And there needs to be rules like in domestic systems to make sure when there is a crisis that you can just get rid of it, right? With very clear and fair rules, right?  And that does not exist. And that’s why people call it debt forgiveness

You know Germany is a creditor to Sri Lanka as well, so it gave loans to Sri Lanka, but also as part of the global governance, being a powerful member of the International Monetary Fund, the IMF, of the World Bank, of other bodies that well in a way decide about the financial architecture and in that way demand accountability from the German Government

PIX BY Kithsiri De Mel 

• We do have to see and to be clearly aware of like financial hierarchies in the international financial system
• “You shouldn’t be forever a slave of your debt”

In the backdrop where Sri Lanka has been negotiating the debts with various creditors, two international economists from Germany who recently were visiting Sri Lanka analysed that Sri Lanka isn’t an isolated case with regard to debt crisis, but there are many more other countries from all income categories which have been affected since the outbreak of COVID and the associated economic recession.

Representing “Jubilee Germany”, a movement initiated to fight for the negotiation and cancelation of debts for low-income countries, economists Kristina Rehbein and Malina Stutz shared different aspects of the international debt crisis and stressed on the need for a fairer and just world in order to recover debts; especially from poorer and marginalised countries.

Economist Kristina is the Political Coordinator of the German nationwide debt and development network ‘Jubilee Germany’ and she is also a member of the board of the European Network on Debt and Development. Involved in sovereign debt justice activities since 2010, including on monitoring and analysis of the sovereign debt (architecture) landscape, Kristina is involved in policy work on just sovereign debt restructurings and public campaigns on sovereign debt justice. She has a master’s degree in Global Development Management.

An economist and policy advisor at ‘Jubilee Germany’ Malina’s main areas of work are policy and advocacy work on sovereign debt restructurings as well as just global sovereign debt architecture. Currently, at Jubilee Germany, she is intensively involved in designing national legislation to curb aggressive and uncooperative behaviour of private creditors in debt restructurings. She has a master’s degree in plural economics.

Excerpts of the interview:

Q: Since this crisis commenced in Sri Lanka, we only heard about one option, that’s IMF, and there’s no other alternative. But it is interesting that when I read about your work, there are also other alternatives and especially the ones that come from the West. Can you explain your work and the Jubilee Germany movement and how it was started?

So, Jubilee Germany is a German nationwide development network consisting of around 500 member organizations from civil society and church.

Having been founded in the tail end of the 90s, the beginning of the 2000s and is coming from the so-called Jubilee 2000 movement, which was a worldwide and actually one of the biggest mobilizations back then that ever existed, and fighting for debt cancellation for low-income countries back then, successfully. So, this goal has been reached. It’s still very much in the minds and hearts of people that there was this big, like, worldwide and, like, there were millions of people signing postcards and stuff demanding from the richest countries back then the so-called G8 about debt cancellation.

Although it was about a one-time debt cancellation for a group of countries, back then, there was the discussion about fairer structures of the financial architecture that for these countries. Back then it was important to have debt cancellation. So, there this was already an issue and it was needed to fight for these fairer structures, that’s why Jubilee Germany has been founded. Not only Jubilee Germany, there are so many similar groups in the world, in other European countries, in the US, also in countries in the global south, that still worked since the end of the campaign and of the 90s, still worked on this issue of a fairer sovereign debt architecture.

When it comes to our work, so we function mainly as a German network, focused on the German audience; let’s say in the German Government, on the one hand as a creditor. You know Germany is a creditor to Sri Lanka as well, so it gave loans to Sri Lanka, but also as part of the global governance, being a powerful member of the International Monetary Fund, (IMF), of the World Bank, of other bodies that well in a way decide about the financial architecture and in that way demand accountability from the German Government. But also, I mean focusing on that, also looking at the global architecture, like having talks with the IMF, doing campaigns on others, like not only focused on Germany per se, and we are part of, as Jubilee Germany, part of a European and global network on debt justice, and I think it’s like 50, 60 other campaigns as we are.

Q: So when you initially started this network, did you have any particular countries that you are focusing on and going through the crisis that Sri Lanka has been experiencing?

We have to say, like, looking not only back at the last 30 years, but even at the last 200 years, what we have observed is that that a crisis always occurs in kind of cycles. So we do see over the last 200 years, we do see regularly cycles of that crisis.

That means in like every 30, 40 years, there are huge spikes of countries who have to default, who have to renegotiate its debt. And this we do see over the last like 200 years, let’s say. So the last big debt crisis, or the last big wave of debt crisis was actually this one in the 1980s and 1990s, so this was a moment when the jubilee movement was emerging.

