LYNN FRIES: Welcome to the Real News Network. I'm Lynn Fries in Geneva.
In this series we've reported on an historic and unprecedented move on the part of the
UN General Assembly to tackle the kind of sovereign debt crises that have hit Greece,
Argentina, and the Ukraine, and we've been having a conversation on the issue with our
guest, economist Jayati Ghosh. This is the concluding segment of that conversation and
report.
First, to more on the General Assembly.
FRIES: Thanks to Argentina, the UN General Assembly has approved an historic resolution
today. Argentina has opened the world's eyes. So said Bolivia's ambassador to the UN, speaking
in his capacity as president of the G77 plus China at a UN press conference in 2014 on
September 9, as work on the sovereign debt issue got underway as called for in the resolution
introduced by Argentina, presented by the G77, was approved.
In a related comment at a resolution work session, Joseph Stiglitz had this to say.
JOSEPH STIGLITZ: The reason that we have a bankruptcy law is that in the absence of that
there can be long delays. And the outcomes are determined not on the basis of principles
of fairness and efficiency but on the basis of economic weight, economic might. The party
that is willing to wait to spend the most on litigation. These are not principles of
social justice or even economic efficiency. And the reason we have a rule of law is to
protect those who are weaker, those who in the battle would be, would lose out. That's
why we have a legal framework and an international rule of law. And ironically when I talk to
some people in the private sector, they say except for Argentina the old system worked
perfectly well. What they meant was, we could beat up on almost all the countries and get
our way. And it was only because Argentina was willing to stand up and say we want a
fair negotiation that Argentina was the problem.
FRIES: We now continue to part five, the concluding segment of our conversation, with our guest,
economist Jayati Ghosh. Jayati Ghosh is a professor of economics, and chair of the Center
for Economic Studies at Jawarharlal Nehru University in New Delhi. Welcome.
JAYATI GHOSH: Thank you. It's a pleasure to be here.
FRIES: Let's talk now about Argentina's debt restructuring. What happened there?
GHOSH: What really happened, what the Argentine case shows very clearly, is that the bona
fide creditors and those who actually accepted the reduction in the debt, which was a very
reasonable, plausible reduction, they are the ones who suffer. Because even they are
not being allowed to be repaid by the US courts and by the US banks because of this peculiar,
complicated system of jurisdiction.
So a few holdout creditors or a few holdout vulture funds can actually disrupt an entire
system of debt and repayment because of their own interest. And this is not just disruptive
of a particular case, it's disruptive of the entire sovereign debt market.
FRIES: Talk more about the global and systemic implications of all this.
GHOSH: I think more and more people across the world and more and more countries across
the world are realizing that you cannot have a properly functioning global financial system
without this kind of debt workout mechanism. And this was the driving force behind the
UN General Assembly resolution on this matter, which was of course led specifically by the
case of Argentina. As you know, Argentina managed to restructure its debt with the support
of 80 percent of its creditors. There were a few holdout creditors, those who didn't
agree.
Now, if you had a proper sovereign debt mechanism with collective action clauses it wouldn't
matter. They would also have been forced to agree. But these holdout creditors then sold
their assets, their distressed assets, to what are called vulture funds. Vulture funds
are companies that buy these really cheap, distressed assets and then somehow try and
get the maximum gain from them. These vulture funds have been pursuing the case in various
courts all over the world, including in the U.S. court. A U.S. district court, and subsequently
the U.S. Supreme Court, have basically said that Argentina must pay those vulture funds
the full value of the debt, even though they probably bought it at one-hundredth of the
price. But they have to repay the full value of that debt, even when they have not paid
that to the 80 percent of the creditors and they have themselves, when they did that restructuring,
taken the position that they will not pay any other creditor more.
So Argentina's in a complete bind. It cannot pay those holdout creditors or the vulture
funds the full amount, because it has already promised the earlier creditors it would not
do so. Yet now the U.S. courts are saying if you don't do that we will freeze your assets
here, we will not allow you to repay your other creditors. I mean, it's completely bizarre
what has happened.
