tag:theconversation.com,2011:/id/topics/sovereign-debt-538/articlesSovereign debt – The Conversation2024-02-22T07:45:37Ztag:theconversation.com,2011:article/2239822024-02-22T07:45:37Z2024-02-22T07:45:37ZAfrica’s debt crisis needs a bold new approach: expert outlines a way forward<p>It hasn’t been easy for African states to finance their developmental and environmental policy objectives over the past few years.</p>
<p>Recent events suggest that the situation may be improving. For the first time in two years, three African states have been able <a href="https://www.economist.com/middle-east-and-africa/2024/02/15/african-governments-return-to-international-bond-markets">to access international financial markets, albeit at high interest rates.</a> Kenya, for example, is <a href="https://www.bloomberg.com/news/articles/2024-02-12/kenya-said-to-tap-eurobond-market-at-exorbitant-rate-for-buyback?sref=UnSQjRxb">now paying over 10%</a> compared to about 7% in 2014. </p>
<p>Many African countries continue to face challenging sovereign debt situations.</p>
<p>Total external debts as a share of Africa’s export earnings increased from <a href="https://unctad.org/publication/world-of-debt/regional-stories">74.5% in 2010 to 140% in 2022</a>. In 2022, African governments had to <a href="https://data.one.org/topics/african-debt/">allocate about 12% of their revenues to servicing their debt</a>. Between 2019 and 2022, <a href="https://unctad.org/publication/world-of-debt/regional-stories">25 African governments</a> allocated more resources to servicing their total debts than to the health of their citizens. And in late 2023 the <a href="https://www.imf.org/en/News/Articles/2023/09/26/cf-how-to-avoid-a-debt-crisis-in-sub-saharan-africa">International Monetary Fund estimated</a> that over half the low income African countries were either potentially or actually experiencing difficulties paying their debts. </p>
<p>This suggests that it will be very difficult for Africa to raise the US$1.6 trillion that <a href="https://www.oecd-ilibrary.org/sites/3269532b-en/index.html?itemId=/content/publication/3269532b-en#:%7E:text=Africa's%20sustainable%20financing%20gap%20until,Sustainable%20Development%20Goals%20by%202030">the Organisation for Economic Cooperation and Development estimates</a> it needs to reach the sustainable development goals by 2030.</p>
<p>One of the lessons of the COVID pandemic and the climate negotiations is that Africa can’t count on the global community to provide it with sufficient new funds or with debt relief to deal with either its development needs or the consequences of crises such as pandemics or extreme weather events. </p>
<p>Its official bilateral creditors appear more focused on their own needs and on other parts of the world than on Africa. Commercial creditors are happy to provide financing when conditions are favourable and African debt can help them satisfy their investment mandates. But they are less forthcoming when the going gets tough and the risks associated with the transaction – and for which they have been compensated – actually materialise.</p>
<p>This suggests that Africa needs to advocate more aggressively for its own interests. </p>
<p>This year offers some good opportunities to promote a more effective approach to African debt. </p>
<h2>Careful planning needed</h2>
<p>There are two <a href="https://www.un.org/sustainabledevelopment/financing-for-development/">international</a> <a href="https://www.un.org/en/summit-of-the-future#:%7E:text=22%2D23%20September%202024,Solutions%20for%20a%20Better%20Tomorrow">conferences</a> where global economic governance will be on the agenda. This is also the first year that the African Union participates as a full member in the G20. In addition, South Africa, the G20 chair in 2025, currently serves on the troika that manages the G20 process. </p>
<p>Debt and development finance will be an important topic in all these forums. African representatives can use their participation to advocate for a new approach to sovereign debt that is more responsive to African needs and concerns. They can also lobby other participating states and non-state actors for their support.</p>
<p>But African states will need to plan carefully. Their starting point should be the well recognised fact that the current sovereign debt restructuring process is not working for anyone. The G20 agreed a <a href="https://clubdeparis.org/sites/default/files/annex_common_framework_for_debt_treatments_beyond_the_dssi.pdf">Common Framework</a> that was supposed to help resolve the sovereign debt crises in low income countries. <a href="https://saiia.org.za/research/africas-debt-priorities-a-sustainability-perspective-required-support-from-the-g20/#:%7E:text=The%20Common%20Framework%20was%20established,applied%20include%20Ethiopia%20and%20Ghana.">Four African countries</a> applied to have their debts restructured through the framework. Despite years of negotiations, it has failed to fully resolve the debt crisis in three of them. </p>
<p>Countries outside the Common Framework, such as <a href="https://www.reuters.com/markets/asia/sri-lanka-bondholders-raise-concerns-over-debt-deal-transparency-2023-12-01/">Sri Lanka</a>, have not managed to fully resolve their debt crises either. This is costly for both debtors and creditors. It is therefore in everyone’s interest to look for a new approach.</p>
<p>This requires all parties to be willing to entertain new ideas and to experiment with new approaches to old problems. African states should offer their own innovative proposals. They should also state that they are willing to take on new responsibilities if their creditors are willing to do the same.</p>
<p>They can remind their creditors that these experiments would not be taking place in a vacuum. They can be guided by the many existing, but underutilised, international norms and standards applicable to responsible sovereign debt transactions, for example the Unctad principles on <a href="https://unctad.org/publication/principles-promoting-responsible-sovereign-lending-and-borrowing#:%7E:text=Sovereign%20lending%20and%20borrowing%20conducted,neighbors%20and%20its%20trading%20partners.">responsible sovereign debt transactions</a>. Some of these relate to the conduct of sovereign borrowers. Others focus on responsible lending behaviour and are often cited by creditors in their own policies dealing with environmental and social issues, social responsibility or human rights. </p>
<p>By basing any new approach on these international norms and standards, both debtors and creditors will merely be agreeing to implement principles that they have already accepted. </p>
<p>Working from this starting point, African states should make three specific proposals. </p>
<h2>Concrete proposals</h2>
<p>First, they should commit to making both the process for incurring debts and the terms of all their public debt transactions transparent. </p>
<p>This will ensure that their own citizens understand what obligations their governments are assuming on their behalf. It will encourage governments to adopt responsible borrowing and debt management practices. They should also agree that they can be held accountable for their failure to comply with these transparent and responsible sovereign debt practices and procedures.</p>
<p>Second, African states should point out that there is a fundamental problem with a sovereign debt restructuring process that only focuses on the contractual obligations that the debtor state owes its creditors. This focus means, in effect, that servicing its debt obligations will trump the debtor state’s efforts to deal with the country’s vulnerability to climate change and the loss of biodiversity, and with its poverty, inequality and unemployment challenges. This follows from the fact that their creditors can use the restructuring process to force sovereign borrowers in difficulty, unlike corporations in bankruptcy, to pay those who lend them money without regard, for example, to the impact on their obligations to pensioners, public sector employees or the welfare of their citizens. </p>
<p>This exclusive focus on debt contracts is inconsistent with the international community’s interest in addressing global challenges like climate and inequality. </p>
<p>This problem can be resolved if both creditors and debtors agree that they will adopt an approach to debt negotiations that incorporates the financial, economic, social, environmental, human rights and governance dimensions of sovereign debt crises.</p>
<p>Third, African states should propose that their creditors publicly commit to base the new approach to sovereign debt on an agreed list of international norms and standards relevant to responsible international financial practices. These will include those dealing with transparency, climate and environmental issues, and social matters, including human rights.</p><img src="https://counter.theconversation.com/content/223982/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danny Bradlow previously had a grant from ther Open Society Initiative for Southern Africa to work on issues relating to sovereign debt. </span></em></p>Africa needs to advocate more aggressively for its own interests when it comes to negotiating debt terms.Danny Bradlow, Professor/Senior Research Fellow, Centre for Advancement of Scholarship, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2186182023-11-28T13:25:00Z2023-11-28T13:25:00ZZambia’s foreign debt tragedy – what needs to happen to resolve the crisis<p>Three years after <a href="https://www.bbc.com/news/world-africa-54928836">defaulting on its foreign debt</a>, Zambia is still trying to reach agreement with all its creditors on how to manage this situation. This has left the southern African country in a state of development finance limbo. It is handicapped in raising the funds needed to generate jobs, build infrastructure, provide health, education and social services and deal with climate change. Its president, <a href="https://www.dailymaverick.co.za/article/2023-03-29-hakainde-hichilemas-red-alert-to-a-spluttering-world-you-cant-eat-democracy/">Hakainde Hichilema</a>, has warned that the situation threatens to undermine its democracy.</p>
<p>Zambia’s inability to reach a definitive agreement with all its creditors is not for lack of trying. But it has had bad luck. It is the test case for the <a href="https://www.imf.org/en/About/FAQ/sovereign-debt#Section%205">Common Framework</a> that the G20 international forum established in November 2020 to deal with the debts of low-income countries. The framework was expected to result in all creditors making comparable contributions to help a defaulting country resolve its debt crisis.</p>
<p>Zambia’s experience demonstrates that the Common Framework has failed to deliver.</p>
<p>The International Monetary Fund, the global economic governance institution responsible for assisting countries in economic trouble, lacks the resources and the bargaining power needed to push other creditors to reach a sustainable debt deal with Zambia. It could only contribute <a href="https://mediacenter.imf.org/news/imf-zambia-s-extended-credit-facility-arrangement/s/45ff4f0d-ab95-44b4-995b-499fa4f273d1">US$1.3 billion over three years</a> to Zambia’s <a href="https://www.uneca.org/sites/default/files/MGD/INFFSept2022/Zambia%20Debt%20-%20Maryann%20Lumba%20Nkunika-Lwandamina%20En.pdf">financing gap of US$8.4 billion</a>. Furthermore, the conditions it has attached to its financing impose tough choices on the Zambian government and require sacrifices from the Zambian people.</p>
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<a href="https://theconversation.com/african-debt-how-to-break-unequal-relationships-in-financing-deals-195991">African debt: how to break unequal relationships in financing deals</a>
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<p>Zambia’s official creditors have been organised into a committee chaired by China and France. The <a href="https://www.imf.org/en/News/Articles/2023/06/22/pr23235-imf-welcomes-debt-treatment-agreement-reached-by-zambia">official creditors</a> moved slowly and appear to have been more focused on reaching agreements that serve their geo-strategic interests than on what is best for Zambia. In <a href="https://www.bloomberg.com/news/articles/2023-10-14/zambia-agrees-deal-with-official-creditors-on-debt-restructuring?sref=UnSQjRxb#xj4y7vzkg">June 2023, they finally agreed on a common template for all official creditors</a>. Each individual creditor is now expected, based on this template, to reach its own binding agreement with Zambia. These individual agreements are still a work in progress.</p>
<p><a href="https://www.reuters.com/world/africa/zambia-announces-debt-restructuring-agreement-with-bondholders-2023-10-26/">In October 2023</a> Zambia announced that it had reached agreement with the holders of its US$3 billion worth of Eurobonds. These creditors, with Zambian agreement, maintained that they were making a comparable contribution to the official creditors in resolving Zambia’s debt crisis. <a href="https://www.reuters.com/world/africa/zambia-says-international-bond-deal-cant-be-implemented-this-time-2023-11-20/">In November, the deal was rejected by Zambia’s official creditors</a> and some independent experts. They argued that the commercial creditors were receiving more favourable treatment than the official creditors. While both agreed to take a haircut on their debts, they argued that the commercial creditors would received approximately <a href="https://www.reuters.com/world/africa/zambia-creditors-imf-have-reservations-bondholder-deal-ministry-2023-11-10/">20c more for each dollar of debt outstanding than the official creditors</a>. The result is that Zambia and its bondholders will now have to renegotiate their deal.</p>
<p>The current approach to sovereign debt restructuring is failing Zambia and its people. A new approach is needed. It should respect Zambia’s legal commitments to its creditors and serve its need for a sustainable and fair resolution to its debt crisis.</p>
<h2>What should Zambia do?</h2>
<p>First, Zambia should state that its goal is to reach an <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4268443">optimal outcome</a> to its debt crisis. <a href="https://theconversation.com/african-debt-how-to-break-unequal-relationships-in-financing-deals-195991">I define</a> an optimal outcome as one that:</p>
<ul>
<li><p>takes into account the circumstances in which the parties are negotiating and their rights, obligations and responsibilities</p></li>
<li><p>offers each of them the best possible mix of economic, financial, environmental, social, human rights and governance benefits. </p></li>
</ul>
<p>It should also require that the parties monitor the implementation of this outcome.</p>
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Read more:
<a href="https://theconversation.com/debt-distress-in-africa-biggest-problems-and-ways-forward-182716">Debt distress in Africa: biggest problems, and ways forward</a>
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<p>Zambia, by calling for an optimal outcome, will call the creditors’ bluff. Official creditors have all expressed their support for the <a href="https://sdgs.un.org/goals">sustainable development goals</a> and for all countries meeting their <a href="https://climatepromise.undp.org/news-and-stories/NDCs-nationally-determined-contributions-climate-change-what-you-need-to-know?gad_source=1&gclid=CjwKCAiAmZGrBhAnEiwAo9qHidO2KMwwhLKy4NWeVGrO80AyurfBWOBXU1w-RWiZHOkjz_GPm-9BohoCvyUQAvD_BwE">nationally determined contributions</a> under the climate agreements. However, they do not test whether the debt restructuring terms they offer Zambia are consistent with these objectives. </p>
<p>Zambia should publicly state that, while it is serious about fulfilling all its contractual obligations, it is also serious about meeting its SDG commitments and its nationally determined contributions. It should state that it will work with its official creditors to determine that their proposed debt restructuring terms, in fact, will help Zambia meet all these commitments.</p>
<p>Zambia can also point out that many of its commercial creditors have posted <a href="https://www.credit-suisse.com/about-us/en/our-company/corporate-responsibility/banking/human-rights.html">human rights</a> policies or <a href="https://www.nedbank.co.za/content/dam/nedbank/site-assets/AboutUs/Sustainability/Supporting%20Documents/human-rights-statement-may-2019.pdf">statements</a> on their websites in which they <a href="https://www.blackrock.com/corporate/literature/publication/blk-commentary-engagement-on-human-rights.pdf">state their support for human rights</a> and their respect for such international instruments as the <a href="https://www.oecd.org/publications/oecd-guidelines-for-multinational-enterprises-on-responsible-business-conduct-81f92357-en.htm">OECD Guidelines on Multinational Enterprises</a> and the UN <a href="https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment">Principles on Responsible Investing</a>. </p>
<p>Some even express their support for the <a href="https://www.undp.org/laopdr/publications/guiding-principles-business-and-human-rights?gad_source=1&gclid=CjwKCAiAsIGrBhAAEiwAEzMlCymQ8maLyG4m1ZeFtbLIqp4gJPPKrYTL-CLY4iFKij1GgE7SAvb6hxoCHDgQAvD_BwE">UN Guiding Principles on Business and Human Rights</a>. It can ask these creditors to demonstrate that they have they applied these principles in their transactions with Zambia and why they think the terms and conditions they are offering Zambia are consistent with their own policies.</p>
<p>Second, civil society organisations in Zambia and their international allies can take advantage of the fact that in each state that adheres to the OECD Guidelines, which includes many of Zambia’s official creditors, there is an official designated as the <a href="https://www.oecd.org/investment/mne/ncps.htm">national contact point</a>. This officer is responsible for providing guidance to companies based in that country on how they can comply with the OECD Guidelines and on responding to complaints about specific instances where they have failed to comply. </p>
<p>If all parties agree, the officer can help facilitate dialogue between the complainants and the relevant corporations. Thus, these civil society organisations can propose to the relevant national contact points that they encourage the creditors to engage in discussions with civil society and with the Zambian government about how they can help reach an optimal outcome to Zambia’s debt crisis.</p>
<p>Third, Zambia should propose that all its creditors agree to meet with it in <a href="https://www.piie.com/blogs/realtime-economics/towards-integrated-framework-restructure-sovereign-debt">one forum</a> and make one agreement dealing with all its debt obligations. While this will, no doubt, complicate negotiations, it will improve the transparency of the process. It will also give each group of creditors confidence that they are all receiving comparable treatment.</p>
<p>When Zambia meets its official creditors they focus on their agreements. Similarly, when the bondholders meet with Zambia they focus only on their contractual rights. Bringing them all together in one forum will open the space for Zambia to demand that the creditors consider its other legal obligations as well as their contractual rights. </p>
<p>These other commitments can include Zambia’s legal obligations to its public servants, its pensioners, its international treaty commitments and its constitutional obligations.</p><img src="https://counter.theconversation.com/content/218618/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danny Bradlow received funding from the Open Society Foundation for his work on sovereign debt. </span></em></p>The current approach to debt restructuring has failed Zambia.Danny Bradlow, Professor/Senior Research Fellow, Centre for Advancement of Scholarship, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1959912022-12-09T09:21:02Z2022-12-09T09:21:02ZAfrican debt: how to break unequal relationships in financing deals<figure><img src="https://images.theconversation.com/files/499958/original/file-20221209-25705-p3m533.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Africa needs an alternative approach to restructuring government debt</span> <span class="attribution"><span class="source">Gettyimages</span></span></figcaption></figure><p>Africa is facing some impossibly difficult choices when it comes to financing its development. Countries <a href="https://www.afdb.org/sites/default/files/launch_of_aeo_2022_-_extended_speach_-_prof._urama_-_25_may_2022_002.pdf">need hundreds of billions of dollars</a> each year to meet their climate, poverty, unemployment and inequality challenges. They cannot meet these needs only from their own resources, grants and concessional sources. They will have to tap international capital markets. </p>
<p>But these private sources are expensive and difficult for African countries to access and manage.</p>
<p>Currently, 21 African countries have <a href="https://www.imf.org/en/Publications/fandd/issues/2021/12/Africa-Hard-won-market-access#:%7E:text=Entering%20the%20debt%20market,issued%20in%20global%20financial%20centres">issued Eurobonds</a>. In 2021, these foreign currency denominated bonds accounted for <a href="https://datatopics.worldbank.org/debt/ids/region/SSA">$144.7 billion</a> of Africa’s <a href="https://datatopics.worldbank.org/debt/ids/regionanalytical/SSA">total external debt stock of $789.8 billion</a>. The payments due on these bonds will rise from about $5 billion in 2023 to <a href="https://www.un.org/osaa/sites/www.un.org.osaa/files/docs/2118580-osaa-eurobonds_policy_paper_web.pdf">over $10 billion</a> a year in 2024 and 2025.</p>
<p>Some countries already face challenges servicing their Eurobonds. They face the prospect of having to restructure them. Egypt, Ethiopia, Ghana, Kenya and Tunisia are in this position. </p>
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<a href="https://theconversation.com/debt-distress-in-africa-biggest-problems-and-ways-forward-182716">Debt distress in Africa: biggest problems, and ways forward</a>
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<p>Unfortunately, the current restructuring process is time consuming, complex and unlikely to produce an optimal outcome. For example, Zambia defaulted on three Eurobonds in late 2020 and has still not reached an agreement with its creditors.</p>
<h2>Flaws in the current system</h2>
<p>Unlike the case of corporate bankruptcies, there are no courts that can compel the creditors to seek a balanced and expeditious resolution to the sovereign’s debt problems.</p>
<p>Instead, bondholder participation in the restructuring is voluntary. This essentially places the sovereign debtor in the position of a supplicant appealing to the kindness of its creditors. The bondholders are likely to show such “kindness” only if they think they can get more money out of the debtor by restructuring the bonds, than by enforcing their contractual right to payment.</p>
<p>The strong bargaining position of bondholders is further enhanced by legal arguments about their limited space for compromise. For example, they maintain that they are constrained by their responsibilities to their own creditors. They note that they, themselves, are debtors and are counting on the payments from the sovereign to meet their own obligations to their creditors.</p>
<p>In addition, bondholders argue that they have fiduciary responsibilities to these parties, which include the individuals who have placed their savings for their retirements, their children’s education or to buy a home with the institutions that buy the bonds of African countries. Moreover, they can rely on the usually unspoken but ever-present threat to resort to litigation in the event the parties cannot reach agreement.</p>
<p>The negotiating process further favours the bondholders because it treats the debt contracts in isolation from all the other obligations and responsibilities of the debtor. There is no space to explicitly address the obligations that the sovereign has to its own citizens under its constitutional and legal order, and its international treaties. </p>
<p>This is unacceptable.</p>
<p>African debtors and their supporters need to change the dynamics of these debtor-creditor discussions. </p>
<p>They need to create a conceptual framework that is based on existing international norms and standards that are widely accepted by creditors and debtors. The framework can be used to push the creditors to be more open to innovative approaches to debt restructuring. </p>
<p>This should help the parties reach a restructuring agreement that balances the interests, rights and obligations of all the participants in the negotiations and all the parties that are affected by the sovereign debt situation.</p>
<p>Such a framework exists. The <a href="https://www.southcentre.int/southviews-no-242-4-november-2022/">DOVE (Debts of Vulnerable Economies) Fund Principles</a> offer a conceptual framework for sovereign debt restructuring that is balanced and respectful of the rights, obligations and responsibilities of all the stakeholders in African debt.</p>
<h2>The mechanics of a new system</h2>
<p>The DOVE Fund Principles serve three purposes. </p>
<p>First, the parties directly involved in a sovereign debt restructuring can use them to guide their decisions and actions in the debt restructuring. Second, the principles can be used as a benchmark for assessing the terms of the debt restructuring and its implementation. Third, the principles can be used by any investment fund, for example a DOVE Fund, to define the approach it will take in sovereign debt restructurings.</p>
<p>The DOVE Fund Principles are based on <a href="https://www.southcentre.int/southviews-no-242-4-november-2022/">20 international norms and standards</a> that have been developed by international organisations, industry associations and civil society organisations over the past two decades. </p>
<p>Some of these norms and standards exert a compliance pull on at least some of the parties involved in sovereign debt restructurings because of the credibility of their sponsoring entities, and the process that was followed in developing them. Others are recognised by many of the stakeholders in sovereign debt transactions as addressing issues relevant to sovereign debt restructurings. Consequently, most international investors support at least some of these international standards.</p>
<p>The DOVE Fund Principles are:</p>
<p><strong>Principle 1: Guiding norms</strong></p>
<ul>
<li><p>Credibility: all parties have confidence in the process.</p></li>
<li><p>Responsibility: the outcome accounts for all relevant economic, financial, environmental, social, human rights and governance issues.</p></li>
<li><p>Good faith: there is a clear intent to reach an agreement that respects all the rights, obligations and responsibilities of the negotiating parties.</p></li>
<li><p>Inclusiveness: all creditors can participate and all affected parties can access sufficient information to understand how the situation will affect them.</p></li>
<li><p>Effectiveness: the negotiations lead to a timely and efficient agreement that does not unduly burden or undermine the sovereign’s sustainable and inclusive development process.</p></li>
<li><p>Optimal outcome: the agreement reached by the negotiating parties is the best possible mix of economic, financial, environmental, social and human rights benefits for all parties.</p></li>
</ul>
<p><strong>Principle 2: Transparency</strong> </p>
<p>The sovereign debt restructuring process affords the negotiating and affected parties access to the information that they need to make informed decisions.</p>
<p><strong>Principle 3: Due diligence</strong></p>
<p>The sovereign debtor and its creditors should each undertake appropriate due diligence before concluding a sovereign debt restructuring process.</p>
<p><strong>Principle 4: Optimal outcome assessment</strong> </p>
<p>Before concluding any agreement the negotiating parties should explain why they expect it to result in an optimal outcome.</p>
<p><strong>Principle 5: Monitoring</strong></p>
<p>The restructuring process should incorporate credible mechanisms for monitoring the implementation of the restructuring agreement.</p>
<p><strong>Principle 6: Inter-creditor comparability</strong> </p>
<p>The restructuring process should ensure that all the sovereign borrower’s creditors make a comparable contribution to restructuring its debt.</p>
<p><strong>Principle 7: Fair burden sharing</strong> </p>
<p>The burdens of the restructuring should be distributed fairly and shouldn’t impose undue costs on any of the affected parties.</p>
<p><strong>Principle 8: Maintaining market access</strong></p>
<p>The restructuring agreement, to the greatest extent possible, should be designed to facilitate future market access for the borrower.</p><img src="https://counter.theconversation.com/content/195991/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danny Bradlow's SARCHI Chair is funded by the National Research Foundation. He also received a grant from the Open Society Initiative of Southern Africa (OSISA) to support his work on the DOVE Fund and DOVE Fund Principles. </span></em></p>African countries are essentially placed in the position of a supplicant appealing to the kindness of creditors.Danny Bradlow, Professor/Senior Research Fellow, Centre for Advancement of Scholarship, University of PretoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1861302022-07-01T09:48:46Z2022-07-01T09:48:46ZRussian debt default: two experts explain what it means for Russia and for global financial markets<p><em>Russia’s recent default on its foreign debt – it’s first since 1918 – has been <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/06/27/fact-sheet-the-united-states-and-g7-to-take-further-action-to-support-ukraine-and-hold-the-russian-federation-accountable/">hailed</a> as proof that the sanctions imposed by western governments since the invasion of Ukraine in February are working.</em></p>
