Eric Toussaint's two articles on current financial crises

Green shoots amidst debt chaos by Éric Toussaint
4 December 2007
December 2007

As regards North/South relations 1, we are at present in a
situation which is exactly the opposite of the financial crises of
the past 25 years. The credit bubble has begun to deflate and is
moving towards the developing countries in the form of
speculative capital settling on stock exchanges such as those of
Mumbai/Bombay, Shanghai 2 or Sao Paulo. The high level of
foreign reserves accumulated by the developing countries gives
them some protection but caution is required. We are
witnessing a new phase of history. While nefarious practices
continue, at the same time alternatives which empower the
oppressed are beginning to emerge. These embryonic
alternatives need all the support they can get. The time is ripe to
reinforce and radicalize these alternatives, as the countries are in
a position of strength compared to the industrial countries.
Grasped with both hands, emancipation could be on the
horizon.
In 1982, the external public debt crisis of the developing
countries was triggered by the combined effects of the rise in
interest rates imposed by the United States two years earlier,
and the fall in prices of raw materials, particularly oil. The
epicentre was in the South and the first casualties were the
governments of the developing countries, who suddenly found
themselves owing enormous amounts in debt repayments. The financial crises of the 1990s practically only affected
developing countries - there was the Mexican crisis of 1994-
1995, the Asian crisis of 1997-1998, the Russian crisis of
1998, the Brazilian in 1999, Turkish 2000 and Argentine in
2001-2002. Each crisis was triggered by sudden movements of
capital and speculative attacks on the currencies of the countries
concerned. Financial capital that had been directed towards
these countries before the crisis was withdrawn, causing the
crisis. It was a question of capital flight to safety, with capital
being returned to the financial centres of the North, considered
more secure.
Since August 2007, there has been a financial crisis in the North
in the world’s leading economy, which so far has mainly
affected private finance companies in the industrialized
countries, especially North America and Western and Central
Europe. For the moment, Japan has been spared as its private
finance sector, directly hit by a debt crisis over 15 years ago,
has barely had time to get started again. The Japanese crisis
perhaps led Japanese bankers to be rather more prudent than
their North-American and European counterparts 3. Only the
future will tell. The crisis in the financial system of the North is
such that capital flight to safety is operating in the opposite
direction to that of the past. Capital is being directed away from
the North towards the flourishing stock-exchanges of countries
like India, China and Brazil 4, now perceived as safe havens.
The phenomenon is so excessive that the Indian government,
despite being neo-liberal, is considering ways of discouraging
this inopportune capital inflow, which will force up the value of
the Indian rupee and quite possibly flow out again shortly if
more viable financial opportunities present themselves
elsewhere in the world. 5
The global situation has changed over the last 25 years in other
ways, too:
1) History shows that between 1982 and 2005 there was a
tendency for the price of raw materials to fall and the terms of
exchange between industrialized and developing countries
deteriorated. Since 2005, there has been a sharp rise in the
prices of raw materials.
2) Most developing countries now have trade surpluses,
especially China which is inundating the global markets with its
manufactured goods.
3) In 1982 and the years that followed, developing countries’
foreign exchange reserves were limited. Since 2002, slowly at
first and gathering pace since 2005, they have continually
increased.
4) Interconnected markets have led to an increase in private
debt in both the North and the South in the form of complex
types of derivative products which, far from ensuring greater
stability, make for more opacity and speculation (see preceding
article : “An International Situation Dominated by the Bursting
of the North’s Private Debt and Housing Bubble”). We have a
vast financial system with a considerable sector based on the
accumulation of debt paper that could collapse at any moment
like a house of cards.
5) Internal public debt has reached all-time highs in the developing countries, while the external public debt is falling. In the USA it has increased too, although more slowly, and in Japan it remains extremely high at 185% of the GDP, according to the IMF.
6) There is an explosion of food prices worldwide.
7) There has been a frenzied acceleration of the arms race led by the United States.
8) South-South capital flows are on the increase.
9) China is making itself felt as never before in international economic and financial relations.
10) A group of Latin American countries has launched the
foundations of new multilateral regional institutions, starting with
a Bank of the South.
Accumulation of developing countries’ foreign exchange
reserves Since 2004, the economic situation has been characterized by
the high price of raw materials and a number of agricultural
products. This has allowed a large number of developing
countries to increase their export revenues and accumulate
significant foreign exchange reserves, especially countries which
export oil, natural gas and minerals. Some agricultural exporters
have also benefited from this favourable situation. China, by
exporting manufactured goods, has accumulated impressive
quantities of foreign exchange reserves, amounting to stock of
over 1 400 billion dollars. However, not all the developing
countries are included in this scenario; some sub-Saharan
African States have seen their situation take a turn for the
worse.
In 2007, the developing countries together hold over 3 500
billion dollars 6 in foreign exchange reserves while the
industrialized countries hold less than half this sum. How do the
developing countries use their reserves?
1) A considerable share (certainly over 900 billion dollars) is
loaned to the United States through the purchase of Treasury
bonds 7. China lends the United States 400 billion dollars of its
reserves, emanating from its trade surplus with them, so that the
North-American economy can continue to buy Chinese
products. Many Latin-American, Asian and African countries
also lend part of their reserves to the USA. This conservative
policy, which is absurd from the point of view of the interests of
the populations concerned, is increasingly criticized.
2) A significant number of governments have taken the
opportunity to make early repayments of their debts to the
IMF, the World Bank, the Paris Club and private bankers.
3) Some have created development funds, into which they can
place some of their foreign reserves, in view of financing social
and infrastructure projects such as buying up companies in the
industrialized countries 8. These funds are known as Sovereign
Wealth Funds. In order of importance, the biggest are those of
the emirate of Abu Dhabi (the amount of fund is not published,
but estimates place it between 250 and 875 billion dollars!!),
then Kuwait, China, Singapore, Russia. Libya has just
announced the creation of a fund of 40 billion dollars.
Venezuela created the « Fonden » (fund for national
development) in early 2007. In all, the various public funds of
the developing countries place about 2 000 billion dollars at
their disposal. Some of these public funds, such as China’s
National Council for Social Security Fund - NCSSF - aim to
back up the financing of their social security system. The biggest
funds buy up companies in the industrialized countries, which is
a source of anxiety for those governments. The developing
countries are now having recourse to different policies from
those adopted in the years following the oil boom of 1973. In
those days, the governments of the developing countries
recycled petrodollars by lending them to the private banks of
the North and then became indebted to those banks. Present
policies are more solid, but in no way break away from the
dominant logic of capitalism. Investments are not made in
alternative non-capitalist projects, whereas they could serve as
powerful levers to set up policies reinforcing the public sector
by breaking private control over the major means of
production, developing a solidarity-based economy, and
radically redistributing wealth by applying principles of justice
and equality.
4) The creation of a Bank of the South Seven South American countries (Argentina, Bolivia, Brazil,
Ecuador, Paraguay, Uruguay, and Venezuela) are negotiating
the creation of a Bank of the South to finance their regional
integration and social projects. Some among them are also
contemplating the creation of the Bank of ALBA (Cuba,
Nicaragua, Bolivia and Venezuela). The signs of a divorce from
the World Bank and the IMF are increasing: Ecuador expelled
the World Bank permanent representative at the end of April
2007, Venezuela is thinking of leaving the World Bank and the
IMF, Bolivia does not recognize the authority of ICSID
(International Centre for Settlement of Investment Disputes, a
subsidiary of the World Bank) anymore. Having said that,
beyond the signs of bad temper, none of the three countries has
so far actually left the IMF and the World Bank. Concerning the Bank of the South, there are two options. The
first is to set up a bank that will take a neo-developmentalist
stance (supporting the regional expansion of capitalist
companies such as the Argentine Techint, the Brazilian firms
specializing in civil engineering or Petrobras), modelling itself on
the construction of Europe, where big capital overrides all other
interests. The second option would be to endow itself with an
instrument for funding economic, social and cultural policies that
break with the logic of profit-seeking and prioritize economic,
social and cultural integration by applying the different pacts that
guarantee civil, political, social, cultural and economic rights. The governments of Brazil and Argentina uphold the first of the
two options, while those of Venezuela, Ecuador and Bolivia
tend to favour the second. Negotiations are still under way,
since Brazil keeps on finding new motives for deferment. The
outcome is likely to be a compromise based on the first option.
Other themes are being debated by the governments concerned:
will each country have equal influence in the decision-making
structures? Will officials working in the new institution enjoy the
same rights, privileges and impunity as those currently enjoyed
by officials working for the IMF, the World Bank, the Inter-
American Development Bank and other existing international
institutions? What guarantees will there be of transparency and
answerability? The social movements in Latin America and
elsewhere are making a joint effort to influence negotiations in
favour of the second option. For example, they have published
two open letters to the heads of State taking part in the
discussions 9.According to information dating from 11 November, the Bank
of the South should be launched on 9 December 2007 in
Buenos Aires, on the eve of the handover of power between
Nestor Kirchner and Christina Fernandez Kirchner, the newly
elected Argentine president. This awaits confirmation.
Massive increase in domestic public debtA recent development which also has to be considered is that
the domestic public debt is increasing rapidly. In 1998 the
internal and external debts were equal; in 2006 the domestic
public debt exceeded the external debt by a factor of three 10!
This phenomenon is very important: from now on, it is no longer
possible to measure the level of debt of developing countries
solely on the basis of the external debt.
The weight of public debt repayments The latest figures published by the World Bank in GDF 2007
indicate that servicing the external public and private debts by
developing countries amounted to 540 billion dollars in 2006. If
we only consider the servicing of the external public debt, since
this falls under the responsibility of the state budget, it
represented 280 billion dollars in 2006. Despite the fact that the
external public debt/GDP ratio is decreasing, the total volume of
the debt is continuing to rise and the amounts repaid increased
once again in 2006 compared to the previous year. More
ominously, if we include servicing the domestic public debt,
which also falls under the state’s responsibility, it is the
astronomical sum of more than 1000 billion dollars a year which
the public authorities of developing countries have to repay for
both external and domestic public debt. 11.
Increase in the indebtedness of private firmsWe must not lose sight of the increasing indebtedness of private
firms of developing countries. The external debt of developing
countries’ private companies increased from 664 billion dollars
in 2004 to 911 billion in 2006, which represents a hike of 37%
12. Since the raw material exporting countries are witnessing
an upturn in their fortunes, the private banks of the most
industrialized countries have multiplied their loans to these
private companies. The two private sectors which are indebting
themselves most in developing countries are the banks and the
firms dealing with hydrocarbons and raw materials. We must
pay particular attention to this development: the private banks of
the developing countries borrow from the North on low interest
rates, mostly on a short-term basis, to lend this money to the
internal market at a higher rate and on a long-term basis. If the
economic situation suffers a downturn (which is likely in the
coming years), we might witness a number of bankruptcies of
the private banks of developing countries, just like the financial
crises which hit Mexico in 1994-1995, the countries of South-
East Asia and South Korea in 1997-1998, Ecuador in 1998-
1999 and Argentina in 2001. Today’s private debt of banks
might, if we are not careful, become tomorrow’s public debts.
Hence, the need to control private sector indebtedness. The
same applies to the sector of hydrocarbons and minerals.
Private petroleum, gas and mineral companies, take out loans in
order to increase their production capacity and profit from the
current high prices of raw materials. If the prices drop, the
investments made through borrowing might not be profitable
and the debt would become impossible to repay. It is
imperative to limit and control this indebtedness.
Capital flight and profit repatriation towards the North versus
the movement of migrants’ remittances towards the SouthCapital flight and brain drain from developing countries to the
most industrialized countries have increased over the last few
years. However, the amount of profits repatriated towards the
‘parent company’ has multiplied by a factor of 4.5 between
2000 and 2006 (from 28 billion in 2000 to 125 billion in 2006)
13. Moving in the other direction, are the remittances migrants
send to their native countries, which have also increased 14.
According to a recent study, in 2006, migrants sent 301 billion
dollars to their families in developing countries 15. This is six
times more than the amount sent in the context of Development
Aid.

