In this contribution to the Guardian’s “Poverty Matters” blog, Jonathan Glennie of the Overseas Development Institute explores how debt default by a relatively rich country like Greece, could provide support for alternative solutions to global debt problems. Glennie points out that default is no longer a controversial option in political and academic circles because its benefits are increasingly seen to be legitimate. Still, however, many poor countries are forced to pay their debts whilst their societies suffer. According to Glennie, a Greek default might inspire burdened countries to do the same and encourage world leaders to look for a “fair and transparent mechanism to deal with debt problems”.
By Jonathan Glennie
Senior economic advisers in Greece and a couple of other European countries are considering defaulting on part of their debt. Not to be taking such a course of action seriously would be irresponsible. Defaulting can never be plan A. But when countries get into very serious financial trouble it is sometimes the least bad of the bad options.
In the current climate, this doesn't sound very radical. Economists of all backgrounds are popping up arguing that default might ultimately be best for Greece, and indeed for the rest of Europe, providing at least a modicum of stability for banks and country creditors. It is almost in danger of becoming the conventional wisdom.
That certainly wasn't the context five years ago when I wrote a paper arguing that debt default should be considered a serious option for many countries around the world. Rather than conventional wisdom, that view was characterised by many as irresponsible. How could Christian Aid, the organisation for which I was working, sanction the refusal to pay debts?
For much the same reasons it might be good for Greece now. If huge debt payments are causing social problems and political unrest in Greece, one of the world's richest countries (ranking about 30th out of 200 countries in GDP per capita terms), imagine the misery being caused in poor countries with similar or larger debt burdens.
Campaigns since the 1990s had some success in getting creditors to cancel the debt of the very poorest countries, but some of the world's poorest countries are still paying out far more money than they receive in aid, rather than spending it on health, education and infrastructure. It is morally bankrupt to force poor countries to pay debts while their people suffer in extreme poverty, especially if much of the debt is illegal or otherwise illegitimate. It is also bad for the economy.
Another argument for debt repudiation not mentioned in Greece's case but relevant for many poor countries is that the debt may well be illegal. Money lent to dictators and snaffled away into offshore accounts gets racked on to the public debt to be paid by future generations. This immoral practice leaves no responsibility with the creditors for the initial lending, a classic case of moral hazard. Debt audits, such as the one that led Ecuador to refuse to pay some of its debt in 2008, are being used by some countries to bolster their case for debt default.
A recent debate between Mark Weisbrot, an economist at the Centre for Economic and Policy Research , and an IMF deputy director about Jamaica's debt demonstrates the kind of creditor thinking that has kept poor countries saddled with huge debts. Despite a clearly unpayable debt causing havoc to the economy and social welfare, the IMF still insists on repayment.
While the IMF and its main shareholders dress up their insistence that countries "pay up at all costs" with technical analysis and claims to have the interests of the poor at heart, the truth is that they are simply serving their own interests as the major creditors. Economic theory follows economic interest far more often than it does academic reasoning.
There is no doubt that default can be a costly option. That is not in debate. When Peru defaulted in the 1980s, there was a creditor backlash and Peru was eventually forced to pay up. The question is whether the alternative is even more costly.
The famous case of Argentina, which defaulted on its debts in 2001, appears to suggest that default can be the least bad option. Argentina was growing again at 8-9% within a year or two. Although threatened with retaliation from investors, this is probably exaggerated as well, as investors tend not to be moralists – they go where there are returns to be had. As the Economist put it: "Capital markets appear to have a remarkably short memory."
It is possible that two positive outcomes will emerge from default in a country like Greece. First, countries in the poor world might be bolder in defaulting when there are clear public health and education emergencies to deal with. If it was OK for Greece, they might say, why not for us? Our debt burden is higher, and the opportunity cost of paying it greater in terms of basic needs provision.
And, second, it might encourage world leaders to look again at the need for a fair and transparent mechanism to deal with debt problems. Under the present system, when a debtor has to choose between repaying its debts and meeting the basic rights of its citizens, it has to ask for a meeting with its creditors (usually the Paris and London Clubs and the IMF) and request a "rescheduling". Under the proposed alternative mechanism, debtor countries could call for the convening of an ad hoc panel with neutral parties, probably based at the United Nations.
Many existing arbitration panels could serve as a model for this. It was a key demand in the Make Poverty History campaign of 2005 and even an IMF deputy managing director tried to establish one unsuccessfully. An independent panel would try to ensure that the debtor emerges from the proceedings with good prospects for financial and economic stability. And lenders will know that they can no longer get away with odious or careless lending.
