The politics of debt have become an unexpected part of the debate around the economic response to Covid-19. In April, the International Monetary Fund (IMF) cancelled the last six months of debt for 25 countries in the Global South, due to the pandemic. A student loan relief programme has been launched in the US, homeowners have been offered mortgage freezes across Europe – two initiatives that would have been written off as disastrous moral hazards just a few years ago.
As part of Common Wealth’s Covid-19 interview series, we spoke with Sarah-Jayne Clifton, Director of Jubilee Debt Campaign UK The pressure group was born out of the Jubilee 2000 campaign, an international initiative to cancel debt in the Global South. Working in partnership with groups around the world, the campaign has helped to successfully write-off $130 billion of debt cancellation for developing countries between 2000 and 2015. Now, with the pandemic opening up new economic possibilities, the UK campaign group is working to reverse another looming debt crisis in the Global South, as well as at home.
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Josh Gabert-Doyon: At the global level, how did we get to the situation of untenable debt in the first place? What's changed over the last few decades?
Sarah-Jayne Clifton: The starting point, or the thing that's really important to bear in mind when answering that question, is that we [Debt Jubilee UK] don't think that all debt is a problem. While there is a lot of global debt, we don't think necessarily that a lot of global debt is a problem.
We focus on what we call unjust debt, which is when debt is undermining human rights, undermining democracy, supporting authoritarianism, that kind of thing. What you see is a lot of variation around the globe, even in response to Covid-19, in terms of whether a country has problem debt or not.
A lot of countries in the Global North are taking on a lot of debt in response to Covid-19, which we think is entirely legitimate; we're taking advantage of low borrowing costs, we're using it to shore up our economies and societies in the face of very profound shocks, and once our economies have stabilised, then we'll be able to pay off the debt. And it might take us a long time, like it took us a long time to pay off their debt from the Second World War, for example. But it is wholly worth it in terms of what it's enabling us to do in terms of protecting incomes and livelihoods and well-being.
But countries in the Global North face a very different, privileged situation. Because of the nature of our economies we're able to benefit from very low interest rates; because we tend to have control over our currencies, which means that our debt is very trusted as a global asset and that carries lots of benefits.
But for countries in the Global South, it's a very, very different situation. In terms of the core problem at the moment in the global economy, we're really focused on the public debt crises which countries across the Global South are facing.
These debt crises, even though the current round of crises is relatively new, they have their roots in colonialism and in the way in which countries Global South were integrated into the global economy after [their] independence. It's really those kind of structures of the global economy and the terms in which countries were able to trade, and the global economic power relations, which are keeping countries dependent on debt as a source of income to do their basic jobs as governance, to provide health care and education and all of those things. As a result of that, what we see for countries in the Global South is this cycle of debt crises.
My organisation came into being as a coalition in the 1990's in response to a really big round of debt crises, which was hitting countries in Africa, Asia and Latin America. It was really destructive, with some governments spending up to 40% - nearly half of their overall income - on servicing their debt. It led to lost decade of development, with big increases in things like maternal and child mortality, and big drops in kids going to school.
In response to that, a global movement was built up led by campaigners in the Global South and they had a whole set of demands around how to tackle this debt crisis. The top one was to write-off the debt, but the other demands were really around looking at these structural reasons why countries are so reliant on debt in the first place. Things like tax dodging by multinational companies and repatriation of profits, corruption, which is often painted as a problem of poor governance in the Global South, but is actually enabled by lots of businesses, companies and professionals in the City of London and in New York, as well as lots of demands around trade. They weren't big demands around debt write-offs: $130 billion of debt cancellation. But unfortunately, it didn't win those other demands and that means that 10-15 years later we find ourselves once again facing another profound Global South debt crisis.
It was on the cards before Covid-19. And now Covid-19 has accelerated it and deepened it. And it’s pushed a lot of countries over the edge.
JGD: One of one of the campaign central arguments about tackling global debt is that basically our current approach bails out creditors. Can you explain to me why that's the case?