Foodstuff versus biofuel
Throughout 2007, the price of food has increased everywhere.
This increase has direct repercussions on the budget that
households have to allocate to food in order to survive. In sub
-Saharan Africa, as well as in Southern Asia, where the large
majority of the population is forced to assign 60% of their
revenues to purchasing food, this price increase is taking a
dramatic turn, while in Western Europe, Japan or North
America, although the increase in price has certainly produced
discomfort, the great majority of the population has not
manifested concern. Globally, it is mainly women who suffer the
brunt of the increase in food prices, as they are most often in
charge of feeding the family. An analysis based on gender and
class is required to understand the changes.
Two main reasons for the increase in food pricesFirstly, there is the decision of many governments and
multinational companies to develop the production of biofuels,
such as ethanol, which is produced from sugarcane, maize,
colza or other plants 16. Nowadays, 20% of US maize is used
to produce ethanol, and 50% of the sugarcane in Brazil! 17
The rise in price of maize has had repercussions in Mexico and
increased the cost of tortillas. This is an example of the
devastating effect of free-trade treaties. In fact, in 1994, a free-
trade agreement between the US, Canada and Mexico
(NAFTA) was signed. Once NAFTA was in place, US agro-
business flooded the Mexican market with cheap US maize,
selling it at a price that was below the cost of production of the
small Mexican farmers, thousands of whom subsequently lost
their jobs (and have since tried to emigrate to their rich
Northern neighbour). Since 2006, the price of maize exported
by the US has largely increased because of demands linked to
the production of ethanol. Consequently, the price of food went
up in Mexico since maize is the main staple food. The Mexican
peasants that used to produce the maize are not there anymore
to respond to the demand. They have either sold their land and
emigrated to the cities or the US, or they are crippled by debt
and have difficulties in getting back into maize production.
A second phenomenon has worsened the food situation of the
poorest. In 2006 and in 2007 the big grain companies, based in
the most industrialized countries with temperate climates,
reduced the area planted with cereal food crops in order to
force up cereal prices on the world market. This means they
took the risk of creating food shortages in Africa and other
continents which, over the last forty years, have become net
importers of cereals due to the fact that institutions such as the
World Bank have encouraged them to prioritize the cultivation
of tropical products (cocoa, coffee, tea, groundnuts, etc.)
The driving forces of capitalism are trying to profit from this
situation to strengthen the domination and control of
multinationals over agricultural production. Thus, on the pretext
of increasing Africa’s food production, the Bill and Melinda
Gates Foundation and the Ford Foundation have tried to launch
a green revolution in sub-Saharan Africa. They placed Kofi
Annan at the head of their project, who had already created
cronyism with the big multinationals through the creation of
Global Compact in 2000 when he was general secretary of the
United Nations. It must be remembered that since the 1960s,
the green revolution has been imposed in India, the Philippines
and other developing countries, by the World Bank and the
Ford Foundation, resulting in greater dependence of farmers on
the big multinationals responsible for the production of seeds,
herbicides and pesticides (Monsanto, Cargill, Sygenta,…) 18.
The environmental effects are equally disastrous (especially soil
and groundwater salinisation). The solution in sub-Saharan
Africa does not lie in the green revolution but in the radical
reduction in cash crops for export, so as to free up land for the
production of cereals and other essential food crops. A public
policy of support and protection of African peasants is needed.
On a planetary scale, the dramatic increase in the price of food
crops represents a strong argument in favour of implementing
food sovereignty policies and radical agricultural reform,
including rejecting the production of biofuels. Governments must
take strong measures to guarantee that healthy, non-genetically
modified food is available for the citizens of their countries, by
favouring organic crops produced by small and medium scale
farmers under different forms of organization and ownership:
smallholders, cooperatives, public companies, and traditional
communities.