<p><em>A 30-day grace period on US$100 million (£82 million) in interest on two bonds ended on June 27 2022, with Russia’s repayments on this foreign debt not reaching creditors. While the Kremlin claims the payment has been held up by clearing house <a href="https://www.reuters.com/markets/commodities/kremlin-rejects-russian-default-says-bond-payments-executed-2022-06-27/">Euroclear</a>, ratings agency <a href="https://www.forbes.com/sites/siladityaray/2022/06/27/russia-defaults-on-its-foreign-debt-as-grace-period-for-payment-expires-moodys-says/?sh=40b4a07f6b0b">Moody’s</a> has predicted the country is likely to continue to default on payments because it is repaying in roubles, rather than the currency specified in the bond prospectuses.</em></p>
<p><em>Amid this uncertainty, potential longer-term implications include the impact a default will have on Russia’s ability to attract investors, now and in the future.</em></p>
<p><em>We asked a legal expert and an economist who have been following the situation to explain the significance of the defaults. Here’s what they said:</em></p>
<p><strong>Nasir Aminu, Senior Lecturer in Economics and Finance, Cardiff Metropolitan University</strong></p>
<p>Russia’s failure to pay US$100 million in US dollar- and euro-denominated interest payments on June 27 2022 shows the Kremlin is running out of options to respond to western sanctions. The default on foreign debt was not unexpected. The <a href="https://www.bbc.co.uk/news/world-europe-60125659">economic sanctions</a> placed on Russia since it invaded Ukraine in February have limited the country’s financial capabilities. This debt default, therefore, is a result of western governments’ ban on all transactions with the National Central Bank of Russia and the freezing of its foreign reserves, worth more than US$600 billion. </p>
<p>In theory, the debt default on foreign creditors is surprising because Russia’s finances remain strong despite a protracted war in Ukraine. The country <a href="https://www.bbc.co.uk/news/58888451">reportedly</a> continues to receive revenues of about US$1 billion per day from the sale of oil to China, India and other Kremlin-friendly importers. This income means Russia did not default because of an inability to pay. </p>
<p>Russia’s default will have a relatively small impact on global financial institutions, including its own financial sector. There is always a risk of global contagion – when an event has an indirect or unexpected effect on another part of the market – but foreign investors have had less exposure to Russia since it annexed Crimea in 2014. The few investors that do have high exposure are already looking to sell, although they face difficulties due to the western sanctions. </p>
<p>European banks are the most exposed financial institutions to Russian debt. The most recent figures from the <a href="https://www.bis.org/statistics/rppb2204.pdf">Bank for International Settlements</a>, which cover up to the end of 2021, show French and Italian banks have the most exposure to Russia, with outstanding claims of more than US$20 billion, while Austrian banks have US$17.5 billion in outstanding claims on Russian debt.</p>
<p>The most worrying consequence of debt default for Russia will be the loss of access to global investors through the international capital markets. The default will tint Russia’s reputation, making its bonds less attractive in the future due to the risk of further defaults. The country will have to pay a higher cost of borrowing to attract new investors and to keep those it already has because of the increased credit risk resulting from this recent default.</p>
<figure class="align-center ">
<img alt="Russian roubles, notes, cash closeup." src="https://images.theconversation.com/files/471810/original/file-20220630-18-rwhgeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/471810/original/file-20220630-18-rwhgeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/471810/original/file-20220630-18-rwhgeb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/471810/original/file-20220630-18-rwhgeb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/471810/original/file-20220630-18-rwhgeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/471810/original/file-20220630-18-rwhgeb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/471810/original/file-20220630-18-rwhgeb.jpg?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">
<figcaption>
<span class="caption">The bonds were issued in euros and US dollars but can be repaid in other currencies under certain circumstances.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/russian-money-background-roubles-rubles-cash-2127410144">Korobcorp/Shutterstock</a></span>
</figcaption>
</figure>
<p><strong>Rodrigo Olivares-Caminal, Professor of Banking and Finance Law, Queen Mary University of London</strong></p>
<p>Russia’s missed interest payments were on two of its sovereign bonds: the 2026 US dollar and 2036 euro bonds.</p>
<p>In addition to the actual currency of these bonds, both allow interest payments to be made in pounds or Swiss francs if, for reasons beyond its control, Russia is unable to make payments in US dollars or euros. The 2036 euro bond goes even further by adding the Russian rouble as a possible alternative payment currency. These additional options may seem useful, but creditors might prefer to avoid a currency mismatch by having Russia make repayments in the original currency of the bond.</p>
<p>These bonds also include a currency indemnity clause, which would allow Russia to be discharged from its repayment obligations if the investor receives or recovers the entire amount due on the bond. Any payment in roubles must match the original amount owed when converted into US dollars or euros, however. In this case, roubles would probably be most useful to Russia since it has been largely <a href="https://www.reuters.com/markets/europe/blackrocks-fink-says-russia-essentially-cut-off-global-capital-markets-2022-03-09/">cut off</a> from the international financial markets. </p>
<p>In any event, the full impact of the default remains uncertain until the global financial market gets clarity on the following questions: </p>
<ul>
<li>Would a payment deposited to an account in Russia in the name of the creditor amount to “receiving” the payment and therefore discharge Russia from its obligations? A creditor might receive repayments in this way, but actually recovering the money from the account could be complicated by government <a href="https://www.reuters.com/business/russian-lawmakers-give-initial-approval-bill-allowing-foreign-asset-takeover-2022-05-24/">plans to restrict</a> access to or transfers of Russia-based assets at the moment.</li>
<li>Also, was Russia prevented from paying because of the western sanctions? If so, since this is outside of its control, Russia could argue it is not to blame for the default. If a court deems the situation is self-inflicted, however, Russia may not be excused.</li>
</ul>
<p>These issues would be subject to interpretation by a court of law. But Russia has not waived its sovereign immunity and has not submitted to the jurisdiction of a court named in either of the two bond prospectuses. As such, creditors and the global markets must continue to wait for further clarity.</p><img src="https://counter.theconversation.com/content/186130/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 organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Experts discuss the implications of Russia’s recent debt default for the global financial markets and Russia’s reputationNasir Aminu, Senior Lecturer in Economics and Finance, Cardiff Metropolitan UniversityRodrigo Olivares-Caminal, Professor of Banking and Finance Law, Queen Mary University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1793232022-03-16T20:55:20Z2022-03-16T20:55:20ZDebt repayment in roubles, a possible economic counterattack for Russia?<figure><img src="https://images.theconversation.com/files/452172/original/file-20220315-27-15gf38s.jpg?ixlib=rb-1.1.0&rect=0%2C8%2C1920%2C1069&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">At the heart of the economic war: the parity of the rouble.</span> <span class="attribution"><span class="source">Ulianapinto/Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The Russian response to Western sanctions took a rather original form on Monday 7 March: to draw up a <a href="https://www.euractiv.com/section/global-europe/news/russia-adopts-list-of-enemy-countries-to-which-it-will-pay-its-debts-in-rubles/">list of “hostile” countries</a> and to authorise Russian individuals and companies to repay their debts in roubles, despite the fact that the credit was contracted in another currency.</p>
<p>On this list, we find the countries of not only the European Union, the United States, the United Kingdom, Japan, but also Canada, Switzerland, Monaco and Korea.</p>
<p>The decision of the Kremlin seems in fact quite shrewd and aims to indirectly gain the support of foreign banks.</p>
<h2>Double punishment?</h2>
<p>Most of the <a href="https://www.reuters.com/markets/europe/how-financial-western-sanctions-might-target-russia-2022-01-19/">economic sanctions taken against Russia</a> are intended to financially isolate the country. The logic is simple: money is the backbone of the war. Without money, it seems extremely complicated for Russia to be able to continue its action in a sustained manner.</p>
<p>This strategy of undermining the Russian economy is partly working. On February 24, the day of the invasion, the euro/rouble parity rate was 95 (i.e., 1 euro was equivalent to 95 roubles). On Monday March 7, it had risen to 148.38. This means that a Russian who wanted to buy a product for 300 euros in France had to pay 28,423 rubles on February 24, and 44,366 rubles on March 7.</p>
<p><iframe id="7TeJ8" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/7TeJ8/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>The ability of Russians to trade at the international level is therefore greatly reduced. When we know that the Russians imported nearly <a href="https://www.tresor.economie.gouv.fr/Pays/RU/commerce-exterieur">240 billion dollars</a> in 2020 (about 197 billion euros), the bill will increase significantly.</p>
<p>One might think that this devaluation of the rouble would reduce Russia’s export costs to foreign countries, favouring Russian producers on the international scene. However, to counter this potential positive effect, most European countries have decided to <a href="https://www.washingtonpost.com/world/2022/03/02/boycotts-russia-invasion-ukraine/">boycott Russian exports</a>. For example, they refuse to issue export licenses for certain goods. As a result, the penalty is twofold: imports are decreasing, and exports are being blocked.</p>
<p>What are the traditional solutions to this currency depreciation for Russia? The exchange rate regime of the rouble against other currencies is a so-called floating regime, i.e. it is fixed by the laws of supply and demand on the market. To strengthen the rouble, it would be necessary to increase the demand for it, and thus to increase the number of international financial transactions in rouble… which is deliberately prevented by the sanctions that have been imposed.</p>
<p>What card is left in the hands of the Kremlin? The answer given is imaginative, to say the least: to allow the payment of Russian credits abroad in roubles.</p>
<h2>International banks in a bind</h2>
<p>In addition to the international trade players, people who have credits with foreign institutions are directly affected by the international sanctions. Let’s say you are Russian, you have borrowed 100,000 euros from a French bank, and you pay back 500 euros every month. As of February 24, this amounted to 47,530 roubles, while the same amount is 74,190 roubles as of March 7. The credit is becoming more and more complicated to repay.</p>
<p>So there is a risk of a massive increase in defaults, causing difficulties for foreign banks. This is precisely the leverage that Moscow intends to use. By allowing Russian debtors to pay for their foreign loans not in local currency but in roubles, the country’s authorities are delegating the maintenance and management of their currency from Russia’s central bank to foreign banks.</p>
<p>Let’s take our example from another point of view: you are a French bank, you hold in your assets 100,000 euros of debt issued by Russian clients, with a monthly repayment of 500 euros per month. As shown above, the repayment value of this loan between February 24 and March 7 is not the same amount in roubles, respectively 47,530 roubles and 74,190 roubles. </p>
<p>In itself, this may not seem problematic for the French bank, since in both cases it recovers the equivalent in value, namely 500 euros. However, the problem is not the value, but the currency. Once owning this amount, the bank has two options. It can decide to keep this money in rouble, but with the significant risk at the moment that it will devaluate again, and therefore that the reimbursements will not be worth 500 euros anymore. Alternatively, it can decide to go to the financial markets to exchange these roubles for euros.</p>
<p>But if everyone tries to convert their roubles at once, this will lead to an even sharper fall in the value of this currency and thus a direct devaluation of the value of the repayment. In both cases, the French bank risks a significant loss of value on its repayments.</p>
<p>The French bank therefore has every interest in ensuring that the rouble/euro parity does not lose more value than it already has. Thus, by taking this decision, Russia has ensured that international banks will seek to indirectly support the Russian economy, in order to avoid seeing their credit devalued.</p>
<p>Some might argue that another possibility for these foreign banks would be to simply refuse payment in roubles. However, this is extremely complicated from a legal point of view because the question arises as to which authority is competent to judge this case and whether the other party to the contract will recognise the legal decision issued, which is not a given. From an economic point of view, this also means increasing the probability of never being repaid should the conflict escalate…</p><img src="https://counter.theconversation.com/content/179323/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Les auteurs ne travaillent pas, ne conseillent pas, ne possèdent pas de parts, ne reçoivent pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'ont déclaré aucune autre affiliation que leur organisme de recherche.</span></em></p>The idea: to use the credit channel by making foreign banks bear the consequences of the devaluation of the Russian currency.Jérémie Bertrand, Professeur de finance, IÉSEG School of ManagementAurore Burietz, Professeur de Finance, LEM-CNRS 9221, IÉSEG School of ManagementLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1493762020-11-12T13:39:16Z2020-11-12T13:39:16ZHow countries are raising debt to fight COVID and why developing nations face tougher choices<p>COVID continues to ravage societies around the world, and a key issue is how governments can afford to fight it. As economies are disrupted, governments are stepping in to increase their spending to bail out companies, pay the cost of health measures, and subsidise workers’ wages. </p>
<p>Before COVID, when people argued that the state should be able to offer free healthcare and free education, among other services, and welfare measures, a standard political response was that state resources were limited. Asked by a nurse in 2017 why her wages hadn’t increased from 2009 levels, then <a href="https://www.independent.co.uk/news/uk/politics/theresa-may-nurse-magic-money-tree-bbcqt-question-time-pay-rise-eight-years-election-latest-a7770576.html">British prime minister, Theresa May, said</a>: “There is no magic money tree that we can shake that suddenly provides for everything that people want.” </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"870732339155836928"}"></div></p>
<p>Except, a few years later, the government has not only been able to pay the wages of millions, it has also created rescue packages for thousands of firms and offered people vouchers <a href="https://www.theguardian.com/business/2020/sep/04/eat-out-to-help-out-sees-diners-claim-100m-cut-price-meals-in-august">to eat out in restaurants</a>. A number of European countries have also taken the unprecedented step of underwriting the wages of millions of workers in response to the pandemic.</p>
<p>How is the British state and others capable of this radical increase in spending at a time when revenues from taxes are collapsing? </p>
<h2>‘Magic money tree’</h2>
<p>The answer to this lies in the debt market. Over the past few months, world governments have drastically increased their borrowing to cover the costs of the pandemic. It might appear logical that the cost of credit will go up during uncertain economic times. The reality, however, is that capital often goes to safer <a href="https://www.investopedia.com/terms/s/sovereign-debt.asp#:%7E:text=Sovereign%20debt%20is%20a%20central,issuing%20country's%20growth%20and%20development">sovereign debt</a> during economic downturns, particularly as the equity markets become unstable and volatile. </p>
<p>Over recent months, rather than struggling to find lenders or having to pay more for debt, the governments of the major economies have been awash with credit at historically low rates. In October, the EU, until now a small player in the debt market (as borrowing mostly is by national governments of member states), began a major borrowing campaign as part of the efforts to fight COVID through the <a href="https://www.consilium.europa.eu/en/press/press-releases/2020/05/19/covid-19-council-reaches-political-agreement-on-temporary-support-to-mitigate-unemployment-risks-in-an-emergency-sure/">SURE programme</a> (Support to mitigate Unemployment Risks in an Emergency) which was created in May.</p>
<p>The first sale of bonds worth €17 billion was met with what some described as “<a href="https://www.ft.com/content/e3553b68-22c8-487c-a7c0-7e1c6dc0ec4b">outrageous demand</a>”, with investors bidding a total of €233 billion to buy them. This intense competition was for bonds that offered a return of -0.26% over ten years, meaning that an investor who holds the bond to maturity will receive less than they paid today. </p>
<p>The EU is not the only borrower that is effectively being paid to borrow money. Many of the advanced economies have been in recent years and months <a href="https://www.ft.com/content/3d576f71-6833-4a55-8b8c-f4abfb0ca172">selling debt at negative rates</a>. For some countries, the shift has been dramatic. Even countries such as Spain, Italy and Greece that were previously seen as relatively risky borrowers, with Greece going through a major debt crisis, are now enjoying borrowing money at very low rates.</p>
<p>The reason for this phenomenon is that while these bonds are initially bought by “traditional” market actors, central banks are buying huge quantities of these bonds once they are circulated in the market. For a few years now, the European Central Bank (ECB) has been an active buyer of European government bonds – not directly from governments but from the secondary market (from investors who bought these bonds earlier). This ECB asset purchase programme was expanded to help weather the COVID crisis, with the ECB <a href="https://www.wsj.com/articles/european-central-bank-smothers-government-bond-market-11599830877">spending €676 billion</a> on government bonds from the start of 2020 until September. </p>
<p><a href="https://www.brookings.edu/research/fed-response-to-covid19/">Other central banks</a> in the major advanced economies are following the same strategy. Through these programmes, those central banks encourage investors to keep buying government bonds with the knowledge that the demand for those bonds in the secondary market will remain strong.</p>
<h2>Poorer countries</h2>
<p>Not everybody, however, enjoys a similar position in the debt market. While the rich economies are being chased by investors to take their money, the situation is radically different for poorer countries. Many poor countries have limited access to the credit market and rely instead on public lenders, such as the World Bank. </p>
<p>In recent years, this pattern began to change with a growing number of developing countries <a href="https://www.ft.com/content/8c232df6-4451-11ea-abea-0c7a29cd66fe">increasing their foreign borrowing from private lenders</a>. Developing countries, however, are in a structurally weaker position than richer peers. The smaller scale of their capital markets mean that they are more reliant on external financing. This reliance means that developing countries rely on raising money in foreign currency, which increases the risk to their economies. </p>
<p>As many developing countries have less diversified exports with a higher percentage of commodities, <a href="https://www.worldbank.org/en/news/press-release/2020/04/23/most-commodity-prices-to-drop-in-2020-as-coronavirus-depresses-demand-and-disrupts-supply">the price decline in commodities in recent months</a> has increased those risks. As a result, developing countries face a significantly higher cost of borrowing compared to the richer economies.</p>
<p>A few large developing countries, such as Indonesia, Colombia, India and the Philippines, have <a href="https://www.bloomberg.com/news/articles/2020-04-29/copying-rich-world-s-virus-plan-is-big-risk-for-emerging-markets">begun to follow the policy adopted by the advanced economies</a> of buying government bonds to fund an expanding deficit. The risks of doing this, however, are higher than the richer economies, including a decline in capital inflows, capital flight and currency crises. A <a href="https://www.spglobal.com/ratings/en/research/articles/200914-em-central-banks-risk-reputations-with-bond-buying-programs-11638740">report</a> by the rating agency S&P Global Ratings illustrated the differences between those two economies: </p>
<blockquote>
<p>Advanced countries typically have deep domestic capital markets, strong public institutions (including independent central banks), low and stable inflation, and transparency and predictability in economic policies. These attributes allow their central banks to maintain large government bond holdings without losing investor confidence, creating fear of higher inflation, or triggering capital outflow. Conversely, sovereigns with less credible public institutions and less monetary, exchange rate and fiscal flexibility have less capacity to monetise fiscal deficits without running the risk of higher inflation. This may trigger large capital outflows, devaluing the currency and prompting domestic interest rates to rise, as seen in Argentina over parts of the past decade.</p>
</blockquote>
<p>While the reaction of the market to this approach by developing countries has been muted so far, the report argued, this situation might change. Developing countries who do this could “weaken monetary flexibility and economic stability, which could increase the likelihood of sovereign rating downgrades”.</p>
<h2>Ratings downgrades</h2>
<p>Over recent months, <a href="https://qz.com/africa/1850033/coronavirus-moodys-fitch-downgrades-devastating-for-africa/">downgrading by rating agencies have been a major risk</a> facing developing countries with many economies facing higher costs of borrowing as a result of such downgrades. These downgrades were often linked to decline in prices and exports of commodities, as was the case for <a href="https://www.diamonds.net/News/NewsItem.aspx?ArticleID=64900&ArticleTitle=Market+Slump+Prompts+Botswana+Downgrade">diamonds for Botswana</a> and <a href="https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/fitch-downgrades-nigeria-amid-oil-price-slump-pandemic-shock-57921342">oil for Nigeria</a>. </p>
<p>In July, following the participation of Ethiopia, Pakistan, Cameroon, Senegal and the Ivory Coast in a World Bank-endorsed G20 debt suspension initiative, the rating agency Moody’s took action against those countries arguing that participation in this scheme <a href="https://www.ft.com/content/7d51d373-c12e-4440-a408-e61a939e3a3c">increased the risk for investors</a> in bonds issued by these countries, leading to some developing economies <a href="https://theconversation.com/why-african-countries-are-reluctant-to-take-up-covid-19-debt-relief-140643">avoiding</a> the initiative in order not to send a “negative signal to the market”. <a href="https://www.ft.com/content/e56c2a34-16e4-4974-9df8-a72c092c5ee2">Zambia is on the verge</a> of being the first “COVID default” and other developing countries could face a similar situation in coming months.</p>
<p>As a result of these dynamics, many developing countries are facing the tough choice of giving up any economically costly health measures or facing serious fiscal and economic crises. Access to credit has become a defining factor in the ability of governments to respond to the pandemic. As a result of access to cheap credit, developed economies are so far able to take such health measures while limiting the social and economic impact of the pandemic. Many developing countries do not have this luxury. Not everyone gets to shake the branches of the magical money tree.</p><img src="https://counter.theconversation.com/content/149376/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Shamel Azmeh 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>Developing countries face greater risks raising money to deal with the pandemic. Zambia is now on the verge of being the first ‘COVID default’ and other developing countries could follow suit.Shamel Azmeh, Lecturer in International Development, Global Development Institute, University of ManchesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1490272020-10-28T22:25:29Z2020-10-28T22:25:29ZCapitalism and the coronavirus crisis: the coming transformation(s)<p>The world economy is currently experiencing its severest contraction since the Great Depression of the 1930s. Unlike the Great Depression and the global financial crisis (GFC) of 2008-2009, this crisis cannot be directly attributed to the dysfunctional workings of capitalism. But even if it is not a crisis <em>of</em> capitalism, it is a crisis <em>for</em> capitalism. Chronic ills of contemporary capitalism – notably rising levels of socio-economic inequality and debt of all kinds – are being exacerbated and intensify the danger of further political polarization and fresh financial instability.</p>
<p>Capitalism will nonetheless survive this crisis as it has done previous ones. The fundamental structures of capitalism typically don’t change fast. But they can change and they do, especially at critical historical junctures, such as in response to wars and economic crises – or, potentially, pandemics.</p>
<h2>State interventionism</h2>
<p>Compared with recent decades, in post-Covid-19 capitalism the state will emerge as a more dominant actor. Even more than in the years after the GFC, central banks have been resorting to increasingly unorthodox, expansionary monetary policies to stave off economic collapse. To the same end governments have begun and will continue to pursue expansionary fiscal policies and run up ever-higher budget deficits. Austerity policies have suddenly become unfashionable. Sectoral or “industrial” policies have regained favour, with governments everywhere intervening to assist firms in those sectors, such as air transport or tourism, which the crisis otherwise would destroy. Policies to “re-localize” production of critical goods in crises, such as medical equipment and supplies, are suddenly in vogue, whereas state aid policies aimed at preventing distortions of competition are not. The intellectual champions of the free market have fallen silent.</p>
<p>Regardless of how fast the world economy recovers from the crisis, longer-term factors – possible new pandemics and pressures to mitigate or adapt to climate change or, in the “old” advanced capitalist economies, to create a more level playing field against firms aided by the Chinese state – will keep the pressure on governments to maintain or strengthen existing levels of state intervention.</p>
<p>To say that the state will be a more dominant actor in post-Covid-19 capitalism is not to say, however, that previously divergent capitalisms are converging on a uniform “statist” model. State economic intervention can manifest highly divergent forms. Here the 1930s may offer some salient parallels. Higher levels of state intervention characterized countries that moved politically to the left as well as to the (far) right. Numerous countries, such as in Sweden and New Zealand, where Labour and Social Democratic parties came to power in this period, or the US under President Roosevelt, embarked on Keynesian deficit-spending policies that reduced mass unemployment, strengthened organized labour and expanded collective social welfare provision.</p>
<p>At the other end of the politico-ideological spectrum, fascist or Nazi regimes, such as Mussolini’s Italy and Hitler’s Germany, also engaged in large-scale deficit-spending, while destroying liberal democracy, smashing the labour movement, implementing protectionist economic policies, and mobilizing their societies for war.</p>
<h2>Growing polarization</h2>
<p>In the wake of the coronavirus crisis, the democratic-capitalist world may well undergo a process of political polarization comparable to what occurred in the 1930s. Depending on the shifting distribution of domestic political power, countries may tend toward one or the other of two scenarios. In one, which might be labelled “yellow capitalism” (combining the colours Social Democratic red and green), state intervention would aim to redistribute income and wealth on a greater scale than is the case in most capitalist democracies today and to take more sweeping measures to combat global warming.</p>
