>curtail illicit financial flows.</p></li>
</ul>
<p>The approach is far from ideal in that the continent’s debt position – external and domestic – is bordering on unsustainable. Stemming illicit financial flows, which are sometimes overstated, requires institutional capacity-building to enforce. Private-public partnerships is one approach that could bring sustainable development in the area of infrastructure development. But it requires a different model to contribute to other sectors. </p>
<h2>Africa’s debt crisis</h2>
<p>The continent’s sovereign external debt position has been rising faster than gross domestic product (GDP) in the past four years. With the dawn of the cyclical boom-bust of the commodity market, a key trigger factor for the 1980s African debt crisis, it is evident the continent is facing a renewed debt crisis. </p>
<p>Ghana is currently under International Monetary Fund (IMF) <a href="https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr15159">intensive care supervision</a>, while <a href="http://www.wsj.com/articles/imf-cancels-mozambique-credit-meeting-following-wsj-report-1460733681">Mozambique’s</a> IMF support programme is under suspension. <a href="https://www.imf.org/external/pubs/ft/scr/2015/cr1531.pdf">Kenya</a> has applied for a standby credit facility, while Zambia is expected to negotiate an IMF bailout package after its general and presidential elections on August 11 2016. A dozen other countries dependent on single commodities for revenue will be looking for international relief to avoid defaulting on both concessional and commercial loans. This will become more critical as they approach the <a href="https://theconversation.com/africas-ticking-time-bomb-35-billion-worth-of-eurobond-debt-59404">repayment period </a>between 2020 and 2025, when most capital market eurobond loans mature.</p>
<p>A critical factor that underscores the <a href="http://www.eac.int/sites/default/files/docs/protocol_eac_monetary-union.pdf">debt crisis</a> is that the debt has become unsustainable even though debt ratios are below 50% of GDP. The debt crisis is already well under way. The only question is how deep it will cut into the development agenda of the continent.</p>
<p>The challenge with domestic debt is that it limits the resources available to the private sector to borrow for productive activity, which directly contributes to the country’s GDP. The private sector, which consists of <a href="http://www.ifc.org/wps/wcm/connect/9ae1dd80495860d6a482b519583b6d16/MSME-CI-AnalysisNote.pdf?MOD=AJPERES">at least 83%</a> small and medium-sized companies, depends on this financing for expansion. These have limited access to finance but hold the key to job creation and increased tax revenue generation. They are also directly linked to the populace that is living in extreme poverty.</p>
<h2>Illicit financial flows</h2>
<p>The extent to which curtailing illicit financial flows can contribute to creating an alternative source of development finance has been overemphasised. Between 1970 and 2008 it is <a href="http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1567">estimated</a> that the continent lost $850 billion. About 60% of this was through trade mis-invoicing and the use of tax havens. And 35% was attributed to the proceeds of crime, with the balance of 5% apportioned to corruption.</p>
<p>The corporate and commercial outflows (tax havens) are legal modalities of tax avoidance and thus difficult to curtail. Mis-invoicing is a vice that cuts across borders and will require a concerted effort among trading countries. </p>
<p>And if national governments had the resources and capacity to eliminate crime and corruption, the proceeds from these activities would not add to government revenues. </p>
<p>On top of this Africa as a whole has very poor resource management capacity. This means that putting more money into government coffers won’t necessarily lead to the eradication or alleviation of poverty.</p>
<p>Take Nigeria. Oil revenues per capita have <a href="http://www.tradingeconomics.com/nigeria/gdp-per-capita">increased tenfold in 35 years</a>. But Nigeria’s income per capita does not reflect this growth. The Global Finance report lists the country as the <a href="https://www.gfmag.com/global-data/economic-data/the-poorest-countries-in-the-world?page=12">62nd poorest</a> country in the world. </p>
<h2>Foreign direct investment cancer</h2>