SJC: There are two international institutions which play a very central role in the global financial architecture and the global architecture of debt, the IMF and the World Bank. It's worth saying from the outset that while they are very powerful institutions, they are not democratic or really in any way properly accountable to the people who are most affected by their decisions. Really, they’re governed by their shareholders, which are rich countries. The more money a country puts in the bigger say it has in the IMF and World Bank, which means that countries like the UK and US have a very big say. Their role is like banks or development finance lenders of last resort for countries. They play a really big role lending to countries when they are having financial problems and debt problems.
What we see over and over again, and particularly from that IMF, is the IMF lending to countries when they're in debt crisis in a way which just enables the countries to keep paying back their other creditors, which perpetuates the debt crisis. The IMF actually has its own policy and guidelines which says it shouldn't do this – its own policy says that if the debt level of a country is unsustainable then the IMF should first require that the debt be restructured down to a sustainable level (and for that to be shared across the different creditors) before the country can receive an IMF bailout. But what we see is the IMF not following this in practice, and it's very unfortunate, again, because all the IMF's own research shows that if it requires a debt restructuring for that's in debt crisis it's much more likely to recover rapidly from that debt crisis and get its economy back on its feet. But unfortunately, they're not doing that.
The IMF has agreed, I think it's over 40 countries now, possibly more, who've had emergency financing from the IMF in response to Covid-19, and again the IMF has not required debt restructurings and it's not talking about requiring debt restructurings. In response to Covid-19, although we've seen quite an important response from the IMF in the G20, it's likely that quite a lot of that public money is going be wasted, bailing out, principally, private creditors who have contributed to the debt crisis and who are not doing anything at the moment to give countries debt forbearance or suspension.
JGD: What do you feel is the responsibility of creditor nations like the UK in fixing the global debt crisis, and how might they live up to that responsibility?
SJC: We are actually not that much of a creditor nation apart from through the IMF and World Bank. There are some rich country governments that do lend a lot bilaterally, but we're actually not one of them.
Our significance in the global financial system, the global debt system is twofold. The most important one is actually our legal system. 100% of private international debt contracts to governments are written under either New York law or UK law, and around 90% of African debt contracts are written under UK law. There's this former colonial relationship where our legal system is used to govern the debts of sovereign countries. There's various explanation about why that that's the case. Some people would say it's because our legal system is trusted, but a lot of people would say it's because our legal system has been trusted to rule in the interest of creditors. For that reason, our legal system plays an incredibly important role in the global debt regime. And it's for one of those reasons that we think the UK has a really central role to play in resolving the global debt crisis.
The other thing, as I mentioned, is the UK playing a big role in the IMF and World Bank, and we do have a lot of decision-making power and influence there as well. In terms of the role of the UK legal system, when we had the last round of debt crises what we saw is that creditors were bringing cases against countries in the UK. And there's a particular kind of pernicious type of creditor, who we refer to as vulture funds, these are basically hedge funds who's business model is built on buying up the debts of poor countries and businesses when they're in crisis, when the debts have been written down to a very low rate, and then throwing a lot of money at legal action to try and seek full repayment on the debt, repayment of the debt at the value that it was originally worth. When we had countries defaulting and going into debt crisis in the 90s, we had legal actions being brought here in the UK.
We actually managed to get a law passed here protecting poor countries from those kinds of actions, but it only applied to the measures taken by global leaders at that time, so were actually looking now to see if we can try and get something parallel worked in again because we think it's very likely now, where we're at with the global debt crisis that a bunch more countries are going to default and we will see that kind of pernicious action again by creditors.
JGD: We've been talking about public debt, I was wondering if you could kind of outline your concerns around private sector debt, in the UK and on an international level?
SJC: The basic concept around that we have around unjust debt applies to all different types of debt. We see very similar problems across public debt and, for example, personal debt, with debt meaning that for example, people can't afford to provide for their basic needs, which is a growing problem in the UK. People having to prioritise paying their debt back rather than putting food on the table, paying their rent or paying their bills.