 So we have to say that in the beginning of the 2000s, this wave was going down again, also due to this debt cancellation. And so in the beginning of the 2000s, there was a feeling, also the International Financial Institution, the World Bank and the IMF, they were calling all the way, there were these statements that debt crisis is something of the past. We have overcome this now and we will not have this problem anymore, because now we will have more fiscal discipline and everything.

But you know, the international structures, they did not change really that much. So in the beginning of the 2000s, let’s say we only had had like some individual countries being in debt crisis; like Argentina back then, right? Argentina was still in the beginning of the 2000s in a heavy debt crisis. But we did not have at this moment lots of countries being in a crisis.

But still, some people and among them, members of Jubilee Germany, were aware that these cycles are not just over, but that we are just now again in a movement where debt is now again increasing in the beginning of the 2000s, especially after the global financial crisis. So we were very much aware, maybe we do not have a debt crisis, an open debt crisis, which is affecting many countries right now, but we will have it again. Like, it was so clear that it’s not over, but that it’s just the coming of a next crisis.

 And so we were advocating having these kind of fairer international structures to address an upcoming debt crisis. And this was kind of the demand from over the last 20 years.  And when I say, yeah, maybe we can speak also a little bit about our demands for having a fairer international debt architecture.

Q:And also we heard about the concept of debt forgiveness. Can you explain about the debt and the concept of debt forgiveness?

So, I mean, when you say like debt forgiveness it sounds like, okay, there’s something to forgive for.

There’s maybe something that the country or me as a person, I did wrongly, right? And then there’s someone I don’t know, being in a good will, let’s say, and forgiving me of my debt. The reason why Jubilee Germany was founded or the different Jubilee movements were founded is to say, well, actually, when you are in a capitalist system, when you’re actually taking out a loan, this is not between friends, right? This is about, I mean, it’s a normal part of development finance of a capitalist system.

Loans are just part of that. But things can go wrong. And when things go wrong, this is not always, because maybe because the country did something very wrong; mismanagement, etc. There can be so many reasons and that is why there may be a debt crisis, and you need to find a solution.

And in domestic systems, like when me as a person or a company takes out a loan, right, there also is very normal that things go wrong. And what we have there is insolvency laws, right? It’s by law, and that’s not debt forgiveness, right? This is actually, in a way, the right to renegotiate your debt when there is a problem. You are not going to be forever a slave of your debt, let’s say. So there is like these laws in the domestic sphere, and you can just go to court, or there are laws that kind of negotiate, deal with the relations between you and your creditors.

This doesn’t exist for sovereign debt, so the debt of Sri Lanka, let’s say, is the only category of debt where these kinds of very normal rules and laws, they do not exist. It’s like a wild, wild west out there, right? And there, in the kind of sovereign debt discussion, that’s always about debt forgiveness. Now there is this country like Sri Lanka, and now we as creditors, we come and we forgive your debt.

When it comes to sovereign debt crisis, it’s just a very normal part of, let’s say, modern capitalism. And there needs to be rules like in domestic systems to make sure when there is a crisis that you can just get rid of it, right? With very clear and fair rules and that does not exist. And that’s why people call it debt forgiveness.

But in reality, it’s about restructuring your debt. It’s about canceling your debt if it’s needed. And you need some rules to estimate what exactly is needed. But so just to give a bit of a picture, like our demand or the way we see the kind of see the situation, we talk about fair financial structures, you would say it’s the right, right? When you’re in a crisis, like you have a right to negotiate your debt and to engage in debt cancellation, not to have debt forgiveness, but to have debt cancellation.

So if we think why there’s maybe a right or why we would say it’s okay to charge some interest rate is exactly because of this default risk, because things could go wrong and then creditors would have to accept write-offs. So it’s just important to keep this in mind.

That’s really something that’s not nice, let’s say. And when it comes to states and their creditors, right? This is absolutely not about them, right? There is an interest the creditor has when it comes to, like in Sri Lanka, there are, for instance, bondholders. There’s this whole discussion about the so-called International Sovereign Bonds (ISBs), I think, right? There’s National Sovereign Bonds. There’s a very clear and only profit interest behind, right? That’s it. Then you have maybe China, maybe there are some geopolitical interests. Then you have maybe India, maybe there are some economic interests. So you have an interest why a creditor gives a loan to a country,

They assess the risk, right? That means things can go wrong. And when it comes to the ISBs, they charged a very high interest to Sri Lanka, because they already knew, okay, it’s an emerging economy, things can go wrong. It’s an island country, climate change, these things.