<p>Concessional policies associated with foreign direct investment are the <a href="http://unctad.org/en/Docs/iteipcmisc3_en.pdf">single largest drain on revenue</a> for African countries. This partly occurs when investors are allowed duty-free imports on capital equipment. The immediate effect is that it denies governments much needed tax revenue and continually bleeds the country of foreign exchange earnings.</p>
<p>Between 2004 and 2014 Zambia received just over $12 billion in <a href="http://www.indexmundi.com/facts/zambia/foreign-direct-investment">foreign direct investment</a>. These inflows mostly came into the country in the form of capital equipment. The general effect was the immediate loss of tax revenue in import taxes, which represents a minimum net loss of $5.4 billion. In addition, the externalisation of the investment amount and untaxed profits over the long term undermines the country’s capacity to have a solid foreign exchange reserve base. This represents an additional net loss of $4.2 billion. </p>
<p>This $9.6 billion loss comes alongside the depletion of the country’s natural resources. The net effect is that Zambia has not made a tangible reduction in poverty, as pointed out by the European Union in its <a href="http://ec.europa.eu/europeaid/countries/zambia_en">analysis</a> of the implementation of the 11th European Development Fund.</p>
<h2>Africa’s strengths</h2>
<p>The African continent holds a unique position on the global market. <a href="http://nationalgeographic.org/encyclopedia/africa-resources/">It produces</a> more than 20% of the world’s gold, 50% of diamonds, 12% of oil and 6% of natural gas. It also has an array of other minerals, including uranium, copper and nickel.</p>
<p>Yet 75% of the world’s <a href="http://www.worldbank.org/en/topic/poverty/overview">ten poorest countries</a> are in sub-Saharan Africa.</p>
<p>Bilateral and multilateral donors have failed the continent by piling massive public debt on governments in the full knowledge of the history to the 1980s debt crisis. This is despite the fact that they lack fiduciary accountability to their people while causing depletion of natural resources. They have also turned a blind eye to these multinationals parking huge amounts of earnings in tax havens. </p>
<h2>Development goals</h2>
<p>To come anywhere near achieving the target of <a href="http://www.afdb.org/en/aec-2015/papers/paper/growth-and-development-finance-required-for-achieving-sustainable-development-goals-sdgs-in-africa-4760/">eliminating poverty</a>, as per the United Nations’ latest development goals, the continent would need to attain a GDP growth rate of least 16%. The reality is that the continent is averaging <a href="http://www.worldbank.org/en/region/afr/overview">growth of 5%</a>.</p>
<p>The solution lies in African countries taking control of their destiny by replacing foreign direct investment with local direct investment. The continent must direct resources towards production in agriculture and manufacturing, improve its capacity for global competitiveness and import only advanced technologies and expertise.</p><img src="https://counter.theconversation.com/content/63536/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Trevor Hambayi is affiliated with Economic Association of Zambia. </span></em></p>Africa needs billions of dollars to finance the Sustainable Development Goals. Its not clear where this money will come from.Trevor Hambayi, PhD Research Fellow – Finance, University of BoltonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/591802016-05-12T08:02:39Z2016-05-12T08:02:39ZHow Mozambique can contain its debt crisis and avoid long-term damage<figure><img src="https://images.theconversation.com/files/121896/original/image-20160510-20734-4sgv99.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mozambique should prioritise spending on infrastructure, agricultural development and human capital to ensure sustained growth.</span> <span class="attribution"><span class="source">Reuters/Grant Lee Neuenburg</span></span></figcaption></figure><p>Mozambique’s return to the international limelight reads like a John le Carré novel. The elements of a bestseller are all present: growing internal <a href="http://www.worldpoliticsreview.com/articles/17725/political-tensions-threaten-mozambique-s-tenuous-peace">instability</a>, unexplored natural gas deposits, international loans to <a href="http://www.corpwatch.org/article.php?id=16076">purchase weapons</a> disguised as lending to fund tuna boats, and hidden public loan guarantees to private companies owned by the secret services. And, of course, there are legions of <a href="http://www.wsj.com/articles/imf-cancels-mozambique-credit-meeting-following-wsj-report-1460733681">international bankers</a> and diplomats wringing hands in late-night meetings.</p>