China, a capitalist country of the modern style
China is presented from the angle of its economic success, in terms of GDP growth and increased exports. GDP growth may
well be impressive, but in fact, China has chosen a capitalist
model of development, implying increased exploitation of
Chinese workers, mass redundancies, privatisation of many
public companies, radical reductions in State spending on
education, health, social security, and unbridled productivism
with total disregard for nature and public health. Over the last
ten years, the percentage of wages in the GDP has fallen
sharply, going from 53% in 1998 to 41% in 2005 19. It is true
that China is a net creditor with regard to the United States but
it has accumulated a colossal internal debt. Worse still, social
inequalities are growing at a horrendous speed. Various studies
show that while the living conditions of the poorest 10% of the
population have seriously declined, the richest 10% have seen
their income and wealth booming. The number of Chinese
billionaires in dollars has shot up from 3 in 2004 to 106 in 2007
20. A severe economic slowdown in the United States may
not make too much impact on the economic health of China, as
it exports more to Europe than to North America.
Nevertheless, it is not impossible that the contradictions of
China’s domestic economy combined with an external shock
such as a significant slowdown in the USA could lead to major
problems. The rise of internal debt both at government level and
in companies, the accumulation of unsafe debts in banking, the
creation of speculative bubbles on the property market and the
stock exchange are some of the factors that could lead to an
economic crisis, sooner or later. Not to mention the powder-
keg of glaring social inequalities. Quite apart from the risk of a
crisis, it is the model adopted that deserves utmost criticism
21.

India’s economic miracle – a myth
Another country presented as a success story is India.
Economic growth exceeds 9%, the Mumbai (Bombay) stock
exchange is booming, and Indian companies are investing in
industrialized countries and developing countries alike. With few
exceptions, the media fail to report on the changes in living
conditions for the majority of Indian citizens. However, the
Indian daily Hindustan Times on 14 October 2007 revealed that
according to a study by a government institute, 77% of the
population - in other words 836 million Indians - live on less
than 20 rupees a day (less than 0.5 US dollars). These figures
are very different from those of the World Bank, which only
attest to about 300 million Indians living on less than one US
dollar a day 22. India has a high number of working poor.
India’s National Commission for Enterprises in the Unorganized
Sector reveals that 320 million workers live on less than 20
rupees a day 23. The same Hindustan Times article published
the findings of a study on world famine carried out by the
International Food Policy Research Institute (IFPRI) according
to which 40% of underweight children under the age of five live
in India. In the fight against famine, India lags behind other
Asian countries such as Pakistan and China. In a ranking of 118
countries, Cuba and Libya figure among the first while China
comes 47 th, Pakistan 88th and India 94th. The report states
that the situation has seriously deteriorated among India’s
peasants. According to other sources, between 1996 and 2003
more than 100,000 small farmers committed suicide, most of
them for reasons of over-indebtedness. This translates as one
suicide every 45 seconds. According to the Indian newspaper
DNA in its 17 September 2007 issue reporting on a
government study, 46% of Indian children are underweight. In
Mumbai, a city of 14 million inhabitants, where trading on the
stock exchange reached unprecedented heights in 2007, 40%
of children are underweight. According to DNA, in spite of 9
years of sustained economic growth, famine has declined by
only 1% in India. Here we have a perfect example of the fallacy
of the trickle-down effect, whereby economic growth is
supposed to be automatically beneficial to the poor. What will
be the effect of the doubling of the price of milk in India in
2007? Obviously it will have no impact on the consumption of
India’s wealthy. According to Forbes, which publishes an
annual report on the world’s richest people, in 2006 India
became the Asian country with the highest number of billionaires
(36 billionaires with a cumulative fortune of 191 billion US
dollars, thus displacing Japan with its 24 billionaires together
worth some 64 billion US dollars. Of the world’s richest
people, Lakshmi Mittal ranks 5th. According to data provided
in October 2007 by the financial press, the Indian billionaire
Mukesh Ambani has now overtaken Lakshmi Mittal and may
well be in a position to vie for first place (currently held by the
Mexican Carlos Slim) or second place (currently held by Bill
Gates) in the world’s wealthiest line-up. These figures are
challenged by other sources: for example, Newsweek’s 12
November 2007 issue predicts that there will be 106 Chinese
billionaires in 2007. In this case Chinese billionaires will
outnumber Indian billionaires, ousting India from first place. But
this is of little matter here. What is certain is that rapid growth in
India and China is producing more and more rich people, and at
the same time more and more poor people.
Mounting inequality in Asia According to a recent study published by the Asian
Development Bank, social inequality and inequality in income
distribution increased in 22 Asian countries between 1995 and
2005 24. Those countries where inequality is most on the
increase are, in order, China, Bangladesh, Nepal and Sri
Lanka. As for India, the Gini coefficient 25, which measures
the level of income inequality, rose from 32.9 in 1993 to 36.2 in
2004.
Banks and hedge funds rush to invest in Indian microfinance In October 2007, the first international microfinance investment
fair was held in the Indian capital. It brought together 40 Indian
microfinance institutions (among them SKS Microfinance,
Share, Spandana and Basix) and major international private
equity companies 26. Microfinance is a fast-growing sector
that is attracting more and more foreign investors, big banks and
hedge funds. In India, 36.8 million people take out small
microfinance loans for amounts not exceeding 100 dollars on
average. The total volume of loans increased by 76% in 2006-
2007 to reach 766 million dollars. The payment default rate for
these loans is just 2%. Companies like Sequoia (the US venture
capital company that backed Google) and Unitus Equity Fund
(another US company investing in eBay) have taken a share in
SKS Microfinance. Citibank and Fortis-ABN-Amro have
announced that they will also be investing in SKS and other
microfinance companies. According to SKS’ chief executive,
hedge funds are also interested in investing in the sector. Who
was it that said microfinance was a real alternative? Brazil’s
president Lula, former presidents Jacques Chirac and Bill
Clinton, Spanish prime minister Zapatero, G.W. Bush and Kofi
Annan, of course. They were not entirely wrong if they were
thinking of a profitable investment for bankers and private
equity companies, not to mention the founders of some of these
microfinance companies like the executives of the Mexican
microfinance company Compartamos who became millionaires
in 2007.
The astronomical cost of the US war in Afghanistan and Iraq In 2008, US expenditure on the war in Afghanistan and Iraq
since 9/11 will reach 800 billion dollars 27. According to a
United Nations calculation, this is the amount that the
international community should have spent over a period of 10
years to ensure that every inhabitant of the planet has access to
drinking water (over one billion of the world’s population are
currently without), access to basic education (over 800 million
are illiterate), access to medical care and health infrastructures
(2 billion men and women are without), and access for all
women to gynaecological and obstetric care 28. These calculations take into account only US expenditure; if one
were to add the cost of the destruction caused by invasion and
occupation in Iraq and Afghanistan, as well as the money spent
by US allies, the figure would be far higher. Not counting the
number of human lives lost and the number of wounded and
war-traumatized.

