The pleasures of default

Michael Pollak mpollak at panix.com
Thu Jan 6 23:35:36 PST 2000


Daniel, I have to say, I'm kind of intoxicated by this idea of yours that defaulting on loans can cut the Gordian knot of unequal development. I believe Enrique and Patrick Bond put forth similar ideas last century, but I never thought I'd hear the like from an ex-central banker. If you are still avoiding those German accounts, I wonder if you could expand on the likely fallout and why it's nothing to worrry about.

Just to take a real world case, how about the Ivory Coast? Supposedly it's as well run an economy as you can find in Africa. It just had a coup that is absurdly popular as these things go -- even the ex-president's own tribe and party support the new guy. And he's facing a typical poor country squeeze. Cocoa prices tanked just after the country liberalized the sector this year, devasting a huge class of farmers. There isn't any money in the treasury to pay the troops (which was the last straw that led to this); and 40% of the last budget (which was already an austerity budget) was devoted to paying interest. The IMF naturally wants him to squeeze the people even harder before they loan him any more money. At present the country owes 11 billion dollars, which is about equal to its GDP.

Now what if General Guel suddenly decides to say the truth, i.e., "We've got no money. We can't pay all our bills and there's no point in taking on more debts because we can't pay the ones we've got." And he declares a moratorium on debt payments (which according to Thursday's Financial Times has apparently crossed his mind, at least fleetingly). Is that it? He's home free? He can take that 40% of the budget and spend it on army wages and Keynsian expansion this year and each year to come? There's no downside? No huge capital flight, failure of trade finance, evaporation of hard currency reserves, cessation of FDI? Or all of those things can at least theoretically be contained, counteracted and offset?

It sounds to good to be true. But then, so did the truth about social security.

Michael

__________________________________________________________________________ Michael Pollak................New York City..............mpollak at panix.com



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