Hamburg Summit

The end of the G20’s days as a premier forum for international economic cooperation”?

Jesse Griffiths

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad).

The strangest aspect of the G20 communiqué, and the part that has dominated media coverage, is the section on the Paris climate agreement.  The strangeness arises not because of the topic—the G20 has always played second fiddle to the UN on climate issues—but because, for the first time, a whole paragraph is devoted solely to one member, the USA, explaining why it doesn’t agree with the others, followed by a paragraph by the others explaining why they will go ahead without the USA anyway, including through agreeing a “G19” action plan on energy and climate for growth.

The climate change issue is a jarring symbol of the G20’s difficulty in reaching agreement. However, the Trump administration’s “America first” stance and resulting lack of movement on economic issues—the raison d’etre of the G20—is evident throughout the document.

Two things stand out.

Firstly, many key economic issues receive very little attention. The opening paragraphs on the global economy, trade and investment are masterpieces of bureaucratic obfuscation, offering something for everyone, while saying very little, and presenting no new initiatives. Financial sector reform—an issue at the centre of G20 work since the global financial crash of 2007/8—merits one short paragraph, with no new promises. The Action Plan which accompanies the communique has a more detailed summary of work in this area, highlighting that the G20 has essentially outsourced this work to the Financial Stability Board (FSB)—a worrying development given the major governance problems with that institution. In addition to being one of the least transparent and accountable international financial institutions, the FSB replicates the flawed G20 governance model, but makes it worse by adding the financial centres of Switzerland, Hong Kong, and Singapore to the G20 membership list (as well as Spain and the Netherlands).

Secondly, the continued expansion of G20 interest into a whole host of issues outside its traditional mandate is striking, with the G20 concerning itself with, for example, health, women’s empowerment, food security, rural youth employment, and marine pollution.

Debt problems, what debt problems?

Shockingly, despite developing country debts reaching record levels, and a significant number of countries being in debt distress, not a single mention was made of the need to tackle current and future debt crises in the communiqué. This came after the Finance Ministers earlier this year ignored the strong work being done at the UN on the need for a fair and transparent debt workout mechanism to rapidly resolve and help prevent debt crises, preferring instead to endorse a two page Operational Guidelines for Sustainable Financing that simply emphasises better information sharing informal methods of creditor coordination. They are a step backwards when compared to existing guidelines such as the UNCTAD Principles on Promoting Responsible Lending and Borrowing, which have already been endorsed by the UN General Assembly.

The G20’s Action Plan also fails to mention the UN’s work on multilateral sovereign debt restructuring frameworks, and offers only one new initiative—a Compass for GDP-linked Bonds. While it makes sense to focus on linking debt repayments in bond contracts to the ability of the borrower to pay, the vast majority of low-income country debt does not involve bonds: countries suffering from debt crises need a comprehensive approach which deals rapidly and fairly with all kinds of debt. The way the G20 deals—or fails to deal—with debt issues faced intensive critique by Eurodad members and partners at a major event that took place alongside the Hamburg Summit.

The German government had hoped to make management of international capital flows a central issue at this G20, but, as Eurodad predicted, the issue merits barely a mention in the communiqué, due probably to long-standing differences between some developed countries that are keen to further liberalise international finance, and emerging markets, who are rightly wary of this agenda.

As noted previously by Eurodad, promises to conclude governance reform of the IMF by 2019 shows how glacial progress is, given that the last of these “every five year” reforms was concluded in 2010 (though only implemented in 2016).

Tax—a blacklist of one

G20 efforts to tackle tax dodging by multinationals continue to centre on the flawed OECD Base Erosion and Profit Shifting (BEPS) initiative. Eurodad has already noted the major flaws of BEPS—it lacks transparency, contains significant loopholes, and has failed to incorporate the needs and interests of developing countries, the vast majority of which have had little meaningful participation in decision-making.