<p>‘Yellow capitalism" would be fundamentally internationalist, recognizing the fact that the most severe challenges facing humankind are global and can be managed effectively only through comprehensive international cooperation. But it would create scope for governments to protect their economies for specific purposes, such as to combat climate change, for example through carbon tariffs. In this scenario, private business would be much more tightly constrained by state regulation than at the peak of neo-liberal capitalism after the Cold War.</p>
<p>The core support for this incarnation of capitalism, which synthesizes the aspirations of the “old” labour movement and “new” social, especially environmental, movements, would be found in the (especially younger) professional middle classes in the big cities and towns and the unionized working class. Even centrist political parties could support this kind of political agenda.</p>
<p>The other scenario (combining the colour black for nationalism and brown for right-wing populism) might be termed “light-black capitalism”. Like “yellow capitalism”, it would also be highly interventionist, but would be fiscally regressive rather than redistributive, as has been the thrust of President Trump’s tax policy in the US. Climate change would be ignored in favour of maximizing (quantitative) economic growth. Domestic business would be increasingly protected from international competition, while comprehensive immigration controls would offer the (ethnically defined) “people” some protection from the competition of “foreign” workers. The core support for “light-black capitalism” would be in domestic-market-oriented business, among residents of small towns, villages and the countryside as well as in declining industrial regions, among “value conservatives” afraid that changes in dominant social values are destroying traditional norms and life-styles, and among “status anxious” workers hostile to immigration.</p>
<h2>Rising risks</h2>
<p>Which of these two incarnations of a state-interventionist capitalism – “yellow” or “light-black” – becomes the predominant form in the post-coronavirus era will be determined by the outcomes of political struggle and conflict in mostly national political arenas. The only thing that is certain is that, for the time being at least, market-friendly incarnations of capitalism will wither.</p>
<p>So far, in the coronavirus crisis, citizens in most countries have rallied to their governments in a spirit of national unity akin to what has occasionally happened historically at the outbreak of wars. However, we are currently still passing through the first stage – the <em>public-health</em> phase – of the coronavirus crisis. Expansionary monetary and fiscal policies and the subsidization – on a massive scale – of short-time work have enabled most governments to postpone the arrival of the second, the <em>economic and financial</em>, phase of the crisis. But unless the recovery of the world economy is very rapid, this next phase will materialize. It will be all the more destructive now that a second wave of the coronavirus is upon is, requiring new lockdown measures that will exacerbate the economic problems caused by those taken earlier this year.</p>
<p>This phase of the crisis will likely witness greater, perhaps much greater, social and political upheaval than the first. Regardless of how well or badly some national-populist governments have hitherto managed the crisis so far, the growing socio-economic dislocation and insecurity that will increasingly characterize this second phase of the crisis could give movements based on this kind of ideology a powerful new impetus.</p>
<p>An upsurge of “light-black capitalism” would likely plunge the world economy into an even deeper recession. Even more ominously, it would also increase the probability of large-scale military conflict. As the American economist Otto Mallery wrote during the Second World War: “When goods don’t cross borders, soldiers will”. In this regard too, the events and trends of the 1930s still provide us today with lessons that we ignore at our peril.</p><img src="https://counter.theconversation.com/content/149027/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Douglas Webber ne travaille pas, ne conseille pas, ne possède pas de parts, ne reçoit pas de fonds d'une organisation qui pourrait tirer profit de cet article, et n'a déclaré aucune autre affiliation que son organisme de recherche.</span></em></p>The global economy is currently experiencing its severest contraction since the 1930s. While capitalism will survive, its fundamental structure can change at critical historical junctures.Douglas Webber, Professor of Political Science, INSEADLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1378392020-05-07T12:43:24Z2020-05-07T12:43:24ZArgentina is trying to tax its way out of another financial crisis – why that’s so risky<p>Argentina imposed a strict lockdown on its <a href="https://www.reuters.com/article/us-health-coronavirus-argentina/argentina-announces-mandatory-quarantine-to-curb-coronavirus-idUSKBN216446">citizens on March 20</a> and shut down foreign travel after just 128 confirmed cases of coronavirus. </p>
<p>The swift response to the pandemic by the new administration of Argentinian president Alberto Fernández won domestic and international praise for preventing the spread of the disease. There were <a href="https://coronavirus.jhu.edu/map.html">5208 reported cases and 273 deaths</a> from COVID-19 by May 6, compared to 23,000 cases in Chile and 126,000 in Brazil. Current quarantine measures are due to be reviewed on May 10 – and there is growing pressures to ease restrictions.</p>
<p>But dealing with the economic and social costs of this success may be a Pyrrhic victory, as the options for Fernández to finance the recovery are limited. </p>
<p>In December 2019, <a href="https://theconversation.com/alberto-fernandez-who-is-the-frontrunner-for-argentinas-presidency-121839">Fernández</a> took over a country already in recession. Inflation was accelerating inflation, foreign currency reserves diminishing and there was yet another <a href="https://theconversation.com/argentina-how-inflation-debt-and-poverty-combined-to-deliver-a-brutal-primary-election-result-for-president-mauricio-macri-121960">looming debt crisis</a> on the horizon. </p>
<p>In February 2020, the <a href="https://www.imf.org/en/News/Articles/2020/02/19/pr2057-argentina-imf-staff-statement-on-argentina">IMF declared</a> that Argentina’s debt levels were unsustainable. In mid-April, the economy minister, Martín Guzmán outlined a plan <a href="https://www.wsj.com/articles/argentinas-economy-minister-calls-for-three-year-grace-period-on-foreign-debt-payments-11587069314">to restructure</a> around US$70 billion (£57 billion) in foreign debt, calling for a three-year moratorium on debt repayments to creditors. </p>
<p>While other countries discuss how to <a href="http://www.oecd.org/tax/tax-and-fiscal-policies-central-to-governments-responses-to-covid-19-crisis.htm">lower or delay taxes</a> to alleviate pressure on business and citizens, Argentina is seeking to find ways to tax itself out of a crisis yet again. But who to tax is not a question with a straightforward answer. </p>
<h2>Turning to taxation</h2>
<p>Compared to other developing countries around the world, Argentina already has <a href="http://www.oecd.org/countries/argentina/Argentina-2017-OECD-economic-survey-overview.pdf">high levels of taxation</a>. It’s a country with a large informal sector and a semi-industrialised economy built around the export of commodities. This means that the sources from which the government can extract additional fiscal revenue are limited to the richer middle and upper classes, and to the agrarian export sector. </p>
<p>Taxation was actually the way Argentina exited its last crisis after the <a href="https://books.google.co.uk/books?hl=en&lr=&id=3H-xxwTIFogC&oi=fnd&pg=PA62&dq=cetrangolo+and+sabaini+2010&ots=jYnsihzwqY&sig=ySwfmHhqVjr2R3j1kg077dqkrXo&redir_esc=y#v=onepage&q=cetrangolo%20and%20sabaini%202010&f=false">2001 debt default</a>. At that time, the governments of Eduardo Duhalde and Néstor Kirchner imposed extraordinary emergency taxes on agricultural exports such as soy and wheat. This happened at a moment when global agricultural commodities prices were at near record high levels, helping producers offset the emergency taxes. </p>
<p>Coupled with the celebrated debt default and a political system in crisis, this allowed the Kirchner administrations to <a href="http://www.commitmentoequity.org/publications_files/Argentina/CEQ_WP45_TAXES_EXPENDITURES_POVERTY_AND_INCOME_DISTRIBUTION_IN_ARGENTINA.pdf">tax their way out</a>, consolidating a support base that led them to electoral success for over a decade. </p>
<p>This was not without cost. In 2008, facing another attempt to increase taxes, the rural sector revolted, launching a four-month-long protest that culminated in the Congressional defeat of the <a href="https://link.springer.com/article/10.1007/s12116-011-9094-z">proposed tax bill</a>. From then on, this tax strategy became increasingly contentious. It put the left-wing administration, with its allied unions and working-class support base – the tax spenders – in direct opposition with rural producers, business and the urban upper and middle-classes, who see themselves as the tax payers. </p>
<p>This fed into a wider conflict between different conceptions of the state and the social contract. When the <a href="https://www.tandfonline.com/doi/full/10.1080/13597566.2016.1155562?casa_token=2jcPwkVwvtgAAAAA%3ApJN-ge8JijjqYkF2MhgeIseQei1kPJRpoHPPn2USnXrF0EUlF4ZNxb4RHWbX7Mwg8xIraN69p">conservative</a>, and business-friendly Macri government came to power in 2015, some of its early measures were to lower agricultural taxes, abolish export quotas, cut spending and lower subsidies – while raising debt.</p>
<h2>New taxes</h2>
<p>The COVID-19 crisis has reignited Argentina’s conflict between the tax spenders and the tax payers, with the Fernández government turning to the rural sector yet again to finance the country’s needs. On taking office it raised soy export taxes from <a href="https://www.telam.com.ar/notas/201912/416364-gobierno-sube-retenciones-granos-soja.html">24.7% to 30%</a> and another 3% in early March. The rural sector, known as <em>el campo</em>, responded to the new tax hike in March with a <a href="https://en.mercopress.com/2020/03/09/argentine-farmers-begin-four-day-sales-strike-to-protest-higher-export-taxes">four-day sales strike</a>. But the context is not the same: commodity prices are lower and producers cannot so comfortably offset the taxes, given tighter profit margins.</p>
<p>A 30% surcharge was <a href="https://taxinsights.ey.com/archive/archive-news/argentina-implements-new-tax-on-purchase-of-foreign-currency.aspx">imposed in early 2020</a> on foreign currency purchases and card expenses abroad, targeting the more affluent. Referred to as the “solidarity tax”, it became onerous for those stranded overseas when the pandemic struck. A one-off 3.5% tax on people with over US$3 million in wealth <a href="https://www.pagina12.com.ar/259911-ni-en-una-pandemia-los-muy-ricos-en-argentina-quiere-hacer-u">called <em>impuesto Patria</em> (motherland)</a> is being promoted by the harder Kirchnerist wing of the ruling coalition.</p>
<h2>Inflation risk</h2>
<p>In this context, pot-banging in Buenos Aires city went from celebrating health workers to a campaign calling for politicians <a href="https://twitter.com/search?q=%23politicosbajenselossueldos%20argentina&src=typed_query">to lower their salaries</a>. Meanwhile, a group of business people started an online campaign calling on people <a href="https://www.iprofesional.com/afip/312503-a-traves-de-un-mensaje-anonimo-empresarios-ya-hablan-de-una-rebelion-fiscal">not to pay taxes</a> for 90 days. </p>
<p>The government is aware of the dangers of this game – but it needs money. With social tensions rising and political conflict looming, it turned to printing money to finance itself, with the monetary base – the amount of money in public circulation – expanding <a href="http://www.bcra.gov.ar/PublicacionesEstadisticas/Principales_variables.asp">30% from February to March</a>. If fiscal revenues fall, as they are already doing, this trend is set to continue. </p>
<p>But monetary theory indicates this is the path to inflation and, in a country with already double digit numbers, <a href="https://www.clarin.com/economia/economistas-preguntan-puede-tasa-inflacion-pegar-salto-control-_0_snk55Cqb0.html">orthodox economists are raising alarms</a> of an inflationary spiral. </p>
<p>All Fernández’s options look grim: to tax sectors already aggrieved (and taxed) and aggravate their enmity, or aggravate inflationary pressures and risk popular discontent. Picking lesser evils and delaying outcomes is all this impossible game may allow him to do.</p><img src="https://counter.theconversation.com/content/137839/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 organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Argentina’s new President Alberto Fernández has no easy option to address yet another crisis.Alejandro Milcíades Peña, Senior Lecturer in International Politics, University of YorkMatt Barlow, PhD Candidate, University of YorkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1310532020-02-19T13:17:25Z2020-02-19T13:17:25ZAfrican countries aren’t borrowing too much: they’re paying too much for debt<figure><img src="https://images.theconversation.com/files/315900/original/file-20200218-11023-mpxhml.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ethiopia's economic growth hovered between 8%-11% for over 10 years but its sovereign credit rating has not been upgraded </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>There is <a href="https://www.brookings.edu/blog/africa-in-focus/2019/04/10/is-a-debt-crisis-looming-in-africa/">renewed concern</a> about the sustainability of rising debt levels in many African countries. Much of this debt is being incurred through foreign currency denominated <a href="http://documents.worldbank.org/curated/en/491301554821864140/pdf/Issuing-International-Bonds-A-Guidance-Note.pdf#page=8">Eurobonds</a> issued on international financial markets. The total <a href="https://www.africanbondmarkets.org/en/news-events/africa-financial-markets-news/article/african-eurobonds-an-evolving-and-now-100-billion-asset-class-158468/">value of Eurobonds</a> issued between 2018 and 2019 was more than the value of all bonds sold between 2003 to 2016.</p>
<p>African governments are issuing and listing their Eurobonds on established international debt markets – usually <a href="https://cytonnasset.com/topicals/eurobonds-in-sub-saharan-africa">London</a> and <a href="https://www.csd.com.gh/market-info/market-news/493-ghana-lists-10-year-eurobond-on-stock-exchange.html">Irish Stock Exchanges</a>. African governments would venture offshore a lot less if domestic bond markets were active and liquid. But besides South Africa, African bond markets are largely <a href="https://www.euromoney.com/article/b1b6497yd3npt9/africa-comes-under-renewed-pressure-to-promote-its-local-bond-markets">underdeveloped</a> with <a href="https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/AfDB-Guidebook-EN-web.pdf">inactive and illiquid</a> secondary markets. This makes it difficult to attract international investor participation locally.</p>
<p>The International Monetary Fund (IMF) <a href="https://www.moneyweb.co.za/news-fast-news/african-countries-borrowing-like-its-the-1990s-worries-the-imf/">believes</a> that African countries are on a Eurobond issuing spree and half of them are near or at distressed levels. It argues that <a href="https://www.bloomberg.com/news/articles/2019-11-19/imf-s-georgieva-voices-concern-about-rising-african-debt-levels">African governments</a> are piling on debt without evaluating the exchange rate risks and the real costs of repaying the debts.</p>
<p>But, in my view, the debt alarm being set off by international debt management organisations is exaggerated. The problem is not that African countries are borrowing too much, but rather they are paying too much interest. There are a number of reasons for this, including badly informed ratings by rating agencies, as well as the behaviour of issuers.</p>
<p>There are solutions. But these require African governments to stand up and take action.</p>
<h2>Doing the calculations</h2>
<p>There are two key elements that are taken into account in assessing a country’s debt burden. One is the level of debt based on the ratio of debt to gross domestic product (GDP). The other is the cost of servicing the debt – interest payments.</p>
<p>Debt levels on the continent, for example, are on average way below the <a href="https://tradingeconomics.com/country-list/government-debt-to-gdp">100% debt-to-GDP</a> ratio mark. But the impression created is that they are much higher. This exaggerated perception of African debt levels has resulted in countries paying <a href="https://www.sciencedirect.com/science/article/pii/S2214851515000079">higher interest rates</a> on debt. The premiums are much higher than those paid by other countries. In my view these are not justified by the <a href="https://www.sciencedirect.com/science/article/pii/S2214851515000079">risk profile </a> of African countries. </p>
<p>Save for four countries –- Cape Verde, Djibouti, Congo and Mozambique –- all the other African countries have debt-to-GDP ratio averaging <a href="https://tradingeconomics.com/country-list/government-debt-to-gdp?continent=africa">60%</a>. A debt-to-GDP ratio of 60% is the IMF’s and African Monetary Co-operation Program’s <a href="https://www.brookings.edu/blog/africa-in-focus/2019/04/10/is-a-debt-crisis-looming-in-africa/">threshold</a> for prudent debt levels. </p>
<p>The scale of debt issuances in Africa amounts to only <a href="https://www.cnbcafrica.com/videos/2019/12/18/renaissance-capital-eurobond-issuance-to-be-1-of-africas-gdp-in-2020/">1%</a> of the continent’s total GDP annually – whose average annual growth rate is <a href="https://www.bloomberg.com/news/articles/2019-04-03/africa-growth-at-7-year-high-no-thanks-to-its-major-economies">4%</a>. In simple terms, this means the value of income generation is higher than the rate of government debt accumulation. These ratios gives a snapshot of the a country’s fiscal sustainability.</p>
<p>On the contrary, the amount of interest expenditure has been <a href="https://www.247news.africa/business-report/wef-african-countries-punished-by-paying-higher-interest-rates/171022AN/">disproportionate</a> to the debt-to-GDP ratio. <a href="https://www.pgpf.org/blog/2019/05/higher-national-debt-means-higher-interest-rates-for-the-federal-government">Studies</a> show that in developed economies, an increase of 1% in debt-to-GDP ratio is associated with an increase of between 0.02% and 0.03% in interest rates. </p>
<p>African governments are paying interest of <a href="https://za.investing.com/rates-bonds/african-government-bonds">5% to 16%</a> on 10-year government bonds, compared to <a href="https://www.cnbc.com/2019/08/07/bizarro-bonds-negative-yielding-debt-in-the-world-balloons-to-15-trillion.html">near zero to negative rates</a> in Europe and America. On average, the interest repayment is the <a href="https://www.ft.com/content/2a2b402c-c7b4-11e8-ba8f-ee390057b8c9">highest expenditure</a> portion and remains the <a href="https://data.worldbank.org/indicator/GC.XPN.INTP.RV.ZS?locations=AO&view=chart">fastest growth expenditure</a> in sub-Saharan Africa’s fiscal budgets. </p>
<p>The rising interest rates on Africa’s debt should be of major concern. African countries are shortchanging themselves by accepting <a href="https://www.whitecase.com/sites/default/files/files/download/publications/wc_debt_trifold_report_lr_final.pdf">high yield curves</a> in their Eurobond Initial Public Offerings. This unjustifiably cements the <a href="https://africanbusinessmagazine.com/opinion/brand-africa-depends-on-more-than-just-governments/">perception</a> that they are high-risk issuers. </p>
<h2>The drivers</h2>
<p>The high interest rates are driven by several key factors. First, the mismatch between the short-term duration of the debt that African governments have taken on by issuing Eurobonds compared to the long-term nature of the infrastructure projects they propose to fund with the money raised through Eurobonds. The excessive need to attract investors is forcing African governments to borrow short-term to finance long-term projects. </p>
<p>Second, <a href="https://www.ft.com/content/25589487-78ba-4892-9fcf-cfe8556861b7">fungibility of Eurobonds</a> proceeds – flexibility to be utilised for purposes other than the ones they were raise for – exposes the funds to the downside vulnerabilities of <a href="https://www.standardmedia.co.ke/business/article/2001322533/eurobond-money-earned-but-no-project">misappropriation</a> and <a href="https://www.african-markets.com/en/news/africa/8-african-countries-that-misused-their-eurobond-money">nonproductive expenditures</a>. </p>
<p>Third, poor credit ratings as the majority of countries are in junk status. Credit ratings are pivotal in determination of both interest rates and the demand for bonds. </p>
<p>The <a href="https://ageconsearch.umn.edu/record/290096?ln=en">weaknesses of rating</a> agencies’ risk assessments have widely been <a href="https://www.sciencedirect.com/science/article/pii/S2212567115012964">criticised</a>. According to sovereign credit methodologies of the big three rating agencies, economic growth is a <a href="https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1151027">decisive factor</a> in past sovereign credit events. There is a strong positive correlation between economic strength and credit worthiness. But in Africa high economic growth has not translated into <a href="https://www.dw.com/en/are-ratings-agencies-hurting-africas-economies/a-47870146">better sovereign ratings</a>. </p>
<p>Despite consistent positive economic growth averaging 3.6% among 32 rated African states, <a href="https://tradingeconomics.com/country-list/rating">data</a> show that the number of downgrades and negative outlooks are almost double that of upgrades and positive outlooks. This implies that African countries are now worse off than they previously were. This overlooks the continent’s significant progress in <a href="https://www.brookings.edu/blog/africa-in-focus/2019/01/25/africa-is-an-opportunity-for-the-world-overlooked-progress-in-governance-and-human-development/">governance</a>, <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=ZG-ZQ">economic growth</a> and <a href="https://www.worldbank.org/en/region/afr/publication/africa-human-capital-plan">human development</a> over the past years.</p>
<p>Take Ethiopia. It has a current <a href="https://africacheck.org/reports/yes-ethiopia-the-fastest-growing-economy-globally-but-its-all-in-the-details/">economic growth</a> of 8.5% and has been hovering between 8%-11% for over 10 years. But it has not had a single upgrade activity from any of the three <a href="https://tradingeconomics.com/ethiopia/rating">international rating agencies</a>.</p>
<p>Senegal, one of Africa’s <a href="https://www.worldbank.org/en/country/senegal/overview">most stable countries</a>, experiencing three peaceful political transitions since its independence in 1960, has maintained an economic growth averaging 6% over the past 10 years. It still remains in <a href="https://tradingeconomics.com/senegal/rating">junk status rating</a>.</p>
<p>Some of what drives higher interest rates also rests with Africa governments. For example, a <a href="https://www.ft.com/content/25589487-78ba-4892-9fcf-cfe8556861b7">lack of sufficient information</a> about the specific ‘use of proceeds’ in prospectuses during Eurobond Initial Public Offerings is magnifying the risk of fiscal indiscipline. It means that funds have no conditionalities or any lines of accountability.</p>
<p>It is also the case that governments use the money they raise on loss-making projects and nonproductive fiscal expenditure. Two examples illustrate the point: the failing <a href="https://theconversation.com/why-ethiopias-showcase-sugar-projects-face-huge-challenges-122871">Kuraz mega sugar project</a> in Ethiopia was funded from the 2014 Eurobond as was the <a href="https://www.theelephant.info/op-eds/2019/11/15/i-dont-understand-why-kenyans-are-broke-mr-kenyattas-debt-distress-revisited/">Kenyan Standard Gauge Railway (SGR)</a> which is failing to stimulate any new economic activity. </p>
<h2>Solutions</h2>
<p>African countries can act to address the rising interest burden, and to avert falling into a debt trap through the following mechanisms:</p>
<ul>
<li><p>Governments should use the money raised to fund profitable projects and use the profits from these projects to repay interest owed. </p></li>
<li><p>Governments must take control of the bond issuance process during the bond structuring stage. They must exercise their choice of accepting or rejecting investors’ bids. It is imperative for African countries to structure bonds with favourable yields and tenure. This process should not be entirely renounced to syndicates of lead-managers, originators and investment banks. The oversubscription of recent Eurobond issues – Eurobond issuances have been <a href="https://cytonnreport.com/topicals/sub-saharan-africa-ssa-eurobonds-2018-performance-and-effects-on-debt-sustainability">oversubscribed</a> by three times on average – simply shows that demand is outweighing supply. Countries should manage lead issuance advisors to negotiate for the lowest interests possible to be saved from unnecessary costs.</p></li>
<li><p>Governments should bargain for competitive interest rates and accept only favourable bids. </p></li>
<li><p>Governments should borrow for productive expenditure and manage proceeds from international bonds more prudently with integrity and transparency.</p></li>
<li><p>African countries should establish a continental position, adopt international standards and guidelines to establish lines of accountability in rating agencies. This will create a platform to enforce adherence to scientific rating methodology, rating appeals, regulating rating agencies and sufficient involvement of rated countries in the rating process.</p></li>
</ul><img src="https://counter.theconversation.com/content/131053/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Misheck Mutize consults for the African Peer Review Mechanism (APRM) on support to African Union (AU) member states on credit rating agencies.</span></em></p>The alarm being raised by multilateral financial institutions about rising government debt across Africa is exaggerated. The real problem is that African governments pay way over the odds for debt.Misheck Mutize, Lecturer of Finance, Graduate School of Business (GSB), University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1109572019-02-06T11:42:59Z2019-02-06T11:42:59ZAutocracies that look like democracies are a threat across the globe<figure><img src="https://images.theconversation.com/files/256887/original/file-20190201-103164-to7fhl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A rally celebrating the second anniversary of Russia's annexation of Crimea, March 18, 2016. </span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Russia-Crimea/d572a67ffa844324a14d389cbbaa6ac5/27/0">AP/Ivan Sekretarev</a></span></figcaption></figure><p><a href="https://www.nytimes.com/interactive/2018/09/20/us/politics/russia-interference-election-trump-clinton.html">Russia’s successful interference</a> in the 2016 U.S. presidential election may inspire other countries to do the same. </p>
<p>These other countries don’t look threatening. They look like democracies. But they’re not. </p>
<p>They’re a special kind of autocratic regime that masquerades as a democracy. And what looks like benevolent conduct by these countries can quickly change into aggressive, politically charged behavior. </p>
<p>Autocracies, often known as “authoritarian regimes,” maintain power through centralized control over information and resources. Political opposition is either forbidden or strongly curtailed and individual freedom is limited by the state.</p>
<p>Autocracies that look like democracies are different because their leaders permit political opponents to run for election – even though they rarely win.</p>
<p>These countries’ capitalist systems have some of the trappings of liberal democracies in the West. But these regimes use capitalism to further their authoritarian rule.</p>
<p>These so-called “dominant party authoritarian regimes” have surged in number from around 13 percent of all countries before the end of the Cold War to around <a href="https://doi.org/10.1017/9781108186797">33 percent today</a>. </p>
<p>Most are located in Africa, the Middle East and Asia. They are also present in Eastern Europe and in the Americas. Russia is one of them; so are Turkey, Malaysia, Singapore and Venezuela. </p>
<p>These regimes often engage in the same kinds of bad behavior as other autocracies. But their behavior is critically different in both the motivations and methods used to further authoritarian ends, as detailed in my new book “<a href="https://doi.org/10.1017/9781108186797">Authoritarian Capitalism</a>.”</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/256890/original/file-20190201-108334-dhuupg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/256890/original/file-20190201-108334-dhuupg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/256890/original/file-20190201-108334-dhuupg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/256890/original/file-20190201-108334-dhuupg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/256890/original/file-20190201-108334-dhuupg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/256890/original/file-20190201-108334-dhuupg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/256890/original/file-20190201-108334-dhuupg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/256890/original/file-20190201-108334-dhuupg.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"></a>
