By Yilmaz Akyüz
GENEVA, Mar 30 2015 (IPS)

Debt restructuring is a component of crisis management and resolution, and needs to be treated in the context of the current economic conjuncture and vulnerabilities.

International debt workout mechanisms are not just about debt reduction, but include interim arrangements to provide relief to debtors, including temporary hold on debt payments and financing.

They should address liquidity as well as solvency crises but the difference is not always clear. Most start as liquidity crises and can lead to insolvency if not resolved quickly.

Yilmaz Akyuz

Liquidity crises also inflict serious social and economic damages as seen in the past two decades even when they do not entail sovereign defaults.

International mechanisms should apply to crises caused by external private debt as well as sovereign debt. Private external borrowing is often the reason for liquidity crises. Governments end up socialising private debt. They need mechanisms that facilitate resolution of crises caused by private borrowing.

Only one of the last eight major crises in emerging and developing economies was due to internationally-issued sovereign debt (Argentina). Mexican and Russian crises were due to locally-issued public debt; in Asia (Thailand, Korea and Indonesia) external debt was private; in Brazilian and Turkish crises too, private (bank) debt played a key role alongside some problems in the domestic public debt market.

We have had no major new crisis in the South with systemic implications for over a decade thanks to highly favourable global liquidity conditions and risk appetite, both before and after the Lehman Brothers bank collapse in 2008, due to policies in major advanced economies, notably the United States.

But this period, notably the past six years, has also seen considerable build-up of fragility and vulnerability to liquidity and solvency crises in many developing countries."There are problems with standard crisis intervention: austerity can make debt even less payable; creditor bailouts create moral hazard and promote imprudent lending, and transform commercial debt into official debt, thereby making it more difficult to restructure”

Sovereign international debt problems may emerge in the so-called ‘frontier economies’ usually dependent on official lending. Many of them have gone into bond markets in recent years, taking advantage of exceptional global liquidity conditions and risk appetite. There are several first-time Eurobond issuers in sub-Saharan Africa and elsewhere.

In emerging economies, internationally-issued public debt as percentage of gross domestic product has declined significantly since the early 2000s. Much of the external debt of these economies is now under local law and in local currency.

However, there are numerous cases of build-up of private external debt in the foreign exchange markets issued under foreign law since 2008. Many of them may face contingent liabilities and are vulnerable to liquidity crises.

An external financial crisis often involves interruption of a country’s access to international financial markets, a sudden stop in capital inflows, exit of foreign investors from deposit, bond and equity markets and capital flight by residents. Reserves become depleted and currency and asset markets come under stress. Governments are often too late in recognising the gravity of the situation.

International Monetary Fund (IMF) lending is typically designed to bail out creditors to keep debtors current on their obligations to creditors, and to avoid exchange restrictions and maintain the capital account open.

The IMF imposes austerity on the debtor, expecting that it would make debt payable and sustainable and bring back private creditors. It has little leverage on creditors.

There are problems with standard crisis intervention: austerity can make debt even less payable; creditor bailouts create moral hazard and promote imprudent lending, and transform commercial debt into official debt, thereby making it more difficult to restructure; and risks are created for the financial integrity of the IMF.

Many of these problems were recognised after the Asian crisis of the 1990s, giving rise to the sovereign debt restructuring mechanism, originally designed very much along the lines advocated by the U.N. Conference on Trade and development (UNCTAD) throughout the 1980s and 1990s (though without due acknowledgement).

However, it was opposed by the United States and international financial markets and could not elicit strong support from debtor developing countries, notably in Latin America. It was first diluted and then abandoned.

The matter has come back to the attention of the international community with the Eurozone crisis and then with vulture-fund holdouts in Argentinian debt restructuring.

After pouring money into Argentina and Greece, whose debt turned out to be unpayable, the IMF has proposed a new framework to “limit the risk that Fund resources will simply be used to bail out private creditors” and to involve private creditors in crisis resolution. If debt sustainability looks uncertain, the IMF would require re-profiling (rollovers and maturity extension) before lending. This is left to negotiations between the debtor and the creditors.

However, there is no guarantee that this can bring a timely and orderly re-profiling. If no agreement is reached and the IMF does not lend without re-profiling, then it would effectively be telling the debtor to default. But it makes no proposal to protect the debtor against litigation and asset grab by creditors.

