The Debt Threat by Noreena Hertz

Author:Noreena Hertz
Language: eng
Format: epub
Publisher: HarperCollins

The Perspective of the Debtor

Clearly, overborrowing and overlending, whether it leads to crises, defaults, or bailouts, has deleterious consequences for the borrower too.

When a country defaults, the initial response of the international financial market is to freeze out the defaulter. Not only does this make it impossible for the country to get access to any new credit, but also almost impossible for any corporations within those countries to do so either, as corporate debt is typically rated no higher than the debt of the corporation’s home country, no matter how well they may be run. The defaulter will face problems with importing goods, even critical ones such as life-saving drugs, as credit lines freeze and those selling into the country demand up-front cash payment. The most aggressive creditors may use the opportunity to attempt to seize government assets in lieu of payment. Some of the debt vultures I have spoken with have identified every hotel, apartment building, and property that the debtor country owns outside its own shores, and tell me that they would be more than ready to issue liens on them. Argentina already faces lawsuits from hundreds of bondholders seeking compensation for the government’s decision to halt payments on its debt, some of which threaten to put at risk Argentine accounts and assets held abroad.

If a significant percentage of the sovereign debt is held by domestic investors—as is increasingly the case in many emerging markets—this creates other problems. The impact of having to write down a significant percentage of their outstanding loans, as would be the case in a default, could wipe out most of the capital of domestic financial institutions, making many insolvent and thus triggering a collapse of the domestic banking system. Such a scenario could play out in Brazil, for example, were it to default on its debt, given that it’s Brazilian banks that hold almost 60 percent of the outstanding loans.

In a cruel irony, the act of default itself exacerbates the crisis that necessitated it in the first place. Ecuador suffered a severe recession in the wake of its default, as well as political unrest that included a short-lived military takeover. Eight months after its default, Argentina resembled Dickensian Britain. Living standards had dropped by 70 percent and GDP by 17 percent; 60 percent of the population had fallen below the poverty line—20 million people of whom 2.3 million were children were suffering from malnutrition, and unemployment was running at 30 percent. On the streets of Buenos Aires, cartoneros (cardboard collectors) rummaged through trash to salvage paper, glass, and cardboard to sell, while around its perimeter, three hundred thousand people lived off garbage dumps. Radio and TV announcers had become domestic servants, skilled engineers could be found selling handicrafts on the street, and those lucky enough to keep their former jobs had to put up with conditions that previously would have been unacceptable.

And the burden of economic crisis always falls disproportionately on the shoulders of women. There is considerable evidence, for example, that in

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