<figcaption>
<span class="caption">The Russian military intelligence service building; 12 of its officers hacked into the Clinton presidential campaign.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Russia-US-Trump-Probe/39c1c0cf812c4522b3152d7b348c664d/1/0">AP/Pavel Golovkin</a></span>
</figcaption>
</figure>
<h2>Political control</h2>
<p>Part of the danger with dominant party authoritarian regimes is that their veneer of democracy permits political opponents to run for election. But when incumbent rulers face a threat to their power, the autocrats often respond by targeting political dissidents and taking aggressive actions toward foreign enemies to bolster popular support.</p>
<p>For example, Russian leader Vladimir Putin faced an unprecedented challenge from <a href="https://en.wikipedia.org/wiki/2011%E2%80%932013_Russian_protests">citizen protests during the 2012 presidential election</a>. The protests continued into 2013.</p>
<p>Putin punished the protesters. New York Times correspondent <a href="https://www.nytimes.com/2013/01/06/world/europe/in-russia-a-trendy-activism-against-putin-loses-its-moment.html">Ellen Barry reported in 2013</a> that “new laws prescribe draconian punishments for acts of dissent. … Mr. Putin … embraced a new, sharply conservative rhetoric, dismissing the urban protesters as traitors and blasphemers, enemies of Russia.”</p>
<p>Shortly afterward, Russia’s foreign activities became even more <a href="https://www.banking.senate.gov/imo/media/doc/McFaul%20Testimony%209-6-18.pdf">belligerent than during the Soviet period</a>. This accomplished just what Putin wanted: Following his annexation of Crimea in 2014, his approval ratings <a href="https://www.washingtonpost.com/news/worldviews/wp/2015/06/24/putins-approval-ratings-hit-89-percent-the-highest-theyve-ever-been/?utm_term=.cdbd4c686102">skyrocketed</a>. </p>
<p>Another recent example is Turkish leader Recep Tayyip Erdogan’s repression of <a href="https://www.theguardian.com/world/2016/nov/05/erdogan-cumhuriyet-turkey-journalists-arrested-detained-dissent">domestic political dissidents</a> following the failed July 2016 coup against him. According to The Guardian, the regime arrested or suspended “more than 110,000 officials, including judges, teachers, police and civil servants.”</p>
<p>Erdogan went after foreign-based dissidents too, allegedly orchestrating a plot to kidnap opposition leader <a href="https://www.newsweek.com/mueller-investigating-michael-flynn-plot-kidnap-turkish-opposition-leader-708053">Fetullah Gulen</a> from Pennsylvania.</p>
<p>And while he won the presidential election in June 2018, Erdogan’s foreign-based critics remain concerned about his threats. <a href="https://www.nytimes.com/2019/01/09/sports/kanter-knicks-erdogan-turkey.html">Enes Kanter</a>, a Turkish NBA star, declined to travel to London in January 2019 out of fear that Turkish spies might kill him.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/256888/original/file-20190201-127151-199bf61.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/256888/original/file-20190201-127151-199bf61.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/256888/original/file-20190201-127151-199bf61.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=808&fit=crop&dpr=1 600w, https://images.theconversation.com/files/256888/original/file-20190201-127151-199bf61.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=808&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/256888/original/file-20190201-127151-199bf61.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=808&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/256888/original/file-20190201-127151-199bf61.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1016&fit=crop&dpr=1 754w, https://images.theconversation.com/files/256888/original/file-20190201-127151-199bf61.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1016&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/256888/original/file-20190201-127151-199bf61.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1016&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Turkish NBA star Enes Kanter curtails foreign travel for fear of kidnapping by the Turkish government.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Mavericks-Knicks-Basketball/627009ce8b004df39b8c836df302337b/10/0">AP/Kathy Willens</a></span>
</figcaption>
</figure>
<h2>Information control</h2>
<p>Another distinction that characterizes dominant party authoritarian regimes is how they exploit Western legal and financial systems against Western media outlets critical of the regime.</p>
<p>Normally, <a href="http://oxfordre.com/politics/view/10.1093/acrefore/9780190228637.001.0001/acrefore-9780190228637-e-3">autocrats control information and resources</a> to retain power. But rather than relying on the typical autocrat’s crude hostile attacks or outright censorship, dominant party authoritarian regimes use legal or financial methods regarded as legitimate by the West.</p>
<p>In other words, they sue the media or they buy them.</p>
<p>A slew of foreign news organizations – including <a href="http://www.nytimes.com/2010/03/24/opinion/global/24iht-opednote.html">The New York Times</a>, <a href="http://www.wsj.com/articles/SB122791989311765753">Wall Street Journal</a>, <a href="http://www.nytimes.com/2010/04/04/opinion/04pubed.html">Bloomberg</a> and <a href="http://www.nytimes.com/2010/04/04/opinion/04pubed.html">The Economist</a> – were sued by the Lee family, autocratic rulers of Singapore, for political and financial reporting after the 2008 global financial crisis. </p>
<p>The family maintained the coverage defamed them. As the Wall Street Journal’s <a href="https://www.wsj.com/articles/SB122791989311765753">editors wrote in 2008</a>, “We know of no foreign publication that has ever won in a Singapore court of law. Virtually every Western publication that circulates in the city-state has faced a lawsuit, or the threat of one.”</p>
<p>Malaysian political authorities deployed similar tactics when their rulers felt threatened.</p>
<p>Following the Asian financial crisis of 1997, and in the months leading up to the November 1999 general election, wealthy ruling party supporters in Malaysia filed a flurry of <a href="http://www.ipsnews.net/1999/05/rights-malaysia-on-a-media-suing-spree/">defamation lawsuits</a> against foreign journalists and media organizations, such as the Asian Wall Street Journal and Dow Jones.</p>
<p>Russia’s means of pressuring foreign media are slightly different, but they also involve taking advantage of Western legal-financial systems.</p>
<p>Russia has engaged in <a href="https://www.csis.org/analysis/kremlin-playbook">disinformation campaigns</a> that exploit weaknesses in the West’s freedom of speech protections, as documented by experts at the Center for Strategic and International Studies and at the Center for the Study of Democracy. </p>
<p>And Russian companies have acquired sufficiently large <a href="https://www.csis.org/analysis/kremlin-playbook">ownership stakes</a> in foreign media companies to influence their operations. </p>
<p>This has involved both the manipulation of their coverage and a reduction in media freedoms of the country in which they are located. </p>
<p>For example, <a href="https://www.csis.org/analysis/kremlin-playbook">Delyan Peevski</a> is a controversial member of the Bulgarian Parliament who advocated for pro-Russian policies. Peevski built and sustained a media empire that controls around 40 percent of Bulgaria’s print sector and 80 percent of the newspaper distribution with loans from a partially Russian-owned bank.</p>
<h2>Resource control</h2>
<p>In contrast to firms located in other types of autocracies, state-controlled businesses in dominant party authoritarian regimes often comply with international financial regulations. This helps them gain access to Western countries’ corporate and financial systems.</p>
<p>Under cover of legitimate business operations, their autocratic leaders can pursue political objectives with less scrutiny. </p>
<p>Malaysia’s state-owned investment fund, <a href="https://www.theguardian.com/world/1mdb">1MDB</a>, engaged in <a href="http://www.theedgemarkets.com/article/why-malaysians-should-be-worried-about-1mdb%E2%80%99s-debts">aggressive investment tactics</a> with corrupt practices – including “abnormally high payback” for investment bankers – that extended across the globe. </p>
<p>The U.S. accuses former Prime Minister Najib Razak’s <a href="https://www.theguardian.com/world/2016/jul/28/1mdb-inside-story-worlds-biggest-financial-scandal-malaysia">family friend</a> of masterminding the theft of US$2 billion from the fund. And its capital was also <a href="https://www.cnbc.com/2015/12/28/wsj-reports-malaysia-pm-najib-razak-used-700m-donation-to-win-2013-elections.html">channeled to politicians and projects</a> to help the ruling party win the 2013 elections.</p>
<p>Russia has also used <a href="https://www.csis.org/analysis/kremlin-playbook">state-linked companies</a> to gain influence over Hungary, Serbia and Bulgaria’s crucial energy sectors via purchases of ownership stakes in listed companies.</p>
<p>This granted the Russian state access to other key sectors of these economies, such as finance and telecommunications. <a href="https://www.csis.org/analysis/kremlin-playbook">Russia then was able to influence government policies</a>. </p>
<p>In one case, the Serbian government <a href="https://www.ft.com/content/ac12dd62-c881-11e7-ab18-7a9fb7d6163e">chose not to enforce the European Union’s sanctions against Russia</a>. That was a risk for Serbia, because it has wanted to qualify for European Union membership by 2025.</p>
<p>Even bolder actions occurred with Russia’s interference in the U.S. 2016 presidential election.</p>
<p>Michael McFaul, the former U.S. ambassador to Russia, told the Senate in September 2018 that never before had the Kremlin violated American sovereignty so <a href="https://www.banking.senate.gov/imo/media/doc/McFaul%20Testimony%209-6-18.pdf">“illegally, aggressively and audaciously”</a> – even during the high-stakes rivalry of the Cold War.</p>
<p>It is now common knowledge that <a href="https://www.justice.gov/opa/pr/grand-jury-indicts-thirteen-russian-individuals-and-three-russian-companies-scheme-interfere">Russian-controlled agencies and businesses</a> played a strategically vital role in the election interference.</p>
<h2>Resisting influence</h2>
<p>Can democracies defend themselves against such aggressive regimes?</p>
<p>The “<a href="https://www.csis.org/analysis/kremlin-playbook">Kremlin Playbook</a>,” written by Heather A. Conley, James Mina, Ruslan Stefanov and Martin Vladimirov, is an extensive study of Russian influence in Hungary, Slovakia, Bulgaria, Latvia and Serbia. It provides a detailed list of policy recommendations to resist Russian influence that can be applied to other dominant party authoritarian regimes.</p>
<p>They include strengthening intelligence gathering and cooperation between the U.S. and its allies; increasing U.S. and allied governments’ assistance to vulnerable countries; and stronger protections for and enforcement of transparency measures.</p>
<p>But I believe an important addition to this list is the need to monitor the strength of the ruling party’s hold on power. That’s because aggressive, politically charged activities are most likely to occur when incumbent rulers face an elevated threat. </p>
<p>With its attack on the U.S. 2016 election, Russia showed that it’s possible to interfere destructively in the most powerful Western democracy. I expect that other autocracies that look like democracies will follow suit – across the globe.</p><img src="https://counter.theconversation.com/content/110957/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Carney 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 one-third of countries around the world are authoritarian regimes with the trappings of democracy. Their bad behavior poses a threat to real democracies, as the United States recently learned.Richard Carney, Professor, China Europe International Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/916882018-02-14T16:27:14Z2018-02-14T16:27:14ZThe real reason why cities in sub-Saharan Africa aren’t issuing municipal bonds<figure><img src="https://images.theconversation.com/files/206241/original/file-20180213-118385-nj5yaq.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">REUTERS/Euroluftbild.de</span></span></figcaption></figure><p>Cities around the world have been financing their long-term investment needs through municipal bonds for centuries. The first recorded transaction occurred in Genoa in 1150. More recently, in the US, over <a href="https://www.ft.com/content/b792c166-fc61-11e7-9b32-d7d59aace167">USD$111 billion</a> were issued in November and December last year for infrastructure, pension obligations and other critical needs across the country.</p>
<p>A bond is a debt security issued by a public agency to raise money, often for infrastructure projects. Sovereign bonds are widely used by national governments, and municipal bonds are used by many cities (particularly in the Americas). </p>
<p>For comparison, cities in sub-Saharan Africa have raised less than 1% of the US amount since 2004. Only a handful of local governments have successfully issued municipal bonds, almost all of them in South Africa. Yet there is a desperate need for infrastructure investment throughout the region. Current estimates place the financing gap at <a href="http://www.imf.org/external/pubs/ft/fandd/2016/06/sy.htm">USD$ 41.6 billion</a>. Municipal bonds, originated for urban infrastructure, will go a long way to addressing this gap.
Why aren’t African cities using municipal bonds to raise money for capital projects?</p>
<p>Some international experts point to a lack of local capacity and technical ability to prepare a municipal bond. Others argue that projects are not structured in ways that ensure a sufficient return to prospective investors. Still another group insists that municipal leaders lack the interest or ability to use more transparent financing instruments.</p>
<p>All of these views stem from a belief that civil servants and investors in sub-Saharan Africa are not exposed to global financial best practices, or are unwilling to comply with them. Some of these assumptions are both wrong and offensive.</p>
<p>My <a href="http://journals.sagepub.com/doi/full/10.1177/0956247817741853">paper</a> considered this question and came to a conclusion that there is another key contributing factor that is often overlooked. This is the weakness in regulations governing the roles and powers of cities’ authorities to raise finance and the ability of central governments to adjust these based on political whims.</p>
<p>This creates an uncertain environment. Prospective issuers cannot be confident that their preparatory work will ultimately lead to a transaction. And they can’t be sure that their efforts can be undone at the last minute by a government.</p>
<h2>A bridge too far for Dakar?</h2>
<p>In my paper I argue that poor financial skills and ignorance is less of a problem than many suggest. </p>
<p>Take, for example, the cities of Dakar (Senegal) and Kampala (Uganda). Both recognised the need to reduce their reliance on development assistance or commercial banks. They also recognised that, to attract investment from institutional investors like pension funds and insurance companies, they would have to demonstrate their creditworthiness.</p>
<p>Creditworthiness can be understood as both the willingness and the ability to borrow. To achieve a satisfactory credit rating, Kampala and Dakar needed to prove that they could reliably raise and manage money from a range of local sources, including from property taxes, parking fines and license fees.</p>
<p>Months of dedicated work yielded positive results. Independent ratings agencies assessed the health of the cities’ finance systems. Both cities received investment-grade credit ratings, meaning that prospective investors could be reasonably confident of recovering their money.</p>
<p>Indeed, after the cities secured these credit ratings, several local investors indicated their desire to purchase municipal bonds. </p>
<p>But political conflicts between the local and national levels led to Dakar’s bond issuance being <a href="http://citiscope.org/story/2015/how-dakar-almost-got-its-first-municipal-bond-market">cancelled</a> at the last minute. And in the case of Kampala, national regulation has <a href="http://newclimateeconomy.report/workingpapers/workingpaper/financing-the-urban-transition-policymakers-summary/">capped</a> the city’s borrowing at a prohibitively low amount. This limit means that the city cannot borrow enough money to make bond issuance worthwhile. </p>
<h2>What’s the real problem?</h2>
<p>If the issue doesn’t stem from creditworthiness, technical proficiency, or financial market readiness, there must be another factor limiting municipal bond issuance.</p>
<p>My <a href="http://journals.sagepub.com/doi/full/10.1177/0956247817741853">paper</a> attributes the lack of bond issuance not to the municipality or potential investors, but to limiting behaviour of national governments. </p>
<p>While they devolve substantial responsibilities to cities, they limit their ability to raise funds. This is often driven by a fear on the part of sovereign leadership to allow cities to have a hand in holding their own purse strings. This power can ultimately lead to less dependence on the national government.</p>
<p>A closer look at a number of cities shows that only those in highly centralised countries – like Cameroon – or highly decentralised countries – like South Africa – have been able to successfully issue bonds. The argument for the success of bond issuance in decentralised economies is well-understood in the African context and more broadly around the world. But the case for success in countries at the other end of the spectrum is less-considered but equally valid.</p>
<p>Cities in heavily centralised countries are not provided with autonomy for decision-making. Instead they are positioned as direct participants within an administrative machine governed by decisions from the capital. Any financial obligation entered into by a city in this political ecosystem is viewed as one explicitly guaranteed by the central government.</p>
<p>South Africa provides a good example of how enabling legislation can help municipalities raise money. In 2004 the country passed a law – <a href="https://www.acts.co.za/municipal-finance-management-act-2003/index.html">The Municipal Finance Management Act</a> – that sets out clearly what financial activities cities can and can’t undertake. Cities are prohibited from borrowing for operational expenditures and, instead, can only borrow for long-term investments.</p>
<p>The law has made it safer for pension funds, insurance companies and other investors to lend to city governments. They know that municipalities cannot issue bonds without being in full compliance with existing regulations that are not subject to different types of interpretation or changes in political will.</p>
<p>By comparison, the cities of Dakar and Kampala have struggled because of ambiguous or contested relationships with their national governments. And both cities have spent years improving their revenue collection and management systems to achieve an investment-grade credit rating. Yet the constraints on municipal bonds are created by systems beyond the city’s control.</p>
<h2>Clarity is key</h2>
<p>More African governments need to clarify enabling regulatory and legal environments on the sub-national level. These must explain how much cities can borrow and under what conditions. Only then will African cities be able to use bonds to finance the infrastructure their citizens so desperately need.</p><img src="https://counter.theconversation.com/content/91688/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeremy Gorelick 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>African cities are failing to raise development funds through bond markets.Jeremy Gorelick, Lecturer in Emerging Markets Finance, Johns Hopkins UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/607152016-06-16T13:07:43Z2016-06-16T13:07:43ZHow investors see South Africa: lots of potential, not worth the hassle<figure><img src="https://images.theconversation.com/files/126344/original/image-20160613-29222-26djv1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">International investors are still rattled by President Jacob Zuma’s sacking of respected Finance Minister Nhlanhla Nene.</span> <span class="attribution"><span class="source">Reuters/Sumaya Hisham </span></span></figcaption></figure><p>South Africa has narrowly survived a downgrade of the rating of its government bonds. The reprieve, however, is temporary because government has been warned by the <a href="https://www.ted.com/talks/annette_heuser_the_3_agencies_with_the_power_to_make_or_break_economies/transcript?language=en">Big Three</a> rating agencies – Fitch, Moody’s and Standard & Poor’s – to pull up its socks. </p>
<p>South Africa’s <a href="http://reports.weforum.org/global-competitiveness-report-2015-2016/competitiveness-rankings/">current rating</a> – just about investment grade, heading south fast – puts it more or less on par with countries such as Italy and Spain. And even with a downward trajectory through speculative grade it is still several notches away from outright “junk” or “CCC”. </p>
<p>But a downgrade to sub-investment grade would slow inward investment and the economic fallout could become a self-fulfilling prophecy: as outflows increase, the economy slows.</p>
<p>Such meta-narratives are especially powerful during periods of global turbulence as is currently being experienced, with volatile commodity prices, the oil rout, the slowdown in China and speculative investors moving large amounts of short-term capital very quickly around the world. </p>
<h2>Why sovereign debt matters</h2>
<p>When governments need to raise money they may decide to do so by borrowing on international financial markets. Such loans, or sovereign bonds, are each assigned a rating by a credit ratings agency. The rating estimates the likelihood of a government’s creditors being repaid against a range of factors. These include hard economic data, political analysis, reputation and sentiment. </p>
<p>The yield of the bond can be roughly understood as the interest rate on a loan. The lower the credit rating, the higher the risk of a default and the higher the yield payable to investors for taking on that risk.</p>
<p>It’s important to note that sovereign bonds are just another asset class investors can consider in a universe of investable assets. A downgrade is not desirable as it may slow down institutional investment and make the economy more vulnerable to speculative activity. But some investors may very well have an appetite for risky sovereign debt if it means they can make a lot of money. </p>
<p>In fact, high-end brokerages such as <a href="http://www.forbes.com/sites/charlesschwab/2016/04/22/why-global-diversification-matters/#2571f7e63870">Charles Schwab</a> advise investors on investing in high-yield, sub-investment grade emerging market debt. This sort of speculative sentiment is exactly what <a href="http://www.theguardian.com/world/2012/nov/07/africa-economy-rising-growth">drove</a> the “Africa Rising” narrative. It also <a href="https://www.moodys.com/research/Moodys-Primary-issuance-by-African-sovereigns-year-to-date-has--PR_283968">drove</a> the introduction of ratings for previously unrated sub-Saharan sovereigns, as investors sought new sources of alpha in the low-growth fallout of the financial crisis in Europe.</p>
<p>Despite this, countries need to borrow to plug the gap between projected tax revenue and budgeted expenditure. However, as debt has to be repaid at some point in the future, any debt raised should be used to finance investment such as infrastructure, which expands an economy’s capacity and therefore potential for growth and increased tax revenue. In addition, the interest government pays on its debt is of paramount importance. </p>
<h2>What there’s to like, not to like about South Africa</h2>
<p>Rating agencies have cited maintaining investor confidence as one of the critical factors towards preventing a future downgrade for South Africa. So it’s important to know what investors were thinking about South Africa in the run up to the ratings, and what they’re thinking now.</p>
<p>The first point to make is that local institutional investors and financial institutions are also influenced by the global context. The political and economic developments of all countries are viewed proportionately to other markets. For example, in the case of South Africa, Investec Asset Management evaluates the country relative to other emerging markets. It recently <a href="https://www.investecassetmanagement.com/international/professional-investor/en/insight/investment-views/emerging-market-debt-indicator">did so</a> in relation to Brazil in particular.</p>
<p>Investec’s house view on the two countries is informed by two insights. The first is that South Africa and Brazil have political headwinds that are governance risks to long-term economic development, and may present watershed moments. The other is that the strength of institutions in these countries is often overlooked. An example of this is the South African <a href="https://theconversation.com/zuma-court-ruling-south-africans-witness-a-massive-day-for-democracy-57070">Constitutional Court’s ruling</a> on President Jacob Zuma’s spending on his private home in Nkandla.</p>
<p>Publicly available international perceptions also matter. An example is the World Economic Forum competitiveness ranking. South Africa is <a href="http://reports.weforum.org/global-competitiveness-report-2015-2016/competitiveness-rankings/">ranked</a> 49th out of 140 countries and only second to China among the Brazil, Russia, India, China, South Africa group. </p>
<p>Investors also like the country’s sound fundamentals. These include a sophisticated financial markets sector, and respect for property rights and the rule of law. And despite US government complaints about infrastructure gaps and the inaccessibility of officials, it still regards South Africa as an important gateway to the rest of the continent.</p>
<p>However, inequality, unemployment, power shortages, policy incoherence around black economic empowerment and labour relations remain risk factors. The UK government, for example, <a href="https://www.gov.uk/government/publications/overseas-business-risk-south-africa/overseas-business-risk-south-africa">singles out</a> corruption, fronting around empowerment deals and dubious tender processes. </p>
<p>International investors are also still rattled about President Zuma’s <a href="http://mg.co.za/article/2015-12-09-nhlanhla-nene-removed-as-finance-minister">unexpected decision</a> late last year to replace his respected finance minister, only to reverse the decision a few days later. </p>
<p>Another bugbear is Zuma’s weakened position and how <a href="http://www.financialmail.co.za/coverstory/2016/04/28/will-cyril-ramaphosa-be-sa-s-next-president">succession</a> within the ruling African National Congress will play out, particularly the realisation that Cyril Ramaphosa, currently the deputy, may not have enough power to become president. </p>
<p><a href="http://www.bloomberg.com/news/articles/2016-05-16/zuma-factor-stymies-gordhan-s-bid-to-rescue-south-africa-economy">The competition</a> between Zuma and Finance Minister Pravin Gordhan is also being watched closely, as Gordhan is seen as a business champion.</p>
<p>Overall South Africa, right now, is viewed as a terribly difficult place to do business, with overweening bureaucracy, a collapsing education system, poor policy and militant labour groups. Kenya and Nigeria are increasingly seen as more favourable destinations. </p>
<p>As one investment advisor in London pithily described South Africa:</p>
<blockquote>
<p>Lots of potential, not worth the hassle.</p>
</blockquote>
<p>South Africa is thus particularly vulnerable with its relatively liquid portfolio flows and sophisticated financial markets. In addition, the rand, with its high interest rate, is a particular favourite commodity currency for speculators in <a href="http://www.investopedia.com/terms/c/currencycarrytrade.asp">the carry trade</a>. And indeed, both Moody’s and Standard & Poor’s have worried aloud about the combination of low growth, high debt and political risk in the current global environment.</p>
<p>But some healthy scepticism and perspective is also in order. Yes, South Africa’s parliament is out of order, but there have been <a href="http://content.time.com/time/photogallery/0,29307,1912340_1913577,00.html">fisticuffs in South Korea</a> too. </p>
<p>And there is no such thing as “idiosyncratic emerging market risk” – a patently hypocritical concept. South Africa has had its recent share of protests, but the 2011 London riots were intense, with three days of <a href="http://www.huffingtonpost.co.uk/2011/08/09/london-riots-450-arrested_n_921816.html">violence</a> during which 450 arrests were made. Nor are emerging markets essentially “corrupt”. Take Italy, for example. And rent-seeking patronage networks and what the Chinese call <a href="http://www.investopedia.com/terms/g/guanxi.asp?layout=infini&v=5E&orig=1&adtest=5E"><em>guanxi</em></a> – networks of influence – are a feature of politics everywhere.</p>
<h2>Economic policy priorities</h2>
<p>The sooner South Africans realise they have frittered away the Mandela dividend in a cutthroat global economy, the better. But this realisation does not have to come at the expense of equal negotiating power in trade and investment. By growing the economy inclusively with a focus on human development, the business environment also becomes more sustainable. Investors know this too. </p>
