Oct 31, 1982
In recent months, there has been more and more talk among financial experts, politicians,
and the press about the possibility of an international financial disaster. Just before the annual meeting of the IMF (International Monetary Fund) in Toronto last summer, Denis Healey (formerly Britain’s Chancellor of the Exchequer) said that that meeting would be the “last chance to save the world from a catastrophe even greater than the slump of the 1930s.” Speaking about Mexico and other countries heavily in debt, he added, “The risk of a major default triggering a chain reaction is growing every day.”
Healey was not alone in his concern. The principal discussion at the IMF meeting centered around proposals to expand members’ donations to the IMF so that it could have a special fund available to bail out countries facing an imminent collapse.
In fact, their concern is how to protect the international banking community whose interests are affected whenever a country such as Mexico is forced to default. By last summer, Mexico’s foreign debt (public and private) had reached 80 billion dollars. Nearly half was due to be paid within the year, but Mexico was unable even to fully pay off the interest due, let alone any principal. How did the bankers get into this mess? According to one European central banker at the IMF meeting, “There has been an underlying problem here of shoddy bank lending that has got to stop. A bust at one of the banks may get them interested again in prudent lending around the world. If not, we simply will have to somehow curb lending activities.”
But, if “shoddy” practices are at issue, it is the world’s biggest banks which stand accused, not to mention different international financial agencies, like the IMF. Among the U.S. banks involved, Bank of America, Citicorp, Chase Manhattan, Manufacturers Hanover, Chemical of New York, and J.P. Morgan each stand to lose at least one billion dollars if Mexico were to default. For Bank of America and Citicorp, it is close to 3 billion each.
Their loans were based on Mexico’s economic boom, which took off in the 1970s, as some of the world’s richest oil reserves were discovered there. As world oil prices rose dramatically, Mexico’s supply seemed to be among the best collateral imaginable. Oil came to account for 75 per cent of Mexico’s exports. A tremendous program of economic, particularly industrial, development was undertaken, based on anticipated long-term oil earnings.
Mexico’s borrowing outstripped its real gains in production. In recent years, more and more of the money borrowed went to pay off earlier debts, rather than financing additional increases in production. Nevertheless, the world’s bankers continued to make loans so that earlier debts would be paid, all the while hoping that somehow the Mexican economy could support them. But, when world oil prices began to drop in 1981, Mexico had no way left to sustain its earnings, or to pay its debts. It recorded in 1981 a record balance of payments deficit of 12.2 billion dollars. Consequently, the Mexican economic “miracle” has fallen down to earth. Construction has been halted on 4 new ports, on steel mills, petrochemical plants, and nuclear power plants.
By last summer, the bankers were unwilling to continue extending the debt under the old terms, without any guarantees. Bank of America, Citicorp, and the rest were worried in the first place over their own potentially disastrous losses. But together the bankers showed a concern for what could happen to their system as a whole – the “chain reaction” that Healey had warned of.
The world’s banks, private and public, and the international financial institutions are all part of an interlocking system. Each borrows from the others to be able, in turn, to lend as much as possible. The amounts they lend extend far beyond the real deposits they have available at any one time. The inability of any one bank to collect payment on its loans reduces its ability to pay others. The whole system is responsible for trillions of dollars world-wide, but it’s possible that a default on a tiny fraction of that could trigger the kind of chain reaction that Healey remarked on, like a house of cards collapsing.
The bankers are quite aware of the risk of collapse inherent in their system. This is why they are so concerned to find a solution to the Mexican crisis.
The world’s bankers discuss the risk of a world financial collapse as if it were a problem
generated by the special circumstances of the underdeveloped countries. Perhaps it’s true that countries like Mexico, Brazil, Argentina, and Poland run the greatest risk of disaster in the short run today. But their debt burden is far smaller than that of the industrial countries. It would be quite another matter to deal with a financial disaster in Europe, Japan, or the U.S. The international financial system, which has the means to deal with a financial collapse in a country like Mexico, has much less means which would allow it to deal with a similar collapse in the least important of the industrialized countries.
The way the international bankers describe the situation obscures the problem. For if it’s true that the underdeveloped countries carry a heavy external debt, the industrialized countries carry a much heavier debt – it’s just that much more of it is internal. But that changes nothing so far as the basic problem of the debt is concerned – the financial system can be choked by debt, not matter where it is generated.