There is thus a need for statutory re-profiling involving temporary debt standstills and exchange controls. The decision should be taken by the country concerned and sanctioned by an internationally recognised independent body to impose stay on litigation.

Sanctioning standstills should automatically grant seniority to new loans, to be used for current account financing, not to pay creditors or finance capital outflows.

If financial meltdown is prevented through standstills and exchange controls, stay is imposed on litigation, adequate financing is provided and contractual provisions are improved, the likelihood of reaching a negotiated debt workout would be very high.

The role of the IMF in crisis management and resolution is incontrovertible. However, the IMF cannot be placed at the centre of international debt workout mechanisms. Even after a fundamental reform, the IMF board cannot act as a sanctioning body and arbitrator because of conflict of interest; its members represent debtors and creditors.

The United Nations successfully played an important role in crisis resolution in several instances in the past.

The Compensatory Financing Facility – introduced in the early 1960s to enable developing countries facing liquidity problems due to temporary shortfalls in primary export earnings to draw on the Fund beyond their normal drawing rights at concessional terms – resulted from a U.N. initiative.

A recent example concerns Iraq’s debt. After the occupation of Iraq and collapse of the Saddam Hussein regime, the U.N. Security Council adopted a resolution to implement stay on the enforcement of creditor rights to use litigation to collect unpaid sovereign debt.

This was engineered by the very same country, the United States, which now denies a role to the United Nations in debt and finance on the grounds that it lacks competence on such matters, which mainly belong to the IMF and the World Bank.

Edited by Phil Harris   

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

* This article is partly based on South Centre Research Paper 60 by Yilmaz Akyüz titled Internationalisation of Finance and Changing Vulnerabilities in Emerging and Developing Economies.

Excerpt:

By Guillermo Medina
MADRID, Mar 4 2015 (IPS)

At last, on Tuesday Feb. 24, the Eurogroup (of eurozone finance ministers) approved the Greek government’s commitment to a programme of reforms in return for extending the country’s bailout deal.

The agreement marks the end of tense and protracted negotiations. It consists of a four-month extension for the second bailout programme worth 130 billion euros (over 145 billion dollars), in force since 2012 and which was due to expire on Feb. 28. The first bailout was for 110 billion euros, equivalent to 123 billion dollars.

Guillermo Medina

During this period, the European Central Bank (ECB) will provide Greece with liquidity and the terms of a new bailout will be hammered out.

The eleventh-hour agreement was no doubt motivated partly by fears that a “Grexit” – Greek withdrawal from the eurozone monetary union – would have triggered a financial earthquake with unforeseeable consequences. The result is a very European-style compromise that averts catastrophe and gains time while avoiding facing the underlying problems.

In exchange for an extension of financial support from Greece’s partners and creditors, Prime Minister Alexis Tsipras will have to submit all his government’s measures during this period to Eurogroup inspection.

But the deal promises Greece more than just restrictions. The country will have to pay its debts to the last euro, but if, as seems probable, deadlines for primary surplus targets are extended, the country will have greater ability to pay (France has just secured this for itself).

In the final document, Greece promised to adopt a tax reform that would make the system fairer and more progressive, as well as reinforce the fight against corruption and tax evasion and reduce administrative spending.“Germany has undeniably secured its basic goal: the enshrining of austerity as the fundamental dogma of the new European economic order, although political prudence and even self-interest have softened the application of the dogma, and may continue to do so in future”

If the government pursues these goals, together with the fight against contraband, efficiently and with determination (as indeed it should, because they are part of its programme and target its domestic enemies), the income will be helpful for the application of its social and economic programmes.

In view of the successive positions that Greece has had to relinquish in the course of the negotiations, it appears that the country has achieved the little that could be achieved.

The negotiations between Greece and its European partners mark a milestone in the political tussle in the European Union since the reunification of Germany in 1990, between moving towards a Europeanised Germany or a Germanised Europe.

Germany has undeniably secured its basic goal: the enshrining of austerity as the fundamental dogma of the new European economic order, although political prudence and even self-interest have softened the application of the dogma, and may continue to do so in future.

Germany has openly tried to impose its convictions and its hegemony on Europe. Greece was only the immediate battlefield. Brussels and Berlin have been divided from the outset about how to solve the Greek crisis, but Germany prevailed.

