IOU: The Debt Threat and Why We Must Defuse It

But to win that fight they would need even more Republicans on board. And they would need to work fast – the House and Senate would make their decision on how much to appropriate for debt relief by the beginning of the new fiscal year, October 1.

With less than four months to go, the campaigning shifted up to an even higher gear.

‘John Kasich [Arnold Schwarzenegger’s friend, the Republican Chairman of the National Budget Committee] took the lead, and agreed to launch the fight. But we needed to ensure that when he got up and said “We’re not going to accept the Committee’s recommendation,” others would get up and say, “John is right – I agree with him. Let’s not accept these recommendations, let’s do the full $435m,”’ Shriver recalls. ‘So we met with Jim Leach from Iowa. We met with Clinton’s staff. We started calling everybody who could help challenge Callahan’s recommendation. And then we called them back again and again. We got Volcker to call them, we got the President to call them. We were like animals, we would not leave them alone.’

Bono flew from Europe to Washington eight times that summer. ‘He came back and forth like a tired old dog,’ says Shriver. ‘I would do the red eye from Los Angeles, meeting him there [in Washington]. We were pretty bedraggled. It had become beyond a full-time thing for the both of us. And when we weren’t meeting face-to-face, we were back on the phone and writing to people and having conference calls, and asking people to write stuff, and finding out names of newspaper editors in key states, and then placing articles in papers.’

‘It was kind of like the Theatre of the Absurd,’ remembers Bono, who was supposed to be delivering a new album, All That You Can’t Leave Behind, while all this was going on. ‘There were even times that Bobby used to hide outside meetings that I would have with Republicans. I would go in and he would hide, stay outside. He’d say, “I’m a Kennedy. You don’t need me around here.” He would have flown from LA and be hiding outside.’

The Bono-Shriver commitment, tenacity and good humour encouraged their allies to bat that bit harder too.

Kasich pulled his considerable weight. ‘He was soundly determined,’ Shriver says. ‘And he’s one of those fellows who when he gets very determined you know you really don’t want to cross him. People knew that he would just, to put it bluntly, fuck them if they didn’t go along with him.’

So they did.

Larry Summers went all out for them too. ‘He went to those meetings at a time of hostility that is hard to imagine,’ remembers Bono. ‘This was after the Monica Lewinsky affair when there was a terrible stink in the city, and he batted for us.’ Professor Jeffrey Sachs hosted a prominent conference on debt cancellation in Washington and Gene Sperling played an integral part: ‘He was always on the phone, always with great ideas of how to get things done,’ recounts Shriver. The US affiliate of the Jubilee campaign did a lot of leg work on Capitol Hill to educate Congressmen and their staff, producing form letters for their supporters to send to their representatives, and providing e-mail addresses of swing Senators and Representatives that campaigners could send out. And big business was brought on board – Goldman Sachs, Motorola, Bechtel, Caterpillar and Merck all signed an open statement calling for the full $435 million to be found.

But, if the Congressional floor fight was to succeed, they’d need yet more support. Various key Republicans were still holding out, and Callahan needed to be, at the very least, out of the way.

It was time to call upon Jesus.

And it was Eunice Shriver who had his number. She was pals with the Reverend Billy Graham, the TV evangelist with a virtual congregation of hundreds of millions. Graham agreed to make a video for Bono and Bobby that they then sent around to recalcitrant members of Congress, a two-minute, no bells, no whistles video, in which he asked them to support Bono’s Jubilee cause.

Jesse Helms, the notoriously conservative, hugely influential Republican Senator and Chairman of the Senate Committee on Foreign Relations, a man who symbolized opposition to foreign aid of any sort, wasn’t sent a video – he was, after all Graham’s own Senator, and knew him well. But Graham’s office played an important part in enabling what became a critical meeting between Bono and Helms – they vouched for Shriver. And with this endorsement, Helms agreed to the meeting.

‘Bono connected with him in a spiritual way,’ recounts Shriver. ‘The two talked about the vast gulf between Africa’s misery and America’s prosperity. About the Bible, children and so forth. And Helms was very moved by Bono’s sincerity and evident knowledge. Not only in terms of the scripture, but in terms of the financing. He said he would come on board.’