In March, Finance Ministers called on the OECD to prepare a blacklist of countries not meeting “agreed international standards of tax transparency.” The result was that the OECD—a body that boasts well known tax offenders such as Luxembourg, Switzerland, the Netherlands and the UK amongst its members—produced a blacklist naming only tiny Trinidad and Tobago as “non-compliant” with international standards. Almost comically, the G20 chose to see this as a sign that all was well, and asked the OECD to repeat the flawed exercise for the next summit. Finally, the G20 leaders noted the work they are doing on “enhancing tax certainty” which previous Eurodad analysis suggests is an effort to shift attention away from ensuring that multinationals pay taxes in the country where they do business, to a focus on ensuring they don’t receive any surprises—in other words, protecting the status quo.

Private finance

There is remarkably little in the communiqué on previous G20 pushes to increase the role of private finance, particularly for infrastructure. However, the leaders endorsed the Joint Principles and Ambitions on Crowding-In Private Finance, which Eurodad has previously raised concerns about, including its emphasis on mechanisms to “de-risk” private finance—a euphemism which can often mean the risks are not actually reduced, but simply transferred to the public sector.

As one centrepiece of its presidency, the German government had launched a new Compact with Africa initiative, aimed at encouraging foreign private investment in Africa, but this is not mentioned in the communiqué. Instead, the G20 groups a number of smaller initiatives under the umbrella of an Africa Partnership. Perhaps this downplaying of the Compact was due to the small number of African countries that signed up—only seven are listed in the communiqué—or it may be a response to the substantive criticism of the Compact and the real motives behind it. For example, Eurodad’s sister organisation, Afrodad, launched a comprehensive critique of the initiative, after consultation with groups from across the African continent. While noting that “the initiative could be beneficial,” Afrodad goes on to highlight major concerns, including noting that developed countries that support such initiatives are “in search of space for their expansionism” and that the end result may be “how to integrate Africa into the global division of labour … with Africa playing the same old role of raw materials provider.”

The “digital economy” was a particular focus of the German G20, which published a “G20 Roadmap for Digitalisation.” The G20 promise to “constructively engage in WTO discussions relating to E-commerce” is a warning flag for critics of the WTO’s work in this area. A recent analysis by the think tank the Center for Economic Policy Research (CEPR) found that current e-commerce proposals being considered by the WTO “are designed around a borderless, digitized global economy in which major technology, financial, logistics, and other corporations like Amazon, FedEx, Visa and Google can move labor, capital, inputs, and data seamlessly across time and space without restriction. They also want to force the opening of new markets, while limiting obligations on corporations to ensure that workers, communities, or countries benefit from their activities.”

Finally, green finance, a major topic of China’s presidency, seems to have been sidelined: it is not mentioned in the communiqué, though both the accompanying G20 Hamburg Action Plan and the Climate and Energy Action Plan take note of the work of the G20 study group on green finance, and the recommendations of the Task Force on Climate-related Financial Disclosures.

The lack of concrete outcomes in the G20’s core areas as the self-proclaimed “premier forum for international economic cooperation” underlines the governance shortcomings of the G20. As an informal club with no permanent secretariat and which operates by consensus, its ability to reach agreement can be held to ransom by powerful countries, such as the U.S., refusing to cooperate. This governance problem is inherent in the G20 design, which is one reason Eurodad and others have called for its replacement by an Economic Coordination Council elected by all UN member states, as proposed by the UN Commission of Experts on reforms of the international monetary and financial system.

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Expansionary Fiscal Consolidation Myth

Anis Chowdhury and Jomo Kwame Sundaram

The debt crisis in Europe continues to drag on. Drastic measures to cut government debts and deficits, including by replacing democratically elected governments with ‘technocrats’, have only made things worse. The more recent drastic expenditure cuts in Europe to quickly reduce public finance deficits have not only adversely impacted the lives of millions as unemployment soared. The actions also seem to have killed the goose that lay the golden egg of economic growth, resulting in a ‘low growth’ debt trap.