Crisis in the World Bank and the IMF
In 2007, the chief executives of the World Bank and the IMF
resigned before the end of their mandate. Paul Wolfowitz, who,
with Donald Rumsfeld, fabricated the lies that served as a
pretext for the invasion of Iraq (the existence of weapons of
mass destruction and collaboration between Saddam Hussein
and Al Qaida), was forced to resign because he had been found
guilty of favouritism towards his girlfriend (a World Bank
employee). Rodrigo de Rato, managing director of the IMF,
resigned from his post, thus triggering a new election. The
“elective” processes – both of the World Bank and the IMF –
demonstrate that these institutions operate outside the
democratic norm. The US president alone designates the
candidate for the World Bank presidency and the WB
governors simply ratify this decision. This is how the “election”
has worked for over sixty years. As for the IMF, it is the
principal European governments who designate the candidate
for managing director, who must then be approved by
Washington 29. Recent events highlight the fact that both the
European and US governments wish to maintain strict control
over the two main multilateral financial institutions 30. Beyond
this denial of democracy, the two institutions are going through
difficult times: IMF resources have dried up, since, apart from
Turkey, no other major developing country owes it large
amounts of money (the IMF lives off the sums refunded by its
clients) and the World Bank is having trouble proving it is
fulfilling its mission in the fight against poverty. Many clients are
trying to pull out of the Bank as other sources of financing
become available on more favourable terms. Among these are
the loans granted by China and other developing countries.

Vulture funds descend upon weaker countries
Vulture funds are private investment funds that buy up large
portions of the debt of a poor country on the secondary market,
at a very low rate, in order to sue the country and obtain the
face value of the debt they hold, plus late penalties. These
vulture funds have already received close to one billion USD on
court decisions. Just last April the London High Court ruled that
Zambia was to pay 17 million USD to Donegal International for
a debt they had bought for only 3 million in 1999. No less than
40 lawsuits have currently been filed against twenty countries of
the South, most of them in Africa though some in Latin
America. Eight lawsuits have been filed against the Democratic
Republic of Congo, and courts have already ruled against the
Congolese State in five of them. Here is another illustration: the
US Kensington Funds has filed a case against Congo-
Brazzaville for 400 million USD as payment of a debt they
bought for USD 10 million. In the current legal context it is most
likely that US judges will again decide in favour of the vulture
funds.

Unstable LIBOR
The London Interbank Offered Rate is the interest rate at which
London banks lend money to each other. Almost all variable
rate loans granted to developing countries are based on it. Loan
contracts specify that the interest owed is equal to the LIBOR
interest rate plus a given percentage, for instance, Libor + 3%.
If the Libor rate is at 4.5 %, the interest owed will be 7.5 %.
Since the crisis that started in August 2007, the Libor rate has
been extremely unstable. When banks lose their confidence in
each other the Libor rate increases. This is what happened in
September when the Libor rate soared before decreasing again.
If the crisis that started in August drags on, which is not at all
impossible, the Libor rate may reach a much higher level than
the present rate. In which case the following paradoxical
situation could arise: the US interest rate falls while interest rates
paid by developing countries actually increase because of an
increase in the Libor rate. Developing countries would then
have to dig into their reserves in order to pay a higher bill. Of
course this is only a possibility.

Increase in South-South lending and the growing role of ChinaPrivate and public Banks in some developing countries
(China, Brazil, India, Malaysia, South Africa) grant more and more
loans to governments or companies in other developing
countries. Loans by Chinese public banks to Africa have
soared. In 2004-2006 Chinese banks lent two billion USD to
developing countries for oil and gas development and
production. 31 India, South Africa and Brazil as well as China
are on the lookout for raw materials, which accounts for their
banks granting more loans in order to back up supplies. These
countries also try to sell their goods and services to other
developing countries. The more vulnerable countries may thus
fall into a new kind of dependence that will not necessarily be
any better than the current one towards industrialized countries.
In order to avoid this happening, South-South loans must be
part of a more general process aiming at mutual empowerment.