Helms’ support was what Bono had been waiting for. His entry into the fold gave permission to all those politicians who were in his anti-foreign aid camp to stop opposing debt cancellation. What’s more, the very public way in which Helms joined the team, with stories of the hard man of American politics in tears during his meeting with Bono doing the rounds, meant that the final laggards – people like Phil Gramm from Texas, who might have opposed any challenge to the Committee’s recommendation – could now safely be counted upon not to do so.

Sonny Callahan was the last hold out.

‘It was a story Harry Belafonte told me that made me go for Sonny’s bishop,’ recounts Bono. ‘Harry Belafonte said that he remembered being with Martin Luther King and a group of Dr King’s key supporters when Bobby Kennedy was made Attorney General. The team around Dr King was very depressed, because at the time Bobby was known to be quite reactionary on civil rights. They saw it as a very black day for the Civil Rights Movement, and they were all bitching about Bobby Kennedy, about what a hopeless case it was. And Dr King told them to stop bitching and said, “Look, there must be one redeeming thing about this guy – give me one redeeming thing.” And they said: “Look, I’m telling you Martin, there’s nothing redeeming about him. He’s an Irish racist.” And Dr King closed the meeting and said: “Come back when you’ve got one redeeming thing.” And when they met again two weeks later they said, “We’ve found something.” “What?” said King. “His Bishop. He’s very close to his Bishop. He’s a religious guy and he really listens to his Bishop.” So they went and met with the Bishop. And then Harry tells me, in this incredible voice that he has, “When Bobby Kennedy lay in a pool of his own blood in Los Angeles, there was no greater friend to the Civil Rights Movement.”

‘He moved. Any man can move one hundred and eighty degrees. Harry had told me this as a sort of way of steering my way and I have used the story many times as a guide. But in the case of Sonny I used it literally.’

‘There were priests in the pulpit. Priests and pastors sermonizing on debt relief on Sundays, telling their congregations to tell Callahan to take care of this, including my own Bishop. Eventually I gave in,’ concedes Callahan. ‘What else could I have done?’

When the floor fight finally did take place in early September and Kasich got up as planned and voiced his objections, Callahan didn’t stand in the way. Members from both sides of the aisles, in a rare moment of bipartisanship, voted to override the Committee’s recommendations.

And on October 25, 2000, Congress agreed to provide $435 million for debt relief, the entire amount the campaigners had hoped for.

The Herculean efforts of Bono and Shriver are a beacon to what the civic community can achieve. And leave us with a permanent hope that we can get politicians to act. But did the great American gesture inspired by Bono and Shriver actually resolve the developing world’s debt crisis? Did the Cologne Initiative that they had been backing ever provide the world’s poorest countries the opportunity to make a ‘fresh start’? Were the IMF and World Bank loans ever cancelled? Was the $435 million the start of a renewed commitment on the part of the United States, and other countries to funding development? Or were the difficulties in securing it, a warning of how hard it would continue to be to raise money domestically for foreign aid?

And what about less poor but still highly indebted countries like Brazil or Turkey or Pakistan which were not included in the debt cancellation programme? How likely is it that emerging markets such as these, if their debts continue to build up, will also reach crisis point, and be forced to call a default? And how destabilizing to the world economy would such a scenario be? With what political consequences?

And how about the two issues that most threaten the stability of our future – the environment and terrorism? How connected are they to the debt story? Is debt an issue that should just be of concern to financiers, number crunchers and churchgoers? Or should defusing the debt threat be of uttermost importance to us all?

But first, how on earth had most of the developing world at the end of the millennium ever got into a situation where it was so visibly drowning in debt? How had debt, surely a positive instrument for development, ended up becoming the cause of so much desperation and despair? What had gone so dreadfully wrong?

THE BACKGROUND (#ulink_c89f8028-3a5a-5ded-83c8-75275d4132d8)

CHAPTER TWO It’s Politics Stupid (#ulink_e8d9add2-ccce-5ab7-a99d-8689868f3f94)

‘Imagine your bank manager saying to you “I’ll lend you as much money as you want, as long as you’ll be my friend.”’

Debt-endency

‘Eat, sleep and shit’ was all Mao Zedong said he did while in Moscow in December 1949, his first ever trip abroad. He should have added ‘and wait’. Because in between crapping, snacking and napping, that was primarily what he did. Ensconced in virtual seclusion in one of Stalin’s dachas, in a birch forest a few miles to the west of Moscow with nothing but biographical films of Stalin to watch, Mao Zedong waited for weeks to be received by the ‘steel man’ whom he had travelled 8,600 km by train to see.

