Credit_crunch_briefing-1 by fanzhongqing


									                                                                                          October 2008

The credit crunch
and the debt crisis
Another name for a

debt crisis?
The “credit crunch” which is causing
chaos in the financial markets, and
leading to the onset of recession in the
rest of the economy, has been explained
as a lack of liquidity, or credit, available
to banks on the international markets.
Inject these markets with enough
liquidity, restore lenders’ confidence
enough to start lending again, and
everything will come right. Hence last
week’s $700 billion US bail out, and our
own British bail out this week.

But is that the full story? In fact the                   countries have faced since the early 1980s. Andrés
problems faced by the banks and the economy are           Velasco, Chile’s finance minister, recently stated
not so much about a lack of available credit, but a       that the credit crunch is “a more modern and a much
massive over-accumulation of debt. Debt is a sum          bigger version of what we have seen in emerging
of money, or other obligation, owed to someone.           markets over the last couple of decades1.” In other
Taking out a loan – getting into debt – is a means of     words, a new form of debt crisis, but this time
using future purchasing power in the present. Banks       affecting the rich world.
lent to mortgage borrowers, increasingly recklessly.
These debts were repackaged and sold on, in ever
more complicated “derivatives” which investors
themselves mostly did not understand. As it became
                                                          A brief history of the
apparent that these sub-prime debts could not be          (developing world) debt
repaid, international banks and investors found
themselves hugely exposed to bad debts and have
gone into free-fall. All that is left is a huge pile of
debt. This is a story about a debt crisis, not a credit   After the Second World War and the end of most
crunch.                                                   colonial regimes, many countries in Africa, Asia and
                                                          Latin America sought their own paths to economic
Not only are we witnessing a debt crisis, but it bears    development. Banks sought to lend money to these
a strong resemblance to the debt crisis that poor         governments, seeing them as a safe investment.
As the Cold War deepened, governments from both            debt taken on to rescue the banks who created this
East and West blocs lent increasingly recklessly as        problem.
they sought to gain political influence. The situation
was dramatically intensified by the oil price hikes and     But compare and contrast how developing countries
currency changes in the 1970s, when cheap money            are treated by rich governments to how international
flooded the financial markets and banks lent it on to        banks are being treated – the former told to get their
poor countries without regard for what it was being        house in order before they receive financial support,
spent on and whether it could be repaid. The change        and meanwhile left to squander, while the latter are
in economic situation from the late 1970s, with rising     being bailed out to sums incomprehensible to most of
interest rates, deflation and falling commodity prices,     us.
caught developing countries in a spiralling debt trap.

Since this time, despite many plans to reduce the debt     Ignoring the lessons of
burden, the crisis has continued to engulf countries
in the Global South. Today developing countries’           history
debt stocks stand at a staggering $2.9 trillion and
every day the poorest countries pay the rich world         Analysts have been predicting such a crisis for some
almost $100 million in debt repayments2. Jubilee Debt      time. Ann Pettifor, former director of Jubilee 2000, and
Campaign estimates that at least $400 billion should       various thinkers at the New Economics Foundation,
be cancelled for around 100 countries if they are to       for example, have been talking about the coming
be able to pay for essential services for their people3,   “first world debt crisis” for several years. In an article
while the remainder needs to be audited so that            written in 2003, she quoted Winston Churchill at
illegitimate debts – those arising from irresponsible      length, who wrote about the Great Depression in his
loans – can be written off.                                book, The Gathering Storm :