However, the masters of Europe do not have any interest in “destroying” Greece, and so cutting off their nose to spite their face. They are satisfied with a demonstration of the asymmetry of power between the two sides, and the public contemplation of assured failure for whoever defies the status quo and supports any policy that deviates from the one true official line.

The problem with a Germanised Europe is not the preponderant role that Germany would play, but that it would impose a “Made in Germany” model of Europe that conforms to its own interests. That is how it would differ from a Europeanised Germany.

The Greek crisis has highlighted the ever-widening contrast between the values and ideals that we consider to be central to the European project, such as solidarity, mutual aid and social justice, and the new values that set aside basic aims like full employment, social welfare and equal opportunities.

It is paradoxical that Europe, which is apparently absent from or baffled by threats from the opposite shore of the Mediterranean, should take a harsh, tough attitude with a small partner overwhelmed by debt. It is also paradoxical that structural reforms are demanded of Greece, without admitting Europe’s own urgent need to redesign the eurozone and reframe the policies that have led to the poor performance of its monetary union.

The Greek crisis and the difficulties in overcoming it have a great deal to do with a design of the euro that benefits financial interests, particularly Germany’s.

The project neglected the harmonisation of tax policies and created a European Central Bank that lacked the powers that permit the U.S. Federal Reserve and the Bank of England to issue money and buy state debt.

As is well known, the ECB has made loans to European banks at very low interest rates, and they in turn have made loans to states, including Greece, at much higher interest. Government debts thus mounted up, and in order to pay they were forced to cut public spending.

Why does Europe persist in following failed policies while refusing to follow those that have lifted the United States out of recession? The only explanation is stubborn attachment to an ideological vision of economic policy that is devoid of pragmatism.

How can insistence on the path of error be explained at such a time? There may well be a quota of incompetence, but the basic reason is, as Nobel prize-winners Joseph Stiglitz and Paul Krugman affirm, that the goal of the policies imposed by the “Troika” (European Commission, ECB and International Monetary Fund) is to protect the interests of financial capital. And this is because the powers of political institutions, the media and academia, are dominated by financial capital, with German financial capital at the core.

Financial interests are essentially capable of shaping the decisions of European governance institutions. In the United States this subservience is less clear-cut, allowing hefty penalties to be imposed on certain banks, as well as the development of other economic strategies.

This is because independent mechanisms of control and oversight exist, the Federal Reserve has well-defined goals (whereas the ECB has spent years fighting the insistent threat of inflation), and there is democratic administration with the political will to resist.

In conclusion: the issue is to clarify what sort of Europe the citizens of Europe want, and what institutional changes are needed to achieve it.

And even more importantly, having seen the consecration of German hegemony over the Old World, what sort of German leadership would be compatible with a united Europe based on solidarity? Is this even possible? (END/IPS COLUMNIST SERVICE)

Translated by Valerie Dee/Edited by Phil Harris    

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

Excerpt:

Alexis Tsipras (centre), Syriza’s charismatic 40-year-old leader, has been campaigning under the banner “Hope is on its way.” Credit: Mirko Isaia/cc by 2.0

By Marianna Fotaki
COVENTRY, England, Jan 24 2015 (IPS)

The European Union should not be afraid of the leftist opposition party Syriza winning the Greek election, but see it as a chance to rediscover its founding principle – the social dimension that created it and without which it cannot survive.

Greece’s entire economy accounts for three per cent of the euro zone’s output but its national debt totals €360 billion or 175 per cent of the country’s GDP and poses a continuous threat to its survival.

Courtesy of Marianna Fotaki

While the crippling debt cannot realistically be paid back in full, the troika of the EU, European Central Bank, and IMF insist that the drastic cuts in public spending must continue.

But if Syriza is successful – as the polls suggest – it promises to renegotiate the terms of the bailout and ask for substantial debt forgiveness, which could change the terms of the debate about the future of the European project.

It would also mean the important, but as yet, unaddressed question of who should bear the costs and risks of the monetary union within and between the euro zone countries is likely to become the centrepiece of such negotiations.

The immense social cost of the austerity policies demanded by the troika has put in question the political and social objectives of an ‘ever closer union’ proclaimed in the EU founding documents.The old poor and the rapidly growing new poor comprise significant sections of Greek society: 20 per cent of children live in poverty, while Greece’s unemployment rate has topped 20 per cent for four consecutive years now and reached almost 27 per cent in 2013.

