Is there a solution to the debt crisis?

The politics of profit

The debt crisis has recently been relegated from the front pages of the press. It remains, nevertheless, the critical question confronting hundreds of millions of people in the oppressed nations. David Reed (David Yaffe), examining two recent publications on the debt crisis, shows Fidel Castro’s solution to be the only realistic one.

Over the last six years Fight Racism! Fight Imperialism! has carried many articles high-lighting the role British imperialism, through its international banks, has played in making massive profits out of the misery and poverty of millions of oppressed peoples. ‘British banks lead imperialist offensive’ was the lead article on the front page of FRFI I6 in September/October 1980.

However, unlike the RCG, the rest of the British left chose to play down the significance of the imperialist banks in defending British imperialist interests worldwide. They only see Britain as a declining imperialist power or, in some cases, not even an imperialist power at all (see The revolutionary road to communism in Britain p51ff). They refuse to acknowledge that the fall in the rate of profit on industrial capital in the imperialist countries during the 1970s led to a rapid rise in the export of capital and an enormously strengthened role for banking capital. And that imperialism’s stranglehold over the oppressed nations has grown immeasurably as a result. In fact British imperialism through its banking system was second only to the United States in gaining a commanding position in this process. In the last few years there has been one significant new development. Japanese banks have dramatically increased their international role and by the end of 1985 had overtaken US banks to become the largest holders of international assets (see FRFI 57).

As the debt crisis worsened and imperialism suddenly faced the dual threat of a major default and possible revolutionary upheavals in the oppressed nations, concern about the overall situation has dramatically increased. Books and articles have appeared, international conferences have taken place in a desperate effort to stave off the greatest threat to the stability of the imperialist system since the 1930s.

A recent Penguin Special Debt and Danger: The World Financial Crisis by Harold Lever (millionaire cabinet minister in successive Labour governments) and Christopher Huhne (economics editor of the Guardian) argues that decisive reforms could still re- establish sound credit and world economic growth and so defuse the serious threat to the imperialist financial system. Their reforms – Keynesianism on an international scale – would require the co-operation of imperialist governments, the imperialist banks, international financial institutions (lMF, World Bank) as well as the debtor nations. Why this co-operation should be forthcoming in a world torn apart by imperialist greed is not at all clear. After an interesting and factually detailed analysis of the path towards the present debt crisis it is not surprising that we are left with a note of despair. The details of a new reform are less important than the mustering of political will in the advanced countries to change a perilous and unsustainable situation’. No reason is given as to why that ‘political will’ should be forthcoming.

Profits out of Poverty? British banks and Latin America’s debt crisis published by War on Want is certainly more politically committed. From the beginning it makes clear that the ‘main British banks are heavily involved in a chain of lending and debt which is forcing millions of women, men and children into poverty’. It also warns that if this chain is broken the western world could be plunged into the depths of economic crisis. War on Want know there is little immediate chance of a rational and internationally agreed solution to the debt crisis. They recognise that the British banks with the backing of the government are pushing for policies ‘which actively promote poverty in Latin America’. This policy has to change. Interest payments on existing debt must be significantly reduced. ‘The banks must take a major drop in profits in recognition of the irresponsible lending they have made in the past and of the large profits already received’. New lending must continue but the major role has to be played by governments and financial institutions like the World Bank. The needs of the poorest should be put first in any new lending. The conditions for new lending, by for instance the World Bank ‘should encourage social and development programmes and link lending to the redistribution of wealth and the fair sharing of the benefits of economic recovery.’

Finally new initiatives must be taken to promote world economic growth. This requires a co-ordinated effort to reduce interest rates, promote economic expansion in the industrialised world and to resist the growing clamour for protectionism.