The Bank of the South: the first step towards a new international financial architecture
It is all the more urgent to develop a new international
institutional architecture which would include the WB and IMF
being replaced by democratic institutions. The IMF and the WB
will eventually overcome their ongoing crisis if developing
countries do not rapidly develop new alternative financial
instruments. Indeed were there to be a new financial crisis in
developing countries, we can be sure that the IMF would be
straight back in the lead as last resort creditors. Even though
they have been weakened, these two institutions are still
implementing their neo-liberal agenda. Developing a new architecture will require the creation and
reinforcement of South-South regional integration processes:
setting up one or several Banks of the South that will have to
coordinate their efforts, devising counter-trade mechanisms
among developing countries that are based on solidarity. 32
Such mechanisms are already producing interesting results in
Latin America and the Caribbean, for example a marked
improvement in the field of health care, energy security
(Petrocaribe), education and information (Telesur).
We must also continue to demand the cancellation of illegitimate
public debts, whether internal or external, so as to free up new
resources to meet human development, which forcibly requires
that human rights be respected. This is why initiatives
concerning debt auditing are essential.
We are witnessing a new phase of history. While nefarious
practices continue, at the same time alternatives are beginning to
emerge which empower the oppressed. These embryonic
alternatives need all the support they can get. The time is ripe to
reinforce and radicalize them, since the developing countries are
in a position of strength compared to the industrial countries.
Local ruling classes want to use the situation to buttress their
own capitalist projects which can take the form of regional
trade integration (the Chiang Mai agreement in East Asia or
Mercosur in South America) but in a context that favours the
pursuit of maximum private profits. Peoples and governments
who want real change cannot be content with such projects;
they can go further by taking advantage of this historic
opportunity - an opportunity for emancipation not to be missed.

============================================
notes articles:
1 his article follows on from “An International Situation
Dominated by the Bursting of the North’s Private Debt and
Housing Bubble” also written in November 2007. The author
has recently published several articles on the international
economic situation and its alternatives: “The International
Situation and the Debt: the new Challenges Facing CADTM”
August 2007 http://www.cadtm.org/spip.php?article2800, “The
Bank of the South: a Review of what is at stake” May 2007
http://www.cadtm.org/spip.php?article2655 , “Bank of the
South, International Context and Alternatives” Sept 2006,
http://www.cadtm.org/spip.php?article2040 , See also: Damien
Millet, Eric Toussaint, “« Banque du Sud contre Banque
mondiale », Le Monde diplomatique, juin 2007.
Centre/Periphery or industrialized countries/ developing
countries. Neither of these descriptions is satisfactory.
2 The Shanghai stock exchange, which has seen a sharp rise
throughout 2007, has nevertheless fallen in the second fortnight
of November 2007. This would seem to indicate that investors
are beginning to have doubts about the unfailing strength of the
Chinese economy, and are starting to think that it could be
affected by the crisis which erupted in the USA.
3 That said, the economic situation of Japan is particularly
depressed. In the second quarter of 2007, the GDP had fallen
by 1.2% when annualized. At the same time, investment
spending fell back by 4.9%, while household consumption only
progressed by 0.3%; yet these two items are the principal
motors of growth. The Nikkei index on the stock-exchange has
nose-dived. Salaries are stagnating and unemployment is up.
Projected growth for the whole of 2007 was 1.7% but this will
depend on the success of the exports which are pulling the
economy this year.
4 See the extended report on this subject in the Financial
Times, 18 October 2007.
5 The Thai government had already taken steps to control
capital movement in 2006 for the same reasons.
6 The value of foreign exchange reserves is calculated in
dollars, the main international currency of foreign exchange
reserves, although in fact, the reserves are also made up of
other currencies: euros, yens, sterling, Swiss francs…
Worldwide reserves for 2007 are 2/3 in dollars. ¼ in euros and
the rest in other strong currencies. (See Bank for International
Settlements, Annual Report 2007, Bale, p.97)
7 See the critical analysis of this policy in “Bank of the South,
International Context and Alternatives” Sept 2006,
http://www.cadtm.org/spip.php?article2040
8 This is the case of Venezuela, Russia, China. The Norwegian
government has done the same thing to maximize the returns on
petroleum. (See Bank for International Settlements, ibid, p.
104.)
9 Open letter to the Presidents of Argentina, Bolivia, Brazil,
Ecuador, Paraguay and Venezuela. 26 June 2007 For a Bank
of the South in accordance with peoples’ rights, needs,
potentialities and democratic vocation
http://www.cadtm.org/spip.php?article2720 . Second letter (in
Spanish) : http://www.cadtm.org/spip.php?article2967
10 World Bank, Global Development Finance 2007,
Washington DC, p. 46.
11 According to the calculations of the author. Neither the
World Bank nor the other IFI provide reliable data on the
reimbursement of the domestic public debt. The basis of the
calculations is the following: according to the World Bank, in
2006, the internal public debt was three times higher than the
external public debt. In 2006, the interest rate for the internal
public debt of developing countries was generally higher than
the interest rate for the external public debt. Since the
repayment of the external public debt of developing countries
amounted to about 280 billion dollars in 2006, we can estimate
that the total repayment on the external and internal public debts
exceeded the sum of 1000 billion dollars in 2006. In 2007, the
amounts repaid were greater than those of 2006.
12 World Bank, Global Development Finance 2007,
Washington DC, Tables, All Developing Countries
13 World Bank, Global Development Finance 2007,
Washington DC, p. 53.
14 World Bank, Global Development Finance 2007,
Washington DC, p. 54
15 The study was carried out by the IFAD (International Fund
for Agricultural Development), one of the specialized UN
agencies. See
http://www.ifad.org/events/remittances/maps/index.htm
16 The reduction of farm land devoted to the production of
cotton in the US will have a positive collateral effect for cotton
producing countries in Africa (Mali, Benin, Burkina-Faso) and
also Uzbekistan, because the price of cotton on the world
market will go up.
17 World Bank, Global Development Finance 2007,
Washington DC, p. 25.
18 See Vandana SHIVA, The Violence of the Green
Revolution, Third World Network, Malaysia, 1993, 264p.
19 Newsweek, 12 novembre 2007.
20 Newsweek, 12 novembre 2007.
21 Pour une présentation critique du modèle chinois, voir
Martin Hart-Landsberg – Paul Burkett, China : Entre el
Socialismo real y el Capitalismo, Editorial CIM, Caracas,
2007.
22 It should be noted that to arrive at this figure the World
Bank calculates in purchasing-power parity, which enables it to
present the situation more positively.
23 Newsweek, 12 November 2007.
24 The Hindu, 24 September 2007
25 0 represents perfect equality and 100 total inequality
26 Financial Times, 12 October 2007
27 See Peter Backer in the Washington Post, article
reproduced in Courrier International of 11 October 2007.
According to the Washington Post, when Bush leaves office on
20 January 2009, the cost of war could reach 1000 billion
dollars (since September 2001), or more than the cumulative
cost of the Korean and Vietnam wars.
28 A calculation made jointly by United Nations specialized
agencies: World Bank, WHO, UNDP, UNESCO, UNFPA,
UNICEF and published in Implementing the 20/20 Initiative.
Achieving universal access to basic social services, 1998,
http://www.unicef.org/ceecis/pub_implement2020_en.pdf The
above-mentioned agencies estimate that 80 billion dollars per
year is the additional sum needed for expenditure relative to the
basic social services concerned, given that approximately 136
billion dollars are already devoted to them. The total annual
amount to be guaranteed fluctuates between 206 billion and
216 billion dollars. For the detailed calculation see the
document cited above, p. 20.
29 In 2000, Washington refused the European candidate and
succeeded in having another European proposed.
30 Not forgetting that another European, Pascal Lamy, is
Director-General of the WTO.
31 World Bank, Global Development Finance 2007,
Washington DC, p. 44.
32 See the kind of trading developing between Bolivia,
Venezuela and Cuba in 2006-2007, for instance in the fields of
hydrocarbons, technology transfer, health care and education.