Government debt in the Euro zone reached nearly 92 per cent of GDP at the end of 2014, the highest level since the single currency was introduced in 1999. It dropped marginally to 90.7 per cent at the end of 2015, but is still about 50 per cent higher than the maximum allowed level of 60 per cent set by the Stability and Growth Pact rules designed to make sure EU members “pursue sound public finances and coordinate their fiscal policies”. The debt-GDP ratio was 66 per cent in 2007 before the crisis.

High debt is, of course, of concern. But as the experiences of the Euro zone countries clearly demonstrate, countries cannot come out of debt through drastic cuts in spending, especially when the global economic growth remains tepid, and there is no scope for the rapid rise of export demand. Instead, drastic public expenditure cuts are jeopardizing growth, creating a vicious circle of low growth-high debt, as noted by the IMF in its October 2015 World Economic Outlook.

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Unfounded Debt Fears Block Economic Recovery

Anis Chowdhury and Jomo Kwame Sundaram

Debt anxieties are not new, often fanned by political competition. But so is a double dip recession due to premature deficit reduction. For example, to seek re-election, President Roosevelt backed down from his New Deal in 1937, promising that “a balanced budget [was] on the way”. In 1938, he slashed government spending, and unemployment shot up to 19 per cent.

Deficits and debt

Many countries had huge public debts when World War II ended. Despite such anxieties and calls for drastic spending cuts, governments continued to spend. Had they caved in, Europe would not have been rebuilt so soon. As governments continued with massive expenditure to rebuild their countries, economies grew and the debt burden diminished rapidly with rapid economic growth. Clearly, debt is sustainable if government expenditure enhances both growth and productivity.

When the debate about deficits and public debt was raging during the Great Depression, Evsey Domar, growth theory pioneer, noted, “Opponents of deficit financing often disregard … completely, or imply, without any proof, that income will not rise as fast as the debt … There is something inherently odd about any economy with a continuous stream of investment expenditures and a stationary national income.”

After the 2008-2009 financial meltdown brought many OECD economies to a standstill, there was a brief revival of fiscal activism. Many OECD governments initially responded with large fiscal stimulus packages, while bailing out influential financial institutions. Major developing countries also put in place well designed fiscal stimulus packages including public infrastructure investment and better social protection.

Hence, there were sudden increases in debt/GDP ratios, mainly due to large financial bail-out packages and some fiscal activism. But with the first hints of “green shoots” of recovery from mid-2009, fiscal hawks stepped up their calls for winding back, sounding dire warnings about ballooning deficits. They argued that rapid fiscal consolidation would boost confidence, particularly in the finance sector, creating an expansionary impulse.

Thus, the affected countries undertook rapid fiscal consolidation measures with large cuts in public expenditure, especially in the areas of health, education, social security and infrastructure. Yet, their debt-GDP ratios continue to rise as they struggle to reignite growth. Meanwhile, the IMF has admitted that its initial fiscal consolidation advice was based on erroneous ad-hoc calculations.

Overwhelming recent research findings, including from the IMF, indicate that discretionary counter-cyclical fiscal policy in recessionary periods augments and catalyses aggregate demand, encourages private investment and enhances productivity growth, instead of raising interest rates and crowding-out private spending.

Optimal debt-GDP ratio?

The fixation with a particular debt-GDP ratio lacks any sound basis. The 60 per cent debt-to-GDP ratio, used by the European Commission and the IMF as the upper threshold for fiscal sustainability by 2030, was simply the median pre-crisis ratio for developed countries and the median debt-GDP ratio of EU countries at the time of the Maastricht Treaty. Similarly, the 3 per cent budget deficit rule of the EU happened to be the median budget deficit ratio at the time of the Treaty. None of these ostensible bench-marks imply optimality in any meaningful, economic sense.

