The Global Debt Crisis - What's at Stake?
Dominique de Villepin
October 10, 2013
What’s at stake with the global debt? To make it short: it’s about the change of the world. It’s about how to wield and how to share power. It’s about how the West has used its historical privileges to put the whole world’s stability at risk.
1.What are the three privileges of the West?
1.1.The first privilege is the control of currency.
Since we abandoned the gold exchange standard of Bretton Woods, the dollar has become the true currency of world exchanges. And those who had the power to decide the value of the dollar decided to take advantage of it in favour of one single sovereign interest, the interest of theUnited States. That’s what the Fed called the “benign neglect”. What’s the link with the debt? Just look at the figures, since the dollar chose to let its exchange rate float, America has accumulated its huge double deficit. It has become the great debtor of the world but without having to pay back the monthly payments any household would have. The American people have become the consumer in last resort, importing massively goods fromJapanand laterKoreaand nowChina. Meanwhile,Washington financed its policies on debt. And we’re still witnessing the consequences of this. Every year or so, the Congress has to raise the debt ceiling. Profits don’t grow to the sky, but debt ceilings seem to do…Mid-october, after weeks of shutdown of the American administration, there will be one more episode of this political soap-opera with the vote on the ceiling of the debt.
1.2.There’s a second privilege, it’s the control of the rules.
It’s much easier to win a game when you’re the one deciding the rules. and in fact it’s even easier if you can change the rules during the game, according to your needs. That’s exactly what the western powers have done in the last centuries. The opium wars, the breakup of China, the British raj inIndia, Africa torn between European countries in some cold room inBerlin, in 1885: that’s one side of it. But it has still been true in world finance over the thirty last years. Remember the Washington consensus, Remember the adjustment plans that were imposed on developing countries. They created social and economic chaos, just because the rules that could have worked – maybe -- in Western countries had to be exactly the same everywhere else. and when you think of the social, economic, political catastrophe the fast-track liberalization in Russia has been after the end of the cold war, you have to ask yourself who these rules were made for.
1.3.There’s a third privilege. It’s the control of risks.
It decides what’s risky and what’s not. That’s to say it decides where the money should go and where not. To say it even more bluntly, that’s a way to redirect money towards projects in the West by under-evaluating the risks of defaults in Western countries and over-evaluating them in China, in India, in Brazil, in Pakistan. How comes they can do this? Because they master the rules. And mainly because all the “Big Three” rating agencies who control the risk are American or almost. 96% of the market of credit rating is in their hands. In a time when money becomes scarce, that’s a huge advantage.
2.The economic crisis is the beginning of a worldwide revolution. It’s the beginning of the end of privileges.
They have become unacceptable in our world. and that’s the whole meaning of the crisis of 2008.
2.1.The crisis of 2007_2008 was before all a crisis of debt. We ran into the wall of time. For two centuries we had been buying ourselves a future through credit. More and more we have been buying ourselves a present. That’s how the debt bubbles exploded everywhere.
· First we’ve seen the dangerous burst of private debt. In many countries, in the last thirty years, economic growth was artificially curbed by cheap credit. Since the 1970s, in many industrialized countries low interest rates made credit easy and low consideration for the risk of default was facilitated by the massive use of structured financial products. That’s how the mortgage bubbles in the US, in the UKand in Spain were blown up. and how did we respond to this crisis? The Fed flooded the market with liquidities, and in a way the European Central Bank did the same a few years later. The quantitative easing programs may have been justified in the short run, but I’m convinced they are a danger in the long run. Instead of multiple limited bubbles, they have created in fact a giant worldwide bubble, betting that the world would absorb it.
·The dangerous burst of corporate debthas been the second symptom of the global debt disease. For thirty years also, a new financial model has dominated the corporate growth through credit, in the form of leverage buy outs or increase in capital yield by reducing the basis of capital through massive loans. The result has been to fragilize whole industries and even among the most efficient firms. We need to invent a more steady form of capitalization for the industry, more open to innovation, to entrepreneurship by extending the role and scope of the obligatory market.
·The dangerous burst of public debthas been the third symptom. The global public debt alone represents 50,000 billion US dollars.
oWe seem to be back to the age of defaults. We thought we had overcome this with the modern states. From the 16thto the 19th century, states were unpredictable.Austria defaulted ten times,Francein the time of the kings eight.
oWe seem to be back to the times of the Great Depression, when many of the major states were buried under a heap of debts they couldn’t pay back. In whole, the global debt represents over 200 000 billion US dollars, that’s to say over three times the world’s yearly output.
oYou know, this is not something I discovered after I left office, like so many. It’s something I’ve always advocated for and under my government, debt was reduced in a way it had not in forty years before. Between 2005 and 2007 we reduced deficits, debt, public spending, taxes and unemployment and increased growth.
·And if we wanted, we could also countimmaterial debt, like the future costs of our impact on the climate change. But this would bring us too far for today’s discussion.
2.2.But why did the private, corporate and public debts of the West become unsustainable? They had piled up for so many years, why not some more.
For thirty years, the conditions of a worldwide confrontation has been prepared in the West and in the emerging world;
·On one side of the world we had the madness of Western finance. To meet the growing needs of economies with lower and lower returns, the financial system, with the complicity of the different States, has invented mechanisms that allowed to attract even greater quantities of money. That’s how mortgages were granted to households with almost no consideration for the risk. Deregulation and derivate products have anesthetized the economy. The insensitivity to risk became an addiction to risk.
·On the other side of the world, the new emerging powers saw their growth model based on exports was reaching its limits too. Their exchanges with the West created more and more unbalances on both sides. The high increase in exports to Western countries created a hemorrhage of currencies, of factories, of jobs. In the emerging countries it created bubbles and inequalities. The beginning rise in wages weakened the competitive advantages in an export-driven model.
Around 2007, there were three changes that made confrontation inevitable. They happened in the emerging countries.
·First it was anew control over the liquidities. Through the accumulated exports, the emerging countries were now controlling large parts of the world financial resources, through currency exchange reserves of thousands of billions of dollars, through sovereign funds controlling today over 5000 billion dollars.
·Second change, there was anew need for commodities that had their prices skyrocket. This created a conflict for the appropriation of commodities, particularly in the energy sector, but it also created a new geography of wealth and resources that favored new actors, like Russia rising again from its ashes, for example. But it’s true also in Indonesia, in Peru, in South Africa. It created the conditions of a second emergence
·Third change, the emerging countries needed anew growth model based no longer only on exporting manufactured goods but on the development of the inner market. This meant massive needs in credit to develop the country, particularly in the matters of infrastructures. There was no longer a single engine for world growth, controlled by the West, there were now new engines igniting an autonomous growth in some parts of the world, mostly China.
The result of these changes was that the emerging countries needed more and more credit. This created an unprecedented competition for credit in today’s world.
·Credit has become the stake of a worldwide competition.
·Credit has become an issue of standardization and fair common rules for all
·Credit has become the key to the central nervous system of the new world economy.
oThose who control credit control the economy.
oThose who control risk control the credit
oThose who control information control risk
2.3.How did the West react? By clinging to the control of credit through its old privileges, making them even more dangerous as they already were.
·The Quantitative Easing Policies decided by the Fed flooded the markets with fictitious money maintaining the US economy afloat on oxygen pump.
·The banking reform in the United States and Europe, with its tightened rules, has mainly created a club for a well-behaved aristocracy and thus benefited the restauration of the banking empire in London and New York, leaving on the side China,Russia and other important actors on the new banking scene.
·The continuing public deficits of Western countries were financed through cheap credit, by on the aversion to risk
3.So, basically, when it comes to build a new architecture for the world finance and economy, the bottom line has to be the reform of credit
3.1.The solutions won’t come fromAmericaor from the West. They will come from the world. We need principles to build upon.
·We need diversity. We lived in a financial system where ideology has dominated, without even knowing it. American standards in the disguise of orthodoxy have tried to apply mechanically to all the situations. It simply doesn’t work. Judging emerging markets, their potentials, their resources, their political systems, through the eyes of ideology is being certain to be always at least half wrong. In the emerging world, no center of power can impose its ideology anymore. But that’s not enough to create diversity. You have to want it and to cultivate it. If you don’t you take the risk of a collapse of globalization in a few autarkic regions. This would be a setback for the whole world.
·We need confidence. The whole crisis of 2008 has been the result of a breach in trust. There was no way anymore to know your partner. We had been shut off in the dark. and in the dark, you become afraid of one another. That’s how almost all lending and borrowing was suspended. What do you do in the dark? Well, I believe you’ve got to get talking to each other again. and someone has to introduce the talking so everyone gets to speak up. That’s the role of a very new kind of actors on the financial markets, I would say.
·We need responsibility. How could we accept a world where those who create the greatest instability are always “too big to fail”. There’s no freedom, be it political or economic, without responsibility. But this means finding the appropriate courts and arbitrages to recognize the responsibilities and to correct the inequities.
3.2.We need a new multilateral approach to financial issues. Financial stability is a public good, it belongs to all people of the world.
·We need new global institutionsable to cope with the emergency and the complexity of our new world. It implies unprecedented ways of decision-making. The G20 has not proven tough enough. I believe the United Nations can be revived as a common forum of humanity by centering its activities on the economic development and financial stability of the world. In 1944-1945,San Franciscoand Bretton-Woods were two sides of a same coin. There needs to be more and better political guidance for the multilateral financial tools, the IMF and the World Bank.
·We need also new global regulations, concerning all the public goods : stability of the exchange system, climate, oceanic resources. All these are public goods that can not be left over only to the forces of market. A discussion must happen to confront points of view and to find a harmonious settlement of contradictions.
·We also need anew currency exchange systemto resolve worldwide unbalances. I strongly believe that it is not sound if one currency, the dollar or any other, becomes the hegemonic currency, because there’s an obvious conflict of interest between the objectives of the nation controlling the currency and the needs of the world using it. Today with globalization, the hegemony of the dollar is dwindling. and there’ll be no alternative currency. But I believe we can enter the age of multipolar currency through a new Bretton Woods agreement for more worldwide stability. I believe we can have a common world currency, a counting unit calculated on the composite exchange rates of a basket of major currencies – dollar, euro, yuan, yen.
3.3.We have to create the tools that will vouch for a more balanced circulation of credit around the world.
·The first key is anew investor type. The banking system that has failed us in 2008 was a system with no limits, with no rules, with no controls. The speculative funds based on the highest possible immediate yield have created an economy literally without future. An economy of greed, that thinks you should get all you can get today. I’m convinced this can change with a new type of investors. This can change with sovereign funds. They have their flaws too, for sure, but they also have one quality: they have time. Their main concern is tomorrow. The sovereign funds in the Arab world are there to compensate tomorrow’s losses, when the oil rigs go dry. The sovereign funds of exporting countries like China are concerned with creating new revenues and developing a strategy abroad for China, based on investments more than exports. These new actors are already there but they need a place in this order, at the height of their new role.
·The second key is in my view to developnew global project bonds, that would allow to connect again the virtual realm of finance with the reality of day to day economy. The industrialization process was a success because massive quantities of money could be invested easily in new types of anonymous shareholder companies. Today we need a financially backed and worldwide crowdfunding of precise infrastructure or research projects that can promise returns not only in the long run but also promises changes of civilization that would, without them, become impossible.
