PAUL JAY: Welcome to The Real News Network. I'm Paul Jay in Washington. When a corporation
wants to raise money, either for growth or other reasons, they can issue shares, which--investors
can buy equity, in which case they share the upside and the downside risk, or they issue
bonds. And investors buy corporate bonds knowing there's a risk, and they expect to be repaid.
On the other hand, they charge more interest if they think there's more risk. And if the
company goes bankrupt, then they don't collect on their bonds. But that's not the case when
it comes to countries. When investors buy bonds from countries, they assess a risk,
they charge higher interest rates based on what they say is a perceived risk. But the
truth is, when a country gets into trouble, the investors, the bondholders, do not accept
any part of that trouble or that risk. They expect to be paid in full. In other words,
the obligation of a state to bondholders is absolute, whereas in the eyes of the bondholders,
at least, and often in the eyes of the governments and local elites of these countries, their
obligations to their own citizens are quite relative when compared to the obligation to
the bondholders, even though a lot of the money that's being borrowed is actually being
borrowed to pay back previous debt. So once again it's all about the absoluteness of repaying
back the bondholders. And then what happens when a country does get into crisis? How is
its dispute with its bondholders settled? Now to talk about all of this and unravel
this process, and perhaps envision a more sane and rational process, is Kevin Gallagher.
Kevin is a professor at Boston University, he's a research fellow at the Global Development
and Environment Institute, and he's at Tufts University. Thanks very much for joining us,
Kevin.
KEVIN GALLAGER: Thanks for having me, Paul.
JAY: So what do you--in terms of my opening remarks, do you agree? I mean, this--the underlying
law, what there is here, seems to be more contract law than international law. Is that
you better pay us back and we don't really much care what your obligations to your citizens
are?
GALLAGER: That's certainly the tune that we're hearing in Europe right now, and it's being
echoed by the Germans and the ECB and so forth. They want their money back. They wanted 100
percent of the value of those bonds, and don't talk about restructuring. And so there's always
a new bailout and the can gets kicked down the road. But eventually, if you look at the
Argentine case, Brazil, Russia, Argentina in the '90s, and so forth, eventually you're
going to have to restructure, and it's better now than then.
JAY: Now, let's--just to back up a bit, you know, the press is filled with--and commentary
and pundits, you know, talking about how the European countries, they have their pensions'
ages too low, and the benefit are too much, and they can't pay for this welfare state
they're carrying. But how much is the welfare state in Europe responsible for the current
crisis in these countries? And how much it has to do with external factors, for example,
a global financial meltdown triggered by American banks?
GALLAGER: Sure. It varies across countries. And perhaps Greece is one of the more profligate
countries in the region. But in general this is not a crisis of the welfare state. This
is indeed public governments were bailing out the private sector that got overextended
and took too many risks during the crises, and now their balance sheets are in the red,
and those same banks are asking for the full money back on all of their investments.
JAY: I guess that's the other absolute in this equation, that big banks are too big
to fail, so states have to bail out the banks. Then--and they borrow money to bail out the
banks, and then the citizens are supposed to repay the loans to bail out the banks,
all considered absolutes of the current economy.
GALLAGER: Sure. Sometimes it doesn't get as sharply said in public, but I think it's clear
it needs to be more clearly said for everybody to understand, and that's when the European
Central Bank and the International Monetary Fund come in and do a, quote-unquote, bailout
for one of these countries, what they're doing for the most part is giving the country money,
and that money is global taxpayer money. If it's the IMF, it's global taxpayer money.
If it's the European Central Bank, or the Europeans in general, that's European taxpayer
money. And they're handing it to the country to turn around and pay banks back. It's not
a stimulus package to get a country's growth back on track. Indeed, it's borrowing, taking
on more debt, to pay back foreign and some domestic creditors, and not really helping
their economy get back up and recover.
JAY: Now, the law or contracts that govern a lot of this state debt is something called
the international investment agreements, if I have it right. What is that all about, and
how does that function?
GALLAGER: Well, interestingly, that's the dirty little secret that governs this debt.
What the biggest problem is, perhaps one of the most glaring gaps in global economic governance
is that we just don't have a globally agreed-upon regime to work out sovereign debt crises.
It's just every time it happens, we say, oh, we need a global regime because we didn't
like the way Argentina did it or we didn't like the way Brazil did it or we didn't like
the way Russia did it. But then there's always a boom and people forget about it. And boy
do we wish now that we had an agreed-upon system for when the world says, okay, it's
time for this country to default, how should it be done. We don't have that. And the de
facto regime may be trade and investment agreements. While we weren't looking, international trade
treaties or international investment treaties now cover sovereign debt, and so they treat
sovereign debt just like they treat a shoe or a television set, meaning that it has to
adhere to the same kind of roles that we have in the World Trade Organization and trade
treaties like NAFTA. One key thing is that no investment can be, quote-unquote, expropriated,
and that foreign investors have to be treated at least in the same manner as domestic investors.