War on Want asks ‘will the government and the banks choose a solution (to the debt crisis) which favours the poor of Latin America or one which merely protects the banks’. The answer is all too obvious. However, in order to put pressure on the government and the banks to move towards its own perspective, War on Want proposes setting up Profits out of Poverty? campaign groups which will publicise and campaign around the War on Want case. If Lever and Huhne are advocating international Keynesianism, War on Want are proposing another form of wishful thinking – international Fabianism. British imperialism, led by its imperialist banks, is fighting for survival. The British government has backed US imperialism in its efforts to destroy any progressive regimes which constitute a challenge to imperialism. The US invasion and occupation of Grenada, US imperialism’s backing of the contra gangs in Nicaragua, the UNITA bandits in Angola and US state terrorism against Libya, all have British government support. While there is much that is valuable in the efforts of War on Want to make British people aware of the British banks’ role in the debt crisis, no one can seriously believe that a pressure group can force the British government and its imperialist banks to choose ‘a solution which favours the poor of Latin America’. Only the organised political movement of the people of Latin America and their allies in the imperialist nations can impose such a solution.

The debt crisis breaks

In August 1982 Mexico announced suspension of payments of principal for 90 days, pending negotiations, on its massive foreign debt. The debt crisis had broken. The banks immediately cut back their lending to the oppressed nations and made further lending and rescheduling of debts conditional on the acceptance of IMF ‘austerity’ measures – massive cutbacks in public spending, removal or reduction of subsidies on basic foods, transport and other services, suspension of health, education and development programmes, devaluation of the currency and the raising of interest rates. The overall effect was to drastically cut back living standards, fuel inflation and severely restrict vital investment needed for economic development. All this was occurring in a period 1981-83 when real dollar interest rates dramatically increased from below 2% to over 10% with the dollar rising in value against most other currencies. (Profits out of Poverty? p2)

The effects of these developments were devastating. After many years in which there was a net flow of funds to the oppressed nations a massive net transfer of funds to the imperialist nations began from 1983 onwards and is still taking place. This amounted to $34bn in 1984 and was projected to reach $36.4bn in 1985. Most of this outflow of funds, $28.7bn, came from the seven major debtor nations holding 44% of the oppressed nations’ debt. This amount alone was equivalent to nearly 19% of their exports.

*IMF projection

**Argentina, Brazil, Indonesia, South Korea, Mexico, Philippines and Venezuela (From Debt and danger, p74)

This net transfer of wealth to the imperialist nations sustains the profits of the imperialist banks while dramatically reducing the living standards of the peoples of the oppressed nations. In Latin America economic growth was halted and reversed. It fell by 3.3% in 1982 and 5.3% in 1983. By the end of 1984 the fall in income per person was nearly 10% below the 1980 level. Real living standards fell further still. Mexican wages fell by 40% in real terms in the three years after 1982 (See Profits out of Poverty? pp 4-5).

Banking system under threat

The banks are enormously dependent on their profits from the oppressed nations. Latin America holds about 37% of the total oppressed nations’ debt and about 60% of its commercial bank debt. In 1983 the interest received by major US banks on Latin American lending was equivalent to more than 40% of their profits. Brazil alone was, in 1983, responsible for 20% of the profits of Citicorp, the leading US bank, and in 1984 a third of that bank’s profits came from just four Latin American countries – Brazil, Mexico, Venezuela and Argentina. British banks are also playing a central role in the plundering of Latin America. 43% of Lloyds’ international pre-tax profits since 1982 came from Latin America. The other main British banks do not publicly announce their profits from Latin America but given the size of their loans, these must also be a significant proportion of their international profits. (See Profits out of Poverty? pp 8-14) Most of the major US and British banks are also represented on one or more of the Latin American advisory committees of banks established for each major debtor country in that area. These committees coordinate negotiations on behalf of all the lending banks, and it is these committees which insist on IMF ‘austerity’ measures being imposed before new loans are made.

However, the plundering of the oppressed nations by the banks now threatens the stability of the international financial system. Throughout Latin America there has been a growing movement against attempts to force the people to pay for the debt. In Brazil in early 1984 thousands of starving peasants attacked warehouses in more than 40 cities and carried off food for the people to eat. In April 1984 millions of people demonstrated on the streets of Brazil’s major cities. Bolivia has had six general strikes in two years against austerity measures and the impact of hyper-inflation. In the first few months of 1986 100,000 people demonstrated in Mexico City calling for the non-payment of the foreign debt. In Argentina a general strike against austerity measures paralysed the country for two days and a visit by the US banker Rockefeller sparked off riots. And there was another general strike in Bolivia which lasted two days and brought clashes with the army.