<p>Economic policy requires a shift away from the short-termism of a gross domestic product evangelism that is subject to the vagaries of hot money in a panicked and turbulent global economy. If this continues to be the case, economic development will only ever elicit a Pavlovian response from rating action to rating action.</p><img src="https://counter.theconversation.com/content/60715/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Desné Masie 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>South Africa has narrowly escaped a downgrade of the rating of its sovereign bonds, but government has its work cut out as it seeks to restore investor confidence and lift economic growth.Desné Masie, Visiting Researcher in International Political Economy, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/597542016-05-24T08:57:58Z2016-05-24T08:57:58ZA false morality tale blocks the resolution of the Greek debt crisis<p>Optimists hope that Greece will soon be able to put its crisis behind it following the latest meeting of eurozone finance ministers. The optimism is not unfounded. Key lenders like the <a href="http://www.imf.org/external/pubs/ft/scr/2016/cr16130.pdf">IMF</a> and the <a href="http://www.theguardian.com/world/2016/may/08/greece-has-basically-achieved-reform-goals-says-jean-claude-juncker">European Commission</a> have stopped <a href="http://www.ft.com/intl/cms/s/0/c5a7e9fe-201a-11e6-aa98-db1e01fabc0c.html?siteedition=intl#ft-article-comments">pretending</a> that Greek debt is sustainable. More importantly, the obvious is at last recognised – that Greece cannot exit its debt crisis until the very problem of its debt is addressed. </p>
<p>Yet <a href="https://mainlymacro.blogspot.co.uk/2015/07/the-ideologues-of-eurozone.html">economic</a> <a href="https://ineteconomics.org/ideas-papers/blog/joseph-stiglitz-deep-seatedly-wrong-economic-thinking-is-killing-greece">sense</a> has been largely irrelevant in the unfolding of the Greek drama. Following a <a href="http://ser.oxfordjournals.org/content/11/3/601.full.pdf+html">typical pattern</a> in the <a href="http://www.mhpbooks.com/books/debt/">history of debt crises</a>, it is a tale that has been predominantly framed and managed in terms of morality. </p>
<p>For example, Wolfgang Schäuble, Germany’s finance minister, <a href="http://www.wsj.com/articles/germanys-schauble-sees-no-need-for-immediate-decision-on-greece-payments-1457438844">insists</a> that he cannot support Greece’s claim for relief because he lacks “a proper argument for the German lawmaker and the German public”. The truth is that there are overwhelming economic arguments for debt relief, including the fact that the current plan is <a href="http://www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion">self-defeating</a>. The requirement that Greece generates <a href="https://www.project-syndicate.org/commentary/greece-referendum-troika-eurozone-by-joseph-e--stiglitz-2015-06?barrier=true">massive budget surpluses</a> will only accelerate the <a href="http://www.politico.com/agenda/story/2015/07/greece-death-spiral-ahead-000152">death spiral</a> of the Greek economy, inevitably deteriorating its debt-servicing capacity.</p>
<p>But it is vain to fight with economic reason, when the problem is, <a href="http://www.theguardian.com/commentisfree/2015/jul/16/jurgen-habermas-eu-greece-debt-deal">among</a> <a href="http://www.iwh-halle.de/d/publik/iwhonline/io_2015-07.pdf">other</a> <a href="https://www.rt.com/news/310223-Strauss-Kahn-Greek-deal/">things</a>, profoundly governed by moral sentiments. An important issue when it comes to resolving the crisis is whether the Greek population – which has been <a href="https://pogiblog.atlatszo.hu/2015/06/27/corrupt-lazy-greeks-debunking-ethnic-stereotyping-substituting-economics/">systematically</a> <a href="http://ser.oxfordjournals.org/content/11/3/601.full.pdf+html">morally downgraded</a> – deserves debt relief. </p>
<p>The underlying moral struggle and associated <a href="http://www.ft.com/intl/cms/s/0/c5a7e9fe-201a-11e6-aa98-db1e01fabc0c.html?siteedition=intl#ft-article-comments">political impasse</a> was recently captured <a href="http://www.nytimes.com/2016/05/14/opinion/time-to-end-the-greek-debt-tragedy.html?_r=0">in a New York Times editorial</a>: </p>
<blockquote>
<p>The problem is Germany, Greece’s main national creditor: German federal elections will take place next year, and many German citizens feel that their hard work and thrift should not be squandered on rescuing the Greeks from the pain of their fiscal sins. </p>
</blockquote>
<p>According to the <a href="https://theconversation.com/why-weve-been-discussing-the-greek-bail-out-in-the-wrong-way-39884">dominant narrative</a> that has shaped public imagination, Greeks have been repeatedly rescued in order to maintain a profligate lifestyle. Against this backdrop, it is understandable that the prospect of debt relief is resisted on moral grounds. </p>
<p>But the underpinning story is flawed. </p>
<h2>False logic</h2>
<p>The root cause of Greece’s fiscal problem was public expenditure on a bloated and dysfunctional public sector, structurally designed to service <a href="http://eprints.lse.ac.uk/33826/">political clientelism</a> – not the Greek citizen. Greek cronyism was in turn heavily fed by profit-seeking institutions. They <a href="http://www.ft.com/intl/cms/s/0/8db1ae58-23b9-11e5-9c4e-a775d2b173ca.html#axzz498p15b5s">recklessly bought debt</a> from the eurozone periphery that was back then <a href="http://www.nytimes.com/2011/07/22/business/global/europes-new-bank-rules-still-favor-government-debt.html">treated as risk-free</a>. </p>
<p>But investors had underestimated how the waves triggered by the 2008 global financial crisis would affect the <a href="http://www.tandfonline.com/doi/abs/10.1080/09644008.2012.739614?journalCode=fgrp20">poorly designed</a> European monetary union. It was an accident waiting to happen and was first felt in Greece in 2010 when it became increasingly evident that Greek bonds could not be paid in full. </p>
<p>Shockingly enough, the solution was neither to have investors shoulder the consequences of their bad bets, nor to drastically fight the budgetary cause of the Greek deficit. <a href="http://www.independent.co.uk/news/business/comment/greece-crisis-imf-was-pushed-around-by-angela-merkel-and-nicholas-sarkozy-and-now-it-is-being-10356247.html">Defying even the IMF rulebook</a>, Europe’s political elites decided to keep both a dysfunctional state and an unsustainable sovereign debt in place. This was possible by financing Greek clientelism; but more importantly (and <a href="https://global.handelsblatt.com/edition/423/ressort/politics/article/study-finds-greek-bailouts-saved-banks-not-people">disproportionately</a>), by bailing out private investors – <a href="https://www.foreignaffairs.com/articles/greece/2015-07-07/pain-athens">especially</a> <a href="http://www.newyorker.com/news/john-cassidy/greeces-debt-burden-the-truth-finally-emerges">French and German banks</a>. </p>
<p>Of course, what was essentially a reimbursement of imprudent buyers of public debt has been deceptively depicted as a lofty act of European solidarity towards the Greek population. Greeks supposedly received money that could be fully repaid in due course. Likewise, Greek politicians equally misleadingly portrayed bailouts as “success stories” <a href="http://www.theguardian.com/world/2011/jul/17/greece-not-bankrupt-papandreou">helping Greece</a> from <a href="https://theconversation.com/why-weve-been-discussing-the-greek-bail-out-in-the-wrong-way-39884">going bankrupt</a>. </p>
<p>By not dealing with the essence of the debt crisis, the 2012 and 2015 bailouts were unavoidable in order to refinance an unpayable debt and recapitalise Greek banks (that were since suffering the side-effects of disastrous crisis management). And while the early bailout of debt was described as a bailout of Greeks, the subsequent <a href="https://rwer.wordpress.com/2015/07/15/stop-the-frenzy-please-its-just-about-rolling-over-the-debt/">rolling over</a> of the debt is even more <a href="http://www.ft.com/intl/cms/s/0/395ae5a0-142c-11e5-9bc5-00144feabdc0.html#axzz498p15b5s">misleadingly</a> portrayed as an endless influx of <a href="http://blogs.ft.com/brusselsblog/2015/06/25/leaked-greece-bailout-plan-sent-to-eurogroup/">desperately-needed</a> <a href="https://www.yahoo.com/news/eurozone-ministers-approve-first-tranche-greek-bailout-funds-181037147.html?ref=gs">injections of cash</a>. </p>
<p>Moreover, the conditions imposed on Greece in return for <a href="http://www.theguardian.com/world/2015/jun/29/where-did-the-greek-bailout-money-go">supposedly</a> <a href="http://www.cnbc.com/2015/06/16/cramer-greece-on-a-death-spiral-of-total-insanity.html">generous help</a> had <a href="https://theconversation.com/greek-parliament-passes-debt-agreement-but-european-democracy-is-on-its-knees-44624">little to do with economics</a>. Greece undoubtedly stands in needs of structural reforms (necessary for the modernisation of the Greek state – <a href="http://www.wsj.com/articles/real-greek-drama-is-about-reforms-not-debt-relief-1463000335">not</a> the resolution of the debt crisis). But <a href="http://prospect.org/article/what-reform-strange-case-greece-and-europe">the “reforms” demanded from Greece</a> are mostly a mix of <a href="http://www.wsj.com/articles/SB10001424127887324235104578239563893526152">destructive austerity</a> and <a href="http://www8.gsb.columbia.edu/chazen/globalinsights/node/300">punitive policies</a>. They might be best understood as moral reforms of the sort commanded by a <a href="http://www.d.umn.edu/cla/faculty/jhamlin/1095/The%20Protestant%20Ethic%20and%20the%20Spirit%20of%20Capitalism.pdf">Calvinist ethic</a>. </p>
<p><a href="http://www.huffingtonpost.gr/christos-papadimitriou/story_b_7627596.html">Predictably</a> <a href="http://www.ft.com/intl/cms/s/0/9a030cee-24f5-11e2-86fb-00144feabdc0.html#axzz498p15b5s">enough</a>, not allowing Greece to sustainably restructure its debts on the one hand, while imposing unreasonable “bailout conditions” on the other, marked the <a href="http://www.nytimes.com/interactive/2015/07/09/business/international/is-greece-worse-off-than-the-us-during-the-great-depression.html">greatest economic collapse in modern times</a>. All the while Greece is <a href="http://www.wsj.com/articles/real-greek-drama-is-about-reforms-not-debt-relief-1463000335">again blamed</a> for failing to recover. </p>
<h2>Reshaping our moral imagination</h2>
<p>In moving beyond a false morality tale, it is high time we start appreciating that recovery is not possible precisely because of the bailout programmes – not in spite of them. In so doing, we must restructure the way the crisis is framed, since the very words we use nurture an irresistible inclination to blame Greece for not achieving what successive “rescue aids” and “reforms” actually render impossible. </p>
<p>The associated fallacy that Greece is paying for its own fiscal sins must also be put to bed. This was mostly true until 2010. But if punitive economics could be somehow justifiable in the offset of the crisis, they have since become root causes of the current state of the Greek economy. German leadership cannot for much longer afford to claim a higher moral ground and put the blame squarely on Greece – let alone pretend to be the saviour of an ungrateful and defiant population. </p>
<p>I do not even go so far as to contend that Greece deserves debt relief on moral grounds. What I more moderately maintain is that the debt problem is unlikely to be resolved soon due to a moral imagination that has been misguided by the toxic belief that Greece has repeatedly received generous help, and is still suffering for its original fiscal sins. As an antidote, we need to disarm the vindictive morality tale that has been deceptively constructed and allow economic sense to take center stage.</p><img src="https://counter.theconversation.com/content/59754/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stratos Ramoglou 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>Economic sense has been largely irrelevant in the unfolding Greek drama. Instead, morality has been at its heart.Stratos Ramoglou, Associate professor, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/594042016-05-19T07:33:20Z2016-05-19T07:33:20ZAfrica’s ticking time bomb: $35 billion worth of Eurobond debt<figure><img src="https://images.theconversation.com/files/123001/original/image-20160518-13493-137ygnq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">African countries are facing a huge problem brought on by a sovereign debt crisis. </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The <a href="http://www.wallstreetoasis.com/financial-crisis-overview">2008 economic crisis</a> is the single largest factor that has driven developing countries to seek alternative sources of financing for social and developmental infrastructure. This was a result of the drying up of bilateral loans and grants from European and American countries.</p>
<p>Some African countries put forward the argument that the funds from <a href="http://lexicon.ft.com/Term?term=capital-markets">capital markets</a>, or <a href="http://people.ucsc.edu/%7Ehutch/Econ241a/Articles/Panizza_Econ%26Law_SoverignDebt_JEL2009.pdf">sovereign bonds</a>, are a cheaper source of alternative financing. A sovereign bond is a debt security issued by a national government known as a Eurobond. It is denominated in a foreign currency, usually the dollar, rather than what its name (euro) implies.</p>
<p>Seychelles holds the distinction of being the first sub-Saharan African country to issue a sovereign bond – it issued a US$30 million bond in 2006. This was followed by the Democratic Republic of Congo (DRC) issuing $454 million, Gabon $1 billion and Ghana $750 million in 2007.</p>
<p>Between 2010 and 2015 at least a dozen other sub-Saharan African countries, including Côte d’Ivoire, Senegal, Angola, Nigeria, Tanzania, Namibia, Rwanda, Kenya, Ethiopia and Zambia issued sovereign bonds. They raised commercial debt in excess of $19.5 billion. </p>
<p>Many of these Eurobonds will mature between 2021 and 2025. It will require these sub-Saharan African countries to repay an average of just under $4 billion annually in that period. But they are already currently bleeding a rising total of just over $1.5 billion in annual coupon payments on these Eurobonds. This represents a total of an additional $15 billion across the term of the Eurobonds. The total accumulated bonds are in excess of $24 billion. The principle amount of this is $35 billion.</p>
<p>The $750 million Ghana bond, with a ten-year maturity, was issued in October 2007 and was four times oversubscribed. The principle repayment, which kicks in in 2017, will signal the direction of the continent’s economic dynamics in the years to follow. The writing is already on the wall. Ghana has already buckled, requiring an International Monetary Fund (IMF) financial restructuring package.</p>
<h2>Ghana’s story</h2>
<p>At the end of 2015 Ghana agreed to an <a href="http://www.imf.org/external/index.htm">IMF bailout</a>. It is underpinned by austerity measures that include reviewing and streamlining tax exemptions for free-zone companies and state-owned enterprises. A new tax policy is expected to be enacted for small businesses and a raise in value-added tax is planned.</p>
<p>Ghana’s financial problem was brought on by a sovereign debt crisis, rising interest costs, policy slippages and external shocks that have dampened the country’s medium-term prospects. The country carries a total Eurobond debt of $3.53 billion on its external debt of more than $11 billion. Its debt position of $23.38 billion (both local and external) represents more than 55% of gross domestic product (GDP) and is teetering on the edge of being unmanageable. The convergence criteria under the monetary union protocol standard for Africa states that public debt should not exceed 50% of GDP in net present value.</p>
<p>Ghana, whose growth is driven by the exports of gold, oil and cocoa, now faces the daunting task of managing its fiscal deficit, rising inflation, an energy deficit and reduced government revenue due to the slump in global commodity prices. The challenge, as in most African countries, couldn’t come at a worse time. Ghana is scheduled to hold presidential elections in 2016. Fiscal discipline will be a factor of least priority on the political agenda.</p>
<h2>The world before sovereign bonds</h2>
<p>Prior to these countries issuing the bonds, they carried foreign debt in the form of bilateral and multilateral <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9701.2004.00598.x/pdf">concessional loans</a>. These loans carried an average interest rate of 1.6% and a maturity of 28.7 years. The financing from sovereign bonds comes at an average floating <a href="http://www.investopedia.com/ask/answers/111414/how-does-bonds-coupon-interest-rate-affect-its-price.asp">coupon rate</a> price of 6.2% with an 11.2-year maturity period. In recent times the coupon rates on these bonds have hit record highs. This is a reflection of deteriorating economic indicators among sub-Saharan African countries. </p>
<p>The Achilles heel for these countries, outside the realm of poverty, governance and political will, is their dependence on <a href="https://theconversation.com/the-perils-of-relying-on-oil-as-the-only-resource-for-development-56796">one major export product</a> to generate foreign exchange. In at least seven of these countries there is direct dependence on one key product to drive the country’s economy. This is evident with Angola (oil), Zambia (copper), Nigeria (oil), Gabon (oil) and the DRC (copper).</p>
<h2>Warning signs</h2>
<p>In 2014 IMF Managing Director Christine Lagarde <a href="http://www.un.org/africarenewal/magazine/april-2015/how-healthy-africa%E2%80%99s-sovereign-bond-debt">cautioned African countries</a> against endangering their debt ratios by issuing sovereign bonds.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/122456/original/image-20160513-10697-3otdc4.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/122456/original/image-20160513-10697-3otdc4.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=370&fit=crop&dpr=1 600w, https://images.theconversation.com/files/122456/original/image-20160513-10697-3otdc4.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=370&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/122456/original/image-20160513-10697-3otdc4.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=370&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/122456/original/image-20160513-10697-3otdc4.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=466&fit=crop&dpr=1 754w, https://images.theconversation.com/files/122456/original/image-20160513-10697-3otdc4.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=466&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/122456/original/image-20160513-10697-3otdc4.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=466&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Eurobond issuances by African states.</span>
</figcaption>
</figure>
<p>And in the same year Maria Kiwanuka, former finance minister of Uganda and current economic advisor to the president, <a href="http://www.theeastafrican.co.ke/business/Uganda-rules-out-use-of--risky--Eurobonds-/-/2560/2435426/-/oqfn2uz/-/index.html">alluded to the fact</a> that African governments are under pressure to take on debt at market rates despite the risk of public debt rising to unsustainable levels during currency depreciation and increasing bond yields. </p>
<p>Uganda is the only African country that has spoken of the acquisition of Eurobonds as too risky for countries on the continent. Governor of the Bank of Uganda Emmanuel Mutebile <a href="http://blogs.ft.com/beyond-brics/2014/09/01/uganda-says-no-to-sovereign-bonds/">said</a>:</p>
<blockquote>
<p>We should not be complacent about the dangers of big projects built on sovereign debt because it would be unwise for African countries, which will never again get debt relief. From what we are seeing in Ghana, we are not yet ready to issue sovereign bonds.</p>
</blockquote>
<h2>The risks involved</h2>
<p>The cost of finance for the Eurobonds is the first key risk factor. Internal analysis of the exchange rate risk must be considered, unless the country truly believes that it has the capacity to raise the resources for repayment of the debt from commodity export revenue.</p>
<p>But future indicators are all very ominous, showing a slowdown in demand for commodities from China, a possible increase in bond yield rates by the US, lowering oil prices and downgrading of global growth indicators. All these factors will put pressure on countries that have issued sovereign bonds.</p>
<p>The second key risk in the procurement of sovereign bonds lies in debt sustainability. This is the risk associated with poor management of the proceeds of the Eurobond. They end up being invested in non-income-generating social infrastructure to the extent that the government is unable to raise the necessary funds to repay the loan. Other than capital infrastructure developments at least three of the countries – Rwanda, Gabon and Ghana – have used part of their Eurobond proceeds to re-finance public debt. </p>
<p>Sub-Saharan African countries seem to carry a vicious circle of problems revolving around underdeveloped economies. They oscillate around single-commodity exports, recurring power deficit issues, lack of fiscal discipline with budget deficits well above the convergence criteria for Africa of 3% of GDP, and unending rising debt positions even in times of good economic growth. </p>
<p>The cyclical events of unsustainable debt of the 1980s, when the continent’s debt position stood at more than $270 billion, was attributed to – depending on which side of the fence you’re on – poor governance, corrupt leadership and protracted civil wars in many African countries.</p>
<p>The continent was also undergoing rapid population growth while lacking any meaningful democratic checks and balances, and implementing ambitious social and public growth strategies. The crossroad again was with the economic downturn and the drop of global commodity prices. These countries have come a full circle.</p>
<p>Sub-Saharan African countries will require strong political will, prudent financial management, sustained fiscal discipline, long-term economic growth strategies, export diversification and sustained creation of employment to achieve economic emancipation. The current global economic slow down will prevail for at least three to four more years. This means that these countries will continue to bear rising inflation, debt repayment crisis, reduction of GDP growth and challenges with managing their fiscal deficits. </p>
<p><em>Déjà vu</em>, Africa. We are set for troubled times.</p>
<p><em>This is an extract from a <a href="https://www.academia.edu/24841059/Africa_Eurobond_Financing_A_Ticking_35_Billion_Debt_Bust">working paper</a> titled “Africa Eurobond Financing A Ticking 35 Billion Debt Bust” written by the author.</em></p><img src="https://counter.theconversation.com/content/59404/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>At least a dozen sub-Saharan Africa countries have raised debt through sovereign bonds. The chickens are now coming home to roost.Trevor Hambayi, PhD Research Fellow – Finance (SME), University of BoltonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/548652016-03-14T22:52:25Z2016-03-14T22:52:25ZFrom emerging to submerging: the debt burden killing off the age of the BRICS<figure><img src="https://images.theconversation.com/files/114402/original/image-20160309-22120-1bfn7dl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Cracks are showing up in the growth success stories of emerging markets like Brazil.</span> <span class="attribution"><span class="source">AK Rockefeller/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Over the <a href="http://www.jstor.org/stable/3990061?seq=1#page_scan_tab_contents">past three decades</a>, global interest in emerging markets has soared, and when the financial crisis of 2008 hit, emerging markets were largely thought to be the <a href="http://cuts-international.org/brics-tern/pdf/BRICS_and_the_World_Order-A_Beginners_Guide.pdf">next engine of global growth</a>.</p>
<p>Insofar as <a href="https://www.credit-suisse.com/pwp/am/downloads/marketing/credit_suisse_lux_emerging_market_corporate_bond_fund_conference_call_may_2014.pdf">they have complied</a> with this investor aspiration over the past few decades, they have also adopted a negative aspect of the developed economies to which they aspired: corporate <a href="https://www.imf.org/external/pubs/ft/gfsr/2015/02/pdf/c3_v2.pdf">leverage</a>. As the corporate <a href="http://i-mba.dmst.aueb.gr/html/det/HBS_Winning_in_the_Emerging_Markets__5954.pdf#page=5">emerging giants</a> of the developing world have grown, so too have they issued debt at <a href="http://www.bloomberg.com/news/articles/2015-06-08/these-charts-show-the-astounding-growth-in-emerging-market-corporate-bonds">disproportionately faster</a> rates.</p>
<p>Emerging markets are now <a href="http://www.bloombergview.com/articles/2016-01-25/why-emerging-markets-freak-investors-out">saddled with more debt than ever before</a>, but in particular, the debt assumed by the <a href="http://www.bloomberg.com/news/articles/2015-06-08/these-charts-show-the-astounding-growth-in-emerging-market-corporate-bonds">largest corporations</a> in emerging markets has swelled to unforeseen levels.</p>
<p>This isn’t a trivial issue in global finance: in 2014 corporate emerging market bonds as an asset class <a href="https://www.tiaa-cref.org/public/pdf/Emerging_Mkt_Corp_Bond_White_Paper.pdf">represented more than</a> US$1.6 Trillion.</p>
<p>The market is beginning to grow weary of this additional leverage-induced risk, which is why the jitters for emerging markets are <a href="http://www.zerohedge.com/news/2016-01-20/emerging-markets-it-now-worse-asian-financial-crisis">now worse than</a> those during the Asian financial crisis. They have received a painful correction over the past month that is raising intense worries among investors.</p>
<p>The proportion of emerging market debt incurred by corporations rather than by sovereign governments has grown <a href="https://www.credit-suisse.com/pwp/am/downloads/marketing/credit_suisse_lux_emerging_market_corporate_bond_fund_conference_call_may_2014.pdf">at an astonishing rate</a> of more than 25% annually. By comparison, the overall emerging sovereign bonds grew by 10%. As a result, whereas the corporate component was a mere 15% of the size of sovereign emerging market debt in 1998, by 2014 it had swollen to more than 70%.</p>
<p>Furthermore, the ramp-up in corporate leverage has <a href="https://www.imf.org/external/pubs/ft/wp/2015/wp15148.pdf">not been uniform</a> across emerging markets, with corporates in the larger economies being the hungriest, including China, India, Brazil and Turkey.</p>
<p>The global monetary conditions had in recent years been <a href="http://www.imf.org/external/pubs/ft/survey/so/2015/POL092915B.htm">very favourable</a> towards corporate borrowing in emerging markets for a couple of reasons. First, as <a href="http://www.bis.org/speeches/sp121116.htm">monetary policy</a> in developed countries was loose, the central banks of emerging countries were setting lower policy rates as well in order to avoid pressures on their currency to appreciate. Second, loose monetary policy in developed countries also led to investors pouring money into emerging markets in the “<a href="https://www.imf.org/external/pubs/ft/wp/2012/wp12198.pdf">hunger for yield</a>”.</p>
<p><a href="https://www.imf.org/external/pubs/ft/wp/2010/wp1026.pdf">Leading research</a> on emerging market corporate debt finds that “global developments” (international crises) do have an important effect on the credit spreads and that “country factors remain important in asset pricing” even as emerging market corporations list themselves internationally. <a href="https://www.imf.org/external/pubs/ft/gfsr/2015/02/pdf/c3_v2.pdf">Similar literature</a> has already raised the question of whether leverage among emerging market corporates isn’t cause for concern.</p>
<p><a href="http://ssrn.com/abstract=2730622">My ongoing research</a> examines the impact of corporate leverage in emerging markets from a slightly different perspective: the difficulties for legislative fiscal institutions in oversight of debt. If corporations are larger holders of emerging market debt, how does the transparency and budget oversight capacity of legislatures in these countries change? Many emerging markets have undertaken governance reforms over the past decade to try to make their national budgets accountable. This has helped to improve political oversight of debt and make their fiscal positions more open and manageable. </p>
<p>However, the problem arises when debt is held by privately listed corporations, which have not been part of the reforms in emerging markets towards higher disclosure. Does this worsen the risks to fiscal sustainability and democracy if corporations amass debt on their balance sheets? How would national oversight bodies even know? These are some the questions my ongoing research attempts to address.</p>
<h2>Submerging markets?</h2>
<p>The current situation is evoking fears among investors in the <a href="http://i-mba.dmst.aueb.gr/html/det/HBS_Winning_in_the_Emerging_Markets__5954.pdf#page=5">emerging market asset classes</a>: in adopting the negative traits in tandem with the positive, which is to say the leverage in tandem with the best practices of global business, emerging market corporates are left extremely vulnerable to capital outflows.</p>