<p>Unfortunately, this is not fiction. The debts are real and the costs of these decisions will hang over Mozambique for decades. This article provides a summary of what we know about Mozambique’s external debt situation and proposes measures to contain the current situation and avoid longer-term damage.</p>
<h2>The scale of the debt burden</h2>
<p>After weeks of rumour, <a href="http://allafrica.com/stories/201605050952.html">some clarity</a> about Mozambique’s external debt position recently emerged following an emergency visit of the government to the <a href="http://www.imf.org/external/index.htm">International Monetary Fund</a> in Washington. In the table below I pull together some rough estimates based on the <a href="http://www.ta.gov.mz/article.php3?id_article=266">latest information</a>.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/121883/original/image-20160510-20731-1m8omms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/121883/original/image-20160510-20731-1m8omms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=195&fit=crop&dpr=1 600w, https://images.theconversation.com/files/121883/original/image-20160510-20731-1m8omms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=195&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/121883/original/image-20160510-20731-1m8omms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=195&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/121883/original/image-20160510-20731-1m8omms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=245&fit=crop&dpr=1 754w, https://images.theconversation.com/files/121883/original/image-20160510-20731-1m8omms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=245&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/121883/original/image-20160510-20731-1m8omms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=245&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Estimates based on own calculations.</span>
</figcaption>
</figure>
<p>The country’s officially reported external debt stock at the end 2014 was more than US$6.5 billion, excluding $500 million taken on to government accounts in 2014 associated with the infamous <a href="http://journalismfund.eu/ematum">Ematum deal</a> for the tuna fleet.</p>
<p>Even before the current crisis this was a cause for concern. Mozambique had been a major beneficiary of various <a href="http://go.worldbank.org/BS05HP0KZ0">debt relief initiatives</a> in the late 1990s and 2000s. At the beginning of this century the country’s debt stock was about $1 billion. In 2010 the same stock was $3.3 billion. By 2014 it had doubled.</p>
<p>Then there’s what is owed on the controversial “new” debts: </p>
<ul>
<li><p>Ematum, for the controversial tuna fleet;</p></li>
<li><p><a href="http://clubofmozambique.com/news/mozambique-cenbank-knows-nothing-of-pro-indicus-secret-loan/">ProIndicus</a>, which is aimed at providing security, especially for gas and oil operations; and </p></li>
<li><p>Mozambique Asset Management, which was set up for maritime maintenance and repairs. </p></li>
</ul>
<p>Due to the heavy financial burden of the Ematum deal, originally due in 2020, it was recently restructured. The repayment period was extended from 2020 to 2023, increasing the annual interest rate from 6.305% to 10.5%, and switching to a “bullet” repayment. This means that the full principal amount is only repaid at the end of the period.</p>
<p>The two other loans, ProIndicus and Mozambique Asset Management, are standard private loans and must be repaid in the next five years.</p>
<p>Together, the immediate annual costs of these three debts are expected to be more than $300 million per year, double the total external debt service costs in 2014.</p>
<p>Another point that has been neglected in the debate around these three controversial loans is additional public debt taken on since 2014. According to government declarations, the external debt stock stood at $9.89 billion in May 2016. Basic arithmetic means that, even excluding the controversial loans, a further $1.4 billion of public external debt has been incurred since 2014. This continues a worrying trend of rapid indebtedness.</p>
<h2>What it all adds up to</h2>
<p>Putting all this together, annual debt service costs are likely to be in the region of $500 million over the next few years, of which more than $200 million are in interest costs alone. These costs could be higher, depending on the structure of these other more recent debts.</p>