An international economic situation dominated by the bursting of the North’s private debt and housing bubbles by Éric Toussaint
22 November 2007

An international economic situation dominated by the bursting of the North’s private debt and housing bubbles 1
The crisis that swept through the US in August 2007 is not over yet and the international repercussions will be deep and lasting. When the housing bubble burst in August 2007, it shook financial markets worldwide. This housing crisis is closely linked to a private debt crisis in the world’s most industrialized countries. Clearly this crisis will be with us for several years. With perhaps worse to come.
All the warning signs were there: the boom in housing construction over several years 2 (buoyed up by lower interest rates decided by the Federal Reserve to stem the crisis of 2001-2002) leading to overproduction and a hike in real estate prices which in turn opened the door to speculation. Purchases of new homes have plummeted since the start of 2007 while the default rate for households with mortgages is rising sharply. The weakest link in the debt chain has finally snapped: lenders specializing in high-interest loans to heavily indebted, low or middle-income households (the subprime mortgage market) have found themselves in trouble as the default rate soars (see box). Unfortunately, it is not enough to replace the broken link for the chain to regain its economic momentum. Other links are also likely to give way.
The subprime crisis : Summary of a study by the Wall Street Journal, published 12-14 October 2007
In 2006, 29% of housing loans were high-yield (in other words high-interest) mortgages. Between 2004 and 2006, out of 40.3 million housing loans, 10.3 million were high-interest mortgages. A high interest rate is a rate at least 3% higher than the rate for same-term treasury bills. Many of these high-interest loans contracted in 2006 were to wait till 2008 to undergo a sharp interest hike (loans that totalled some 600 billion dollars). The reason for this is that to persuade customers to contract a mortgage with a higher, variable interest rate, the rate for the first two years was fixed, increasing only in the third year. The worst of the crisis is perhaps still to come. The Wall Street Journal mentions the case of a photocopier store manager who bought a house in Las Vegas for 460.000 dollars in 2006. In 2006-2007 her monthly payments were 3.700 dollars at a rate of 8.2%, but in 2008 her monthly payments will be 14.000 dollars at a rate of 14%. Meanwhile, because of the crisis, her house is now worth only 310.000 dollars (real estate values dropped by more than 30% in 2007). She has stopped her mortgage repayments and is certain to lose her dream house. The Wall Street Journal study demonstrates that the high-interest subprime mortgage market concerns not only low-income American families but also the middle class, as seen in the case just described. The mortgage lenders that made loans sold them to the big banks in the form of securities. These big banks bought them up by the thousands and now find they are worth very little. In 2004, 63% of mortgages were bought up by Wall Street bankers who, to finance these purchases, issued and sold commercial papers 3 to money market “investors”. In 2006, no less than 73% of new high-interest mortgages were bought by Wall Street.
The mortgage lenders (like the banks) made long-term mortgage loans while borrowing for the short term (either from depositors, or on the inter-bank market at historically low interest rates, or by selling their mortgages to big banks and hedge funds). The “problem” is that they made long-term loans to a sector of the populaton that was struggling to make repayments while the housing glut caused their property (which was the surety for their loan) to depreciate drastically. As the number of defaults increased, these mortgage lenders began to experience difficulties in repaying the short-term loans they had contracted with other banks. And the banks, to cover themselves, refused to grant them new loans or did so at much higher interest rates. In the United States, 84 mortgage lenders went bankrupt or partially ceased their activity between the beginning of the year and 17 August 2007, as opposed to only 17 for the whole of 2006. In Germany, the IKB bank and the public institute SachsenLB, both of whom had invested heavily in the US mortgage market, suffered immediate effects and were only saved by the skin of their teeth. 4
But the domino effect does not stop there: the banks that bought up mortgages did so by setting up largely off-balance sheet operating companies called Structured Investment Vehicles (SIV) 5. These SIVs finance the purchase of mortgage loans by selling commercial papers to other investors. Their profit comes from the difference between the remuneration paid to buyers of their commercial papers and the money gained from high-yield mortgage loans converted into bonds (CDO Collateralized Debt Obligations 6).
Of course all these complex debt and loan packages do not create real wealth (whereas there is real wealth in the construction industry): they are largely speculative financial operations. The crisis in this shaky “paper” market, however, leads to the destruction of wealth and human lives (failed construction companies, financial ruin and suicide, loss of employment, repossession of properties).
When the crisis erupted in August 2007, the investors who habitually bought commercial papers issued by the SIVs stopped buying them because they no longer had confidence in the health and credibility of the SIVs. Consequently the SIVs lacked liquidity for buying mortgage bonds and the crisis worsened. The big banks that had created these SIVs had to honour SIV commitments to avoid them going bankrupt. While SIV operations had until then been below-the-line items (which allowed them to conceal the risks they were taking), big US and European banks were now obliged to show SIV debts on their balance sheets. Among these were Bank of America, Citigroup (the leading worldwide banking group), Wachovia and Merrill Lynch, Deutsche Bank and UBS (Union des Banques Suisses). Between August and October 2007, US banks alone took on at least 280 billion dollars of SIV debts 7, with serious bottom-line consequences. Several major banks such as Citigroup and Merrill Lynch at first tried to minimize their level of risk exposure, but their losses were so considerable that they could not conceal them for long. Chairmen were ejected, but not without a golden parachute. Merrill Lynch’s chairman Stan O’Neal received 160 million dollars as compensation for his untimely departure!
Indebtedness of households, defaults on mortgages and much more
In the United States, repossessions of mortgaged homes reached 180,000 in July 2007, over twice as many as in July 2006, and have passed the one million mark since the beginning of the year, that is, 60% more than just a year ago. It is estimated that there will be 2 million repossessions in 2007. Indebtedness in American households has reached an extraordinarily high level: 140% (in other words household debts amount to almost one and a half times their annual income).
Few economic commentators make the connection between the increasing number of mortgage defaults and the fact that American workers work on average longer hours per week to earn less money. This is the result of creating a more flexible and precarious labour market as part of the employers’ offensive 8. A large section of North American employees have seen a real drop in income over the last few years. The rise in interest rates imposed by the Federal Reserve since June 2004 has finally made mortgage repayments far too heavy in relation to household income. In fact the rise in payment defaults is not restricted to the real estate sector: it now concerns loans and credit cards 9.
Double standards
The August 2007 crisis had spectacular effects both in the United States and in Europe. “On Friday 10 August, in Europe and in the United States, an incredible thing happened: in 24 hours banks became too mistrustful of each other to do any mutual lending, forcing the central banks to step in massively. In 4 days, up to 14 August 2007, the ECB pumped nearly 230 billion euros of liquidities into the market.” 10 The US Federal Reserve acted likewise. The dynamic response of the US and European monetary authorities thus prevented multiple bankruptcies.
The response of the US and European political and financial authorities to the liquidity crisis which began in August 2007 is a far cry from the response imposed on the Indonesian authorities by the IMF, supported by these same governments, at the time of the Asian crisis of 1997-1998. In the first case, the US and European authorities saved the banks by placing liquidities at their disposal, whereas in Indonesia, the IMF enforced bankruptcy on dozens of banks by refusing to let either the Indonesian Central Bank or the IMF itself lend them liquidities. This ended in a social disaster and a huge increase in the internal public debt because the debts of the failed private banks were transferred to the Indonesian State. Another glaring difference: to stem the crisis, the US monetary authorities have since August 2007 lowered interest rates (as they did between 2001 and May 2004), whereas the IMF demanded that the Indonesian government increase interest rates, a factor which considerably aggravated the crisis 11. Double standards for the North and South …
International contamination
In September 2007 the US crisis affecting the financial world abroad became even more visible when Northern Rock, a major British bank specializing in mortgages, was suddenly unable to honour its engagements. This bank was contracting short-term loans on the interbank market and making long-term loans on the real estate market. The breach of confidence among banks led to a sudden rise in the London interbank offered rate (LIBOR). This directly hit Northern Rock, whose borrowing rates increased unexpectedly. An emergency loan from the Bank of England saved Northern Rock from bankruptcy. This breathing space was of short duration however, and Northern Rock is now for sale.
The real estate crisis and the private debt crisis are interconnected