<p>This is exacerbated by the increasing attractiveness of US as a destination to park money while the Federal Reserve <a href="https://theconversation.com/why-rising-interest-rates-are-bad-news-for-emerging-markets-51431">raises interest rates</a> and thus enhances the price of storing money in American dollars.</p>
<p>Corporations in emerging markets cannot get away with the same balance sheet risks as developed-market corporations. They must therefore start to exercise greater caution vis-à-vis their balance sheets. Some of the noteworthy policy <a href="https://www.imf.org/external/pubs/ft/gfsr/2015/02/pdf/c3_v2.pdf">options prescribed</a> by the experts include: <a href="http://www.imf.org/external/pubs/ft/survey/so/2015/POL092915B.htm">monitoring</a> vulnerable and systemically important firms, improving the transparency of data on corporate sector finances, turning to <a href="http://www.dnb.nl/binaries/267%20-%20Macroprudential_tcm46-243120.pdf">macro-and micro-prudential policies</a>, and reforming insolvency regimes.</p>
<p>Experts on the more pessimistic end say the emerging market sell-off might <a href="http://www.cnbc.com/2015/10/12/is-em-turmoil-the-third-wave-of-the-financial-crisis-goldman-thinks-so.html">portend the “third wave”</a> of the 2008 economic crisis (following the American and European waves), and that the age of BRICs might be over <a href="https://theconversation.com/does-the-global-stock-market-sell-off-signal-the-bric-age-is-already-over-46550">before it really began</a>.</p><img src="https://counter.theconversation.com/content/54865/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Usman W. Chohan 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>Debt is the reason jitters for emerging markets are now worse than during the Asian financial crisis.Usman W. Chohan, Doctoral Candidate, Policy Reform and Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/519642015-12-10T04:07:15Z2015-12-10T04:07:15ZQ&A: why credit rating agencies matter for developing countries<figure><img src="https://images.theconversation.com/files/104845/original/image-20151208-32402-qdxikn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Credit rating agencies often elicit criticism when they downgrade countries. </span> <span class="attribution"><span class="source">EPA/Justine Lane</span></span></figcaption></figure><p><em>Credit rating agencies have played a crucial role in international debt markets for more than 150 years. But they have often attracted controversy. Matthew Kofi Ocran, Professor of Economics at the University of the Western Cape, explains why rating agencies matter for developing countries.</em> </p>
<p><strong>What do credit rating agencies do?</strong></p>
<p>Credit ratings express an agency’s opinion about the ability and willingness of any issuer – governments, financial institutions, corporations, insurance companies and structured finance – to meet its financial obligations in full and on time. </p>
<p>There are more than 70 agencies around the world. But three dominate, controlling 91% of the <a href="http://www.esma.europa.eu/system/files/2014-1583_credit_rating_agencies_market_share_calculation_2014.pdf">global market</a>. They are Standard & Poor’s, Fitch and Moody’s.</p>
<p>Though there are slight differences in the rating scales that the big agencies use, all fall into two broad categories. These are investment and speculative grades. The investment grades range from AAA, very high credit quality, to BBB-, moderate credit risk. There are eight other notches between AAA and BBB-. </p>
<p>The speculative grade ratings start from BB+, which is associated with substantial risk. The bottom of the scale of the non-investment or speculative grade ratings is designated as C by Moody’s, and D by Standard & Poor’s and Fitch. The last rating on the scale suggests that the issuer is very close to default or already in default. When considered as numerical scales, there are 22 - from AAA to D ratings. </p>
<p><strong>Do ratings agencies matter for developing countries?</strong></p>
<p>Credit rating agencies are incredibly important for developing countries for a number of reasons.</p>
<p>First, the ratings act as a kind of moral suasion that compels developing countries to pursue more prudent and sensible monetary and fiscal policies. Sovereign ratings serve as an incentive for sound monetary and fiscal policies because performance on these policies forms an integral part of the rating methodologies.</p>
<p>Second, a favourable rating enables governments and companies to raise capital in the international financial market. </p>
<p>Institutional investors in both the developed and developing world rely heavily on rating agencies in making investment decisions.</p>
<p>This is because credit ratings are essentially opinions about credit risk. Ratings provide insight into the credit quality of an individual debt issue and the relative likelihood that the issuer may default. </p>
<p>Fund managers often don’t know enough about the risk associated with parties they’re interested in. Credit rating agencies provide an opinion about the credit quality of borrowers such as governments, corporates, financial institutions, and their related debt instruments such as bonds. </p>
<p>This means that to attract investors with deep pockets you can’t avoid having a credit rating. And a good one at that.</p>
<p><strong>Why are they controversial?</strong></p>
<p>The key point here is that credit ratings are opinions. That means they are bound to be disputed or elicit criticism. </p>
<p>The credibility of credit rating agencies took a knock during the <a href="http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article">financial crisis</a>. They were criticised for failing to do a diligent job in evaluating the credit worthiness of bonds in the lead up to the crisis. Some had punitive fines <a href="http://www.economist.com/news/business-and-finance/21642130-justice-departments-treatment-sp-raises-some-serious-questions-fine-too-far">imposed on them</a> by US financial regulators. </p>
<p>That said, their role has by no means diminished. The international financial industry still relies heavily on their opinions.</p>
<p>Even though the agencies use their own unique rating methodologies, they usually arrive at comparable conclusions. Very often an analyst may form an assessment based on a number of quantitative and qualitative measures which is then presented to a committee for review. Standard & Poor’s follows this process. In some cases assessments may be based on a quantitative model. </p>
<p><strong>What impact do they have on economies?</strong></p>
<p>The opinions by the rating agencies tend to have an important effect on the cost of financing for governments and companies. For example, the benchmark 10-year Government Bond issued by countries with high investment grade <a href="http://www.bloomberg.com/markets/rates-bonds">ratings</a> attract very low interest rates. This is usually less than 2.50%. For instance, Canada with its AAA rating borrows at 1.58%; Germany (AAA) 0.58% and France (AA+), 0.90%. </p>
<p>For low rated <a href="http://www.tradingeconomics.com/country-list/rating">countries</a> such as Greece (CCC), the rate is as high as 8.33%. </p>
<p>But more importantly downgrades from investment grade to non-investment grade can elicit unfavourable, and costly, market reactions. For example, South Africa is just a notch above investment grade rating by both Standard & Poor’s and Fitch. Any further downgrade would cause a significant escalation in the cost of raising finances. That’s why countries pay a lot of attention to their credit ratings.</p>
<p><strong>How objective are they?</strong></p>
<p>Like any human institution, the rating agencies cannot be said to be perfect. The recent global financial crisis demonstrated this. That said, by and large, the credit rating agencies have been found credible and <a href="http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/G-RatingAgencies&TheirMethodologies-LauraFeinlandKatz.pdf">transparent</a> in the methodologies used in their assessments. </p>
<p>The critical variables that go into the assessment and rating of sovereigns for instance, include information on:</p>
<ul>
<li><p>macroeconomic outcomes such as economic growth;</p></li>
<li><p>the state of public finances;</p></li>
<li><p>the external finance situation including exchange rate management;</p></li>
<li><p>political risk; and </p></li>
<li><p>the performance of state institutions. </p></li>
</ul>
<p>Naturally, when countries, municipalities and companies are downgraded the rating agencies are heavily criticised. But a review of the rating performances often suggests a strong correlation between the ratings countries get and their propensity to default. For example, historically triple A issuers and issues have defaulted less frequently as compared with those with lower credit ratings. Indeed, lower-rate issues and issuers have usually correlated with defaults across all the leading <a href="https://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/chap3.pdf">rating agencies</a>.</p>
<p>Each of the three leading rating agencies has a well-defined methodology for assigning ratings. In most instances, ratings committees vote on the rating outcomes before they are published. In most cases these committees are made up of a lead analyst, managing directors or supervisors as well as a number of junior analytical staff. Decisions are made by a simple majority of the committee. The agency’s reports are also made available to the issuer for factual verification. </p>
<p><strong>How accurate are they?</strong></p>
<p>Governments have from time to time questioned the opinions of the credit rating agencies. Developed world countries such as the US and France have strongly criticised major agencies because of a <a href="http://www.nytimes.com/2011/08/07/business/a-rush-to-assess-standard-and-poors-downgrade-of-united-states-credit-rating.html?_r=0%5D">downgrade</a>.</p>
<p>But this has not stopped agencies from sticking to their guns. An International Monetary Fund <a href="https://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/chap3.pdf">review</a> suggests that since 1975 all the sovereigns that have defaulted were rated as non-investment grade at least one year before they defaulted. Between 1983 and 2009 no country with investment grade rating defaulted. </p>
<p>And just about 1% of the corporations rated as investment grade risk defaulted over the period in question. These statistic speaks volumes about the credibility of the risk assessment opinions of the top three agencies.</p><img src="https://counter.theconversation.com/content/51964/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Kofi Ocran receives funding from the NRF. He is affiliated with the African Economic Research Consortium, Nairobi. </span></em></p>Credit rating agencies have come in for a lot of flack. But the bottom line is that to attract investors with deep pockets countries can’t avoid having a credit rating. And a good one at that.Matthew Kofi Ocran, Professor of Economics, University of the Western CapeLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/372302015-02-08T19:49:54Z2015-02-08T19:49:54ZThe next card Yanis Varoufakis will play<p>Decades ago, before Yanis Varoufakis became the rock-star finance minister of Greece, he and I developed some game-theoretic models of macroeconomics.</p>
<p>The gist of the work was this: for monetary authorities eager to preserve their autonomy, an unequivocally good reputation for relations with the government may not be desirable. </p>
<p>Our <a href="http://uadphil.econ.uoa.gr/UA/files/921175705..pdf">work</a> illustrated why a central bank may prefer to be shrouded in ambiguity rather than be known as a strong defender of its monetary policy against government challenges, or otherwise. Why? Because central banks are also involved in contests with other self-seeking interest groups like banks and other financial entities, and the bank’s overall reputation is predicated on these simultaneous contests.</p>
<p>In our youthful exuberance, we sold the model with a sexist parable for delivering a punchline: “Suppose you are an avatar like Adonis and you have two beautiful divas, Aphrodite and Persephone, as your girlfriends who are blissfully unaware of each other. If you don’t want to come under the wrath of either of them, what should be your rational strategy? Should you reveal your hand? Should you guard it and hide it?” </p>
<p>The value of ambiguity arises and evolves from the very nature of multiple contests. </p>
<p>As the new finance minister of Greece, Yanis Varoufakis faces a new batch of contests.</p>
<p>The common perception in Greece today is that the government was elected with the main mandate to write off most of the country’s €310 billion in sovereign debt. This is the first contest Yanis is involved in: supporters of the political constituency of Syriza in Greece will put relentless pressure on him to write off the debt. </p>
<p>This contest is more like the classic courtship between Aphrodite and Adonis: Aphrodite (Greek voters) falls in love with young Adonis (nouveau politician Yanis), a fresh political force in Greece, since she is wounded by Eros’ arrow (i.e. crumbling sovereign debts). After the election, Aphrodite now entrusts Yanis with Persephone, the eurozone governments who are the creditors of Greece’s €310 billion sovereign debt. This opens up the second, but interlinked, contest between Yanis and Persephone.</p>
<p>In the first contest, Aphrodite seeks a “haircut” from Yanis – close to the aggressive one Yanis is donning at the moment. In other words, Greek voters want the “haircut” to write off €310 billion of sovereign debt. Aphrodite knows that Persephone possibly wants Yanis to respect the debt obligations that eurozone tax-payers have lent to Greece. </p>
<p>Yanis travelled to Germany, France and the UK last week to meet his new consort, Persephone, who immediately demanded a debt-swap. Facing Persephone on her own territory, Yanis now knows the fundamental conflict of his political life: Aphrodite vis-a-vis Persephone, or debt-haircut vis-a-vis debt-swap. </p>
<p>If Yanis goes for Aphrodite, the wild boar (the eurozone governments, sent by Artemis - the EU financial interests), will kill his political career. His political career will die in Aphrodite’s loving arms in Greece – a perfect theme for an opera like <a href="http://www.theopera101.com/operas/tosca/">Tosca</a> in the Puccini style, though I am not sure who will play the role of Baron Scarpia – maybe George Osborne. If Yanis goes for Persephone, the lynch mob will wait for him at Athens airport.</p>
<h2>The need for ambiguity</h2>
<p>So the new era of the eurozone is riddled with at least two contests for Yanis - one is between Yanis and Aphrodite and the other involves Yanis and Persephone. </p>
<p>Little over a week ago Greek premier Alexis Tsipras, together with Yanis, announced with due boldness: </p>
<blockquote>
<p>“there will be no unilateral action on sovereign debt.”</p>
</blockquote>
<p>Once outside Greece, Yanis announced that the debt haircut was not feasible – so one should expect a debt swap. Was it just a simple act of Yanis serenading Persephone while outside Greece? Will it be a different tune when Yanis serenades his political constituency in Greece by going for the debt haircut yet again? </p>
<p>Here, I reckon Yanis, being an astute game theorist, will fall back on our old model of strategic ambiguity to simultaneously bluff and, thereby, manage Aphrodite and Persephone. If Yanis can do this, Syriza will enjoy a gala time in the office.</p>
<p>The story is simple: Yanis will split the €310 billion debt into two categories: the first one will go to the basket earmarked for debt swap, with the debt converted into performance bonds linked to the nominal growth of Greek GDP. The second component of debt will be converted into a perpetual bond.</p>
<p>Greece will need to pay interest on this second component, but no repayments of the principal. This clever ploy can appease Aphrodite and Persephone simultaneously - Yanis’ key to resolve this uncertainty for the political survival of the new government.</p>
<p>One uncertainty is about the split – should it be a 50-50 split? This question will be answered soon from multi-party negotiations. This is not the fundamental uncertainty. The fundamental uncertainty is the nominal growth of Greek GDP. Note that both baskets will appease Aphrodite and Persephone, yet Yanis can choose who is the “real” winner between them.</p>
<p>With the second basket, Aphrodite (his voters) is very happy since the debt will not be repaid ever, which is akin to some sort of debt haircut. The first basket is the bitter pill for Aphrodite since the debt is replaced by performance bonds. Persephone should be ecstatic as this will lift the productivity and growth in Greece and business confidence will return. </p>
<p>However, the key to understanding the uncertainty is nominal growth and not real growth. As long as Greece enjoys real growth but no, or low, nominal GDP growth – Yanis will pay nothing to eurozone creditors. In other words, Greece will pay nothing for the performance-linked bonds if deflation continues in Greece.</p>
<p>Hence, Yanis’ economic strategy will be to ask the (Central) Bank of Greece to control inflation, keeping it below real economic growth, which will stop Aphrodite from clamouring for his head but can deliver close to nothing to Persephone.</p>
<p>At the end of the day, Yanis will have some control over the rate of inflation, rather dis-inflation, vis-a-vis the growth rate of real GDP. The uncertainty evolves from the deflation, or dis-inflation, rate. In the second basket of reformulated debt, for the perpetual bond, Yanis will have absolutely no control.</p>
<p>So the strategic ambiguity will be Yanis’s evolving preference for dis-inflation vis-a-vis growth, which will in turn change over time depending on the interpretation of his monetary policy by his two consorts Aphrodite and Persephone. This ambiguity will give Yanis leeway for undertaking long-term changes in the Greek economy. These long-terms changes will mainly involve boosting investment in infrastructure and curbing tax evasion in Greece.</p>
<h2>What will happen to the Greek economy?</h2>
<p>There are two critical issues lurking in Greece: first, in the short run, what will happen to austerity measures if the rate of growth of GDP falls below 2%? The Greek government will have to pump money to avoid recession. The additional money could create high inflation with supply-side problems, increasing Greece’s debt repayments under the performance bonds. This will evict Syriza from the political arena.</p>
<p>In the long run, Yanis is holding his breath on arresting the rising trend of tax evasion by Greek oligarchs. This will be a tough wrestle, with Yanis shirt-fronting the most powerful Greek lobby of bare-chested oligarchs. Nobody yet knows whether Yanis will be able to extract any tax revenues from these Greek oligarchs and, must I highlight yet again, these revenues are the lifeblood for the reconstruction of the Greek economy. This wrestle will pose a major law and order issue in Greece, which is beyond the realm of economics only.</p>
<p>I am sure that Yanis will receive great support from Aphrodite in the battle against oligarchs, but what of Persephone? Will she show courage and lend support to Yanis in his battle against Greek oligarchs? Right now I have grave doubts.</p>
<p>This is the major source of crisis both for Greece and the eurozone: how to have Greek oligarchs bound, delivering much-needed resources to the Greek economy. This will possibly lead to the next Greek tragedy, “Yanis Bound”. Much like <a href="http://en.wikipedia.org/wiki/Prometheus_Bound">Prometheus</a>, who defied the gods to give fire to humanity and was subsequently subjected to perpetual punishment, Yanis will likely be judged harshly if his gambit is not favourably received.</p><img src="https://counter.theconversation.com/content/37230/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Partha Gangopadhyay 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>Decades ago, before Yanis Varoufakis became the rock-star finance minister of Greece, he and I developed some game-theoretic models of macroeconomics. The gist of the work was this: for monetary authorities…Partha Gangopadhyay, Associate Professor of Economics, Western Sydney UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/371102015-02-04T19:01:59Z2015-02-04T19:01:59ZPut your hand up if you’d like to pay more tax<figure><img src="https://images.theconversation.com/files/70984/original/image-20150203-25520-62koe0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We all want governments to do more with our taxes, so should we be willing to pay more?</span> <span class="attribution"><span class="source">Photo sourced from Shutterstock.com</span></span></figcaption></figure><p>The same deep forces that were behind the election result in Queensland are being played out in Canberra. The Australian people want, although most won’t admit it, higher taxes – either now or in the future. This is the inescapable conclusion from the rejection of the Newman government’s <a href="https://theconversation.com/uncovering-the-black-holes-in-plans-to-fix-queenslands-debt-36218">debt-reduction plan</a> and the shenanigans in the Australian parliament that have prevented the Abbott government from implementing its pre-election pledge to pay down government debt. </p>
<p>A preference for higher taxes is perfectly rational and is being expressed across most developed countries. The evidence is clear. Consider what has happened over the last two decades in Queensland, Australia and most OECD countries (the 30 most economically advanced countries). Actually this has been going on for longer than two decades, but I’ll focus on this period as this is where the <a href="http://www.oecd.org/eco/outlook/economicoutlookannextables.htm">OECD’s published data set</a> starts. </p>
<p>Government spending has risen, tax revenue has fallen and government debt has risen, all measured as a share of national production of goods and services (GDP). In Australia, spending across all levels of government has been <a href="http://www.oecd.org/eco/outlook/economicoutlookannextables.htm">2% of GDP higher</a> over the past decade than over the previous decade. The figure across all OECD countries is 3% on average. Government revenue has been about 2% of GDP lower over the past decade than it was over the previous decade – and 0.5% for the OECD. </p>
<h2>Governments and households</h2>
<p>This has meant rising government debt. Government liabilities have <a href="http://www.oecd.org/eco/outlook/economicoutlookannextables.htm">risen 11%</a> (of GDP) in Australia over the past two decades and <a href="http://www.oecd.org/eco/outlook/economicoutlookannextables.htm">30% across the OECD</a>, which eventually implies either higher taxes or lower spending. </p>
<p>Some <a href="http://theconversation.com/why-the-federal-budget-is-not-like-a-household-budget-35498">say this isn’t true</a> – that governments are not like households that eventually have to repay their debts because governments can simply print money to repay their debts. This is a dangerously naive view for an economy like Australia that borrows heavily from the rest of the world, and it has been debunked in detail <a href="http://newsroom.unsw.edu.au/news/business/federal-finances-and-family-budgets-have-great-deal-common">elsewhere</a>. Suffice to say that Queensland lost its AAA credit rating several years ago because of its rising debt, which has cost the taxpayer dearly through rising interest payments.</p>
<p>The solution to rising debt is, eventually, lower spending, higher taxes and/or selling assets - provided the private sector is prepared to pay a price high enough to compensate for the loss of income from the assets (which they often are willing to do). Australians seem not to want either lower government spending on services like education (case in point: the rejection of higher education cuts) or health (case in point: rejection of cuts to Medicare rebates to doctors), or asset sales (e.g. the rejection of the Newman government’s key election policy). Indeed we seem to want governments to spend in new areas such as disability funding and spend more in existing areas like child care, which explains the edging up in government spending as a share of GDP.</p>
<p>We’ve seen the same overseas: the election of the new Greek government that has rejected further austerity despite its <a href="http://www.oecd.org/eco/outlook/economicoutlookannextables.htm">net debt of 125% of GDP</a> (compared with the OECD average of 70%). And the failure of the US Senate to agree to measures to reduce its net debt, which stands at <a href="http://www.oecd.org/eco/outlook/economicoutlookannextables.htm">85% of GDP.</a> </p>
<h2>Why we can afford it</h2>
<p>The only option left is higher taxes, which brings me to my original point: this is not so crazy. Indeed it is rational.</p>
<p>Why? Because our living standards are rising. Our incomes and wealth are rising, giving us the means to buy more goods and services. The core source of this rising prosperity is productivity. If the average worker can produce more over time we can all be better off. </p>
<p>Labour productivity in Australia has grown at 1.3% per year on average over the past two decades, according to the <a href="http://www.oecd.org/eco/outlook/economicoutlookannextables.htm">same OECD data</a>, which means that national output per worker is about 40% higher now than it was only two decades ago. Think, for example, of the productivity gains in communication through cloud computing. Sure, when translating the 40% figure to living standards we need to chop a few percent off to account for the drop in the number of workers relative to consumers (mouths to feed). But still it’s a substantial gain. The annual figure for the whole OECD is 1.2%, so the same applies across other advanced countries – the cloud knows no borders.</p>
<p>Which brings us to the punch line. If we’re all better off than we were 20 years ago, why not pay a bit more tax rather than give up government services on child care, disability services, health care and higher education? </p>
<p>This is what Australian taxpayers are saying in voting out the Newman government and, through their representatives in the Senate, in voting down the Abbott government’s budget cuts, modest as they are. And it’s what voters are saying in Europe and the US. That is, we don’t want cuts to government services, we’d rather pay higher taxes – either now or in the future when we eventually have to address the accumulation of government debt.</p>
<p>There’s <a href="http://www.smh.com.au/national/tax-survey-finds-australians-would-pay-more-for-health-education-and-do-not-feel-overtaxed-20140605-39lxy.html">evidence</a> Australians feel they pay about the right amount of tax, but we won’t always openly admit to a willingness to pay more – certainly not to politicians. Why not? Partly because we always live in hope that someone else will pay: “raise someone else’s taxes or cut someone else’s services”. </p>
<p>Also we want to keep governments on their toes – make sure they are trying hard not to waste our taxes. And finally, even though we know we are better off than 20 years ago, it’s happening very slowly - we don’t feel it when we wake up in the morning.</p>
<p>The bottom line: we’re in for more government paralysis until eventually a government rings the bell on us and raises taxes.</p><img src="https://counter.theconversation.com/content/37110/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>I have in the past received funding from the ARC but not for some years.</span></em></p>The same deep forces that were behind the election result in Queensland are being played out in Canberra. The Australian people want, although most won’t admit it, higher taxes – either now or in the future…Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/368272015-01-28T04:07:21Z2015-01-28T04:07:21ZYanis Varoufakis: from accidental economist to finance minister<p>Since 2009, the economic situation of Greece has helped expose the architecture and policy regime problems of the European Union and the eurozone. On Sunday the Greek electorate rebelled against the self-defeating austerity policies imposed upon the country by Germany and its collaborators. As the new Greek government begins to take shape an Australian connection has emerged, with Yanis Varoufakis appointed to the crucial position of finance minister.</p>
<p>Of course, there has long been an Australian connection with Greece - Australia has been a major destination for the Greek diaspora of the twentieth century. But Yanis Varoufakis is not really a part of that phenomenon.</p>
<p>Born and raised in Greece, following university studies in economics in England, including a PhD, he came as a lecturer at the University of Sydney in the late 1980s. He stayed at Sydney University for more than a decade, returning to Greece and a position at the University of Athens in the early 2000s.</p>
<p>Varoufakis was a gifted and popular university teacher in Sydney. I know because I taught side-by-side with him for a number of years. He was also a thoughtful and productive researcher.</p>
<p>His research was first focused primarily upon game theory. But he also developed an expansive intellectual reach across what may be called “political economy” in the generic sense, particularly focused on the evolution of capitalism as a global system. He became a highly <a href="https://theconversation.com/profiles/yanis-varoufakis-9969/articles">active commentator</a>, including for The Conversation, and policy advocate in relation to the euro crisis over the last half-decade.</p>