That all seems fine and good for televisions and shoes, and perhaps even for sovereign
debt until there is a crisis. If there's a crisis and a country defaults on its debt
and the value of those bonds devalues, the trade treaty is going to see that just the
way they would see an expropriation, like a country's national troops coming in and
taking over a foreign oil company.
JAY: And then you could then--this party then sues the country, and in theory can win a
lawsuit that would force the country to repay what they're calling expropriated debt. And
if the country doesn't play ball with the decision, then they actually get excluded
from some of these global trade agreements. So it's a pretty big hammer they have.
GALLAGER: It's a pretty big hammer that they have. One of the things that many folks don't
see unless you follow this closely is that trade treaties outside of the World Trade
Organization have something called the investor-state arbitration, so a private investor can actually
directly sue a foreign government for some sort of a dispute. That stands in stark contrast
to what we have in the World Trade Organization, where, say, the United States is concerned
with subsidies for aircraft in Europe. We--our aircraft industry has to go to the United
States government and say, hey, we're losing to these subsidies that the Europeans are
giving to their aircraft producers. Would you take them to the WTO and file a case against
them so we can have a more level playing field? So that's what we call state-to-state disputes.
And when you have that kind of a mechanism, the state thinks about a whole bunch of different
factors before they go ahead and file a case: they look at other geopolitical things that
they have going on, they look at the full welfare benefits for the whole country, and
so forth. The private sector can totally circumvent that kind of a process in a regional or a
bilateral treaty. There, a private firm can say, hey, we're losing the value of our bonds.
Let's not even let our government know. Let's go in there and sue another government in
a very private and nontransparent tribunal that's housed at the World Bank.
JAY: It's an interesting form of double blackmail that takes place. Like, first the banks say,
you bail us out or your economies will be destroyed, even though the reason you have
to bail us out, to a large extent, is because of the high-risk plays we were making. And
then, once we're bailed out, you'd better borrow money to pay for the bailout, or we
won't loan you money again, in which we'll find that will also destroy your economy.
So this is a double blackmail. But Argentina a few years ago said no to all of this and
did default. So what happened? And is this a model of what some of these other countries
might consider to be doing?
GALLAGER: Argentina had to do two exchanges. They did one in 2005 and they did one last
summer. And finally they got over 90 percent of the bondholders involved. But, interestingly,
some of the key holdouts are a number of Italian pension funds, 150,000 or more of them, who
are suing Argentina to the tune of $4.3 billion under the Italy-Argentina bilateral investment
treaty. This is one of these treaties that covers sovereign bonds. And those investors
see the haircut as tantamount to an expropriation. And there's a pending case right now at this
World Bank tribunal, which houses something called the International Center for the Study--I'm
sorry, for the Settlement of Investment Disputes, where these private bondholders are directly
suing the Argentine government.
JAY: So why can't other countries do what Argentina did, like, for example, Spain? Why
can't Spain say--and I guess there's two issues people raise. At the time, if I understand
it correctly, Argentina was--had pegged their currency to the US dollar. And part of this
default was they delinked from the US dollar. So if a Spain or Greece was to do something
similar, would they have to start off with a delink from the euro?
GALLAGER: Yeah. In general it's more difficult for European nations to do what Argentina,
quote-unquote, did, because they're part of the European Union and so they have their
own single currency. They can't make a sovereign decision to delink from the euro and let their
currency devalue. So even though Argentina had pegged its currency to the US dollar,
they were--they had the freedom to make the sovereign decision to let go of that and let
their currency devalue. They also got really lucky. They've got a lot of soybeans and some
oil and gas. And right after they devalued, there was also a major commodity boom that
they were able to ride on. Many of these European countries, one, can't devalue, and two, don't
have some of the hot commodities that are making developing countries really grow quickly
right now.
JAY: Well, if the--most of the European countries and other countries that get into this predicament
can't necessarily go the Argentinian route so easily, what could be done in terms of
a global structure that would balance, at the very least, the interests of the citizens
of these countries with the bondholders? I mean, the other--I think the other part that
doesn't get talked about this very much is that the majority of the citizens of these
countries don't have a heck of a lot to say about how these economies are run and why
this money got borrowed in the first place. I mean, a lot of these countries it's 'cause
they don't tax their own local elites enough to pay for a lot of the programs. But any
rate, what would you suggest should be a global structure?