Public debt in Japan soared to well over 200 per cent of GDP over two and a half decades of deflation. Yet, interest rates have remained low for many decades. In 1988, Belgium had the highest public debt, and Italy’s debt rose above 100 per cent of GDP during this period. Neither of them experienced spiraling inflation or very high interest rates as ‘austerity hawks’ claim will happen when government fiscal deficits rise. Meanwhile, studies of public finance in the United States do not find any significant relationship between debt-to-GDP ratios and inflation or interest rates during 1946-2008.

However, real interest rates may be adversely impacted by whether the debt is denominated in domestic or foreign currencies. In other words, a sovereign country should have the option to monetize debt. The problem arises when that option does not exist, as with countries in the Euro zone. This is clear from the contrasting experiences of Spain and the UK during the recent rapid public debt build-up.

The UK public debt-GDP ratio was 17 percentage points higher than the Spanish Government debt (89 versus 72 per cent) in 2011. Yet, the yield on Spanish government bonds rose strongly relative to the UK’s from early 2010, suggesting that international bond markets costed Spanish risk much more than UK government bonds.

As a member of a monetary union, Spain does not have control over the currency in which its debt is issued, while UK public debt is mostly in its own currency, as in the US and Japan. Therefore, much of the problem in the Euro zone is not really about high public debt or deficits. Rather, it is rooted in the currency union that limits its members’ policy space with regard to money creation and exchange rate policy. Hence, the only way they can improve what is seen as competitiveness is by cutting wages!

Then and now

Since 2014, even the IMF has changed its stance. In its October 2014 World Economic Outlook, it advised that “debt-financed projects could have large output effects without increasing the debt-to-GDP ratio, if clearly identified infrastructure needs are met through efficient investment”.

There is, of course, one difference between now and the 1930s. The finance sector and rating agencies are much more influential and powerful now than then. Democratically elected governments have become hostage to money-market investors who shift money from one place to another in search of quick profits.

Governments should not be driven by superficial diagnoses of complex economic issues by rating agencies. The record of rating agencies before the 2008 global economic crisis was abysmal, and the US Congress has seriously debated whether they should be prosecuted. Trying to win their confidence is futile, and trying to anticipate them is hazardous, but they nevertheless hold finance ministries and central banks to ransom.

Originally published by Inter Press Service.

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Enforcement of Puerto Rico’s Colonial Debt Pushes Out Young Workers

“Compromise” protects vulture funds, not Puerto Rico

José A. Laguarta Ramírez

At least 23 of the 49 people killed in the mass shooting that took place at Pulse nightclub in Orlando on June 12 were born in Puerto Rico. While the horrendous hate crime targeted LGBT people of all ethnicities, the large proportion of island-born casualties is not surprising, as the central Florida city has become a preferred destination of Puerto Rican migrants over the past two decades. Steadily growing since the onset of the island’s current “fiscal” crisis in 2006, yearly out-migration from Puerto Rico now surpasses that of the 1950s. The island’s total population has begun to decline for the first time in its history.

Nearly a third of the island-born victims of the Orlando massacre were 25 or younger, most of them students employed in services or retail. This is the population group that will be hit hardest when the ironically named Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) comes into effect. Among its other “promises” for working-class Puerto Ricans, PROMESA will cut the minimum wage in Puerto Rico for those under 25, from the current federally mandated $7.25 to $4.25 per hour, and scale back the federal nutritional assistance program on the island. Purportedly aimed at “job-creation,” these measures will likely intensify the outflow of able-bodied “low-skilled” workers. Ongoing out-migration has already decimated the number of available healthcare and other professionals on the island. Puerto Rico’s 2013 median household income of $19,183 was barely half that of Mississippi, the poorest U.S. state (at $37,479), despite a cost of living that rivals that of most major cities in the United States. Inequality on the island is also greater than in any of the states.

