A Debt of Solidarity for the Year 2000
A few weeks ago, the unthinkable happened. A country missed a Brady bond payment.
During the 1970s, bankers and investors fell in love with Latin America, and they lent — maybe even pushed — huge amounts of money. Military dictatorships, which back then ruled most of Latin America, fell in love with the money and asked for as much debt as they could get. Ordinary people became euphoric and borrowed in dollars with no thought for tomorrow. Things were going generally well for their economies; debt levels rose steadily. At the end of the 1970s, democratic winds blew — but at the same time the economies started to turn sour. Many factors contributed.
The most important one, in my view, is that U.S. interest rates soared. The chairman of the Federal Reserve Board at that time decided that it would be a great idea to raise interest rates in order to bring inflation down. But he forgot — and many others in the U.S. forgot — that it is not moral to make national decisions without considering the international consequences. Rising interest rates made Latin American debt burdens impossibly large.
Third-world governments found that, unless they wanted to be international lepers, they had to dedicate funds to debt service that should have gone to education and roads and health. Some larger countries got assistance, but most countries were just assisted over the cliff. Creditors banded together and forced governments to pay the private debts of their citizens — something capitalist-minded people had sworn would never happen. Stealing from someplace that I cannot remember, someone said: "We international bankers believe in the market when things are going well, but we believe in the state when things are going badly."
So the burden of paying the debt was to fall on the poor. To pay the debt and stay in the good graces of the international powers, governments cut back spending on everything else, especially social programs. Employment plummeted while inflation skyrocketed. The massive transfer of wealth abroad impoverished the economies, destabilized the political systems, weakened social order and social unity and led to what has been called the Lost Decade of the 1980s.
It is an old adage in banking that it is better to get 100 percent of something than zero percent of everything. If a borrower cannot pay his debts, it is better to just erase some of it from the books to allow the borrower to get into better shape and pay at least something. International creditors appeared to remember this when countries had "proved their willingness to undertake structural reforms," which means that they had to accept the free market ideology of the creditors. The Brady bonds were born.
The Brady plan was put together by someone named Brady, and it consisted of erasing some of the debt but enforcing the payment of the rest. Debt was "repackaged" into little bonds that could be sold in the markets. Creditors got their money by selling the bonds, while countries had to pay less — but to a large number of small bondholders. It became harder to avoid paying the debt.
Things went pretty well for a while. The economies underwent the needed reforms, stabilized their economies, and started going up. Brady bonds became "sacrosanct," in that countries never missed a payment, never defaulted, never even talked about defaulting on their Brady bonds.
In the last few years, things changed. Mighty South East Asia tumbled in 1997. Prices of oil plummeted, spelling misery for its producers. A couple of recessions here, a couple dozen shocks there, and Ecuador was forced to delay a payment last Aug. 28. This has brought trouble for Argentina, a much larger country but also deep in a long recession. Lenders could soon start refusing to lend to the whole region. If Brady bonds are stained, how safe can it be to lend?
What to say about all this? On the one hand, the money is the lenders'. They got it from a multitude of small depositors who put their trust in the banks, who then did business with Latin American countries — solidarity must imply a fair respect for the rights of the lender. On the other hand, there is a point when paying the debt is immoral. It is immoral because, although governments represent the nation, paying it entails starvation an disease not to the small bureaucratic or political elite who contracted it — but to the disenfranchised poor.
Wealth — of bankers, of rich countries' taxpayers — implies responsibility and a debt of solidarity because possessions ultimately belong to all of humanity. God gave people an intrinsic and unalienable dignity, which is why contracts are people's tools, not their masters. Whoever understands this should support the initiative to forgive large portions of poor countries' debt by the Jubilee of 2000.
Gabriel Xavier Martínez is a graduate student in economics. He apologizes to all economic historians for all of the gross inaccuracies in this article. But alas! He is an economist and simplifies heroically for the sake of exposition.
The views expressed in this column are those of the author and not necessarily those of The Observer.
All Viewpoint Stories for Thursday, September 9, 1999