The proposed sovereign bankruptcy mechanism to be ready by spring 2003 “will not undermine the credit culture in the global economy”, says the IMF managing director Horst Kohler.
Under the plan, a country with heavy debt burden will be able to enter into something akin to bankruptcy procedure to lessen the severity of a debt crisis.
Debt crises constitute the main threat to the global financial system and globalization itself. Debt crises result in currency crashes. The focus to contain fiscal deficits even in periods of economic slump, is prompted by efforts to prevent unsustainable debts. Credit culture specially in industrialized states, like the USA and Japan, is being threatened by mountains of high sovereign, corporate and household debts.
The unsustainable debts make write-offs, restructuring, grants and interest-free loans, and defaults like in the case of the IMF’s show piece, Argentina, imperative. Global official development assistance tend to decline with servicing of debts becoming difficult and even impossible.
Pakistan’s own experience bears testimony to these global trends. The Paris Club decided to write off part of the debt, a substantial portion was rescheduled, The World Bank provided the IDA credit at zero rate of interest and the United States gave a $600 million grant to provide budgetary support. The United States has also come out with a proposition that grants should substitute loans.
In the emerging economic scenario,the fiscal space for finance capital with interest as core issue, is shrinking.
The severity of global debt crises as a result of unsustainable debt burden of a growing number of states has put the traditional credit culture to a critical test. Contrary to the IMF assertions, the credit culture is undergoing a radical change. The strategic vision of emerging credit culture is being shaped by a pretty low inflation rate, bordering deflation and consequently a very low interest rate.
And the fears of deflation haunting the USA and Europe, specially Germany, indicates that the two continents may meet the same fate as Japan which suffers both from deflation and recession.
“It is a testing time for the world economy” as 20 countries accounting for half of the world’s output have been at some point last year or this year in recession”, says Gordon Brown, the UK Chancellor of Exchequer.
A communique issued after the finance ministers and central bank governors of intergovernment Group of 24 on International Monetary Affairs and Development has expressed concern at “the persistence of deflationary pressures in Japan and the potential for their spreading to other countries.” The Japanese interest rates are at zero and the US Fed rate at 40-year low interest rate of 1.75 per cent. Once deflation sets in specially in USA and Germany, hardest hit by slump, nominal interest rates can’t fall below zero. So there is no way to pull economies out of slump. And to quote economists if monetary policy becomes impotent, a budgetary stimulus is the only weapon left. Deflation is stated to be more harmful than inflation.The falling inflation rates in industrial economies, is increasing the risk of deflation. It would mean zero interest rates.
The unsustainable sovereign debt, swelling non-performing assets of banks, corporate or consumer defaults and all of them put together make lending( finance capital) a very risky business. To diversify their risks, the banks are trying to increase their fee-based incomes and enhance their interest incomes. The rentier class is is moving towards performance-oriented customer service business. In industrialized states, the ratio is 40:60 for fee-based and interest incomes respectively. Pakistani banks are much more heavily dependent on interest incomes.
The decline in the global equity markets and loss of investors’ confidence has also intensified the risks of worldwide credit crunch. Official development assistance is declining.The OECD countries give farm subsidies that are six times their total official development assistance. The global financial system faces many a risks and vulnerablities in the current economic slump which has also implications for the distant future.
In the United States, the households carry heavy debt burden. Economists say that debt cannot rise faster than incomes for ever. Eventually households need to spend less and save more, which implies several years of slow growth and a double dip recession.
In countries like Pakistan the banks are awash with excess liquidity because there is growing disconnect between their lending and national economic progress despite the fact that the lending rates have been reduced from 22-24 per cent a few years ago, to about 12-14 per cent to help revive business and reduce budget deficits.
Finance minister Shaukat Aziz says that the interest rate have come down by two per cent and there is room for another cut of two per cent. He is trying to persuade the banks to cut the lending rate to a single digit. Prime borrowers already get money at 8-9 per cent. But there are not many borrowers of this category.
In Pakistan, exports are being encouraged through reduction in interest rates and not by depreciating the rupee. In USA, interest rates have been brought down to weaken the dollar and boost exports. In Pakistan, the rupee is getting stronger with simultaneous cut in interest rates. The specifics of the two countries are different.
There is the IMF pressure on countries like Pakistan to reduce budget deficits to attain sustainable level of debt. The financial stability programme tends to translate into low rate of inflation and lower rate of interest.
The global trend is to shed off financial excesses with interest rate at the core of the crises.All religions opposed interest because, in the mediaeval ages, money lenders exploited individual borrowers. Finance capital acquired respectability because funds provided to corporates gave leverage to businesses.But the hegemonic position of finance capital led to financial oppression. Now, in the fast changing world, ideas are capital and rest is money. Sooner or later, the banks should turn into knowledge brokers to survive and grow, with lending providing marginal incomes.
Excesses of finance capital in Pakistan have made business enterprises sick. A group presentation at a conference of financial system held recently was summed up by a NCB president as follows:” Banks have to be realistic at what rates they restructure problem credits. A number of problem loans were given to companies at 14 per cent and were restructured at interest rates of 22 per cent ensuring that they never survive.Interest rates have to reflect a restructuring which can enable the automatic repayment of the loan; not a short- term solution where you get paid once and then the company collapses because it cannot sustain interest rate of 22 per cent.” In this process banks were left with non-performing loans and bad debts. Their operations continue to shrink by closure of banks and bank branches and by exclusion of project financing.
There is need for investigation as to the principal amount lent by banks to the companies and the accumulating interest on these loans. There should be some transparency. The unrealised mark up for the past three years, depreciation of the rupee and discovery of undisclosed non-performing loans(NPLs) have raised NPLs by Rs 47 billion to Rs.259 billion by June 2002.
It was massive devaluation of the rupee in early 1970s that made debt service costs on foreign loans prohibitive for companies and had their own impact of budget deficit. Fiscal deficits can be contained by low rate of interest and by prudent borrowing.
The State Bank wants fewer and stronger banks. The policy will end up in creation of oligopolies, with few banks dominating the market, at the cost of borrowers. Stronger banks are desirable. They can be small as well as big, with the operations tailored to the size of capital and equity that each bank has.
Whereas the privatization of UBL would reduce NCB’s asset to less than 50 per cent, it would enhance the market share of foreign banks.
And big banks prefer best performing and big companies. They quicken the pace of social exclusion, retard the process of broad-basing of prosperity and widen the disconnect between lending and national economic progress. In the end they create an environment in which the space for operation of finance capital is narrowed down.