The Politics of Debt Relief
Recently, a German newspaper issued a fake bill to China for $162 billion for damages to the German economy due to COVID-19. While it has been argued that China breached treaty obligations relating to disease reporting, historically, damages have not been pursued in these matters. However, what if countries started to consider the avenues for redress seriously?
Desperate Times, Desperate Measures
The most basic responsibilities of government boil down to providing protection and ensuring justice. Throughout history, states have racked up debts protecting their citizenry plus whatever else they thought they could get away with. King Philip IV of France, noted for his draconian ways to dispel debt, owed so much to the Knights Templar that he took drastic measures to eliminate it. At the other end of the spectrum, Iceland took it on the chin, sacrificing the errant and battling back to a comfortable level of economic growth.
With China owning approximately $1.08 trillion of the US debt and the US GDP shrinking 4.8% in the first quarter of 2020, the anti-China sentiment is increasing not only in the US but worldwide. This situation is compounded by the he-said, he-said battle currently engaging both sides as to who is to blame for COVID-19. While this may seem like a distraction, it may well be a mid-term strategy to bear fruit in the garden of public opinion to support asking for debt forgiveness.
Default Nation, Reparation
A debt crisis occurs when income (read: taxes) is less than expenditures over a long period. Considering that politicians are encouraged to think only long enough to get re-elected, and austerity budgets are as welcome as a skunk at a lawn party, it’s not surprising that the populace is addicted to credit. These factors make sovereign debt crises more common than you might think. Developed nations weather a debt crisis better than developing nations. For a developed country, like the United States, their credit rating will take a hit, but the lenders will keep coming back. For less-developed countries, the lenders return with punitive measures, sinking the country into a vicious cycle from which it is unlikely to escape.
Countries generally have the incentive to repay the debt. However, unpalatable measures are typically rejected by citizens at the ballot box.
Raise taxes – this is universally hated, even in countries where the people refuse to pay taxes to begin with.
Cut spending – this is an unpopular choice as people dislike being offered fewer benefits for the same amount of money.
Grow the economy faster than the debt – a proposal based on the magical thinking that led us to a sovereign debt crisis to begin with.
Debt forgiveness - one country agrees to absolve another country of its debt by forcing its citizens to shoulder it instead.
Institution Restitution
Calls for debt relief for developing nations has been increasing in light of the COVID-19 pandemic. The sticky wicket then becomes how we define a developing nation. The World Trade Organization (WTO) considers China to be a developing nation. So how does a developing nation become the world’s largest official creditor? Finding that creditor is responsible for the COVID-19 pandemic’s impact on the world economy, do they owe debt forgiveness, and what would it look like?
Politico states that the US defaulting on the debt would be disastrous for the global economy. Some members of the US government are calling on China for debt relief as restitution. The question of whether China manipulates its currency is a grey area, but what is clear is that a US sovereign default would be a financial catastrophe for China. This reality could force China’s hand to forgive the debt to save the going rate of the Yuan. However, it plunges us into the far murkier waters of who gets to ask for debt relief and is it even a good idea?