The purpose of his trip was twofold. First to ask Stalin for a $300 million loan on behalf of the newly established People’s Republic of China – Mao had no other source of ‘hard currency’ – the US wouldn’t lend to China, and China’s economy was in difficulty; and second to establish a new Sino-Soviet Treaty of Alliance.

Given that the Soviet Union was itself strapped for cash and in the process of trying to rebuild its own war-torn economy, $300 million was a huge amount for it to lend out. Moreover, Stalin needed time to work out whether an alliance with Communist China was really in the Soviet interest, and more specifically whether Mao, a man he considered a ‘cave Marxist’, someone with no real understanding of socialism, was a necessary ally. Would he be an asset or a liability?

Eventually, Stalin buried his doubts. China was too important to risk losing. A number of countries, including India, had officially recognized the People’s Republic, and Stalin was worried that continued procrastination would risk alienating the Chinese Communists. Stalin also realized that by lending to China, the Soviet Union would be able to bank a favour it could later call in. He agreed to establish the treaty and authorized the loan.

The wisdom of the decision was soon vindicated. Only a few months later the Korean War erupted, and within weeks of the American landing at Inchon, the Russian-backed North Korean army was on the verge of annihilation. An anxious Stalin requested Chinese intervention and Mao, partly prompted by his desire to prove that Soviet support of China had been justified, obliged. Ironically, and much to Mao’s irritation, almost all of the $300 million Soviet loan ended up being used to buy Soviet weapons to fight a prolonged war in Korea on Stalin’s behalf.

Four years later the question of debt reared its head once more in Sino-Soviet relations. In 1954, Stalin’s successor Nikita Khrushchev, in a show of ‘fraternal’ support, offered another $500 million to Mao Zedong – at a very low interest rate of only 2 per cent. The loan was meant to be paid back between 1966 and 1967, but this time China returned the debt ahead of schedule, much to Khrushchev’s surprise. As he told the Central Committee Plenum in February 1964, the Chinese could have reaped great financial rewards on such a low-interest loan. In fact, the Soviets had made this clear to Beijing. But Mao insisted on repayments. ‘Can any of the economists understand this?’ Khrushchev asked. ‘It is difficult to understand. Only Mao Zedong can understand this.’

Mao had insisted on repaying the Soviets so quickly because he understood all too clearly that the cost of debt cannot only be measured in financial terms. He saw that loans from other governments often also come at a huge political cost: binding countries to each other, and creating a dependency that first establishes and then serves to reinforce pre-existing power asymmetries and he didn’t want to risk being so dependent on the Soviet Union that he lost political manoeuvrability and endangered his own sovereignty. This was a similar conclusion to that reached by Simon Bolivar, the liberator of the Andean Spanish Colonies (a rough amalgam of Venezuela, Colombia and Ecuador as they are today) over a hundred years before. ‘I despise debt more than I do the Spanish!’ Bolivar had said to his comrades-in-arms, explaining that, ‘it threatens the independence (#litres_trial_promo) that had cost so much in blood.’ And one echoed much more recently by the Indian government in 2002, when it paid off its most expensive multilateral loans (loans to the IMF, World Bank and regional development banks) early, and again in 2003 when Prime Minister Atal Behari Vajpayee announced (#litres_trial_promo) to 22 donor countries that he did not want to receive their aid on a government-to-government basis any more as India was no longer willing (#litres_trial_promo) to accept the conditions that came with it. Echoed again by Thaksin Shinawatra, Prime Minister of Thailand in 2003 when he repaid the $12 billion loan his country had secured from the IMF in the wake of the Asian financial crisis, a year before it was due. Against a backdrop of a massive national flag and with patriotic theme songs blaring, he swore to his audience that this was ‘the last time the country would be indebted to the IMF’, while reminding them of what a ‘pain to the nation’ the debt had been.

But the responses of Mao, Bolivar, and Vajpayee and Shinawatra are not typical. Most developing countries have not and do not take a stance against borrowing. Instead developing world leaders have on the whole accepted indeed in many cases embraced loans from whichever government has proffered them. The reasons we will come back to later on.