<p>A total of $500 million is equivalent to about 33% of conventional merchandise exports – excluding the contribution of mega-projects such as aluminum and coal – or 25% of net international reserves. This will create significant pressures on public finances. </p>
<p>Moreover, news that a set of <a href="http://www.bbc.com/news/world-africa-36158118">major donors</a>, including the International Monetary Fund and <a href="http://www.worldbank.org/">World Bank</a>, are reviewing their lending to Mozambique means that access to hard currency will become even more scarce in the short term. Further depreciation of the currency is likely, which would only add to the local currency cost of the debt burden.</p>
<h2>What action can be taken</h2>
<p>How can Mozambique contain this situation and avoid a downward spiral?</p>
<p>There are no simple solutions. But calls by donors for full transparency and accountability around the debt situation must be taken more seriously. The government could start by opening its books to a credible and thorough external audit of the external debt, as well as of its relationships with private companies through loan guarantees and private-public partnerships.</p>
<p>Admittedly, a <a href="http://allafrica.com/stories/201605010073.html">legal investigation</a> into the controversial loans has begun. This is welcome but needs to be more than a pro forma exercise and must be free from political interference. </p>
<p>Substantive actions in these two domains would go some way to restoring donor confidence.</p>
<p>A further set of immediate actions should be to deal with the companies associated with the controversial loans. Under current circumstances, it is difficult to envisage any plausible scenario under which these companies become viable. A sensible option is to avoid further losses now. </p>
<p>One strategy here starts by recognising that some of the rights owned by these companies are valuable, as are the existing assets of Ematum. An international auction to these rights or to an exclusive management contract would serve two purposes. First, it would raise money to pay off the loans, thereby reducing their social costs. Second, it would provide a transparent commercial valuation of the businesses opening the way for renegotiation with creditors. </p>
<p>In my view, if the private lenders to ProIndicus and Mozambique Asset Management were excessively optimistic in their valuation of these businesses, they should bear some losses.</p>
<h2>Temptations to be avoided</h2>
<p>An unavoidable consequence of the current crisis will be some form of austerity. Here the government needs to maintain a cool head and avoid rash decisions that undermine long-term growth and fiscal health. It will be tempting to seek a new round of loans from abroad, perhaps from China where Mozambican President Filipe Nyusi will be making <a href="http://macaudailytimes.com.mo/president-mozambique-visits-china.html">an official visit</a> in May. </p>
<p>Of course, some short-run relief would be handy. But there is a major risk that this is not transparent and will incur new fiscal liabilities or high long-run opportunity costs. Moreover, this approach could alienate other donors and therefore jeopardise critical sources of financing for social sectors.</p>
<p>The general point is that a more serious and rational approach to public debt is needed, in which loan decisions based on vanity or political preferences are avoided. Rather, rigorous analysis of project viability and the profile of their net benefits is needed. It would be helpful to enact in law stricter requirements and transparency around all new debt issues and guarantees.</p>
<p>Another temptation is to hand out attractive tax breaks to foreign companies to kick-start delayed natural resource investments. Again, this might provide temporary relief but this would be the public finance equivalent of selling the family silver to a pawn shop. It is critical that the long-run public value of these assets is not squandered due to poor policy decisions by a previous government.</p>