The U.S. House of Representatives approved PROMESA on the evening of June 9, following a strong endorsement by President Barack Obama. The bill, which would also impose an unelected and unaccountable federal oversight board and allow court-supervised restructuring of part of the island’s $73 billion debt, now awaits consideration by the Senate. Its advocates hope the president can sign PROMESA into law before July 1, when $1.9 billion’s worth of Puerto Rico general obligation bonds will come due. Unlike those issued by public utility corporations and certain autonomous agencies, general obligation bonds, under Puerto Rico’s colonial constitution, must be repaid before any further public spending for the following fiscal year is authorized. Puerto Rico’s government has partially defaulted three times within the past year, but not on general obligation bonds. Puerto Rico is not the only place, under the global regime of austerity capitalism to face predatory creditors and the imposition of unelected rulers —as illustrated by cases like Argentina, Greece, and post-industrial U.S. cities such as Flint, Mich.— but its century-old colonial status has made it particularly vulnerable and defenseless.

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After the “Battle of the Century”

What next for debt crisis management?

Bodo Ellmers

Bodo Ellmers is Policy and Advocacy Manager at the European Network on Debt and Development (Eurodad).

In late April, the ‘battle of the century’ between the government of Argentina and a group of vulture funds reached an inglorious end. The government of Argentina finally surrendered and paid the vulture funds in full, at a price tag of more than US $10 billion. The consequences are severe: Argentina started a new cycle of indebtedness; the vulture funds’ predatory business model has been further strengthened and threatens to affect more and more nations; and future debt crisis management in general is in a mess. Now this battle has been lost, the question remains: what next for debt crisis management?

Argentina: back to markets or back to debt crisis?

Argentina had to borrow the money it needed to pay the vultures, thus it returned to financial markets after more than a decade of absence. To the surprise of many financial market observers, the bond issue of the former pariah state was hugely oversubscribed. In the largest emerging market issuance ever, Argentina managed to raise US $16.5 billion in three different bond series that yielded on average 7.2%. This successful return has the caveat that it starts a new cycle of indebtedness. While the government of Argentina hopes that the ‘normalisation’ of financial relations will attract foreign investment, none of these borrowed dollars will be invested productively. The lion’s share of more than US $10 billion went to pay the vulture funds; the smaller share replenished Argentina’s depleted currency reserves, i.e. mainly to refinance capital flight.

The issuance was a perfect deal for investors. It soon turned out that Argentina had sold the bonds too cheaply. Prices surged in the first few days, allowing the banks that were the bookrunners to make quick profits. JP Morgan celebrated: “These yields don’t exist anywhere else in the world in countries with such low levels of debt.”

Argentina’s citizens are paying the price for their government’s strategy of pleasing foreign investors. The recent removal of exchange restrictions has resulted in a 40% currency devaluation and a spike in inflation. Subsidies on essential services have been removed and, by March 2016, 32,000 public service workers had been laid off.

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From BBB-razil to BB+razil or the meaning of investment grade

Matias Vernengo

So Brazil (or here about Petrobras, the State oil company) lost its investment grade status with Standard & Poor’s. You would think this is huge given the media attention in Brazil. If you read S&P’s actual rationale for the downgrading (here) it is essentially about the fiscal situation. They say: “We now expect the general government deficit to rise to an average of 8% of GDP in 2015 and 2016 before declining to 5.9% in 2017, versus 6.1% in 2014. We do not expect a primary fiscal surplus in 2015 or 2016.” They do discuss the political problems too, the corruption investigations,* and the political instability that has plagued the government. There is a discussion of the external vulnerability, but here they are quite sensible and know there is no problem. The report says that: “despite the wider current account deficit, Brazil has low external financing needs compared with its current account receipts and its high level of international reserves compared with some of its peers.” So this is a fiscal problem in their view.

And therein lies the problem. They had years ago also revised the outlook of US debt negatively (my comments here), also on the basis of fiscal, and political, factors. As much as the US then, Brazil now has no risk of not paying its internal debt in domestic currency. And yes, the fiscal outlook has worsened, and the reasons are no secret. It’s austerity. If you cut spending, output falls, and the recession leads to lower revenue and higher deficits. It’s part of the problems caused by policies that S&P’s analysts actually favor. Austerity also is the cause of the recession, and the worsening of the growth outlook in the next couple of years, which are also discussed in S&P’s rationale for the downgrade. So the fiscal problems that are the main cause for the downgrade are self-inflicted wounds (see Serrano and Summa), and the cause of the lack of growth and the worsening of the future fiscal balances.