Formally established through the Treaty of Rome in 1957, the European Economic Community between France, Germany, Italy and the Benelux countries tied closely the economies of erstwhile foes, rendering the possibility of another disastrous war unaffordable. Yet the ultimate goal of integration was to bring about ‘the constant improvements of the living and working conditions of their peoples’.

The European project has been exceptionally successful in achieving peaceful collaboration and prosperity by progressively extending these stated benefits to an increasing number of member countries, with the EU now being the world’s largest economy.

Since the economic crisis of 2007, however, GDP per capita and gross disposable household incomes have declined across the EU and have not yet returned to their pre-crisis levels in many countries. Unemployment is at record high levels, with Greece and Spain topping the numbers of long-term unemployed youth.

There are also deep inequalities within the euro zone. Strong economies that are major exporters have benefitted from free trade and the fixed exchange rate mechanism protecting their goods from price fluctuations, but the euro has hurt the least competitive economies by depriving them of a currency flexibility that could have been used to respond to the crisis.

Without substantial transfers between weaker and stronger economies, which accounts for only 1.13 per cent of the EU’s budget at present, there is no effective mechanism for risk sharing among the member states and for addressing the consequences of the crisis in the euro zone.

But the EU was founded on the premise of solidarity and not as a free trade zone only. Economic growth was regarded as a means for achieving desirable political and social goals through the process of painstaking institution building.

With 500 million citizens and a combined GDP of €12.9 trillion in 2012 shared among its 27 members the EU is better placed than ever to live up to its founding principles. The member states that benefitted from the common currency should lead in offering meaningful support rather than decimating their weaker members in a time of crisis by forcing austerity measures upon them.

This is not denying the responsibility for reckless borrowing resting with the successive Greek governments and their supporters. However, the logic of a collective punishment of the most vulnerable groups of the population must be rejected.

The old poor and the rapidly growing new poor comprise significant sections of Greek society: 20 per cent of children live in poverty, while Greece’s unemployment rate has topped 20 per cent for four consecutive years now and reached almost 27 per cent in 2013.

With youth unemployment above 50 per cent, many well-educated people have left the country. There is no access to free health care and the weak social safety net from before the crisis has all but disappeared. The dramatic welfare retrenchment combined with unemployment has led to austerity induced suicides and people searching for food in garbage cans in cities.

A continued commitment to the policies that have produced such outcomes in the name of increasing the EU’s competitiveness challenges the terms of the European Union’s founding principles. The creditors often rationalise this using a rhetoric that assumes tax-evading unproductive Greeks brought this predicament upon themselves – they are seen as the undeserving members of the euro zone.

Such reasoning creates an unhealthy political climate that gives rise to extremist nationalist movements in the EU such as the Greek criminal Golden Dawn party, which gained almost 10 per cent of votes in the last European Parliament elections.

Explaining the euro zone debt crisis as a morality tale is both deleterious and untrue. The problematic nature of such moralistic logic must be challenged: one cannot easily justify on ethical grounds forcing the working poor to bail out a banking system from which many wealthy people benefit, or transferring the consequences of reckless lending by commercial outlets to the public.

Nor can one explain the acquiescence of creditors to the machinations of the nepotistic self-serving corrupt elites dominating the state over the last 40 years that got Greece into the euro zone on false data and continue to rule it. As I have argued, the bailout money was given to the very people who are largely responsible for the crisis, while the general population of Greece is being made to suffer.

Greece’s voters are determined to stop the ruling classes from continuing their nefarious policies that have brought the country to the brink of catastrophe, but in the coming elections their real concern will be opposing the sacrifice of the futures of an entire generation.

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS-Inter Press Service.

Edited by Kitty Stapp

Excerpt:

The appointment of Italian Foreign Minister Federica Mogherini as the new European Union foreign policy chief offers the opportunity for an overhaul of EU foreign and security policy.

With many EU leaders, ministers and senior officials slow to respond to world events given Europe’s traditionally long summer break, the 2014 summer of death and violence has left the reputation of ‘Global Europe’ in tatters, highlighting the EU’s apparent disconnect from the bleak reality surrounding it.