<p>The problems of the eurozone can be more easily understood with an analysis of global capitalism and the place of the US within it. On the one hand, the eurozone then appears as a smaller-scale version of the problem of international imbalances (deficits and surpluses) between the national economies of the global system. On the other hand, as a common currency area, the eurozone and its governance could be contrasted (unfavourably) with a successful common currency area, the United States. The operation of the latter could serve to reveal what was lacking in the architecture of the euro area.</p>
<h2>Hesitant politician</h2>
<p>Varoufakis has described himself as an “accidental economist”. He is perhaps even more an accidental finance minister. </p>
<p>There is no reason to doubt the sincerity of his earlier expressed ambivalence about entering politics and the party-political fray. It is the vacuum created by the failure of the mainstream parties of the centre-left and centre-right that calls forth this participation.</p>
<p>Indeed it is the moral and intellectual failure of the European political class as a whole that is the root cause of the both leftward and rightward shifts of European voters in recent times. </p>
<p>The media’s referring to the new Greek government as “far left” or “radical left” is just an intellectually lazy acquiescence in the language of the European political and policy establishment. </p>
<p>In truth, the position of Syriza is not so way out. That such a perception can have public currency is more a symptom of how far to the right the centre of politics has shifted since 1979 (Thatcher, Reagan) and 1989 (the collapse of official Communism). Syriza is merely left-wing, whereas the mainstream European parties supposedly of the centre-left are no longer left-wing at all.</p>
<h2>A new game to play</h2>
<p>I mentioned above that Varoufakis’s earliest academic research was concerned with game theory, albeit from a rather critical standpoint. He has already <a href="https://theconversation.com/greeces-choice-bargaining-versus-pleading-7718">broken down the realities of one Greek election</a> using game analogies.</p>
<p>Game theory as a method of research in the social sciences is first and foremost about the logic of strategic interaction between players. The situation that is being played out now, between Greece (as well as others of the “south”) and the political establishment in Europe, is without doubt a strategic situation. It is a game of high-stakes policy poker with the players on both sides, perhaps engaged in an element of bluff.</p>
<p>It is interesting that a game theory expert should find himself, now, at the centre of this situation. There is a great deal at stake, for the welfare of the people of Greece, the other high-debt States and Europe as a whole, as well as for the viability of the European Union and the euro.</p><img src="https://counter.theconversation.com/content/36827/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tony Aspromourgos 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>Since 2009, the economic situation of Greece has helped expose the architecture and policy regime problems of the European Union and the eurozone. On Sunday the Greek electorate rebelled against the self-defeating…Tony Aspromourgos, Professor of Economics, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/317042014-09-16T05:23:19Z2014-09-16T05:23:19ZHow Argentina’s government has drawn new energy from the vulture fund crisis<p>Sovereign debt, crises and default have been regular features of the Argentine economy for years – but the latest debt crisis, involving the government and the so-called “vulture funds”, has thrown up new questions about the state’s capacity versus the ethics of capitalism. </p>
<p>Vulture funds are private creditors who deliberately took up cut-price Argentine bonds after the 2002 collapse, then refused to renegotiate their terms in 2005 and 2010 when the country entered a process of debt restructuring – all with the aim of eventually litigating against default and reaping exorbitant profits. </p>
<p>Accordingly, these creditors had been demanding the full value of the debt on which they had originally speculated. At the end of July this year, in the latest twist in its fiscal saga, Argentina was <a href="http://www.bloomberg.com/news/2014-07-30/argentina-defaults-according-to-s-p-as-debt-meetings-continue.html">declared to be in default</a> for the second time in 12 years. </p>
<p>Defaults are always economically damaging and politically destabilising, particularly in a context of inflation and growing political and social malaise. But the irony this year is that, unlike December 2001, today’s markets seem relatively untroubled by the event – and that rather than putting the government on the ropes, the current financial crisis is apparently shoring up the dominance of the Kirchnerist project.</p>
<h2>The bad old days</h2>
<p>The background to all this is Argentina’s financial crisis of 2001-2002, precipitated by what was then the biggest <a href="http://www.efinancialnews.com/story/2011-07-25/history-of-debt-defaults-argentina-2001?ea9c8a2de0ee111045601ab04d673622">sovereign debt default</a> in history. </p>
<p>Argentina was at a critical juncture; its public debt as a percentage of GDP reached 166%, the nation was facing abrupt pauperisation, road blocks, and factory takeovers; its leaders were struggling to preserve social cohesion. Two months after Argentina defaulted, the value of the peso dropped by more than a third. </p>
<p>Cross-class demands for more inclusive and responsive democracy screamed “¡Que se vayan todos!” (“Out with all of them”), expressing the enormous gap that had opened up between government and society. </p>
<p>As the country’s whole political economic order collapsed, presidents came and went in quick succession – until a temporary parliament-led government under the Peronist former leader of Congress, <a href="http://www.economist.com/topics/eduardo-duhalde">Eduardo Duhalde</a>, assumed some degree of institutional command. That administration eventually gave way to the elected government of Nestor Kirchner in May 2003.</p>
<h2>Fixing it up</h2>
<p>The challenges facing the new government were huge. A judicious devaluation of the peso in January 2002, however, led to a considerable expansion of exports, especially agro/industrial ones, greatly boosting state revenues. Systematic renegotiations of the terms of privatised companies and nationalisations followed suit. Negotiations also began with creditors of 152 different bonds series, issued under several jurisdictions. </p>
<p>In 2005 and 2010, a deal brought the country’s default to a successful close, with 93% of creditors accepting new bonds worth 30 cents on the dollar. The remaining 7% of “hold-out” creditors rejected the offer, demanding payment in full. The government also sought independence from the IMF, cancelling off the debt and creating an image of a sovereign state, with greater room for manoeuvre than was possible in the previous decades.</p>
<p>A more confident and better-resourced government was often accompanied by controversial forms of social and political incorporation. Like Menem in the 1990s, the administrations of Nestor Kirchner, followed by Cristina Fernandez de Kirchner, concentrated heavily on reinforcing executive authority, took timely yet bold initiatives and advanced controversial forms of government interventionism. </p>
<p>This strategy paid off by doing something to alleviate widespread poverty, inequality and exclusion. But whatever the social gains, the cost has been economic stress, distributional pressures and badly weakened political institutions.</p>
<h2>Betting the farm</h2>
<p>The political strength of the government has been tested to the extreme by two main forces: farmers and vulture funds. </p>
<p>In 2008, during a state decision to increase agro-export taxes to reflect fluctuating <a href="http://www.nytimes.com/2008/10/22/business/worldbusiness/22iht-pension.4.17173710.html?_r=0">commodity prices</a>, landowners and farm-based groups organised lock-outs, road blocks and the destruction of crops bound for market, until the export tax was settled.</p>
<p>To this day, conservative and reactionary rural factions play a massive and direct role in shaping policy, even while supporting the political opposition. In a flailing economy that has failed to diversify its industrial base and is highly dependent on the primary sector, this is not a minor concern.</p>
<p>Argentina is now stuck with recession, high inflation and, over the past year, the pressure of an unstable peso and the <a href="http://www.slate.com/articles/news_and_politics/roads/2014/02/argentina_s_black_market_for_hard_cash_buenos_aires_deliverymen_will_bring.html">black market for dollars</a>. All this, combined with the gloomy global environment, leaves the country increasingly dependent on foreign capital to maintain growth, employment and price stability.</p>
<h2>Under pressure</h2>
<p>Factions outside the government have increasingly joined forces in the renewed legal battle being waged on behalf of the vulture funds – and litigation from hold-out creditors, which has persisted for more than a decade, now carries the weight of the <a href="http://www.washingtonpost.com/blogs/worldviews/wp/2014/06/26/three-things-to-know-about-the-supreme-courts-ruling-on-argentine-debt-and-why-it-matters-to-argentina-and-the-world/">US Supreme Court</a>, which in July upheld a decision ruling that Argentina is legally obliged to repay its American hold-out creditors in full. </p>
<p>This took a Kafkaesque turn when the Argentine government deposited the bondholders’ payment into US-based financial intermediaries, only to be <a href="http://www.theguardian.com/business/2014/aug/07/argentina-default-griesafault-more-accurate">blocked by US district judge, Thomas Griesa</a>, alleging that payments could not be processed at all unless settled directly with the vulture funds. As a result, Argentina defaulted.</p>
<p>Legally, Judge Griesa’s sentence is widely believed to be impracticable: agreement with vultures means last-to-come-in creditors get the best deal, which would send Argentina into an economic tailspin based on an contorted interpretation of the legal principle of <a href="http://www.lse.ac.uk/fmg/events/financialRegulation/LFR14L_Buchheit-(How-to-Negotiate-the-Pari-Passu-Representation-Clause).pdf">pari passu</a> (equal treatment of creditors). </p>
<p>So, full payment: politically unlikely and economically impossible. The government will need to weigh Argentine laws and citizens versus US laws and investors – a fiendish balancing act for a government that has invested all its political capital in opposing the vultures at all costs.</p>
<h2>Paradox</h2>
<p>The case against the vulture funds has had a huge impact on the economic agenda not just in Argentina, but also internationally: in early September, the United Nations General Assembly <a href="http://lainfo.es/en/2014/09/07/argentine-foreign-minister-lead-un-debate-on-sovereign-debt/">began work</a> to establish a new international convention regulating the restructuring of sovereign debt.</p>
<p>Meanwhile, the political fallout of the crisis at home has paradoxically been largely to the benefit of term-limited president Cristina Kirchner, reasserting her centrality in politics just as she was losing her clout in the run-up to the 2015 elections. </p>
<p>The struggle against the hold-out creditors is being played out electorally through social mobilisation. This is just what happened in the 2008 conflict with the farmers; Cristina Kirchner’s strategy was to appeal to the urban working class. She pointed out farmers’ relative prosperity and stoked fears that popular social programmes would have to be eliminated if they got their way – even publicly calling them “greedy” and “coup-plotters”. </p>
<p>The Kirchner administration is now once again back on its old mettle, appealing to citizens with the slogan “Patria o Buitres” (“homeland or vultures”), a binary definition that suits her barnstorming rhetoric and mocks casino capitalism and those who support it. Her political opposition is back on the defensive – and her government perhaps reinvigorated – even as she grapples with the thorniest crisis of her tenure.</p><img src="https://counter.theconversation.com/content/31704/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Pia Riggirozzi receives funding from ESRC-DfID grant Poverty Reduction and Regional Integration: SADC and Unasur Health Policies (PRARI) </span></em></p>Sovereign debt, crises and default have been regular features of the Argentine economy for years – but the latest debt crisis, involving the government and the so-called “vulture funds”, has thrown up…Pia Riggirozzi, Senior Lecturer in Global Politics, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/311202014-09-01T20:26:27Z2014-09-01T20:26:27ZBid to avoid repeat of Argentina debt row risks a sting in the tail<p>Sovereign debt is a crucial lubricant for growth, especially among emerging nations, and so it is equally crucial that we can ensure the <a href="https://theconversation.com/why-argentina-matters-for-indebted-countries-everywhere-30801">interminable row over Argentina’s default</a> is not repeated. Measures proposed to do just that, however, might just make things worse.</p>
<p>Argentina’s latest default (its eighth) has at least sparked key players into action. According to <a href="http://www.ft.com/intl/cms/s/8e27f6b8-2e8b-11e4-afe4-00144feabdc0,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F8e27f6b8-2e8b-11e4-afe4-00144feabdc0.html%3Fsiteedition%3Dintl&siteedition=intl&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fasia#axzz3Bk1HkvYl">a report in the Financial Times</a>, the International Capital Market Association (ICMA), whose members include banks, investors and debt issuers, has created fresh clauses for inclusion in sovereign debt contracts that will give countries the option to bind all investors to decisions agreed by the majority.</p>
<p>It is an effort to keep the wheels turning smoothly in international financing: Just as a new company requires loans to start up, emerging markets must depend on richer countries to fund their development needs. </p>
<p>But, just as a company may go bankrupt because of external factors, a country may be faced with economic crises that make it difficult to repay the debt. A company in that situation can declare bankruptcy and reach a deal with creditors to restructure or sell assets in a deal brokered by the local courts. When the same situation faces an entire nation, there is no international court that can enforce contracts between creditors and debtors from different countries. This lack of enforceability creates a host of problems.</p>
<h2>Credit where credit’s due</h2>
<p>A natural question is that if creditors are aware of the non-enforceability of contracts, why would they lend in the first place? And how can sovereign states then raise funds? The obvious answer is reputation for repayment. If a country shows that it is credit-worthy because it repaid loans in the past, then this reputational capital may be used to attract funding. In principle, a better credit history may imply better terms of repayment – and we can all relate to that.</p>
<p>However, this relies on the creditors being able to punish the debtor country effectively once default occurs. In other words, if there is no punishment after default, then the signal is that debt will be forgiven in any case and may lead to less effort to repay on the part of the debtor country. This undermines the reputation mechanism and is a particularly salient issue when there are multiple creditors, as in the case of most sovereign debt, and notably Argentina. </p>
<p>Argentina’s experience has acted as a pretty thorough examination of the flaws in the current system. In 2005, at the time of the last crisis, the country had agreed on reduced debt servicing with the vast majority of creditors (75% of the defaulted bonds). In 2010, another 17% of the original bond holders agreed to the new terms. Thus all but a small minority of the bondholders agreed to a proposed “haircut” on their debt which essentially meant creditors sacrificed 35% of what they were owed.</p>
<h2>Out for blood</h2>
<p>The 8% of bondholders who did not accept the terms, <a href="http://www.businessweek.com/articles/2014-08-07/argentinas-vulture-paul-singer-is-wall-street-freedom-fighter">“vulture” investors like Elliott Associates</a>, specialise in buying up cheap debt and seeking full repayment when the country comes out of the crisis. They sued the Argentinian government for full repayment plus the interest accrued (about $1.5 billion). Had the debt been issued in Argentina, it would be handled by judges within Argentina. The problem was that the debt was issued in New York and thus subject to the American judicial system (this made it cheaper for Argentina to borrow money). </p>
<p>Judge Greisa, the governing judge in the case, <a href="https://theconversation.com/argentinas-vulture-defeat-shows-courts-have-too-much-power-28623">has ruled in favour of the vulture funds</a> and has prevented Argentina from paying back the restructured debt to other creditors until it pays the full amount asked for by Elliot Associates. This has virtually sent Argentina into an involuntary default. </p>
<p>So, what’s going to happen now? What can Argentina do? <a href="http://www.bloomberg.com/news/2014-07-30/argentina-defaults-according-to-s-p-as-debt-meetings-continue.html">Standard and Poor’s has already downgraded Argentinian debt</a>. Usually, as after the Greek crisis, a downgrade means that countries can only borrow at very high rates of interest. In the case of Argentina, this may not happen because investors realise the reason for the default is not in Argentina’s control. If Argentina were to do what Judge Greisa has ordered, it opens itself up to a spate of legislation from other creditors, making another default inevitable.</p>
<p>The main problem lies in the inability to make creditors agree on the restructuring deal. The latest proposal from the ICMA has been suggested before and has some broad support, even if some fine turning of the new clauses for insertion in contracts would be required to deal with multiple bond issues and all debt. The proposed solution would bind all creditors to a vote that is agreed to by at least 75% of the creditors, instead of 100%. The idea is that this reduces the incentives to hold out. Some countries, such as the UK, already employ these clauses.</p>
<h2>Counter-productive?</h2>
<p>While this approach is promising, the trade-off is that debtor countries may default more readily knowing that restructuring can be agreed to more readily. This in turn may discourage creditors from lending in the first place. The new clauses, after all would not address the lack of enforceability of sovereign debt, and so we are left to see how they impact on the reputational mechanism instead.</p>
<p>The change in the voting threshold implies that the value of distressed debt will be higher, thus reducing the incentives of vulture funds to buy it. This can only be good. However, will the new clauses improve creditor coordination? And what if, instead of faster agreements, the bondholder composition becomes more concentrated and more creditors decide to hold out? The risk lies is not quite knowing whether a new regime would lead to a different, and more coordinated group of creditors, and not knowing which way they might act. </p>
<p>The second point to make here is that the revised contracts will have to wrestle with age-old dilemmas over the balance created in such debt deals. If bankruptcy laws favour the debtor too much, it creates incentives to misuse them and in turn discourages banks and investors from lending. If the law favours creditors too much, then it reduces the incentives to borrow money and reduces the potential for innovation and entrepreneurship. Sovereign states and the financiers know this only too well, and no single clause will be a cure-all for the kind of predicament faced by Argentina.</p><img src="https://counter.theconversation.com/content/31120/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amrita Dhillon 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>Sovereign debt is a crucial lubricant for growth, especially among emerging nations, and so it is equally crucial that we can ensure the interminable row over Argentina’s default is not repeated. Measures…Amrita Dhillon, Professor of Economics, King's College LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/302242014-08-07T05:19:46Z2014-08-07T05:19:46ZArgentina will survive default but indebted nations in Africa will not be so lucky<p>The Argentine government recently defaulted on its external debt. The country’s debt issues had been <a href="http://theconversation.com/for-argentina-debt-default-is-a-solution-not-a-problem-30010">building up for some time</a> and then, just over ten years ago the country’s newly-elected president, Néstor Kirchner, rejected responsibility for the external debts his predecessors had recklessly accumulated.</p>
<p>Specifically, Argentina’s neoliberal regimes of the 1990s had tried to sustain the peso one-to-one with the dollar. To paraphrase <a href="http://www.quotesandsayings.com/quotes/oscar-wilde/">Oscar Wilde’s comment on fox hunting</a>, this was a case of the unspeakable in pursuit of the unsustainable. Quite sensibly, Kirchner felt no obligation for his government to honour this foolishly acquired debt, which had brought no benefit to the vast majority of Argentines.</p>
<p>Instead of completely cancelling the US$80 billion debt, the new Argentine government negotiated with creditors over the amount they would repay. Far from some transgression of basic values, such renegotiations of debt occur quite commonly among creditors and debtors, both public and private (when corporations declare bankruptcy, for instance). After several years <a href="http://www.jubileeusa.org/truth-about-debt/vulturefunds/argentina.html">agreement was reached with creditors</a> holding over 90% of the debt to accept 30% repayment (to employ the current cliché, the creditors accepted a “<a href="http://www.investopedia.com/terms/h/haircut.asp">hair cut</a>”).</p>
<p>As these discussions proceeded, some hedge funds saw the possibility to make a fast buck (to use an old fashioned cliché) by purchasing Argentine debt with the intent to hold out for full payment. Foremost among these “vulture” debt speculators was MNL Capital that had bought its US$1.3 billion (face value) of bonds for far less than that amount, and far less than the 30% reached in the agreement. How much less we do not know because MNL Capital has not been notably forthcoming with such information (<a href="http://www.nmlcapital.com/">its website</a> is a blank page with a small logo and nothing more).</p>
<p>To achieve their speculative end, the directors at MNL Capital “went to court” in New York state, where some of the Argentine bonds were sold (establishing jurisdiction for the case, NML Capital vs. Argentina). To the surprise of many if not most, the judge ruled in favor of MNL Capital, and the US Supreme Court declined to review the case (de facto endorsing the lower court decision).</p>
<h2>Cash in hand</h2>
<p>What makes this lender-borrower dispute rather unique is that the cash to meet the pending debt obligation (less than US$600m) <a href="http://www.nasdaq.com/article/bank-of-new-york-mellon-still-has-argentina-payment-money-20140731-01160">sits in the Bank of New York Mellon</a> ready for collection by the holders of the 90% of the debt that was renegotiated. The funds remain frozen in the Mellon bank because the judge in the case ruled that the Argentine government could pay no creditor without also paying the “holdouts” – the speculators in MNL Capital; ergo, we have default by the formal definition.</p>
<p>This is the first case I have ever encountered in which the borrower has made the necessary debt service payment, but the lender is prohibited from collecting it. Even the International Monetary Fund, always in favour of full payments of sovereign debts, described itself as “<a href="http://www.imf.org/external/np/tr/2014/tr060514.htm">deeply concerned about the broad systemic implications</a>” of NML Capital v Argentina, with a stronger criticism of the court decision <a href="http://www.cepal.org/cgi-bin/getProd.asp?xml=/prensa/noticias/comunicados/3/53183/P53183.xml&xsl=/prensa/tpl-i/p6f.xsl&base=/prensa/tpl-i/top-bottom.xsl">made by Alicia Bárcena</a>, head of the United Nations Economic Commission for Latin America and the Caribbean (<a href="http://www.cepal.org/cgi-bin/getProd.asp?xml=/prensa/noticias/comunicados/3/53183/P53183.xml&xsl=/prensa/tpl-i/p6f.xsl&base=/prensa/tpl-i/top-bottom.xsl">CEPAL</a> in Spanish).</p>
<p>The IMF’s concern is hardly surprising because if the New York court decision becomes generally accepted legal practice, many countries face financial disaster now or in the future. This disaster does not immediately threaten or even focus on Argentina. The danger lies in the longer term implications for sovereign debt management.</p>
<h2>Willing and able</h2>
<p>But, first, the impact on Argentina: <a href="http://www.theguardian.com/world/2014/jul/31/argentina-defaults-debt-talks-break-down">according to the Guardian</a> “it could add more pain for Argentinians, with the economy already in recession”. It would appear that most bond speculators disagree; Argentine <a href="http://www.ft.com/cms/s/0/c9e3efac-18bc-11e4-a51a-00144feabdc0.html#axzz39PxDopoz">bond prices have risen</a>, not fallen, after the formal default.</p>
<p>The explanation should be obvious. The Argentine government wishes to pay the service on 90% of its debt, but is prevented from doing so by a court order. Any <em>compos mentis</em> speculator (aka “investor”) draws the obvious conclusion – the government is willing and financially able to service its debt.</p>
<p>Of course, the limited impact of the formal debt default does not mean all is well. Depending on your definition of “recession”, Argentina is either <a href="http://www.economist.com/blogs/americasview/2014/06/argentinas-economy">in it or will be soon</a>. But either way, debt is not the major factor. </p>
<p>Inflation, Argentina’s dominant economic problem, has little to do with tension over the external debt (the economy has been <a href="http://en.wikipedia.org/wiki/Economic_history_of_Argentina">prone to inflation, even the hyper version, for decades</a>), and it is no great secret that the Argentine economy rises and falls with the fortunes of its much larger neighbor, Brazil (the former economy about US$500 billion, the latter US$2.3 trillion).</p>
<p><strong>Follow the Leader: Argentina and Brazil</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/55884/original/dw43c8qb-1407336099.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/55884/original/dw43c8qb-1407336099.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55884/original/dw43c8qb-1407336099.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55884/original/dw43c8qb-1407336099.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55884/original/dw43c8qb-1407336099.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55884/original/dw43c8qb-1407336099.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55884/original/dw43c8qb-1407336099.jpg?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">
<figcaption>
<span class="caption">Annualised quarterly growth rates.</span>
<span class="attribution"><a class="source" href="http://stats.oecd.org/index.aspx?queryid=350">OECD</a></span>
</figcaption>
</figure>
<h2>Real losers</h2>
<p>Poor countries, especially those in Africa, are the real losers from this whole fiasco. Unlike Argentina with its relatively diversified economy and skilled labour force, the sub-Saharan countries have few options. Their underdeveloped financial sectors and near-total dependence on primary product exports leave them heavily reliant on foreign borrowing.</p>
<p>As catalogued by <a href="http://blogs.wsj.com/moneybeat/2014/06/25/what-happens-when-the-the-vulture-funds-start-circling/">Daniel Huang in the Wall Street Journal</a> (hardly an anti-business source), three sub-Saharan countries have infamously suffered assaults by hedge funds – Zambia (by Donegal International, not the Irish car rally and head office in the British Virgin Islands, no website), Democratic Republic of the Congo (FG Hemisphere, New York based, which has a <a href="http://fgcap.net/">website</a>), and Republic of the Congo (Kensington International, Cayman Islands, no website). </p>
<p>The British government considered the first two of these so appalling that it over-ruled the court decisions granting the hedge funds their prey, the latter through the intervention of the Privy Council of England (apparently not all royalist relics are dysfunctional). Subsequently Parliament passed <a href="http://www.theguardian.com/business/2009/may/06/vulture-funds">legislation to clip the wings and claws of the vultures</a>.</p>
<p>There is a general principle in the affairs of finance – default by a small borrower is the debtor’s problem and default by a large borrower is the lender’s problem. During the Latin American debt crisis of the 1980s that principle was over-ruled by the US government, which prevented defaults by a variety of political and economic interventions.</p>