Mexico’s debt of 80 billion dollars is nothing compared to the debt in the U.S. and other industrial powers. Even the combined debt of all the underdeveloped countries in the world is less than 900 billion dollars. But the total debt (public and private) in the U.S. alone is near 4 trillion dollars! The debt of U.S. manufacturing and other non-financial corporations alone is over 1.2 trillion dollars. And this does not take into account the fact that the whole world has been flooded by U.S. dollars, which in fact is a kind of external debt.
We see the risk of imminent default in countries like Mexico and Poland today because of the dramatic growth in the gap between their debt and their production. But, in fact, we see the same kind of gap growing in the U.S. Total debt in the U.S. today is ten times what it was in 1950, while industrial production is only three times as great. That is, there is a greater and greater disparity between the two. But, in the last three years, the economic crisis has aggravated the disparity. For example, the U.S. index of industrial production has dropped from a high of 152.5 in 1979 to 138.0 in August 1982, during a period in which debt has continued to climb sharply. In July 1982, U.S. factories and mines were operating at 69.5 per cent of capacity, down from 85.7 per cent in 1979. Thus, not only has debt grown much faster than production in the U.S., but now production has significantly declined.
The situation is similar in the other industrial powers. And several of them, most notably France and Canada, are facing real difficulties. Growing debt on top of stagnating production characterizes the world economy as a whole, not only cases like Mexico.
If the bankers are right to worry that Mexico could fail to pay its debts, what does this say about the rest of the world? If Mexico is a threat to world financial stability, then in the imperialist countries, especially in the U.S., we sit on top of a veritable volcano. Perhaps it is merely smoldering now, but when will it erupt?
In any case, the discussions in the IMF focus on the manifestations of the crisis in the
underdeveloped countries. The first thing the IMF has to propose to these countries is more loans to pay off the loans now about to be defaulted. That is, the solution which the bankers propose to the problem of old debt is... new debt! Second, the bankers insist that these countries must impose “austerity” programs on themselves, in order to pay off the debts. In a situation where production is already stagnating, the IMF proposes that a bigger chunk go to pay off the banks by reducing what goes to feed, clothe, and house the people. That is, to satisfy the banks, those who are merely poor should face starvation and those who today face starvation should die.
This gruesome proposal of the bankers might postpone a complete collapse for a while, but even in their own terms it resolves nothing. It simply adds to the world-wide mountain of debt. The only way to have new money to pay the old debts, money which does not in itself represent a new debt, would be to increase production. But the proposal of “austerity” implies just the opposite – restricted consumption on the world level can only imply restricted production. This is in fact what precipitated the crisis in the first place!
The bankers make the same kind of proposal everywhere. Their solution is to insist on “austerity” for the people in countries as diverse as Mexico and Poland.
It’s also what the bourgeoisie has begun to implement to a degree, not only in the underdeveloped countries, but in the industrial powers, including Britain, France, West Germany, and the U.S. Whether represented by right-wing politicians like Reagan and Thatcher or by social-democrats like Mitterrand, they propose to resurrect their economies by reducing the standard of living of the working layers of the population. Meanwhile, in every case, the mountain of debt grows while production stagnates. And so the chance of catastrophe, of the house of cards collapsing, continues to grow. We can’t say exactly what could precipitate it or when, but we can see plainly that the conditions which could cause it become more intense.
And the methods which the bourgeoisie uses to deal with the crisis, while they may postpone its climax, only aggravate the problem rather than resolve it.
The deeper we go into the economic crisis, the more their response is to demand extreme austerity from the working classes and poor of the world. But as we have discussed, this in no way provides a way out of the crisis. In fact, we can see, as the more and more likely outcome, a collapse of the whole international financial system. Such a collapse would mean a deeper and deeper economic crisis which would pose the risk of a major war. The last two world wars were entered into as the only resolution the bourgeoisie could ultimately find to the crises of the day. And a world war posed today, with the armories of the major powers filled with nuclear
weapons – could it be anything but a nuclear conflagration?
This is not to say that nuclear war is inevitable. But we are faced with a system which drives toward catastrophe in quest for profit, a system which accepts to starve millions in the name of stability.
In 1930, predicting World War II, Leon Trotsky wrote: “The objective prerequisites for the proletarian revolution have not only ‘ripened’, they have begun to get somewhat rotten. Without a socialist revolution, in the next historical period at that, a catastrophe threatens the whole culture of mankind.” The world war which followed was not only the greatest destroyer of human life in history so far, but it produced the weapons which could destroy humanity itself.
If the bankers who represent and guide the capitalist press today can openly speak of its possible collapse in the immediate future, they have written the indictment of the system itself. Trotsky’s appeal for revolution is all the more relevant and urgent today.