When she takes charge in November along with other members of the new European Commission, led by Jean-Claude Juncker, Mogherini’s first priority must be to restore Europe’s credibility in an increasingly volatile and chaotic global landscape.

Shada Islam. Courtesy of Twitter

It cannot be business as usual. A strategic rethink of Europe’s global outreach is urgent.

Europe can no longer pretend that it is not – or only mildly – shaken by events on its doorstep. In a world where many countries are wracked by war, terrorism and extremism, EU foreign policy cannot afford to be ad hoc, reactive and haphazard.

Given their different national interests and histories, European governments are unlikely to ever speak with “one voice” on foreign policy. But they can and should strive to share a coherent, common, strategic reflection and vision of Europe’s future in an uncertain and anxious world.

Changing gears is going to be tough. Many of Europe’s key beliefs in the use of soft power, a reliance on effective multilateralism, the rule of law and a liberal world order are being shredded by governments and non-state actors alike.

With China and other emerging nations, especially in Asia, gaining increased economic and political clout, Europe has been losing global power and influence for almost a decade.“Europe can no longer pretend that it is not – or only mildly – shaken by events on its doorstep. In a world where many countries are wracked by war, terrorism and extremism, EU foreign policy cannot afford to be ad hoc, reactive and haphazard”

Despite pleas by the North Atlantic Treaty Organization (NATO) and the crisis in Ukraine, most European governments remain reluctant to increase military and defence spending. At the same time, the Eurozone crisis and Europe’s plodding economic recovery with unacceptably high unemployment continue to erode public support for the EU both at home and abroad.

Populist far-right and extreme-left groups in Europe – including in the European Parliament – preach a protectionist and inward-looking agenda. Most significantly, EU national governments are becoming ever greedier in seeking to renationalise important chunks of what is still called Europe’s “common foreign and security policy”.

To prove her critics wrong – and demonstrate foreign policy expertise and flair despite only a six-month stint as Italy’s foreign minister – Mogherini will have to hit the ground running.

Her performance at the European Parliament on September 2, including an adamant rejection of charges of being “pro-Russian”, appears to have been impressive. Admirers point out that she is a hard-working team player, who reads her briefs carefully and speaks fluent English and French in addition to her native Italian.

These qualities should stand her in good stead as she manages the unwieldy European External Action Service (EEAS), plays the role of vice president of the European Commission, chairs EU foreign ministerial meetings, chats up foreign counterparts and travels around the world while also – hopefully – spearheading a strategic review of Europe’s global interests and priorities.

Italian Foreign Minister Federica Mogherini with UN Secretary-General Ban Ki-moon. Credit: UN Photo/Evan Schneider

The tasks ahead are certainly daunting. There is need for reflection and action on several fronts – all at the same time. Eleven years after the then EU High Representative Javier Solana drew up the much-lauded European Security Strategy (partially revised in 2008), Europe needs to reassess the regional and global security environment, reset its aims and ambitions and define a new agenda for action.

But this much-needed policy overhaul to tackle new and evolving challenges must go hand-in-hand with quick fire-fighting measures to deal with immediate regional and global flashpoints.

The world in 2014 is complex and complicated, multi-polar, disorderly and unpredictable. Russia’s actions in Ukraine have up-ended the post-World War security order in Europe. The so-called “Islamic State” is spreading its hateful ideology through murder and assassination in Syria and Iraq, not too far from Europe’s borders. A fragile Middle East truce is no guarantee of real peace between Israelis and Palestinians. Relations with China have to be reinforced and consolidated. These and other complex problems require multi-faceted responses.

The days of ‘one-size-fits-all’ foreign policy are well and truly over. In an inter-connected and interdependent world, foreign policy means working with friends but also with enemies, with like-minded nations and those which are non-like-minded, with competitors and allies.

It is imperative to pay special attention to China, India and other headline-grabbing big countries, but it could be self-defeating to ignore the significance and clout of Indonesia, Mexico and other middle or even small powers. Upgrading ties with the United States remains crucial. While relations with states and governments are important they must go hand-in-hand with contacts with business leaders, civil society actors and young people.

Finally, Europe needs to acquire a less simplistic and more sophisticated understanding of Islam and its Muslim neighbours, including Turkey, which has been left in uncertainty about EU membership for more than fifty years.