And they charge something around nine to10% interest rate, which is very high. Very, very high. But because they wanted to, they kind of thought about, oh, when things go wrong, I’m at least compensated for this risk. And now things are going wrong, right? And that’s why now they need to give that relief. Why? Because they already charged this risk.

Q:When we analyse Sri Lanka’s debts and compare with other countries it is evident that there are clear differences in the interest rates.  As far as you understand what happened to Sri Lanka and where did we go wrong?

To come back to your first point, it was charging different interest rates in the different countries. Exactly, this is like we do have to see and to be clearly aware of like financial hierarchies in the international financial system. Hierarchies or, different asymmetries let’s say.

And for some countries like the US with the US dollar are very much on top of this hierarchy. They can very much influence the interest rate to which they can lend money themselves while countries like Sri Lanka cannot influence this interest rate so much. And they are very much dependent on politics going on in the Global North; for example interest rates of the US state. So also coming back to these cycles of debt, we do see that for example the interest rate which Global North countries choose to set for themselves is very much influencing whether money is kind of flowing in to countries like Sri Lanka or flowing out.

So looking back at the financial crisis of 2008-2009, the Global North countries they kind of followed a very cheap money policy back then, right? They were setting interest rates for themselves at zero or even negative rates and that meant that a lot of money was kind of flowing into countries of the Global South. So if you ask like where these things went wrong, I would say it started back then and of course for Sri Lanka this went together with the end of the civil war, right? So it started back then and followed from 2009 onwards that a lot of debt was taken on. It always takes two to tango. So I really like this phrase because it’s like it’s not just you may say maybe your government you’re not happy with the decision to take on all these loans for these high interest rates and I would say yeah probably you are right and probably there should be some critique to this government, but it always takes two to tango. So it’s always also the creditors who gave this money to Sri Lanka who were really very keen to get in and to give all these loans and this is of course linked to this financial hierarchies and to the interest rates in the Global North.

So it’s really important to keep this in mind because this is part of the reason why we are in this crisis now. And maybe comparing it to other countries, there are other countries right now in debt distress, it’s not only Sri Lanka and they have a similar pattern that they started after the global financial crisis, a pattern of commercial borrowing which is actually like what you just said about thinking about cycles of debt, you usually see this upswing of oh there’s lots of capital in the Global North that needs to be exported somewhere, right? Because you don’t get any profit in the Global North. Interest rates now; someone else needs to please give us profit. So they would do it like without looking at repayment capacity of countries.

But then at some point and that happened especially after COVID and I think when COVID had hit, that was also something that was when it comes to external vulnerabilities of Sri Lanka, that actually was also one of the turning points. Because tourism is totally breaking down and all those problems and then when it comes to foreign exchange that was like very tricky for Sri Lanka. And that also added to the problem. But you have these external things that a country like Sri Lanka kind of cannot control. And after that, when COVID hit, the whole kind of foreign capital totally dried up. So it was not possible to take on new loans.

So countries like Sri Lanka, they’re a bit dependent on this upswing. And when kind of these external dynamics are there, it’s a bit like, you’re a bit dependent on that. But compared to other countries, let’s take Zambia, let’s take Ghana, that are also right now in the same situation, like Sri Lanka also have to negotiate that.

But it’s also other countries that not yet defaulted. It’s a similar pattern of that you have like, like a very quick and higher stock of commercial borrowing. And commercial lenders with high interest rates and then there was like, no new money that they could attract. Kenya is an example, like these kinds of countries.

Q: Does a corrupt government or political system has a role here?

Yah So there is also, as we discussed, that is a corrupt government or governance corruptions was a part of this. This whole cycle of debt,  because there are certain countries know that with these governments, this particular governments, you can do businesses. Isn’t that correct? Is that also a reason here in Sri Lanka? I mean, I guess like many other things, this may be part of the story, right? There’s this question, like when I’m a creditor, right? And I give out a loan, and maybe I give out a loan for a 9% interest rate, right? I mean, I give the, I mean, when I decide to lend, right, I decided to lend obviously to a corrupt government, right? And when there is a crisis, right? Because it’s not the government, like the corrupt, whatever figure of your government that’s going to repay the loan, right? It’s populations for taxes, and I don’t know, cutting spending and these things, right? I think like, you know, this narrative about corruption, right? This is something, especially in the West. It’s usually taken as a reason for a debt crisis. There was a corrupt government, a government that’s going to, like, that mismanaged. So it’s the sole responsibility of, in that case, the Sri Lankan government.