<p>Finally, it is essential that the government continues to invest in the foundations for sustained growth. This means that public investment in infrastructure, agricultural development and human capital (education, health) should be the main priorities. So these budgets need to be ring-fenced in some way. This is easier said than done, especially given ongoing <a href="http://foreignpolicy.com/2016/05/06/mozambiques-invisible-civil-war-renamo-frelimo-dhlakama-nyusi/">internal conflict</a>. Solving this political standoff is vital to get out of the current economic mess.</p><img src="https://counter.theconversation.com/content/59180/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sam Jones works for the University of Copenhagen, which provides technical assistance in economic research and analysis to the Ministry of Economy & Finance in Mozambique. The present article is written in his personal capacity only.</span></em></p>Mozambique returns to the limelight following controversy over its external debt. How can the country contain this situation and avoid a downward spiral?Sam Jones, Associate Professor in Development Economics, University of CopenhagenLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/591272016-05-12T00:50:31Z2016-05-12T00:50:31ZCan Puerto Rico escape its $72 billion debt trap and avoid Greece’s fate?<p>To almost no one’s surprise, Puerto Rico <a href="http://money.cnn.com/2016/05/02/investing/puerto-rico-default-may-1/">missed</a> a US$422 million debt payment earlier this month, triggering fears among investors that additional defaults are on the way and increasing pressure on Congress to act. </p>
<p>The <a href="https://theconversation.com/puerto-ricos-long-fall-from-shining-star-to-the-greece-of-the-caribbean-43097">warnings</a> that this would happen could hardly have been louder. The major credit rating agencies <a href="http://www.reuters.com/article/sp-puertorico-idUSL3N0ZG1UQ20150630">long ago cut</a> Puerto Rico’s $72 billion in debt to some of the lowest levels. Its bonds have been trading at steep discounts to their face value for several years. And in December, Puerto Rico Governor Alejandro García Padilla <a href="http://www.theguardian.com/world/2015/dec/01/puerto-rico-debt-govenor-alejandro-garcia-padilla-senate-repayment">told the U.S. Senate</a> that his government had “no cash left” and would need to restructure its debt or face “disastrous” consequences. </p>
<p>And this week, Treasury Secretary Jack Lew <a href="http://www.nytimes.com/2016/05/10/business/dealbook/treasury-secretary-jacob-lew-puts-a-face-on-puerto-rico-debt-crisis.html?_r=0">visited the island</a> with a similar message, urging lawmakers to act and highlighting the crisis’ human toll. </p>
<p>The warnings thus far, however, have fallen on deaf ears, leading to this month’s inevitable default. The only question is – as it has been for a long time – how to resolve the crisis before it spins out of control. </p>
<p>At stake is years of falling incomes and house prices, chronic unemployment and lost economic opportunities – typical outcomes of unresolved debt crises, as <a href="http://www.bbc.com/news/world-europe-33507802">citizens of Greece can attest</a>. </p>
<h2>No easy way out</h2>
<p>Debt crises are typically contentious and take a long time to unwind. </p>
<p>I’ve been researching financial crises for 25 years, and several unique features promise to make Puerto Rico’s especially messy. These include years of economic decline, no standing in U.S. bankruptcy courts and hedge funds intent on seeking to collect as much possible in a lawsuit. </p>
<p>At this juncture, resolution of the crisis without action from Washington is hard to imagine. </p>
<p>How did Puerto Rico get to this point? And what options remain to avoid disaster? </p>
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<h2>Economic shocks</h2>
<p>For decades, Puerto Rico, a largely self-governing U.S. territory, had a vibrant economy. Real income per capita more than doubled from 1975 to 2006, growing at a 4.2 percent annual pace, much faster than in the U.S. or Latin America over the same period. </p>
<p>But the commonwealth suffered a severe economic shock in 2006, when Congress allowed tax breaks encouraging businesses to set up on the island to expire. The result: factories closed and job losses followed. </p>
<p>Next came the 2008-09 financial crisis and recession, which hit Puerto Rico especially hard. Its economy has contracted every year but one since, resulting in the loss of <a href="http://www.gdb-pur.com/economy/statistical-appendix.html">more than a third</a> of manufacturing jobs and <a href="http://data.bls.gov/timeseries/LASST720000000000003?data_tool=XGtable">driving unemployment</a> to as high as 17 percent in 2010. <a href="http://country.eiu.com/article.aspx?articleid=1524151536&Country=Puerto%20Rico&topic=Economy&subtopic=Forecast&subsubtopic=Forecast+summary.">Economic output</a> is expected to decline at least through the 2017 fiscal year. </p>