Europe’s response to the new world must include a smart mix of brain and brawn, soft and hard power, carrots and sticks. Isolation and sanctions cannot work on their own but neither can a foreign policy based only on feel-good incentives. The EU’s existing foreign policy tools need to be sharpened but European policymakers also need to sharpen and update their view of the world.

Mogherini’s youth – and hopefully fresh stance on some of these issues – could be assets in this exercise. Importantly, Mogherini must work in close cooperation and consultation with other EU institutions, including the European Parliament and especially the European Commission whose many departments, including enlargement issues, trade, humanitarian affairs, environment, energy and development are crucial components of ‘Global Europe’.

The failure of synergies among Commission departments is believed to be at least partly responsible for the weaknesses of the EU’s “Neighbourhood Policy”.

Also, a coherent EU foreign policy demands close coordination with EU capitals. This is especially true in relations with China. Recent experience shows that, as in the case of negotiations with Iran, the EU is most effective when the foreign policy chief works in tandem with EU member states. Closer contacts with NATO will also be vital if Europe is to forge a credible strategy vis-à-vis Russia and Ukraine.

Such cooperation is especially important if – as I suggest – Mogherini embarks on a revamp of EU foreign and security policy.

Mogherini will not be able to do it on her own. Much will depend on the EEAS team she works with and the knowledge, expertise and passion her aides bring to their work. Team work and leadership, not micro-management, will be required.

Putting pressing global issues on the backburner is no longer an option. The change of guard in Brussels is the right moment to review and reconsider Europe’s role in the world. Global Europe’s disconnect needs to be tackled before it is too late.

(Edited by Phil Harris)

* Shada Islam, Head of the Asia Programme at Friends of Europe, a leading independent think tank in Brussels, is an experienced journalist, columnist, policy analyst and communication specialist with a strong background in geopolitical, foreign, economic and trade policy issues involving Europe, Asia, Middle East, Africa and the United States.

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

By Demba Moussa Dembele
DAKAR, Aug 29 2014 (IPS)

A few years ago, nobody could have imagined that some 50 Heads of States and Prime Ministers from Africa would meet the President of the United States for a summit. Yet, the first Africa/United States Summit took place in Washington from August 4 to 6, making headlines around the world.

It is obvious that geopolitical considerations were behind this summit, with the shadow of the BRICS (Brazil, Russia, India, China and South Africa) hanging over the meeting.

Demba Moussa Dembele

The United States would have never organised such a summit if the global balance of power had not been gradually shifting towards emerging powers, notably towards China and the BRICS.

Western economic domination is being eroded, as illustrated by the deepening crisis of the Eurozone and the worsening deficits of the United States. Meanwhile, the BRICS are increasing their economic and financial weight in the world economy, and represent about 20 percent of the world’s GDP and 17 percent of world trade, with China now the second economy behind the United States.

For most observers, the BRICS Summit in Fortaleza and Brasilia (Brazil) in mid-July heralds a new world monetary and financial order in the next decades or so. Observers from the South and the West are predicting the gradual shift to a new balance of monetary and financial order, with the BRICS at the centre.“Growing China-Africa ties are a disturbing development for Western countries, the European Union (EU) and the United States. They view these relations as a threat to their “traditional” neo-colonial relationships with Africa”

Indeed, the decision to set up the BRICS bank and the Contingency Reserve Arrangement (CRA) is seen as a serious challenge to the World Bank and the International Monetary Fund (IMF), which have been the tools of Western countries for more than half a century. They will gradually become more and more irrelevant to developing countries, as these increasingly turn to BRICS’ financial institutions.

On the other hand, China and the other members of the BRICS group are challenging the hegemony of the U.S. dollar through several swap arrangements, aimed at boosting their trade by using their own currencies. One of the most significant arrangements is the swap between China and Russia, when one takes into account the 400 billion dollars gas deal signed between Russia’s Gazprom and the China National Petroleum Corp. (CNPC).

The French online newspaper, Mediapart (July 5, 2014), reported that in the oil and gas sector, the top three investors in 2013 were all from the BRICS – PetroChina (50.2 billion dollars), Gazprom (44.5 billion dollars) and Petrobras (41.5 billion dollars). The first Western company was Total, which ranked seventh with 30.8 billion dollars.

It is obvious that these developments are of great concern to the United States, especially in light of the BRICS’ drive to strengthen their economic and financial relations with Africa and South America.