The present crisis is not limited to real estate: it directly affects the debt market. Over recent years the private debt owed by companies has dramatically increased. New financial products have become more widespread, namely the Credit Default Swaps (CDS). CDS are bought to protect against the risk of the non-payment of a debt. The market for CDS has multiplied by a factor of 11 in the last five years 12. The problem is that these insurance contracts are sold without any regulatory control from the public authorities. The existence of these CDS encourages companies to take increasing risks. Believing that they are protected against non-payment, the lenders give out loans without verifying the borrower’s ability to pay. However, if the international economic situation deteriorates, tens or hundreds of borrowers could suddenly become bankrupt, in which case the CDS would become valueless pieces of paper as the insurers would be incapable of honouring their engagements. The SIVs mentioned previously specialize in selling CDOs (Collateralized debt obligations) that many investors have been trying to get rid of since August 2007. Finally, during 2006-2007, several companies have endeavoured to buy out other companies by contracting debts: this is what is called Leveraged Buy-Out (LBO). To sum up, over recent years a huge house of cards has been built on accumulated debts. It is now collapsing and the central banks of the most industrialized countries are attempting to patch the breaches and (to) hastily put up some scaffolding to prevent the worst from happening. They might avoid a complete disaster but the damage will be severe in any case.
Several time bombs have been set
In the conclusion to Chapter 5 of Your Money or Our Life, The Tyranny of Global Finance (2005), I raised the question of whether the 2001-2002 crisis in the United States would have long-term consequences:
“Twenty years of deregulation and opening up of markets on a planetary scale have eliminated all the safety barriers that might have prevented the cascade effect of crises of the Enron type. All capitalist companies of the Triad and emerging markets have evolved, some with their own variations, on the same lines as in the USA. The planet’s private banking and financial institutions (as well as insurance companies) are in a bad way, having adopted ever riskier practices. The big industrial groups have all undergone a high degree of financialisation and they, too, are very vulnerable. The succession of scandals shows just how vacuous are the declarations of the US leaders and their admirers in the four corners of the globe. A mechanism equivalent to several time-bombs is under way on the scale of all the economies on the planet. To name just a few of those bombs: over indebtedness of companies and households, the derivatives market (which in the words of the billionaire Warren Buffet, are "financial weapons of mass destruction"), the bubble of property speculation (most explosive in the USA and the UK), the crisis of insurance companies and that of pension funds … It is time to defuse these bombs and think of another way of doing things, in the USA and elsewhere. Of course, it is not enough to defuse the bombs and dream of another possible world. We have to grapple with the roots of the problems by redistributing wealth on the basis of social justice.” 13
From the 2000-2001 crisis to the crisis in 2007-…
Before the 2000-1 "New Economy" or "dot-com" speculative bubble burst in the US and elsewhere in the world, economists and politicians eager to praise the benefits of capitalism in its neoliberal stage (supported in this by a whole armada of journalists specializing in financial issues) confidently claimed that no crisis could be expected. On the contrary, they maintained that the United States had found the magic formula for permanent growth without crisis. They had to change their tune when recession hit the US in 2001 and stockmarket prices kept falling. With the resumption of growth these same commentators then claimed that capitalism had found the magic formula to dispell risks related to too high a rate of debt emissions by creating (among other measures) Credit Default Swaps (CDSs). There was a staggering number of reassuring statements and papers on risk spreading. Yet official bodies such as the BIS (Bank for International Settlements), the IMF, or the WB knew that this meant playing with fire. These institutions’ reports published before the August crisis include scenarios that do not rule out the possibility of a crisis 14 but the prevailing message they conveyed was that effectively, thanks to the new debt security engineering, risks had been spread and major accidents were unlikely. In its 2007 report published in June, two months before the crisis broke out, the BIS noted: “The episodes of market turbulences . . . may have reflected market participants’ latent nervousness that the balance of risks tends to be skewed towards the downside when times are good. In the near term, however, few market participants appear to be overly concerned about a sudden and widespread deterioration in credit quality.” 15 The crisis that started in August gave them a rude awakening. Criticism was heaped on scapegoats. “The conduct of some mortgage brokers was shameful and called for nation wide regulation of the home lending business”, the US Treasury Secretary Hank Paulson said in the Financial Times. 16 Few economists writing in financial papers share Wolfgang Münchau’s criticism of the policies pursued by the Washington government and the Federal Reserve: "I believe that the explosive growth in credit derivatives and collateralised debt obligations between 2004 and 2006 was caused by global monetary policy between 2002 and 2004,” and further “The channel through which negative real interest rates can translate into a credit bubble will remain open”. 17In big banks and private financial bodies there was heavy turbulence and a certain amount of in-fighting at board level (cf. Citigroup and Merrill Lynch). On 11 October 2007 the Institute of International Finance (IIF), an international association of some 800 banks and other financial institutions (including the most prestigious banks) sent a long letter to the IMF and to the main central banks in which it diagnosed a deep crisis and asked public bank authorities to more closely supervise the international private finance sector. 18 The neoliberal European Commissioner for the Internal Market and Services, Charlie McCreevy, has very strong words to denounce "irresponsible lending, blind investing, bad liquidity management, excessive stretching of rating agency brands and defective value at risk modelling. … Nobody can be proud of some of the ugliness that this credit crisis has exposed." 19 However, according to the Financial Times, “the Commissioner, one of the EU’s most prominent exponents of free market thinking, will caution against a rush to regulate, saying rules that enforce transparency in financial markets can sometimes backfire, spreading panic and moral hazard across the system”. 20 Of course we cannot expect the European Commission or the Washington government to decide on firm regulations to be applied to the financial corporations that are responsible for the current crisis.
Are the measures adopted by Washington the sought-for solution?
While they momentarily alleviate the impact of the crisis, the measures taken by the US administration (among them a reduction in interest rates in September and October 2007) are not a solution. In a way the reduction of interest rates alleviates the crisis while dragging it on since it merely postpones deadlines. The real estate crisis has indeed started and its consequences will be felt in the long term. Why? Here are several reasons:
1. There is real over-production in the US housing industry compared with demand.
2. A great number of building projects are under way. In the months and years ahead hundreds of thousands of new homes will come onto the market. A building firm can hardly abandon a site in progress. In short, these new buildings will be added to what is on offer in an already depressed market. A production slowdown in the building sector will have long-term consequences for the economy at large: layoffs, and fewer orders to building suppliers.
3. For several years, there has been a tendency to “go out and buy” since home owners and shareholders have been feeling rich due to the fact that their assets had substantially increased thanks to the rise in real estate prices and to the recovery of the stock market (after the 2001 slump). Now the opposite effect is underway: the value of real estate property is plummeting and the stock markets are uncertain. Households are likely to respond by buying less, which will make the crisis worse.
4. The major banks, pension funds, insurance companies and hedge funds have numerous bad debts on their books. Since August 2007 institutions such as Citigroup, Merrill Lynch and UBS have been trying to minimize their declared losses but have repeatedly had to admit to new losses, which has led to a steady fall in their share value and to the firing of several executive officers. Other institutions will no doubt be affected. It is not impossible (let’s be cautious) that financial institutions will find themselves in a similar situation to that of the Japanese banks when the real estate bubble burst in the 1990s. They needed some fifteen years to get back into the black.
5. The steady fall of the US dollar is undoubtedly a good thing for exports to the United States, and allows the US government to pay back its enormous external debt with a devalued currency. But it also has major drawbacks. A weak dollar makes Treasury bonds and stock market investments less attractive to foreigners who normally invest a large part of their capital in the United States. Less capital is likely to flow in (at a time when it is much needed to narrow the deficit) and more capital is likely to flow out.
The Washington government and the board of the central bank are faced with a real dilemma. If they lower interest rates further, the consequences will be equivocal: it would reduce the immediate risk of bankruptcies and make the fall in consumption less dramatic, but it would also make investments in the US much less attractive and reduce the pressure for sounder company and household accounting. If on the other hand they increase interest rates, the consequences would be the exact opposite with investments in the US becoming more attractive but household consumption falling and companies being faced with increased cash flow problems.
Clearly this crisis will be with us for several years. With perhaps worse to come.