<p>As U.S. citizens, Puerto Ricans can move to the mainland in search of jobs, and the island’s population has been falling as thousands have done just that, leaving the commonwealth with a lower tax base.</p>
<p>These shocks, together with chronic budget deficits, put Puerto Rico on an “unsustainable trajectory of financing gaps” with <a href="http://www.bgfpr.com/documents/puertoricoawayforward.pdf">no end in sight</a>. </p>
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<h2>Surging debt levels</h2>
<p>But how did Puerto Rico’s economic crisis spiral into a debt crisis? </p>
<p>Puerto Rico bonds enjoy what is known as a triple tax exemption. That means interest investors earn on the bonds is exempt from federal, state and local taxes, giving them higher after-tax yields than similarly rated debt.</p>
<p>Normally, the triple tax exemption is available only to those who live in the state or city that issued the bonds. But buyers of Puerto Rico’s bonds get the exemption regardless of where they live, which made them popular with tax-exempt mutual funds, hedge funds and wealthy individual investors.</p>
<p>That meant there was always plenty of demand for the debt, even as Puerto Rico’s budget deficits worsened and its economy contracted – problems that required ever more borrowing to pay the bills. As a result, its <a href="http://www.economist.com/news/finance-and-economics/21588364-heavily-indebted-island-weighs-americas-municipal-bond-market-puerto-pobre">debt burden</a> soared to 89 percent of personal income, about nine times that of the most heavily indebted U.S. state by that measure (Hawaii).</p>
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<h2>How can we get out of this mess?</h2>
<p>The first step in resolving any debt crisis is to recognize that a loss has occurred and that without changes in policies or external intervention, it is likely to get worse. In Puerto Rico’s case, this is no longer in question. </p>
<p>The only real issue now is how the loss should be split among Puerto Rico’s creditors, its residents and taxpayers in the mainland United States. Here Puerto Rico government’s options are limited. </p>
<p>Its access to the bond market has been cut off, so further borrowing is out of the question. With another $2 billion in debt payments due in July, the <a href="http://www.wsj.com/articles/puerto-ricos-debt-crisis-turns-up-the-heat-on-congress-1462219483">government says</a> that paying creditors would require cutting essential public services.</p>
<p>What’s more, bankruptcy <a href="https://www.law.cornell.edu/uscode/text/11/109">is currently not an option</a> because neither Puerto Rico nor its municipalities are eligible for protection under Chapter 9. </p>
<p>So what options are left to deal with the crisis, at least in the short term? Here are a few of the main ones under consideration:</p>
<ol>
<li><p><strong>Provide a bailout.</strong> A federal bailout could be devised to cover losses on Puerto Rico’s bonds, but it’s highly unlikely because neither the White House nor Congress has any appetite for it. The concern is, in part, that it would set a precedent for financially troubled states. The federal government has not come to the direct assistance of a state since it assumed their independence-related debts in 1790. Barring an outright bailout, Congress could modify some federal programs for the island, something the <a href="http://www.c-span.org/video/?326821-1/white-house-briefing">Obama administration appears interested</a> in doing. Under current rules, Puerto Rico receives less from Medicaid than states and no Supplemental Security Income. </p></li>
<li><p><strong>Change the law to allow bankruptcy.</strong> Congress could amend Chapter 9 to allow Puerto Rico and its cities to declare bankruptcy. <a href="http://www.bloomberg.com/news/articles/2015-07-29/treasury-s-lew-says-puerto-rico-crisis-must-be-resolved-locally">Treasury Secretary Lew has expressed support</a> for this approach. Legislation has been introduced to do just that but has run into opposition from some hedge funds and other investors. In December, an effort to <a href="http://www.nytimes.com/2015/12/20/us/politics/puerto-rico-money-debt.html?_r=0">bring one of the bills</a> to a vote failed. </p></li>