In a 2013 report, the United Nations Economic Commission for Africa (UNECA) indicated that Africa’s trade with the BRICS had doubled since 2007 to 340 billion dollars in 2012. It projected that the trade would reach 500 billion dollars by 2015.

Trade between China and Africa is estimated at about 200 billion dollars in 2013. It has become Africa’s main trading partner. And most African countries are now turning to China for loans while Chinese companies are involved in building roads, bridges, and other infrastructures across Africa.

Growing China-Africa ties are a disturbing development for Western countries, the European Union (EU) and the United States. They view these relations as a threat to their “traditional”, neo-colonial relationships with Africa.

While the European Union has tried to lock African countries into Economic Partnership Agreements (EPAs) – as part of a scheme to create a free trade area (FTA) between the European Union and the African, Caribbean and Pacific (ACP) group of countries – since 2007, the United States seems to be “wakening up” only now to the reality of the fast-changing economic landscape in Africa.

A Paris-based magazine, Jeune Afrique, wrote that with this Summit, Barack Obama was organising a “catch-up meeting”. The reason, said the magazine, was that the United States has lost too much ground to China and to a lesser degree to Europe. It is estimated that trade between Africa and the United States doubled between 2000 and 2010, while trade between Africa and China increased twenty-fold over the same period!

Most observers believe that without China building strong and growing economic and financial ties with Africa, the United States would not have thought about organising such a Summit. Clearly, China’s role in Africa has given a greater “respectability” to the continent and elevated its standing with Western countries, which are now looking at Africa through a new light.

Catching up for will not be an easy exercise for the United States. For one thing, its imports from Africa are essentially composed of crude oil, which accounts for 91 percent of total trade. Second, in its relations with Africa, security concerns have always topped the U.S. agenda.

This is why during the George W. Bush Administration, the United States set up “Africa Command” (AFRICOM) with the view to “helping” African countries fight “terrorism”. And the aim is to move AFRICOM headquarters – now in Germany – to Africa, preferably in the Gulf of Guinea, which is home to the bulk of African oil reserves. U.S. companies, like Chevron and ExxonMobil, have already invested billions of dollars in the area in order to control huge chunks of those reserves.

At the end of the Africa-U.S. Summit, Obama announced that 33 billion dollars will be invested in Africa between 2014 and 2017. But only seven billion dollars will come from public funds in order to boost trade between the United States and Africa, 14 billion dollars will come from the private banking and construction sectors, while 12 billion dollars are part of the “Power Africa” project aimed at bringing electricity to households and the industrial sector. This programme is financed by the World Bank and U.S. private companies such as General Electric.

So, the 33 billion dollars announcement is not really a “gift” made by president Barack Obama to African leaders, as some newspapers erroneously presented it. It will essentially serve the interests of U.S. private companies in their drive to compete against BRICS and European companies in Africa.

But, beyond “catching up” with China and the European Union, the Africa-U.S. Summit should be viewed in the context of the discourse on “Africa Rising”. Indeed, for neoliberal ideologues, Africa seems to hold the solution to the crisis of global capitalism.

In January 2014, Japanese Prime Minister Shinzo Abe toured Africa. In a speech at the headquarters of the African Union, in Addis Ababa, he was quoting as saying that “with its immense resources, Africa is holding the hopes of the world.” This was an echo to a report by the French Senate, released in December 2013, with the incredible title ‘Africa is our Future’.

This may explain French military adventures in Africa over the last several years, from Cote d’Ivoire to Libya, from Mali to the Central African Republic, among others.

Several forums are being organised to advise Western corporations to invest in Africa and tap into its resources. Apparently, Africa has become the “new frontier” of global capitalism, at the expense of its own people. As the renowned Egyptian economist Samir Amin used to say: “the West cares about Africa’s resources, not about its people.” (END/IPS COLUMNIST SERVICE)

(Edited by Phil Harris)

Excerpt:

By Yilmaz Akyüz
GENEVA, Oct 22 2013 (Columnist Service)

Five years into the crisis, growth in the U.S. is still below potential, Europe is struggling to pull out of recession and major emerging economies are slowing rapidly after an initial resilience during 2010-2011.