GALLAGER: Well, there was one proposed after the Argentine crisis by Anne Krueger when
she was at the International Monetary Fund, called the sovereign debt restructuring mechanism,
which would be a global mechanism whereby the parties would get to the table, decide
on a haircut, freeze capital so you couldn't sneak it in and out of the country or, you
know, take it out of the country during the negotiation process, agree on a haircut, and
have it be done in a swift manner. The IMF, of course, wanted to be the international
body that oversaw that. Many of us were a little concerned that since they've accentuated
so many of these crises, why should they be the ones to oversee it. But nevertheless,
some sort of a global neutral body needs to be able to parachute in and be rational about
the process. In the European case, we're dealing with an emergency right now. If you can't
delink from the euro, austerity is not the answer. And the Europeans are going to need
to go in there and have some real fiscal stimulus to help the country grow in tandem with some
of their budget cuts and so forth. Yes, Greece has been profligate, but it wasn't a country
that analysts were really concerned about five or seven years ago.
JAY: But the idea of stimulus rather than austerity doesn't even seem to be on the table
in Europe right now. The quick and guaranteed repayment to the banks seems to be far more
important than the idea that Spain and Italy and Greece and some of these other countries
could be in a decade of recession. They seem not--they don't--they being the powers that
be, Germany and the big banks in France, they don't seem to be very concerned about that.
GALLAGER: Yeah. We're--we're sort of living under the tyranny of the bond markets right
now. There's a narrative in the mainstream press that we need to make investors feel
calm and feel settled, and make sure that their expectations are met, that things are
going to be cut and so forth, and that austerity brings growth. During the Great Depression,
we had John Maynard Keynes that completely contradicted that narrative and said, no,
you need to go into debt if you don't have a surplus, and you need to have fiscal stimulus.
We're experiencing that in the United States. We're starting to see job losses here in the
US now that the stimulus is petering out, and we're starting to have an austerity economics
kind of discussion here as well. And there are many voices of sound economists, many
of them that you've had on your show and that are found in the mainstream media here and
there as well, that are pushing hard for saying, no, we need a new stimulus. Laura Tyson, University
of California economist and Obama adviser, broke with many other Obama advisers and wrote
a piece in The Financial Times last week saying we need more stimulus. And this is something
we need to communicate more.
JAY: But stimulus doesn't necessarily mean more debt. There's other ways to have stimulus,
I mean, including, number one, real taxation on wealthy, real taxation, for example, been
proposed on stock and other kinds of finance sector areas, real budget cuts in other sectors,
like the military. I mean, one doesn't have to go into more debt to have stimulus.
GALLAGER: No, absolutely not; you don't need to go into more debt if you have stimulus.
And Robert Pollin, who you've had on here a number of times, has proposed a bank levy
to make them lend. And certain targeted taxation can be possible as well. You just have to
be careful when you tax during a recession, because that is a disincentive, right? If
you have a surplus, the idea is, well, when times are bad, you cut taxes and increase
spending. When times are good, you increase taxes and decrease spending. Unfortunately,
during the Bush era, we decreased taxes and increased spending during the boom.
JAY: But I thought that research has shown that taxation at the upper end is not--is
less a destimulant than when those taxes are raised and then the state spends that money
as direct stimulus money, that the wealthy don't actually spend or invest that much of
their extra capital, that when a state taxes it and uses it, it's more stimulus.
GALLAGER: Well, like I said, it has to be--taxes need to be targeted. You have to be careful
where the tax goes.
JAY: So what measures can--do you think people could demand from their governments that will
break some of this tyranny of the bond market?
GALLAGER: Well, we need to have a more serious economic narrative about what causes economic
growth during a crisis, and that needs to include stimulus. It's clear that in the developed
world, countries are not growing because of austerity economics and we need to be very
serious about targeted stimuli. And we also need to de-shackle ourselves from these de
facto regimes that can snare us while we're trying to get out of crises. And the key one
from the study that I published this week, called The New Vulture Culture: Sovereign
Bonds and International Investment Agreements, is that these trade treaties that we think
govern shoes and television sets actually can snare us while we're trying to prevent
and mitigate a financial crisis. This is a problem that's not their original intent.
These things crept into trade treaties while we weren't looking. And we need a global regime
for sovereign debt workouts, and it should not fall back to private investors to decide
how a sovereign bond is dealt with during a crisis.
JAY: Thanks for joining us, Kevin.
GALLAGER: Thank you for having me.
JAY: And thank you for joining us on The Real News Network.