The foreign debt of the oppressed nations is unpayable. The people will not tolerate the conditions the imperialist banks are imposing on them for very much longer. A major default is inevitable, and with it runs a very serious threat to the imperialist banks and their international banking system. Lever and Huhne make this point admirably clear:

‘Today a unilateral and long-standing default by Mexico, Brazil, Argentina and Venezuela could wipe out the capital of seven of the nine largest banks in the United States and two of the four in Britain, with consequential damage to the entire banking system.’(p 22)

Just nine US banks (out of about 15,000 US banks) hold 63% of US loans to the oppressed nations. 60% of this is in Latin America and amounts to more than 154 per
cent of these banks’ primary capital. At the end of 1984 the four largest British banks had loan exposures in Latin America which matched those of the major US banks. (see table below). Midland’s [Now HSBC – DY] loans may even be much greater. Although in February 1986 it sold Crocker, its US subsidiary with loans of some $2,428 million in Latin America, it is thought that Midland will retain Crocker’s loans to Latin America on its own books.

British bank lending to Latin America (end 1984)

In October 1985 the US government came up with the Baker Plan in an effort to prevent debtor nations taking unilateral action as conditions deteriorated. Peru had already announced it would spend no more than 10% of its export income on servicing its debt. The Plan proposes that new lending of $40bn should be made available between 1986 and 1988. Half should come from the banks and half from the World Bank. $40bn will barely cover a third of the debt service payments Latin America alone must pay over the next few years. So the outflow of funds would continue. Further, the conditions attached to the loans will merely serve the interests of the imperialist banks: free-market policies; greater penetration by multinational companies; an end to protection of local industries, price controls and wage indexation; and the sale of public industries and assets.

There is a great deal at stake. The banks will do everything in their power to retain interest payments on their loans. The US and British governments will back them to the hilt with military force if required. We have to take sides. And we must unequivocally take the side of the oppressed people fighting for their countries’ independence, sovereignty and economic development.

The most serious, detailed and thorough analysis of the debt crisis in the recent period has been contained in the articles and speeches by Fidel Castro (see ‘Castro calls for a general strike of debtors’ in FRFI 51). His conclusion is that the foreign debt is unpayable. Lever and Huhne dismiss his position by saying he is perceived by most Latin American leaders ‘as attempting to make as much self-serving mischief as he can’ (p105). War on Want faithfully report Castro’s position but only see it as one of several approaches, if a radical one, to the debt crisis. However, Castro’s position is the only realistic one.

Castro argues that only a general strike of debtors will force the imperialists to the negotiating table. Only unified action of this kind by Latin American and other oppressed nations can achieve a solution to the crisis in the interests of all the oppressed. As he stated in a recent speech to the 3rd Congress of the Communist Party of Cuba:

‘The formula proposed by Cuba is simple, understandable and perfectly feasible: that the governments of the developed creditor countries assume the debts of the Third World countries, with their own banks, and that 12% of what is now invested in military expenditures be used to pay off the debts.’

A simple write off of the debt will however not solve the problem:

‘the principles of the New International Economic Order adopted by the United Nations must be implemented to end unequal terms of trade, protectionism, dumping, usurious interest rates and the monetary and financial manipulation on the part of a few developed capitalist powers; and that unconditional economic solidarity be extended to the poorest and most economically backward countries.’ (Granma 16 February 1986)

Our contribution to that end here in Britain must be to demand the nationalisation of the banks and the writing off of all oppressed nations’ debt.

Profits out of Poverty? British banks and Latin America’s debt crisis can be obtained from War on Want Campaigns Ltd, Suite 4-6, The Hop Exchange, 24 Southwark Street, London SE1.

Fight Racism! Fight Imperialism! 59 / 15 May – 15 June 1986