It’s a Cold War

At no time in recent history have loans been proffered as ‘generously’ as during those not so distant days of the Cold War. A money-for-influence circus with China, the Soviet Union and the United States all pursuing Communism around the ring. A time of two political and economic ideologies and three camps – the capitalist bloc under the auspices of the United States, and the Chinese and Soviet socialist blocs – with each camp seeking to win the allegiance of the greatest number. A time when loans to countries and regions shot up in direct proportion to their perceived geopolitical influence or ideological loyalties and when loans were used as a means of securing powerful allegiances and ensuring political stability.

In 1960, for example, when South Asia and the Far East were perceived as the main ‘red threats’, 50 per cent of all US aid (loans and grants) was sent to key ‘domino’ countries like South Korea, Vietnam, Thailand, India, Pakistan and Iran. Between 1945 and 1952, when the Soviet penetration of Europe was perceived by the Americans as their greatest threat (#litres_trial_promo) it was Europe that received $13.3 billion in US aid, (in that case mainly grants) while other regions had to make do with significantly less.

The Bay of Pigs fiasco (#litres_trial_promo), in which the US attempted and failed to overthrow the Communist regime of Fidel Castro, moved Latin America onto America’s list of preferred borrowers. In a. speech soon after the invasion, John F. Kennedy spoke of ‘the struggle in many ways more difficult than war…a struggle…taking place every day, without fanfare, in thousands of villages and markets…and in classrooms all over the globe.’ A struggle which needed, Kennedy believed, foreign financial assistance to win. Why? Not for the sugar-coated reasons laid out in his inauguration speech only a few months before.

‘To those people in the huts (#litres_trial_promo) and villages of half the globe struggling to break the bonds of mass misery, we pledge our best efforts to help them help themselves, for whatever period is required, not because the Communists may be doing it, not because we seek their votes, but because it is right.’

But, rather, because if the Americans didn’t provide loans, ‘the reds’ would. As Kennedy proclaimed later, in an address at the Waldorf Astoria on a blustery winter night just weeks after the resolution of the Cuban Missile Crisis:

‘Less than a month ago (#litres_trial_promo) this Nation reminded the world that it possessed both the will and the weapons to meet any threat to the security of free men. The gains we have made will not be given up, and the course that we have pursued will not be abandoned. But in the long run, that security will not be determined by military and diplomatic moves alone…Aid is a method by which the United States maintains a position of influence and control around the world and sustains a good many countries which would definitely collapse or pass into the Communist bloc…Really I put it right at the top of the essential programs in protecting the security of the free world.’

And, indeed Latin America’s external debt (#litres_trial_promo) increased from $12.6 billion (thousand million) to $28.9 billion between 1960 and 1970, a 230 per cent increase, the majority of which was provided by the American government and the World Bank, the institute set up after World War II to aid world economic stability, but which throughout the Cold War was blatantly used by the US as a conduit of its foreign policy. Among loans made by the Bank (#litres_trial_promo) were those to Nicaragua’s US-friendly Somoza regime, and to Yugoslavia once it broke from the Soviet bloc and the US had recommended that the West offer the country ‘discreet and un-ostentatious support.’ Among loans withheld by the Bank were those to Poland in 1948, because the US didn’t want money going to a Communist country and to Allende’s Chile at a time when Nixon had given orders to ‘make the enemy [Chile] scream’. The lending to Chile resuming a few months after Allende was killed in a military coup.

Everyone’s at it

The rivalry during the Cold War was not just between America and the Communist ‘other’. Throughout, China and the Soviet Union also battled each other for who would prevail in the Communist World, often also using loans as a means to hold sway.

In 1965, for example, during the Vietnam conflict while Moscow was bankrolling Hanoi’s purchases of arms and ammunition, Deng Xiaoping reportedly offered an enormous loan of 4 billion yuan ($1.6 billion (#litres_trial_promo)) if Vietnam agreed to abandon economic ties with Moscow.

Or take Soviet lending to decolonized Africa in the late 1950s and early 1960s. Initially this had almost nothing to do with the Cold War rivalry between Moscow and Washington. Nor was this an altruistic act. Instead it was a direct outcome of an intensifying competition with the Chinese for the leadership of the international Communist and national liberation movements: securing influence in Africa (#litres_trial_promo) was seen as greatly important in that quest, and if it took hundreds of millions of dollars in loans to do it – as it did – so be it.

In that case, however, the West soon also got involved. The patronage of Africa by the Chinese and the Soviets threatened it. As a British Foreign Office document of 1959 warned: