American Jubilee

By Yong Kwon

The ongoing pandemic will disproportionately harm countries in the Global South, which are less able to mobilize resources needed to address both the public health crisis and its economic consequences. The United States government is uniquely positioned to help these vulnerable economies recover by coordinating debt forgiveness. In doing so, the US will help indebted countries create fiscal space to make critical investments in social infrastructure that can address current challenges, minimize the economic consequences, and prevent future health crises.

While debt forgiveness does not address other growth impediments such as gaps in capacity and knowledge, historical case studies show that indebted governments increase public investments when their obligations to creditors are lessened. And during crises, debt relief is an effective tool for stopping the sudden outflow of investments – a paramount threat to the health of emerging economies. Post-war Germany and Latin America in the 1980s provide examples of these cases.

Despite Germany’s strong insistence today that struggling economies in Southern Europe honor their debts fully, the country was a beneficiary of one of the most successful debt forgiveness programs in history. In 1953, creditor nations slashed West Germany’s external debt obligations from 29.7 billion German marks to 14.5 billion. Repayment of the remaining debt was linked to the country’s economic growth, with an upper limit set at 3 percent of the country’s export revenue. These measures allowed West Germany to increase its social expenditure in health, education, housing, and economic development. This not only facilitated the reconstruction of Germany but also helped sustain its economic takeoff.  

Debt forgiveness is perhaps more vital during crises. In 1982, increases in US interest rates made Latin American governments unable to honor their combined debt obligation of USD 327 billion. This led to an abrupt ceasure of foreign lending to these countries. Unable to borrow, public spending in infrastructure, health, and education in the region fell – crippling countries’ immediate and long-term capacities to grow. 

Initial US assistance to Latin American governments focused on mobilizing new loans – but there were no plans to reduce any of the existing debt burdens. This approach failed to restore confidence in the indebted governments and money continued to leave the region.  

The US government changed its tack in 1989, organizing a 12 percent reduction in the debt that the Mexican government owed to external commercial creditors. This “haircut” was not as generous as the one extended to Germany in 1953; nonetheless, commercial lending resumed because there was increased confidence in the Mexican government’s ability to manage the reduced stockpile of debt. 

Ultimately, 16 countries received USD 60 billion in debt forgiveness during this period. The US government made further improvements to the fiscal health of the region by exchanging some of the outstanding loans with bonds that were backed by the US Treasury. These measures were central to ending the debt crisis

Debt forgiveness is a matter of great urgency right now. Emerging economies have around USD 5.5 trillion of debt coming due this year while also anticipating the lowest economic performance in decades. A reduction in both the principal on these debts and their annual interest obligations are central to governments’ ability to address current challenges and their economic consequences. 

However, meaningful debt reduction can only be achieved if all creditors accept some losses. In 2005, 7 percent of Argentina’s creditors refused to accept the government’s debt restructuring plan, causing delays in repayment to the remaining 93 percent of lenders and inflicting further economic distress on the country. 

The United States is uniquely positioned to be a principal in debt relief efforts. In addition to the financial clout that comes with printing the most widely used international currency, 95 percent of all international bonds issued by emerging market countries are governed by New York or English law. And even though Washington often appears beholden to banking interests, the US government is capable of making demands on the financial sector to slash the debt obligations of emerging economies. 

Case in point, Iraq. When the United States began its illegal occupation of the country in 2003, Iraq was the most indebted state in the world in terms of debt-to-GDP ratio, with USD 130 billion in external debt. Eager to justify the invasion with a successful reconstruction of the country, President George W. Bush advocated for a quick write-down of the debt. After immunizing Iraq’s domestic and foreign assets from “any form of garnishment” through UN Resolution 1483, Washington mobilized the Treasury Department, State Department, and the National Security Council to lobby both sovereign and commercial creditors for total debt cancellation. Ultimately, the Bush administration negotiated a net debt reduction of 89.75 percent

The same kind of concerted effort toward debt forgiveness can and should be applied to the global community to help reduce the resource burden on countries addressing the health and economic consequences of a pandemic. The next president interested in effective responses to COVID-19 should get the ball rolling on debt forgiveness with the following three actions:

First, personnel close to the president should be designated to lead this effort. In 2003, the Bush administration designated long-time Republican Party grandee James Baker for this task. The appointment of a former Secretary of both State and Treasury, not to mention two-time White House Chief of Staff, helped not only to streamline interagency coordination but also to signal to creditors that the US government was serious about debt forgiveness. 

Second, assets of indebted countries should be protected from seizure by creditors. This includes indirect garnishment in the form of austerity demands that prevent governments from increasing public investments. Just as Germany was allowed to link its debt repayment to its export revenue, any remaining debt should be paid contingent on economic growth. Such measures would also discourage creditors from rejecting a restructuring agreement with the intention of repossessing public assets of indebted countries. 

Third, there should be consistent and multifaceted public messaging on the long-term merits of debt forgiveness. In the context of the ongoing global health crisis, expanding a country’s fiscal space should be seen as a vehicle for bolstering its public health capacity. Emphasis should be placed on the resources needed to implement effective social distancing for extended periods and provide robust care to the sick and vulnerable – measures that would not only protect nationals of indebted countries but also people elsewhere in the world. 

Much more work would be needed after the initial debt forgiveness to enhance a country’s public health system and to provide the means to overcome the economic consequences of this and future pandemics. But the greatest impact of this policy may be shifting the global attention from its current focus on the health of the financial markets to one that prioritizes human security.


Yong Kwon studied economic history at the London School of Economics and moderates the subreddit r/EconomicHistory. He is currently the Director of Communications at the Korea Economic Institute of America. Views in this post are his own and do not represent the official position of the Korea Economic Institute of America.

2 thoughts on “American Jubilee

  1. Pingback: The Case Against Larry Summers – Fellow Travelers

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