·The third key is therole of the credit rating agencies. and this issue is particularly important, because we can act immediately. The three big agencies failed their mission in 2007 and 2008 because of their methodologies, because of their conflicts of interest. But most of all they failed because they represented a world that was about to disappear. They represented the thirty years of financial deregulation. It’s not by chance that thirty years ago the profitability of the credit rating agencies began to rise steeply. They became part of the credit system itself, remunerated on commissions, encouraging speculative products like CDS.
I’d like to stress and to show what can be made on this third point, credit rating agencies.
Credit rating is not only about statistics, it’s about investigation, information, intelligence. It’s about an understanding of the world. It’s not by chance that the first credit rating agency was founded, inFrance, by an ex-convict and policeman in the times of Napoleon, the famous and adventurous Vidocq.
Today we need new actors on the stage. They have to embody and make come concrete the three principles I mentioned: diversity, confidence, responsibility.
Each of these principles is a challenge to create the new international system.
·How do we create new actors adapted to the diversity of the world？
oWe do by taking up the challenge ofcooperation. We don’t need an alternative hegemony, we need a partnership in which all remain equal but in which all take profit from allying there forces. Who wouldn’t agree to say that when a war is to be fought, a society must unite and overcome its divisions. That’s what history has taught us in Europemany times already.
oThat’s why I’d like to mention a project in particular that seems particularly interesting to me, that is called Universal Credit Rating Group. It’s new because it’s not a sovereign owned Credit Rating Agency that wants to conquer the world, it’s a worldwide alliance of credit rating agencies putting in common their energy and their diversity. We must solve the issue of the double bind, being altogether a worldwide actor and at the same time entangled in national sovereign mentalities and issues. and the Big Three companies can buy as many local partners as they want, it still will be the hegemony. As Guan Jianzhong, the president of Dagong has put it "The system as it exists can not go on. We can’t wait for American initiatives to reform it. "
·We must invent new actors capable of creating more confidence.
·That means accepting the challenge of independence. You’re credible when you’re independent. Independent from ideology, independent from a single financial interest, independent from single sovereign interests.
·We need new actors to give the system more simplicity.
oHow can credit rating agencies do that? By relying on moreobjectivity. It’s not sound when the main credit rating agencies depend on about 50% of subjective criteria. And I’m sure there are new criteria about to be developed.
oThat’s what UCRG has been advocating for: the logic of adual rating. That’s a new outlook on globalization, in which what matters is always altogether global and local. You can’t see the real shape of things with only one eye. It’s difficult to walk only on one leg. It’s the same here. You need a local rating and a global rating to have a full view of the realities of a corporation or of a sovereign debt.
oUCRG is also different, because it wants to stop painting the economy in black and white. It wants a new rating with morenuances, able to draw a better picture. I think this is a major change, like when photography left from black & white to color pictures.
In a way, today there are two ways to do politics, in the noble say, that’s to say to change the world into a place where you’d want your children to live in.
You can choose party politics and choose to shut down the American federal services, because you can’t agree with people from the other party. This means, like in Europe, becoming incapable of taking any difficult decision, because you depend on day-to-day media, polls, PR advice, spin doctors and what ever else.
You can choose another way of doing it, by creating associations or new enterprises or new ideas. and that’s how, little by little you respond, with pragmatic ideas, to the current situation. That’s how some people came to invent microfinance. That’s how some people today are inventing a new way to look at the financial market, like UCRG.
I believe in this project, because we have to take the lessons of the past financial crisis if we do not want to go through new, even more dangerous crisis. and unfortunately, I don’t see Europe and the US learning very quickly from their errors. We have to speed up and that’s why I have accepted recently Mr GUAN Jianzhong’s proposition to chair the new International Advisory Council the group is creating, to promote this idea around the world. There’s a race going on in the world of finance, and until now mad finance has been running ahead. That’s why it’s so important to rise up to the challenge of innovation. To the challenge of fairness. To the challenge of a balanced world, where there’s room for the prosperity of all.