Part of a Triple Crisis series leading up to the Nov. 11-12 G-20 meetings.
For better or worse, the Franco-German axis has always been the driver of European integration. Now the unholy alliance could go one step further, this time for the better, and push for a debt work-out procedure to ensure a fair and orderly resolution of sovereign debt crises.
The ways in which debt crises have been dealt with in developing countries in the past, and nowadays in Europe, are having devastating impacts on vulnerable sectors of society. When debt crises come hand in hand with financial crises ordinary people always pay twice: first, taxpayers’ money is used to bail out financial institutions; and secondly, citizens are deprived of essential services as the state implements harsh austerity measures to win back the confidence of markets.
While official rhetoric denies that a debt crisis could be looming, forthcoming Eurodad research shows that half of all low income countries have seen their debt to GDP ratios more than double since 2007. In peripheral Europe some say that the question is no longer whether a state will go bankrupt but rather when.
In the meantime, higher and costlier debts are being serviced at the expense of government expenditures, compromising progress towards the Millennium Development Goals in developing countries and dismantling the welfare state in Europe.
However, there is an alternative. Governments saddled with debts that either cannot be repaid or can only be repaid at the expense of sacrificing the basic rights of people, could choose to restructure them. A fair and transparent debt work-out mechanism, based on ten key principles as outlined by Eurodad, would ensure fair burden-sharing between debtors and creditors and give countries the option of a fresh start. It would also ensure that private creditors bear part of the burden, thus discouraging future reckless lending.
Unwilling to continue funding bail-outs in Europe, Germany and France are pushing to change the European treaties and flesh-out a proposal for future bail-outs which would include private creditors in future debt restructuring. After the European Council last Friday, Angela Merkel complained that “the president of the European Central Bank looks at doing everything to calm the markets but we also look at our people and their very legitimate belief [that] they should not bear the cost.”
A step forward in the right direction, the proposal now needs to recognise the complexity of today’s sovereign debt and the need for global arrangements to be championed at the G-20.
A debt work-out mechanism is badly and urgently needed, before the next debt crisis hits. In Korea, the G-20 needs to put an end to the vicious circle resulting from the lack of fair debt work-out mechanisms and ensure that citizens do not have to pay yet a third time.
Nuria Molina is the Director of the European Network on Debt and Development (Eurodad).