Another enormous parallel is one of the central issues we see across both public debt and private debt is the power imbalance between creditors and lenders. For example, in the UK, the consumer credit sector, the banks, the high street lenders, are very poorly regulated. We have the Financial Conduct Authority, the regulator whose job it is to regulate and protect the interests of people who borrow from consumer lenders, but we think they're doing that job very poorly. We have a very poorly regulated finance sector, which is basically exploiting and ripping off people in need.
In the UK, again before COVID, we were in a situation of a profound household debt crisis. There was a lot of deleveraging by households after 2008. People were scared and if they could they paid off a lot of debt. For the last 5-7 years, we've seen household debt levels rising rapidly again. The figure last year before Covid-19 was around £230 billion worth of unsecured household debt in the UK, and that's not including mortgages. There's around 9 million people in problem debt, which basically means you've got problems paying your debt back. You either can't make the payments or you're having to cut back on basics in order to make payments. The majority of those people are on low incomes. The household debt crisis in this country is very much the result of wider government failings to protect incomes and protect the financial security of households. It's connected to low wages, to the destruction of our social safety nets, as well as increasingly precarious work and the insecurity that comes from that. And as a result of all those things, we've seen growing numbers of people having to rely on debt to put food on the table, and the lenders taking advantage of that with really exploitative interest rates.
That's a pattern which you see all across the Western world and increasingly across some of the more emerging economies where this model of like liberalism, a highly degraded regulated finance sector and attacks on the social safety net is being replicated and pushed by institutions like the World Bank and IMF.
It's also worth saying that Covid-19 has accelerated and deepened that problem again, really significantly. We don't actually know fully the extent of the extent to which it's happened just yet. We work really closely with advice providers like Step Change, and they put out some research a couple of weeks ago saying an additional £6 billion worth of household debt had been taken on by people in response to Covid-19 so far, and about 4 million people have had to borrow in response to Covid-19 in order to cover gaps in their income. We've seen because of the holes in the safety net, which has been put together in response to Covid-19, a lot of people have had a really dramatic fall in income, and a lot of people claiming Universal Credit, and even though the government has increased Universal Credit a bit that's still not sufficient. A lot of people are still on legacy benefits which are a lot less. It's absolutely clear that this problem is being made a lot worse by COVID-19.
JGD: What about when it comes to corporate debt?
SJC: We would like to do more work on corporate debt. We're a small organisation, we're about to grow to seven people [laughs], but where we would really like to focus is this nexus that I've been telling you about which is the role of the City of London in the global financial system because we know that a lot of multinational corporations have been taking on a lot of debt in order to indicate to their shareholders that they're doing better than they are, in order to prop up shareholder dividends and in order to prop up very inflated senior executive salaries. It's very clear that there's a corporate debt bubble. And it's also clear that what's happening is very dangerous.
It's very similar to what happened prior to the 2008 crash in that corporations are not only taking on debt they're lending to each other. Corporate debt is being consolidated, sized-up and resold in these things called "Consolidated Loan Obligations" which are very similar to the "Consolidated Debt Obligations" which were at the centre of the 2008 crash. We think that there is a very high risk that at some point the whole thing is going to come crumbling down. Obviously that can have profound impact because if these corporations go bust they will sack people, there'll be a kind of domino effect potentially, and the UK because of the City of London and the role of the finance sector in our economy is not only exposed to that happening the UK but is actually very exposed to that happening globally. We would really like to be able to do more to shine a spotlight on that and actually to focus on how we build protections for our economy from that, as well as for other poorer economies who are very vulnerable to economic shocks and likely to be devastated by future economic shocks, like if 2008 were to happen again in a slightly different way.
JGD: You mentioned some ways that Covid-19 has intensified the debt crisis. From your perspective how has the pandemic changed the conversation about debt forgiveness, broadly speaking?
SJC: Across all the issues we work on the pandemic has highlighted and increased the urgency for action on these issues. By deepening and accelerating the Global South debt crisis in some ways it's helped to push it higher up the political agenda.