Longer-term prospects are not much brighter largely because the key problems that gave rise to the most serious post-war crisis – income inequalities, external imbalances and financial fragilities – remain unabated and have indeed been aggravated.

The world economy suffers from an under-consumption bias because of low and declining share of wages in the gross domestic product (GDP) in all major advanced economies including the U.S., Germany and Japan, as well as China.

Yilmaz Akyuz

Still, until 2008-2009 the threat of global deflation was avoided thanks to consumption binges and property booms driven by credit and asset bubbles, particularly in the U.S. and the European periphery.

The crisis has not removed but reallocated global trade imbalances.

Longer-term global prospects depend a lot on the U.S. due to its central position in the world economy and the international reserves system. It is highly unlikely that the U.S. can move to wage-led growth in the near future.

Nor can it shift to export-led growth. This would require, inter alia, exports to grow faster than domestic demand and the share of private consumption in GDP to fall. This is difficult to achieve since for several decades the U.S. has constantly lived beyond its means thanks to its “exorbitant privilege” as the issuer of the central reserve currency.

Thus, a key question is if the U.S. would be inclined to go back to “business as usual” and allow credit and asset bubbles in search of relatively rapid growth. This is closely connected to its exit from the ultra-expansive monetary policy.

Clearly, exit implies not just increased policy interest rates but also the normalisation of monetary policy – the federal funds rate to become again the main instrument of policy, a significant contraction in the size of the balance of the Federal Reserve (Fed) sheet and the volume of excess reserves that depository institutions hold at the Fed, and a large shift of the Fed’s asset composition back to short- and medium-term Treasuries.

A strategy that the Fed should gradually exit from the quantitative easing (QE) 3 but maintain low policy rates for several more years in order to support growth and use macro-prudential regulations to limit systemic risks appears to be enjoying considerable support.

However, it may not be easy to engineer such a process without jeopardising financial and macroeconomic stability. Uncertainty abounds because there are not many historical precedents for exit from extended periods of zero-bound interest rates and QE.

Even a gradual return of the Fed balance sheet to “normal” size and composition may result in a considerable hike in long-term rates even if policy rates are kept low for an extended period. The prospects for exit from the QE3 in the coming months have already pushed up the yield on the U.S. 10-year Treasury bond to almost 3 percent in August 2013 from around 1.60 percent in May.

If concerns about financial instability and the effectiveness of macro-prudential measures come to dominate, the Fed may be obliged to exit rapidly. This would result in a hike in short- and long-term interest rates and give a major shock to the financial system as in 1994.

It would result in slower growth and a stronger dollar. Too rapid an exit and re-pricing of substantially increased stock of debt could even cause a hard landing in the U.S. by leading to large losses for bondholders and depressing private spending.

These dilemmas arise in large part because of excessive reliance on monetary policy to combat recession and the reluctance to use fiscal expansion and debt restructuring to stimulate aggregate demand.

The normalisation of monetary policy in the U.S. will also cause problems for emerging economies. Despite occasional complaints about the “currency war” entailed by liquidity expansion in several major advanced economies simultaneously, the policy of ultra-easy money has generally been benign for emerging economies.

It has been a major factor in the sharp recovery of capital inflows after the sudden stop caused by the Lehman Bank collapse in September 2008.

Many major emerging economies such as India, Brazil, South Africa and Turkey have come to depend on such inflows as their current accounts started to deteriorate. They have invariably welcomed the asset bubbles that such inflows have helped generate and often ignored the financial fragilities caused by increased exposure to interest rate and exchange rate risks by private borrowers abroad.

Such exposures are on the rise since the beginning of 2012. As funds have started to be withdrawn from domestic securities markets, emerging economies have increasingly relied on international debt contracted in reserve currencies, which reached, in net amounts, 600 billion dollars between the beginning of 2012 and mid-2013.

As the Fed has got closer to ending the QE3 and the long-term U.S. rates have edged up, strong downward pressures have started to build up on the currencies, stocks and bonds of several emerging economies such as Brazil, India, South Africa and Turkey, which were widely seen as rising stars only a couple of years ago.

And the longer-term prospects of the eurozone are even less encouraging than the situation in the U.S. Deleveraging and recovery are likely to remain extremely slow in the periphery and many countries cannot expect to recuperate the output losses incurred after 2008 for several years to come.
(END/COPYRIGHT IPS)

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