                                                           “[In] the year 1929 … [e]xtraordinary optimism
Debt crisis II                                             sustained an orgy of speculation. ‘We are apparently
                                                           finished and done with economic cycles as we have
                                                           known them’ said the President of the New York Stock
Today, banks have also been lending recklessly, in the
                                                           Exchange in September. But in October a sudden
sub-prime mortgage market, which by its very nature
                                                           and violent tempest swept over Wall Street… The
gets people into debt who probably can’t afford
                                                           prosperity of millions of American homes had grown
to repay that debt, and
                                                                                      up a gigantic structure
through ever-more intricate
                                                                                      of inflated credit, now
financial instruments in
                                                                                      suddenly proved phantom.
which bad debt has been
                                                                                      Apart from the nation-wide
re-packaged and re-sold.
                                                                                      speculation in shares which
We are now all paying the
                                                                                      even the most famous
price for the same reckless,
                                                                                      banks had encouraged by
irresponsible lending
                                                                                      easy loans, a vast system
without consequence.
                                                                                      of purchase by instalment
                                                                                      of houses, furniture, cars
This time poor households
                                                                                      and numberless kinds of
in the USA, rather than
                                                                                      household conveniences and
poor states throughout
                                                                                      indulgences had grown up.
the developing world,
                                                                                      All now fell together.”
have defaulted on debts
and borne the cost of
reckless lending by losing                                                                 This all sounds very familiar.
their homes. Meanwhile                                                                     If these banks, and the
ordinary citizens of rich                                                                  wealthy governments that
countries including our                                                                    are supposed to oversee
own are now also bearing                                                                   their activities, had learnt
the consequences of                                                                        the lessons of previous
unregulated financial                                                                       debt crises, we might not be
mismanagement on a                                                                         seeing such huge problems
grand scale – housing                                                                      in the financial markets
price collapse, spiralling                                                                 now. There can be no
personal debt, the onset of                                                                excuse for our governments
recession, and a huge public                                                               presiding over the massive
                                                                     US NATIONAL ARCHIVE
                                                                                                                        US NATIONAL ARHCIVE, FLICKR.COM/DOMINICSPICS
deregulation of finance that has occurred in recent
years. Historical experience and warnings of others        Where do we go from here?
have been ignored, and now the current debt crisis
has come.                                                  One key difference between this debt crisis and the
                                                           long-standing developing world one is that there
                                                           is significant political will to bring about change.
Double whammy for the                                      Prime Minister Gordon Brown says he is “angry at
                                                           irresponsible behaviour” of bankers and financiers
South                                                      and that where there has been excessive and
                                                           irresponsible risk-taking those involved must be
Not only does the credit crunch have striking              “punished”. He joins a growing chorus of voices
similarities to the debt crisis in the Global South – it   calling for national and international financial reforms,
will also have a direct impact. The present financial       including French President Sarkozy, who has called
crisis is just one of a number of factors – in addition    for a meeting of world leaders “to set the foundations
to the challenges of climate change and food crisis        for a new international financial system” and IMF
– that are creating a “perfect storm” for poverty and      managing director, Dominique Strauss-Kahn, who
suffering in the developing world. As government           is worryingly seeking to position his own institution
budgets are eaten up bailing out the banks, and            as best placed to provide a joined-up international
shrink even more if we tip                                                               solution. Back in May, a
into prolonged recession,                                                                group of notable European
we need to work hard                                                                     statesmen including
to ensure that aid levels                                                                Jacques Delors and Jacques
and global development                                                                   Santer, both former
generally do not suffer.                                                                 Presidents of the European
                                                                                         Commission, declared
There is even an impact                                                                  in a letter that “financial
on individual borrowers                                                                  markets cannot govern
in developing countries.                                                                 us!”.
In some middle income
countries in particular,                                                                  There is now more interest
there are a growing number                                                                among Northern policy
of people who have taken                                                                  makers in global financial
out mortgages or personal                                                                 regulation, and less fear
loans, having been made                                                                   of even mentioning the
“generous” offers by the                                                                  idea, than there has been
banks. These people, who                                                                  for decades. This could
have sought to build their                                                                mark a watershed in
own way out of poverty, are                                                               global finance, and it is
now likely to suffer most                                                                 vital that any such change
from the effects of the                                                                   in direction is targeted
credit crisis.                                                                            towards tackling global
                                                                                          poverty. This would include
measures to tackle unjust and

unpayable debts, to prevent
capital flight, trace and return
stolen assets, close down tax
havens, and reform the global
financial architecture so that
responsible financing is enforced.

The second UN Financing for
Development conference in
Doha will in fact discuss all
these issues in November, when
international leaders will come
together to seek agreement
on ways to finance poverty
eradication and international
development. Campaigners
currently fear that the
conference, which is a follow-
up to the 2002 Financing for
Development conference in Monterrey, may represent
a step backwards, but it does have the potential to
show the ‘have-nots’ of the world that global leaders
                                                                                    Take action                                  A NEW
are serious.
                                                                                     THIS AUTUMN we are                         WAY OF
In particular, measures are needed to reverse the                                   calling for the UK government
current flow of resources from South to North. To                                    to support a new sovereign debt
give a few examples, developing countries repay on                                  resolution mechanism at the

average $456 billion a year in debt service while an                                UN Finance for Development
estimated $619 billion disappears in illicit capital                                conference in Doha. Please
flight. $130 billion is lost to the developing world                                 send the email action on our
every year through multinationals remitting profits                                  website:
                              back to their home                          
                              countries. $250 billion
                              vanishes through tax                                   IN 2009 we will be pressuring the UK to
                              dodging because $11.5                                 follow-up on the outcomes of the conference.
                              trillion of global assets                             Check out the Act Now pages on our website for
                              are currently held in tax                             the latest ways you can support our campaigns:
                              havens, like the UK, one                    
                              of the centres of financial
                              globalisation. The most
                              recent figure of $106                               and that the murky world of global finance is brought
                              billion in aid to developing                       under control.
                              countries (in 2006) is
                              dwarfed by these huge                              NOTES
                              sums5.                                             1. Quoted in Credit crunch ‘echoes Latin debt crisis’, Financial Times,
                                                                                    11 August 2008.
                                                                                 2. All figures from Global Development Finance, World Bank, 2008.
                                               The current crisis provides       3. Calculations based on research by New Economics Foundation, 2007.
                                               an opportunity for these          4. Ann Pettifor, The coming first world debt crisis, openDemocracy
                                                                                    Ltd, September 2003, at
                                               issues to come centre                americanpower/article_1463.jsp.
                                               stage. Our challenge is to        5. Most figures from Eurodad, except tax figures from Tax Justice
                                               make sure they are tackled           Network, and 2006 aid figures from OECD.

                                                   Jubilee Debt Campaign works for 100% cancellation of unjust and unpayable poor country
                                                   debts. We are a UK coalition of around 90 national organisations and nearly 100 local and
                                                   regional groups, as well as thousands of individuals nationwide.

                                                   Jubilee Debt Campaign, The Grayston Centre, 28 Charles Square, London, N1 6HT
   Charity no. 1055675 | Company no. 3201959       020 7324 4722 | |

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