To pay or not to pay and how much

"The debt trap," South African Archbishop Desmond Tutu, a Nobel Peace Prize winner wrote in a review of Noreena Hertz’s book The Debt Trap, "remains a major reason why poor countries remain poor and are unable to make progress towards reaching the millennium development goals of halving the number of people living in extreme poverty. In a shameful, persistent, and systemic global injustice, debt servicing continues to drain resources away from the poor to the rich of the world on a grand scale."

I had to dig out Hertz’s book as Tutu’s comments came to mind while I was writing last Monday’s column about the P2 billion a day we pay to service our close to P4-trillion debt burden (which includes $32.14 billion in foreign debt). I remember she called for "the cancellation of the odious and unpayable debt of under-developed countries." If only it is as simple as that.

Hertz makes a good case for debt relief. In many instances, she says, leaders of third world countries borrowed heavily because they know "they could easily ill manage, misappropriate, or divert funds – no bank manager would be peering over them, asking them on what they would be spending the money, or how they might pay it back."

The basic question arises: why did poor countries borrow in magnitudes they can’t afford to pay back, to begin with? One answer makes sense: we needed to borrow money from abroad because domestic savings (and tax collections) weren’t sufficient to finance necessary investment for growth and development or in some cases even current consumption requirements. Exports weren’t providing enough foreign exchange to fund imports and service existing debts.

Another answer provided by Hertz is that we borrowed large amounts of money because it was offered to us. During the Cold War, the two competing superpowers were doling out money to their client states in amounts far larger than what was needed, to keep them in their orbit. The third world countries played the two against each other and thought the "banks" would not foreclose, new loans would always be available and at worse, rescheduling would always be an option. "The lending process had become divorced from sober economics."

But the environment changed with the end of the Cold War. The superpower faucet slowed down to a drip. Borrowing countries had to deal with multilateral agencies that imposed stringent requirements and demanded good governance. The overhang of bad debts impeded development as scarce resources had to be allocated to service those debts. Without development, the problems just got worse through the years, as debt service ate up an increasing share of national budgets. The debt crisis was on.

The proposition was advanced that without debt relief, the third world is condemned to eternal poverty. The Rev. Tutu called for nothing less than "the cancellation of the odious and unpayable debt of under-developed countries." It is the marginalized poor, the Rev. Tutu says, who daily carry the burden of the debt through joblessness, increasing user fees for basic services, hunger, malnutrition, and inadequate access to health care and education.

The Rev. Tutu is right. Additionally, the lenders should also bear part of the responsibility for the crisis. The lenders should have known better than to indiscriminately lend without due regard to how the money would be spent or if the borrowing country had the ability to pay back.

Even in commercial transactions, the lender assumes the credit risk, which is why the lender performs due diligence before granting any credit accommodation. Unfortunately, when they lend to governments, the commercial banks know they can depend on the IMF and the World Bank to exert pressure on client states to pay their debts. That’s the moral hazard there. Banks lend to nations risk free.

The Bataan Nuclear Power Plant is often cited as a good example, and it is. The lenders, both commercial banks and the US government through the Ex-Im Bank cannot claim ignorance of the corruption that surrounded the deal. Media had given ample coverage of the kickbacks (euphemistically called commissions) earned by those close to then President Marcos, probably also on his behalf.

It was also no secret that the plant was overpriced for one of its type and class. We never used the plant, yet, we have religiously paid for this anomalous deal over the past 20 years. This is a good case for debt cancellation, for the lenders to take their lumps too because they clearly lent money unwisely. Actually, in the post-Enron environment, the lenders should also bear civil liability for being a party to the crime. We deserve to be paid damages. Too bad we are not qualified voters in New York or its Attorney General Eliot Spitzer would have come to our rescue, even if belatedly.

What makes our government deathly scared of even thinking of debt relief is the fact that our National Treasury is so addicted to it, that it cannot survive without more of it. Furthermore, the creditors cleverly imposed a cross default provision on all our debts that makes all our debts due and demandable should we fail (or refuse) to pay one of our debts, like the nuclear plant’s.

On the bright side, it is no longer heretical to talk of debt relief. The world’s largest economic powers talked extensively about it in their last G8 summit in Gleneagles, thanks to constant nagging by people like the rock star Bono. But so far, they are only ready to grant debt forgiveness to the poorest African countries. The Philippines is supposed to be a middle income nation, so far not qualified for debt relief. The good news is, given Ate Glo’s stubborn insistence to stay in office, we should be qualified in no time at all – together with the poorest in Africa.

For now, the only non African country that got debt relief, is Argentina. It did so by being tough negotiators. Last year, it told its creditors they would only get 25 cents to the dollar, take it or leave it. Thus, Argentina’s over $100-billion debt was cut significantly, enabling the country to get its economy going again. Argentina decided to pay its debts – at its own terms.

Given our fiscal problem, we may end up with a situation wherein we will have little choice. Not to seek debt relief while we are still able to service our debts is a failure of our government. Ultimately, because we allow our leaders to take a passive stance on debt, we are all at fault we are in this mess.

Colliding Galaxies

If watching ANC these days is depressing you about our country’s bleak future, avoid the BBC at all cost. You might just catch a story it featured on its website about two galaxies colliding in the constellation of Pisces, some 100 million light-years away from Earth. The image was captured last month by an instrument on the Gemini North Telescope at Mauna Kea, Hawaii.

Astronomers say it gives a scary insight into what may happen to our own planet some five billion years from now. The Milky Way, the BBC reports, is expected to merge with the neighboring Andromeda Galaxy, swallowing up the Solar System.

"It’s amazing to see so far in advance how planet Earth and our own galaxy will ultimately end," Professor Ian Robson, Director of the UK Astronomy Technology Centre said. The good news is, we won’t be around when the fireballs collide. The bad news is, there are no fireballs in our immediate future, forcing us to endure the remaining years of Ate Glo’s term.

And don’t get too complacent about the five billion years. Someone in our Plaridel e-group warned "there’s even a bigger chance that, within the next billion years, as the Cosmic Dice rolls, a Terminator Asteroid now silently lurking in our solar system’s immediate neighborhood will wipe out much of dominant Earth life as we know it."

I must feast on that crispy pata or better yet, have lunch every day in those monster buffet offerings in town (Crown Plaza, Circles at Makati Shang, Marketplace at Hyatt Manila, Westin Plaza) to get my cholesterol to killer level. If I have to go, I must go happy. I must also make sure I won’t be around when those heavenly fireballs start rolling.

Honorable

Here’s Dr. Ernie E.

A head of state attending a UN General Assembly session checked into a New York hotel. He opened the door to his room and found a pair of beautiful twenty-one-year-old naked twins stretched out on the bed.

"Surprise," the twins say in unison," we’re a gift from your favorite contractor."

"Young ladies," he said, "I am one of the most respected men in my country. I have been married for twenty-five years. I have a wonderful family that I love very much. I have never been touched by a word of scandal; my good name is above reproach. I am sorry, but one of you will have to leave!"

Boo Chanco’s e-mail address is [email protected]