<p>The US government now lacks the power to do that again, and the rule is back in force. A global mechanism for sovereign default would make life easier for countries such as Argentina. For the poor countries of the earth it could be the difference between stagnation and development.</p><img src="https://counter.theconversation.com/content/30224/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Weeks 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 Argentine government recently defaulted on its external debt. The country’s debt issues had been building up for some time and then, just over ten years ago the country’s newly-elected president, Néstor…John Weeks, Professor Emeritus, SOAS, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/300102014-07-31T23:19:12Z2014-07-31T23:19:12ZFor Argentina, debt default is a solution not a problem<figure><img src="https://images.theconversation.com/files/55457/original/f6r2kkf8-1406829483.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">No need for doom and gloom.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/mauriciomacri/14506939245">Mauricio Macri</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Unless you just returned from holiday in some ultra-remote region lacking newspapers, television or internet access (is there such a place?), you will be aware the government of Argentina has <a href="http://www.bbc.co.uk/news/business-28578179">defaulted on its external debt</a>. </p>
<p>The immediate cause of the default was a New York federal court decision that an agreement reached between the Argentine government and creditors <a href="http://www.jubileeusa.org/truth-about-debt/vulturefunds/argentina.html">holding over 90%</a> of the country’s external debt was illegal.</p>
<p>The principal litigant bringing the case against the government holds less than US$2 billion of the Argentine debt, which by comparison makes a tail wagging a dog seem a credible anatomical interaction. This litigant, NML Capital, never lent a cent to the Argentine government (nor to any other). It acquired its one billion plus of Argentine bonds on the re-sale market, purchasing at far below face value.</p>
<p>Depending on your source of [mis-]information, you will think that this default is 1) the result of a feckless, spend-thrift government failing to accept responsibility for its actions (as argued, for example, <a href="http://www.forbes.com/sites/jamesglassman/2012/07/25/dont-mention-argentina-and-greece-in-the-same-breath/">in Forbes</a>), 2) the harbinger of deep <a href="http://www.cnbc.com/id/101875052">economic trouble for the Argentines</a>; and/or 3) the consequence of the <a href="http://jubileedebt.org.uk/actions/support-argentinas-fight-against-vulture-funds">predatory evil of “vulture” hedge funds</a>.</p>
<p>Taking these three in order, they are 1) false, 2) probably false, and 3) true but not terribly important. The current debt of the Argentine government was accumulated before 2003, much of it under the disastrous presidency of Carlos Menem (forced to resign in 1999) and three short-term successors (<a href="http://en.wikipedia.org/wiki/Fernando_De_la_R%C3%BAa">Fernando de la Rúa</a>, 1999 to end of 2001; <a href="http://en.wikipedia.org/wiki/Adolfo_Rodr%C3%ADguez_Sa%C3%A1">Adolfo Rodríguez Saá</a>, last two weeks of 2001; and <a href="http://en.wikipedia.org/wiki/Eduardo_Duhalde">Eduardo Duhalde</a>, 17 months to May 2003).</p>
<p>The massive debt accumulation (see chart below) resulted from the hapless attempt to maintain a one-to-one exchange rate between the national currency and the US dollar via a “<a href="http://www.investopedia.com/terms/c/currency_board.asp">currency board</a>”. This neoliberal bright idea legally links the amount of national currency in domestic circulation with the US dollars held by the central bank (in this case, the Banco Central de la Republica Argentina).</p>
<p>By the rules of this bone-headed currency “regime”, the national money supply must fall when US dollars flow out of the country (for example, if there is a trade deficit or capital flight). Contraction of the money supply invariably means contraction of the real economy. To avoid this, prior to May 2003 the government (under its revolving door of presidents) borrowed US dollars through sales of public bonds, driving the public debt up to almost 200% of national income (measured on the left hand axis of the chart).</p>
<p><strong>Public debt and GDP growth in Argentina, 2000-2013</strong></p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/55455/original/6ppxbg6v-1406826595.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/55455/original/6ppxbg6v-1406826595.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=385&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55455/original/6ppxbg6v-1406826595.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=385&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55455/original/6ppxbg6v-1406826595.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=385&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55455/original/6ppxbg6v-1406826595.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=484&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55455/original/6ppxbg6v-1406826595.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=484&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55455/original/6ppxbg6v-1406826595.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=484&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://data.worldbank.org/data-catalog/world-development-indicators">World Bank</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>This debt was not accumulated in pursuit of “populist” expenditures by a fiscally irresponsible government. On the contrary, not a centavo of the debt funded any public service or brought any benefit to people in Argentina. To the extent that the foreign currency acquired by the bond sales stayed in Argentina, it sat idle in the Banco Central. And when this extraordinarily misconceived and mismanaged currency regime inevitably collapsed, it brought the entire economy down with it, a decline of almost 5% in 2001 and 12% in 2002 (read from the right hand axis of the chart), plus runaway inflation that climbed over 100% during these years.</p>
<p>In the wake of this disaster generated by the neoliberal currency regime, Nestor Kirchner won the presidential election of 2003, succeeded by Cristina Fernandez de Kirchner 2007, who was overwhelmingly re-elected in 2011. Becoming president after the end of completely discredited neoliberal governments, Kirchner abandoned the “currency board” system and disowned the debt accumulated in a foolish attempt to sustain it.</p>
<h2>Why governments default</h2>
<p>This Argentine move demonstrates a general principle – most sovereign debt defaults are not the result of mismanagement or wild spending by sitting governments. Two centuries of debt “refunding” shows there to be at least three major motivations for defaulting on sovereign bonds, unrelated to excessive public spending.</p>
<p>First, we find many examples where debts were repudiated because they were accumulated in dubious circumstances under previous governments, and Argentina is an obvious example. A more extreme example is the cancelling at the <a href="http://en.wikipedia.org/wiki/Agreement_on_German_External_Debts">1953 London conference</a> of the external debt of the Federal Republic of Germany (holdover from the Nazi regime).</p>
<p>Second, global economic and political shocks can make it impossible for a government to service its debt (excellent source is the 1973 <a href="http://www.alibris.co.uk/The-Refunding-of-International-Debt-Henry-J-Bittermann/book/5617431">book by Henry Bittermann</a>). Obvious examples are the debt defaults by Latin American governments during the 1930s (due to a sharp fall in primary product prices) and the 1940s (collapse of international trade due to war).</p>
<p>Third, and being played out now in the euro zone, is public sector nationalisation of private debts. As I show in <a href="http://www.anthempress.com/economics-of-the-1-percent">economics of the 1%</a>, during 2009-2010 the Spain government, previously with the lowest debt-to-GDP ratio of major EU countries, refinanced all its failing banks. This created both an unsustainable fiscal deficit (where before it boasted a surplus) and a public debt it could not finance. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/55456/original/ghcb7ny5-1406827982.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/55456/original/ghcb7ny5-1406827982.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=413&fit=crop&dpr=1 600w, https://images.theconversation.com/files/55456/original/ghcb7ny5-1406827982.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=413&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/55456/original/ghcb7ny5-1406827982.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=413&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/55456/original/ghcb7ny5-1406827982.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=519&fit=crop&dpr=1 754w, https://images.theconversation.com/files/55456/original/ghcb7ny5-1406827982.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=519&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/55456/original/ghcb7ny5-1406827982.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=519&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Augusto Pinochet with his patron Henry Kissinger.</span>
<span class="attribution"><a class="source" href="http://en.wikipedia.org/wiki/Augusto_Pinochet#mediaviewer/File:Reunión_Pinochet_-_Kissinger.jpg">Chile foreign ministry</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>This particular path to debt disaster was pioneered in the early 1980s by none other <a href="http://countrystudies.us/chile/67.htm">than the Pinochet regime in Chile</a>, under pressure from the US government (in value the largest nationalisation in Chilean history, far larger than anything the <a href="http://www.britannica.com/EBchecked/topic/16237/Salvador-Allende">socialist Salvador Allende</a> had done).</p>
<p>All this leads to an obvious conclusion – default serves as the solution to an otherwise intractable problem, an unsustainable foreign debt. The problem is not default, the problem is the absence of an international mechanism to bring it about in an orderly manner.</p><img src="https://counter.theconversation.com/content/30010/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Weeks 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>Unless you just returned from holiday in some ultra-remote region lacking newspapers, television or internet access (is there such a place?), you will be aware the government of Argentina has defaulted…John Weeks, Professor Emeritus, SOAS, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/288782014-07-08T05:11:16Z2014-07-08T05:11:16ZWhy dollar dominance is secure despite growth of global rivals<figure><img src="https://images.theconversation.com/files/53209/original/fcdq2pb7-1404752804.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In the eye of the beholders, dollar dominance rules.</span> <span class="attribution"><a class="source" href="http://www.welovecostarica.com/watching/">http://www.welovecostarica.com/watching/</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>In imploring the world to be less dependent on the US dollar for international transactions, <a href="http://www.bloomberg.com/news/2014-07-06/france-says-boosting-use-of-euro-is-issue-of-global-balance-.html">French finance minister Michel Sapin is expressing a wish</a> that many of the euro’s creators hoped would already be reality. </p>
<p>Backed by the bosses of some major French companies, Sapin argues in a Financial Times interview that Europe should break free from the longstanding use of the dollar for international commodity and goods transactions, and as the intermediary currency for foreign exchange trade. At present, the FT reports, half of all cross-border borrowing and lending and 87% of forex trade is conducted in US$, which also make up 60% of the reserves held by the world’s central banks.</p>
<p>On the face of it, it’s not an outlandish idea. Europe can claim to be a bigger unified economic space than the US, and in some ways it is more structurally balanced. The Eurozone’s current account has recently moved <a href="http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06062014-AP/EN/2-06062014-AP-EN.PDF">slightly into surplus</a>, in contrast to the chronic US deficit. As a result, Europe avoids an American-style reliance on capital inflows to pay its way. Critics say it’s only the dollar’s reserve currency status that allows America to get away with this – uniquely borrowing abroad in its own currency, at near-zero interest rates. This, some allege, also enabled the massive international “imbalances” which led to the 2007/8 crash, and <a href="http://dgff.unctad.org/chapter2/2.html">have not been corrected by it</a>. A “rebalancing” of the world economy, by switching global payments away from the dollar, is part of Sapin’s plea.</p>
<h2>Currency rivalry</h2>
<p>Unfortunately for the Eurozone, and other aspiring economic blocs in Asia and Latin America, the dollar’s status as reserve currency is more than an outmoded historical artefact. The US economy may no longer be the world’s biggest, if Europe is treated as a single commercial space. But the way that space has been constructed makes the euro a very pale substitute for the <a href="http://www.investopedia.com/terms/g/greenback.asp">greenback</a>. Euro-denominated debt is still backed by its national issuers, not the whole Eurozone, meaning that the European Central Bank (ECB) lacks the guarantee and lender-of-last-resort powers of the Federal Reserve – even if the ECB governor might pledge to do “whatever it takes” to <a href="http://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html">preserve the Euro by supporting debts</a> issued in it.</p>
<p>That pledge has helped to stabilise the Eurozone by reining-in the interest rate premium being paid by its weaker peripheral members. But the austerity imposed on those members, and the deflationary bias this creates across the whole area, means that – for the foreseeable future – Eurozone growth is destined to be significantly slower than the US and other countries with a <a href="http://www.oecd.org/eco/outlook/Handout-English-May-2014.pdf">truly unified currency</a>. The UK (with or without Scotland) could, improbably, overtake Germany in economic size if the <a href="http://www.theguardian.com/business/2013/dec/26/britain-europe-top-economy-by-2030">widely-forecast growth differential is not corrected</a>. France, although not a problem debtor, is stuck on a <a href="http://www.oecd.org/economy/france-economic-forecast-summary.htm">particularly lacklustre growth path</a>, despite Sapin’s best efforts.</p>
<p>This means the US$ will remain the obvious currency in which to hold assets and reserves, which in turn makes it the easiest currency for trading primary commodities and other goods and services. US dollar bonds give the holder a call on what is still the world’s largest and most reliable tax base, even when (or if) China overtakes it in absolute GDP. The need to narrow its fiscal and external deficits is making the US more fiscally assertive abroad – extending its tax net, and escalating the punishment of those who hide their assets or use corrupt practices to win foreign contracts. <a href="http://www.reuters.com/article/2014/06/04/bnpparibas-france-idUSL6N0OL19J20140604">Fines imposed by the US on a French bank</a> (for helping sanctions evasion) were one of the triggers for Sapin’s outburst. Yet it’s the Eurozone’s financial transaction tax proposal that is <a href="http://www.ici.org/viewpoints/view_13_ftt_extraterritorial">raising most hackles about extra-territoriality</a>.</p>
<h2>US USP</h2>
<p>The US will continue to wield such power, knowing that it has preserved the virtuous circle (strong dollar demand enabling faster growth that reinforces dollar preference) and that it must underline its tax-raising strength in order to keep doing so.</p>
<p>Recent stand-offs between the president and Congress show that the <a href="http://www.nytimes.com/2013/10/01/us/politics/congress-shutdown-debate.html?pagewanted=all&_r=0">US federal budget isn’t problem-free</a>. But at least it exists – and is large enough to administer a meaningful fiscal stimulus when recession threatens. That’s something the Eurozone still has to leave to member states, of which the only one empowered to run a countercyclical deficit <a href="http://www.telegraph.co.uk/finance/economics/10758577/Germany-risks-EU-fines-with-record-current-account-surplus.html">insists on surpluses that only prolong the surrounding downturn</a>.</p>
<p>Even if the US economy loses its global pre-eminence, too much of the world’s wealth is tied up in dollars for any country to favour more than a marginal shift away from it. If China, Japan, the Gulf states or other major holders of dollar debt wish to switch to other currencies on a large scale, they will need to do it gradually. A rush for the exits would not only <a href="http://blogs.marketwatch.com/fundmastery/2011/04/25/can-china-really-dump-the-dollar/">devalue their investments</a>, but also undermine external trade that will remain reliant on the US market, given Europe’s self-containment and slow growth. </p>
<p>The euro may, despite its zone’s subdued economy, incrementally raise its share of global transactions. The world’s investors have an appetite for Europe’s single currency which it has been slow to sate, because of its aversion to centralised borrowing. China’s biggest sovereign wealth fund, among others, has made clear its willingness to buy more euro debt, <a href="http://www.cnbc.com/id/101699639#">if the ECB can provide it</a>. But the Eurozone’s ability to do so remains fundamentally constrained by its design. And China’s desire to invest abroad also confirms that, despite the impressive absolute size of its economy, its own renminbi (RMB) is a long way from significant international status. For this it would need (among other American characteristics) a <a href="http://www.voxeu.org/article/renminbi-will-become-reserve-currency-within-next-decade">more open capital account and flexible exchange rate</a>, a much more transparent domestic financial system, and stronger assurance that it is not about to repeat Japan’s bubble-bursting lapse into stagnation. By letting its monetary resources finance US stimulus, China has ensured the dollar will stay dominant for at least another decade.</p><img src="https://counter.theconversation.com/content/28878/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman 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>In imploring the world to be less dependent on the US dollar for international transactions, French finance minister Michel Sapin is expressing a wish that many of the euro’s creators hoped would already…Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/286232014-07-02T13:24:14Z2014-07-02T13:24:14ZArgentina’s vulture defeat shows courts have too much power<p>A <a href="http://www.reuters.com/article/2014/07/02/argentina-debt-idUSL2N0PC12920140702">missed debt repayment this week</a> means Argentina further extends its exclusion from the world’s capital markets. The country must find the money to repay all its creditors, or agree to a restructuring deal within 30 days, otherwise it will go into a technical default.</p>
<p>Argentina last defaulted on its debt repayments in 2001, following a prolonged economic recession and a period of rapid inflation. Twelve years on, the situation has come to a head once again after the US Supreme Court ruled in favour of <a href="http://www.buenosairesherald.com/article/163428/nml-capital-argentina-has-refused-to-negotiate">one of its remaining holdout creditors</a>, NML Capital.</p>
<p>NML is a “vulture” fund. Its business model requires it to buy defaulted debt cheap on the secondary market then sue debtors in distress for full repayment in US courts. </p>
<p>But the impact of the court’s decision will be felt far beyond Argentina. The fact US judges have taken such a proactive stand in the sovereign debt markets represents a radical change – and not for the better.</p>
<h2>Swap shop</h2>
<p>When a national government wishes to raise funds on international capital markets it issues sovereign bond contracts in foreign law. Private creditors buy these bonds, effectively transferring money to the debtor country. As these bonds are contracts, default or the failure to repay debt is therefore legally a breach of contract. </p>
<p>On breach it is not unusual for a court to order a defaulting debtor to repay its creditors in full, however international law protects sovereign assets from seizure. It is therefore almost impossible for creditors to collect from defaulting sovereigns – whether you invested in Russian sovereign bonds in the late 1990s, or Argentine ones in 2001, you were taking a clear risk. Usually most creditors negotiate debt swaps – voluntary exchanges of defaulted bonds for new bonds with lower face value payments. </p>
<p>Debt swaps are mutually beneficial. The country buys time to recover from the deep recession that often pre-empted the default. The repayments also signal a willingness to repay allowing the sovereign to regain access to primary capital markets. Bond holders are assured of a steady stream of payments and avoid uncertain and prolonged litigation. Something is generally considered to be better than nothing. In most cases, however, the success of swaps depends on sovereigns repaying vulture funds in full. </p>
<p>Argentina negotiated two debt swaps with 92.4% of its creditors, giving them 30% of what they were originally owed. Thus far, Argentina has kept up its repayments. However, in a break with market practice, Argentina resolutely refused to repay the vulture funds, on the grounds that their claims are extortionate and their refusal to accept what was offered other creditors. </p>
<p>To comply with the US decisions, Argentina must therefore default on bond repayments. Argentina has three further choices: avoid the US clearing system (and the jurisdiction of the US courts) and issue new debt in its own currency; <a href="http://www.bbc.co.uk/news/business-28052533">ignore the US courts</a>; or repay the vulture funds in full.</p>
<h2>The legal issues</h2>
<p>The US decisions will have wide implications for international debt markets.</p>
<p>The court has ruled that a debtor such as Argentina must treat all its creditors equally. In practice this means that the face value of all creditor claims must be repaid simultaneously – no longer can an indebted nation pay off some of its debts while hiding when the vulture funds send the bailiffs round. Another change gives creditors the right to find out a sovereign’s global assets that can be attached to satisfy seizure orders. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/52891/original/jyv3pp49-1404305260.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/52891/original/jyv3pp49-1404305260.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/52891/original/jyv3pp49-1404305260.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/52891/original/jyv3pp49-1404305260.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/52891/original/jyv3pp49-1404305260.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/52891/original/jyv3pp49-1404305260.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/52891/original/jyv3pp49-1404305260.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/52891/original/jyv3pp49-1404305260.jpg?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">A balancing act.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/mikecogh/8035396680/in/photolist-df4vu5-MM4yH-d7NnwY-68BQZq-9y3EeR-6wPWLd-8AqBAj-6wKLzr-6vhunF-conrr3-7JtC9m-bUjXg2-6tqHVV-9BBizJ-6TDWPJ-bKzuZi-mbCT1P-bEzTE5-9gYB9p-7Rzvfv-6Tn4AN-BjrBE-7oL6Ct-4TwVqP-ajzocM-aMjMSH-nQG1yi-6ou7Gs-46w2Qt-dTdGh-au7dHK-8Q2bgF-o8bkG2-86ruND-3zexY-dVWdsa-eDEemS-2SaAQd-ecEUn-77vYMe-oHmNS-6EoKbA-cPVVC7-aqABeA-5XbNnQ-9485rB-7KnzZi-fzH5j9-2nzRw-j9UrNR">Michael Coghlan</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Courts generally tend to stay away from intervening in contractual disputes involving sophisticated investors in financial market transactions. The courts take the view that such investors must take their own protections for
investment risks. In sovereign bond disputes, courts have so far deferred to remedies specified in the sovereign bond contracts and market practice – the right to seize the commercial assets of a sovereign, the right to accelerated payments on default and negotiated debt swaps. </p>
<p>In the most significant move, the US judges have effectively decided to put themselves in charge. The supreme court’s ruling has established the use of judicial discretion to resolve contract disputes and debt crises. Judges, not markets, will decide what to do when a country doesn’t pay its debts. The unprecedented exercise of judicial discretion in customising a remedy to satisfy the claims of vulture funds is a game changer. </p>
<h2>Uncharted territory</h2>
<p>The Argentina affair has at least kicked off a necessary conversation on the regulation of sovereign debt markets. The debate has, however, been unhelpfully polarised, reflecting the oppositional dynamic of judicial decision-making itself. Argentina, backed by the rest of the world including the United States, Mexico and France, <a href="http://www.shearman.com/%7E/media/Files/Services/Argentine-Sovereign-Debt/2013/Arg4112842ArgentinavNML-Amicus120913.pdf">faces the vulture fund and the judges</a>. It’s an interesting story full of dramatic rhetoric, but the focus on individual protagonists is misplaced – they’re just doing what you might expect under the circumstances.</p>
<p>The deeper question concerns the significantly increased role of the courts in sovereign debt markets. Unlike informal rules of “market practice”, the law is binding and legitimate. Market practice made debt swaps possible but must now give way to judge-made law – a law that is customised to benefit one particular vulture fund at a time rather than the collective interests of creditors affected by default, the citizens of the debtor, or the wider region. In the longer term, the new rules will make it harder for countries to swap their debts for bonds with more forgiving terms, as was conventional for most debtors (including Argentina) in the past. Fewer debt swaps will mean more prolonged debt crises. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/52893/original/w25fqwq5-1404305588.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/52893/original/w25fqwq5-1404305588.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/52893/original/w25fqwq5-1404305588.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/52893/original/w25fqwq5-1404305588.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/52893/original/w25fqwq5-1404305588.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/52893/original/w25fqwq5-1404305588.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/52893/original/w25fqwq5-1404305588.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/52893/original/w25fqwq5-1404305588.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"></a>
<figcaption>
<span class="caption">Feeding time?</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/nchill4x4/5129022466/in/photolist-8PezFQ-eLQFGK-6KoUEq-8tRwd6-4i96hP-i7htBK-depTXr-6BdfAY-4vMi2N-bv7viG-6qSp87-bWYwb4-dwgw1U-5EmC3B-5EmBYc-5EqUG1-4sk4u4-i7hufs-kaLnEV-4x6Dwp-m5EmMf-ybYcc-ybYc9-dupdjy-6ZgARb-6WRp4S-8P7jiE-gp35kY-6Zg73Z-4iuU9k-A38dd-7GLENu-dPcphG-615waj-8hL3LF-7X63dM-8J9nDu-6fRSzk-bYKzJw-bq928K-5W3eDB-611vzH-aH7iyF-bYKzxS-5zZj2K-hCMxux-aH7iNx-5YAD3b-nPBWFk-raGof">Nick Chill</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The US Supreme Court decisions offer vulture funds a repayment option in the face of existing international protections that allow sovereigns to
effectively have their assets protected from creditors. In the face of a <a href="http://www.ft.com/cms/s/0/91723dc6-0044-11e4-8aaf-00144feab7de.html?siteedition=uk#axzz36JXFWxnY">“uniquely recalcitrant”</a> debtor, the courts have created an option of intervening in the way that they have. The problem therefore lies in the deep structural flaws that place the courts in the invidious position of acceding to vulture funds gaming the system. But courts don’t exist to solve structural problems – or at least, they haven’t evolved that way. That is what politicians are supposed to be for.</p>
<p>A century ago, judicial interventions failed to deal with the insolvencies of indebted US railway companies. Sensing the limitations of judge-made law, politicians took matters into their own hands and created what became the Chapter 11 corporate bankruptcy law (Arthur. H. Dean, 1940-41). Today, we have a similar problem at the international level – and a similar intervention is required. </p>
<p>We need to build a political consensus behind the idea of a formal
international debt resolution framework. No more ad-hoc decisions by judges. Things could be decided through a sustainable and transparent international sovereign bankruptcy process. This isn’t just a pipe dream – Nobel-winning economist Joseph Stiglitz is among those <a href="http://www.globalpolicy.org/component/content/article/209/42786.html">who have repeatedly proposed</a> such a framework.</p>
<p>In the interim, Argentina continues to be effectively shut out of primary capital markets. In the medium term, expect a significant increase in
litigation – the recent <a href="http://www.shearman.com/%7E/media/Files/Services/Argentine-Sovereign-Debt/2014/Arg88-2014-06-29-Motion-for-clarification.pdf">request for clarification</a> of the US decision by Euro Bondholders is a case in point. And that’s not all. The US Supreme Court’s decisions in favour of the vulture funds may be justified by the need to maintain market confidence but, paradoxically, they seem likely to diminish the certainty and predictability attached to debt issued under US law. </p><img src="https://counter.theconversation.com/content/28623/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dania Thomas 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>A missed debt repayment this week means Argentina further extends its exclusion from the world’s capital markets. The country must find the money to repay all its creditors, or agree to a restructuring…Dania Thomas, Lecturer in Business Law, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.