Q: In a debt transaction we know the debtor is the responsible party. But does the creditor too have a responsibility here?

There’s two sides to the story, right? And the credit, but I think, especially in the West, and especially in general, in the sovereign debt debate, this other part of the responsibility. It’s usually totally neglected. It’s always being said, and then there comes this term of debt forgiveness again in there. Oh, there was a country that did bad.

We as creditors, we did this all in very good faith, right? And well, if we forgive debt, that’s not because that’s something, right? That’s, that’s needed, and it’s our responsibility, but because we are, right, such good people. But that’s not the story. When, I don’t know, if it’s China, or if it’s the Eurobonds, the Eurobond holders, if they give, like, a loan to Sri Lanka, they obviously had a particular interest in giving to a corrupt government a loan. And when things go wrong, and it shouldn’t be the people repaying, but it should actually be the creditors who are taking the responsibility for the decision to lend.

Q: And all these creditors, they are not benevolent, honest, you know, they are not saints right.. Aren’t they?

They also exploit the corrupt systems and, the big governments, the financially difficult situations, I’m sure they must be exploiting these situations as well. I mean, I guess, especially after the financial crisis, right. When there was all this abundant capital. I mean, it’s not only Sri Lanka, it’s also other countries with a weaker governance. Where there was just money, let’s say, flown into, without looking exactly, right, is it a kind of sensible decision or not to lend? I mean, in general, I think it’s also not that all these creditors are only bad guys. I mean, they make a lending decision on kind of certain terms.

And also, when it comes to the system as it works, when I said there’s no legal framework, kind of covering sovereign debt, the system, how it usually works, right, is like, you usually have in like, you have, like, the one with the most power, let’s say, right, that’s the one making the rules, right. And, like, looking into the past, I don’t know, 50 years of debt crisis, usually, it is the case that me as a creditor, especially the bondholders, the private creditors, they can actually expect that there will be someone paying up, right, someone bailing me out, and it means that I actually don’t have to accept at least high losses. That’s, of course, a bad incentive.

If I can calculate and count on maybe someone, and someone can be the IMF, right, an IMF programme, there is money involved, right, that, like, Sri Lanka is in default, there are so many countries that are actually in the similar situation, like Pakistan is a very good example. But they are not in default. They are still paying, right, so what they do is, like, delaying as much as they can this decision to start renegotiating the debt, right, because I feel like it’s costly, it feels like something better not to do, let’s say, but actually, they are already in an unsustainable debt situation, and with kind of, like they do find money from someone, like, from China, they find new money, the IMF, I think they have, like, just repeated IMF programmes, like Sri Lanka had, that keeping up the debt service actually means they pay out creditors, like bondholders, that actually perhaps made a bad decision when lending, right, but I can actually, as a creditor, count on that system, that I don’t maybe have to accept losses, but that there’s someone, right, that bails me out, and then, of course, maybe, let’s say, if we had a system, like, domestically that solves the regime, right, may be creditors would look a bit, like, more prudently, right, whether it’s, it makes sense to lend or not, right, and then maybe you would not have situations like you have today.

There’s an international understanding that creditors also be responsible how these monies are spent. I mean, if may be one of the first loan, may be the second loan, they should, they should have a responsibility how these monies spent, and how these are used, by respective governments. I mean, there’s, yeah, I think we could repeat many things we already said, but there’s this term of due diligence.

Q: So we have been told that there's no other alternative other than IMF. Is there an alternative to get out of the situation, other than the IMF?

A:  Maybe going a step back, right, when it comes to this question of is there an alternative, very generally said, right, it is not enshrined in international law, but you must have an IMF programme, it's not like that the United Nations or whoever says, there's any international treaty saying the IMF programme is mandatory, the only way, when you decide. When a country decides to get into an IMF programme and then IMF lending is involved, right, that's the only moment when there is, like, a necessity. That the IMF, for instance, is doing all these analyses that are, like, for instance, a so-called debt sustainability analysis, that is then the basis for, like, in Sri Lanka right now. The IMF's debt sustainability analysis is the basis for all the negotiations, including that the IMF says this is the debt relief that's needed, but principally there's no international treaty saying this must be the IMF, principally Sri Lanka could have decided to have someone else, right, saying, calculating, making the basis for negotiations with creditors.