Now, it's that kind of ridiculous anomaly which really has to be fought and which would
be clarified if we had a proper sovereign debt mechanism functioning globally. And so,
in fact, there was a UN General Assembly move which, I'm very happy to say, won with a very
large majority. But it's interesting to see the countries that did not vote for it. They
were mostly the developed countries. The United States, which originally President Obama had
actually said yes, a debt workout mechanism is necessary. The United States voted against.
The major European countries voted against.
So essentially, the developed world voted against because they feel that they're in
a position to ensure that their banks somehow get repaid at the cost of all the debtor nations.
I think that's the political economy of it. But it's a very short-sighted political economy.
Because in fact, if these governments feel that being able to by force push down a certain
agreement on a debtor country, grind it into the dust, deny its citizens basic needs and
all of their social and economic rights, force them into poverty and penury and somehow extract
this debt, that this is a feasible way out, it's not.
FRIES: What if things continue like this?
GHOSH: If it continues like this, in fact you will not have financial markets functioning
for sovereign debt. Because it's too messy, it's too unpredictable, it's too unreliable.
And if there is no proper workout mechanism it means that neither creditors nor debtors
actually know what's ahead. This is really not a desirable situation. No financial market
can function like this. Just as it was the financial markets that demanded debt resolution
mechanisms for people, for companies, for municipalities, so in fact I am surprised
that financial markets are not demanding this for the sovereign debt mechanism.
FRIES: To wrap up, what problem can a sovereign debt workout mechanism resolve?
GHOSH: Sovereign debt workout mechanism is something you do when there is a debt crisis,
when there is a solvency problem, when there is a real problem of an inability to repay
and a need to restructure the debt. We need to have a transparent, clear, systematic way
of doing that. Because otherwise, now you are getting these really, really messy crises,
which are not just messy. They're extraordinarily painful and damaging to the citizens of the
country involved. So we really have to think of a way in which we work out how to deal
with the crisis. But of course that's not enough. What we also need is a way of reducing
the possibility of getting into these crises and ensuring stable, sustainable forms of
external finance.
So in a way, you can't separate this issue of the sovereign debt crisis with the fact
that governments are now either forced to or willing to take on extremely unstable sources
of external finance. And we should really try and reduce that. Reduce the reliance of
governments on sources of finance that will be difficult to repay and can create huge
potential for crisis in the future.
FRIES: So are you saying that there's this increased risk of probability of debt crisis
for any economy or government that's seeking financing, so that's a de facto structural
impediment on the path to economic development?
GHOSH: Yes, the system we have today is actually one that either inhibits governments from
seeking finance which is short-term in nature when they have long-term investments, or which
will necessarily involve them in crises.
FRIES: And what about when G7 nations were developing countries?
GHOSH: The G7 nations are classic examples of countries that have benefited from very
positive historical contexts, and from specific institutional conditions which they are unwilling
to give now to developing countries. Or even giving, unwilling to give to some of their
own.
We've talked about how Germany benefited from debt agreements and debt renegotiations that
were dramatically more generous than what it is willing to offer Greece today. But as
I mentioned the United States was a huge beneficiary of long-term sustained capital inflows through
the bond market, which enabled the entire expansion of the U.S. railway system, the
expansion of the U.S. power industry, the development of a whole range of other manufacturing
industries. None of this would have been possible without that very long-term sustained foreign
investment, and particularly foreign bonds.
Now, this kind of stable, sustained investment is what developing countries need today. And
that's what's being denied to them.
FRIES: And a concluding thought?
GHOSH: A lot of sovereign debt crises are not because governments took on too much debt,
or governments were profligate. A lot of them are because when private sector takes on too
much debt and they can't repay, then the government is forced to come in and take over those bad
debts. That's what happened in Ireland, that's what happened in Spain. And then it's the
government that is left holding this baby, and somehow having to deal with the debt crisis
which was really created by private investors.
A sovereign debt mechanism requires governments to be able to access long-term finance in
a sustainable way, but it also requires financial regulation so that private players cannot
behave irresponsibly and then leave the mess for the government and the citizens of the
country to clean up.
FRIES: We'll have to leave it there. This concludes our series. Jayati Ghosh, thank
you.
GHOSH: You're welcome.
FRIES: And thank you for joining us on the Real News Network.