We've been campaigning on that on the Global South debt crisis for the last five years, and actually it's only since Covid-19 that we've got some proper multilateral action. In April we managed to get the IMF to cancel six-month’s worth of debt for the 25 poorest countries. The G20 has announced the suspension of debt for the 73 poorest countries, worth about 12 billion. And it did call on private sector to also mirror that action, but then has backed away from that recently, unfortunately. Still this is some of the most significant action we've seen on the debt crisis yet in the course of five years. Because it's pushed the issue up the political agenda it's positive in some ways that now the global debt movement is mobilising. We think that we can potentially win some important changes in the next couple of years, partly because the action taken so far is just kicking the can down the road to a crunch point probably in around two-year’s time when a whole load of countries are very likely to just go bust unless there is really significant multilateral action to reduce those debts. We think that might be a chance for us to get a global bankruptcy process, which is something we've been pushing for a while., and which the UK and the US because we've got big finance sectors, has been pushing back against. Because what our finance sectors don't want is a fair system for tackling debt crises when they arise because that obviously undermines their power to get what they want.
JGD: One thing I've noticed is that the discussion about Covid-19 debt forgiveness is often framed as a reset. Beyond clearing the books, can you outline a bit more what changes you would like to see in terms of the way that debt is managed, written-off, and restructured? And how would international institutions go about carrying that out?
SJC: Starting on the Global South debt crisis, there's some really well worked out proposals for this global bankruptcy processes. It's called an International Debt Workout Mechanism. and developing countries have been pushing for it through the United Nations pretty much since the last round of debt crises, actually. Argentina, which has suffered a lot from debt crisis and from these kind of predatory actions by vulture funds has been one of the main countries pushing in the UN. The UN adopted a set of principles around how it could work a few years ago. The UK and the US, I'm not sure if they vetoed or abstained, but basically there was a lot of consensus from other countries.
What it would put in places is just a kind of permanent system with agreed principles around how to tackle debt restructuring – so what to do if a country's in debt crisis. How that happens at the moment is a country has to negotiate with its creditors, and that's a kind of messy process because there's no standard way of doing it and there's no principles on which it's based. A bankruptcy process would help enormously with that, like it does with businesses and people in the UK.
What would be another massive benefit from that is that, just as how we started this interview by talking about the IMF bailing out reckless lenders, there's a lot of moral hazard in the system at the moment because the creditors know that they can get away with irresponsible lending, and that they'll be bailed out. A bankruptcy process would not only make it easier for countries to get out of debt crisis, it would also tackle that moral hazard and drive more responsible lending.
So alongside, as you said, writing-down the debt so that countries have breathing room to shore up their health care systems and their social protection in the face of Covid-19, a global bankruptcy process is a top priority on the global level and here in the UK.
We strongly believe that some form of debt write-off is needed to support the poorest households in the UK who've been stuck in a debt trap because of austerity was how the government chose to respond to the 2008 crisis. But again, that's not enough. There are lots of structural drivers which are going to keep pushing people back into the debt poverty trap unless we address them, and that's why it's really exciting that we've seen some calls in response to Covid-19, for example from the Trade Unions Congress and the New Economics Foundation, for something which is really a no-brainer in Scandinavia, which is that we put Universal Credit at a level that people can live on.
At the moment, Universal Credit, even though the government has added another £1000 a year, is still not enough to live on. It structurally pushes people into debt by not paying you for the first five weeks and giving you a loan so you're in debt from the very beginning. And some of the legacy benefits, like sick pay and unemployment benefit are even lower, like we're talking £70 a week. People are not able to live on that amount of money so we're pushing a whole load of people into that.
If we want to build an economy that places at its centre the idea of giving everybody basic well-being and the opportunity to flourish and to contribute to society, then that financial safety net is a number one priority. We think there's a lot of opportunity now, because 2 million new people have had to rely on this system and are realising how inadequate. We've got an opportunity to actually really strengthen it. and that's quite exciting as well.