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New Food for the Vultures?

Lack of state insolvency regime undermines Ukraine debt deal

By Bodo Ellmers, Guest Blogger

Bodo Ellmers is Policy and Advocacy Manager at Eurodad, the European Network on Debt and Development.

Ukraine has reached a debt restructuring agreement with a creditor committee representing 50% of outstanding government bonds. Substantial debt reduction is essential to bring Ukraine’s debt down to sustainable levels. But the agreed deal falls short of what is needed. And the participation of the other 50% of bondholders is not secured, and cannot be secured in absence of a multilateral debt restructuring framework that can make binding and enforceable decisions. The Western powers’ reluctance to help build such a framework might have fed their ally to the vulture funds and their aggressive litigation strategies.

The Ukraine debt deal

According to information obtained by the Financial Times, Ukraine has reached a deal with a creditor committee led by the investment fund Franklin Templeton. The deal agrees a 20% haircut to Ukrainian government bonds worth US$18bn. It will also extend the repayment period by four years to ease Ukraine’s liquidity needs. As a sweetener, participating creditors receive a higher interest rate of 7.75% instead of 7.2%. In addition, reports the FT, “a GDP ­linked warrant will be provided from 2021 to 2040 that will pay out up to 40 per cent of the value of annual economic growth above 4 per cent.”

Too little, too late

The deal comes after Ukraine’s economy fell into a deep recession following the outbreak of the civil war and the annexation of the Crimean peninsula by neighboring Russia. Last year, Western powers used their influence in the IMF to unleash bailout loans of €9.6bn under the Extended Fund Facility. The programme came with brutal austerity and structural adjustment conditionality attached.

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The Failed Project of Europe

Jayati Ghosh

There is a stereotypical image of an abusive husband, who batters his wife and then beats her even more mercilessly if she dares to protest. It is self-evident that such violent behaviour reflects a failed relationship, one that is unlikely to be resolved through superficial bandaging of wounds. And it is usually stomach-churningly hard to watch such bullies in action, or even read about them.

Much of the world has been watching the negotiations in Europe over the fate of Greece in the eurozone with the same sickening sense of horror and disbelief, as leaders of Germany and some other countries behave in similar fashion.

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The Greeks Have Said No to Failed Policies, Not to Europe or the Euro

Matias Vernengo

Originally published by The Wire.

The referendum that just took place in Greece in which 61.3% of voters rejected the terms of an international ‘bailout’ package should not be read as a vote in favour of leaving the euro. The ‘No’ vote – όχι in Greek – is, as correctly pointed out by James K. Galbraith, the only hope for Europe. On the other hand, it may very well be used by the Troika – the European Union (EU), the European Central Bank (ECB), and the International Monetary Fund (IMF) – as an instrument for expelling Greece from the monetary union. If that happens, we have a Grexpulsion and not a Grexit, the more common name for the abandonment of the euro. After all, it is very clear that SYRIZA knows that the costs of leaving the euro may very well outweigh the advantages, and that Greece is not Argentina, as noted by its Finance Minister Yanis Varoufakis recently.

The relationship between West European powers and the Greek Left has been problematic for a long while. In the aftermath of World War II, the British and then the Americans, sided with collaborationists, rather than with the resistance, which had communist leanings, and was seen potentially allied to the Soviets. As Tony Judt says of Greece in Postwar: A History of Europe Since 1945, “despite a significant level of wartime collaboration among the bureaucratic and business elites, post-war purges were directed not at the Right but the Left. This was a unique case but a revealing one.” The British and Americans preferred a conservative government, even if it meant dealing with businessmen who had collaborated with Fascists, rather deal with a communist or socialist threat.

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