==========
notes articles:
1 The author has recently published several articles on the international economic situation and the alternatives: « The International Situation and the Debt : The new challenges facing CADTM », August 2007, www.cadtm.org/imprimer.php3?id_article=2800 ; « The Bank of the South: a review of what is at stake », May 2007, www.cadtm.org/imprimer.php3?id_article=2655 ; « Bank of the South, international context and alternatives », August 2006, www.cadtm.org/imprimer.php3?id_article=2040 . See also: Damien Millet and Eric Toussaint, « Banque du Sud contre Banque mondiale », Le Monde diplomatique, June 2007.
2 “The number of housing starts jumped from 1.5 million, at an annual rate, in August 2000 to a peak of 2.3 million in January 2006. In 2005 housing construction accounted for 6.2% of GDP, the highest share since 1950.” The Economist, 20 October 2007.
3 Commercial papers: An unsecured obligation issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Maturities typically range from 2 to 270 days. Commercial paper is usually issued by companies with high credit ratings, meaning that the investment is almost always relatively low risk (Source : www.investorwords.com/961/commercial_paper.html).
4 See Isaac Joshua, Note sur l’éclatement de la bulle immobilière américaine, September 2007.
5 “Structured Investment Vehicles (SIVs). These are off-balance sheet operating companies set up by banks and asset managers to fund investments in mostly assets-backed bonds of diverse kinds. Their sole purpose is to exploit the difference between low-cost short-term debt and higher-yielding long term investment” (Financial Times, 16 October 2007)
6 CDO Collateralized Debt Obligations: An investment-grade security backed by a pool of bonds, loans and other assets. CDOs do not specialize in one type of debt but are often non-mortgage loans or bonds.
7 Financial Times, 17 October 2007.
8 This is the official policy line of Nicolas Sarkozy in France and the orange-blue government in Belgium, to « allow employees to work more hours to earn more money ». As can be seen in the United States, in reality workers are obliged to work longer but their real hourly wage decreases, if not the total wage.
9 Financial Times, 22 octobre 2007
10 Voir Isaac Johsua, op cit.
11 For an analysis of the Asian crisis, see Eric Toussaint, Your Money or Your Life. The Tyranny of Global Finance, Haymarket, Chicago, 2005, chapter 17. For the Indonesian crisis, see also The World Bank: a never-ending coup d’Etat 2007, chapter 9. Among the many developing countries which the IMF has " helped" during a financial crisis (which it had actually contributed to creating) by insisting that they increase interest rates and pushing banks to bankruptcy, the cases of Mexico in 1994-1995, Indonesia and Thailand in 1997-1998 and Ecuador in 1998-1999 are excellent illustrations of the IMF procedure.
12 World Bank, Global Development Finance 2007, Washington DC, pp. 83-84.
13 Eric Toussaint, Your Money or Your Life. The Tyranny of Global Finance, Haymarket, Chicago, 2005, pp. 117-118
14 See the BIS 2007 77th Annual Report published in June 2007, chapter VIII, Conclusions.
15 BIS, 77th Annual Report, 24 June 2007, Basel, http://www.bis.org/publ/annualreport.htm, see section VI, "Financial markets", subsection "A turn in the credit cycle?", p. 113, my emphasis.
16 Financial Times, 19 October 2007.
17 Financial Times, 15 October 2007.
18 Available on the IIF website : www.iif.com
19 Quoted in the Financial Times, 26 October 2007.
20 Ibid.

infos articleURL: http://www.cadtm.org
Translated by Judith Harris and Christine Pagnoulle in collaboration with Elizabeht Anne.
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Eric Toussaint, president of the Committee for the Abolition of Third World Debt (Comité pour l’Annulation de la Dette du Tiers Monde) – Belgium, author of The World Bank: a never-ending coup d’Etat Editorial VAK (Mumbai-India), 2007. Currently being prepared for publication in Great Britain, Canada and South Africa (Pluto Press / Between the lines / David Philipps) with the title The World Bank : A Critical Primer; author of Your Money or Your Life. The Tyranny of Global Finance, Haymarket, Chicago, 2005 (published in 8 languages); co-author with Damien Millet of Who owes who?, Zedbooks, London, 2004 (published in 9 languages).
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