By Lucas Leiroz, research fellow in international law at the Federal University of Rio de Janeiro…
In the 2008 global crisis, Latin America’s public debt was around 40% of the GDP. By the end of 2019, before the global coronavirus pandemic, this financial solvency indicator had worsened, rising to 62%, according to data of the Inter-American Development Bank. With the issuance of bonds in these months and with the sharp drop in GDP, this ratio has worsened substantially, reaching over 80%. With the growing fiscal deficits to face the economic and social emergency generated by the virus, the biggest challenge currently is to obtain resources to face the health and economic crises.
What scares experts at this moment is the possibility of a double recession on the continent. Most debt in Latin American countries is denominated in dollars. When devaluations of the national currency occur – as is currently the case in most Latin countries – the tax demand for payment of debts is high, so the risk of insolvency also increases. The danger then lies in a likely “double recession”: the first because of the pandemic and the second due to a debt crisis.
Only two countries have provided solutions to the external debt issue since the beginning of the pandemic: Argentina and Ecuador. In Alberto Fernández’s Argentina, a debt restructuring agreement was signed between the government and private creditors. In Ecuador, an exchange rate swap was carried out to avoid default. With these exceptions, all Latin America is left without proposals for debt renegotiation. Chile, Brazil and Mexico are among the top five countries with the largest annual increase in debt nowadays. Chile leads this ranking in Latin America with an overall increase of almost 30% year-on-year, followed by Brazil with an estimated increase of 20% and Mexico with an increase of 12%. The Global Debt Monitor report by the Institute of International Finance indicates that dollar debt remained stable at around 8.4 trillion in the first quarter of 2020, however, with the economic downturn and the devaluation of Latin currencies, the situation of indebtedness has worsened significantly.
The biggest challenge is to establish a debt solution amid the need for increased spending due to the pandemic. The American continent is the current global epicenter of the pandemic, with most countries on this continent being poor and developing nations. With much of the economic activity in sharp decline and tax collection in fall, many countries have failed to avoid default. Some countries will use their scarce resources available to pay creditors, cutting essential expenses such as social and health benefits, which will inevitably worsen the pandemic scenario, generating more deaths. On the other hand, many countries will try to move forward appealing for more debt, at a time when it seems difficult to avoid it. Some experts, however, claim to have an alternative in this scenario: the voluntary repurchase of sovereign debt. The main objective would be to alleviate the debt burden with a significant discount in relation to the face value of sovereign bonds and to minimize exposure to indebtedness with private creditors.
A curious point in the question of debt is the role played by the IMF, which acts promptly in the approval of credits, thus providing security to private creditors and encouraging the indebtedness of Latin countries. Since March 31, 2020, the IMF has approved credits of US $ 3,483 million for 11 countries in Latin America (Bolivia, Ecuador, Paraguay, among others), with orders from Peru – amounting to US $ 18 billion – and Colombia – amounting to 11 billion dollars. For its part, Chile requested a US $ 22.8 billion loan. The approval of these credits creates an illusion for the countries that request them: at first, the problems seem to be solved, but the situation worsens in the long term due to the debt with the international private sector. The IMF is collaborating with this.
Some researchers link the debt of poor countries to international creditors with a form of modern colonialism. The thesis is interesting and certainly true. The definition of a colonial relationship in economics is precisely in the extraction of the economic surplus, which, in the era of financial capitalism, is done through international indebtedness. International financial organizations help creditors and abandon emerging states, creating countries that are increasingly poor and indebted, colonially exploited by the international market.
In the end, there is no apparent solution to the problem: without going into debt, a poor state has no way to face the pandemic; and if it goes into debt, it cannot pay the debt. In other words, debt becomes inevitable and unpayable, perpetuating a scenario of inequality between countries and the exploitation of emerging nations by financial organizations.
The repurchase of debt is an interesting solution, but it must be preceded by a strong process of audit and inspection of the debt. The governments of indebted states and their respective popular organizations have the right to analyze what is to be paid, in compliance with the most basic legal principles. Furthermore, if a State decides that it should not pay a certain debt due to abusive or exploratory practices on the part of creditors, it is in its right to do so as a sovereign subject under international law.
The widespread indebtedness of States and the perpetuation of underdevelopment are clear evidence of the failure of the neoliberal model and the need to think about economic alternatives for a world in transition amid new global challenges.
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