<li><p><strong>Establish an oversight board.</strong> Nearly everyone involved with Puerto Rico’s crisis agrees on the need for fiscal and economic reforms, though not necessarily on how to implement them. Puerto Rico’s government has already cut the public pension system, hiked taxes and laid off government employees, but the budget’s red ink <a href="https://www.fas.org/sgp/crs/row/R44095.pdf">continues to flow</a>. Recently, House Republicans has been in negotiations with the White House over legislation calling for a federal control board to oversee Puerto Rico’s finances. But <a href="http://www.usnews.com/news/politics/articles/2016-03-25/republican-bill-would-create-oversight-board-for-puerto-rico">some Democrats oppose</a> such a board, arguing that it would infringe on the island’s sovereignty. </p></li>
<li><p><strong>Restructure the debt.</strong> The resolution of a debt crisis often involves convincing investors to take a loss on their holdings. The Latin American debt crisis of the 1980s, for example, did not end until the <a href="http://www.oecd.org/development/pgd/1919358.pdf">Brady Plan provided</a> cut the amount countries owed by an average of 30 percent. The outlook for a debt deal is in doubt, however, because hedge funds have been buying Puerto Rico’s debt in an apparent effort to use U.S. courts to force a favorable settlement – as <a href="http://www.npr.org/sections/thetwo-way/2016/02/29/468600774/argentina-reaches-settlement-with-hedge-funds-ending-15-year-dispute">happened recently</a> over Argentina’s 2002 default.</p></li>
</ol>
<h2>Long-term challenges and way forward</h2>
<p>Solving the debt crisis, however, is only a first step toward resolving Puerto Rico’s problems. It must also find a way to sustainable economic growth, which inevitably means becoming more competitive. </p>
<p>A group of former International Monetary Fund economists <a href="http://www.bgfpr.com/documents/puertoricoawayforward.pdf">issued a report last summer</a> in which they argued that Puerto Rico needs to alter labor market practices to lower the costs of doing business, for example by temporarily exempting companies from the federal minimum wage and easing rules governing overtime, vacations and layoffs. They also advocated cutting federal welfare benefits, noting that those benefits can provide a disincentive to work for low-wage workers. </p>
<p>A more long-term-oriented strategy would be to build on the island’s strengths, such as its well-educated workforce. <a href="https://www.newyorkfed.org/regional/puertorico/index.html">Almost 49 percent of Puerto Rico’s population</a> has some college education, making it one of the best-educated work forces in the world. Another advantage is a credible legal system (especially relative to its Latin American neighbors). </p>
<p>These strengths suggest that Puerto Rico could grow by increasing support for high-value industries like finance, management and software rather than competing to lure low-wage producers. Singapore and South Korea are two examples of countries that successfully followed a development strategy of moving up the value-added ladder. </p>
<p>But to follow such a strategy, a more favorable business climate is needed. According to the World Bank, Puerto Rico <a href="http://www.doingbusiness.org/%7E/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB15-Full-Report.pdf">ranks 47th</a> out of 188 countries in terms of ease of doing business (the U.S. is 7th), and is particularly weak in ease of paying taxes, registering property and obtaining construction permits.</p>
<p>The <a href="http://www.maritimelawcenter.com/html/the_jones_act.html">Jones Act</a>, meanwhile, hurts business by requiring that cargo shipped between U.S. ports be carried on U.S. ships. An exemption from the act would help Puerto Rico develop as a regional hub.</p>
<p>While there seems to be consensus that reforms like these are necessary, they will take time to implement and bear fruit. And before we can tackle Puerto Rico’s long-term problems, we must first find a way to resolve its debt crisis. </p>
<p>Time is not on our side: Latin America’s debt crisis took a decade to resolve, and Europe is still struggling with aspects of its debt crisis, six years on. Let’s hope Puerto Rico’s doesn’t take quite as long.</p><img src="https://counter.theconversation.com/content/59127/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian Gendreau receives funding from a Natural Resource Center grant from the U.S. Department of Education. </span></em></p>The island, which missed a debt payment earlier this month, faces ‘disastrous’ consequences if a solution to its spiraling crisis isn’t found soon.Brian Gendreau, Director, Latin American Business Environment program, University of FloridaLicensed as Creative Commons – attribution, no derivatives.