Every bad loan is one too many

Betrug, Mosambik, Kreditbetrug
Credit Suisse's doubtful lending practices in Mozambique have legal repercussions internationally.
Article as analysis
Many poor countries are indebted to major Swiss banks. Instead of debt service, they could now be using their funds to manage the health and social policy aspects of the pandemic. Banks should now provide generous loan write-offs.

Fifty doctors went on strike in April at the John F. Kennedy Memorial Medical Center in Monrovia, Liberia's biggest public hospital. They were protesting the inadequacy of measures to protect against coronavirus at their hospital. In the Liberian capital, the national health authority itself too was later shut down owing to a cluster of infections there. Although the officially registered number of covid-19 cases in this West African country stands at just over 200 so far, the health care system in this city of a million souls had largely ground to a halt by mid-April. Liberia's health system is, after all, rather fragile: there are just four doctors for each 100,000 citizens. In Switzerland it is 100 times more. The World Bank classifies Liberia as a low-income country – i.e., one of the poorest in the world. According to World Health Organisation (WHO) data, cumulative health care costs in the 69 poorest countries was 20 billion francs for last year. In Switzerland alone that figure is 80 billion.

Around the world, the pandemic has not only brought public health structures to a standstill (or worse), it is also having severe economic impacts (see page x). Commodity trading, for example, has practically come to a standstill. Plummeting world commodity prices have in turn further fuelled the debt spiral in producing countries. The oil price, which had collapsed dramatically even before the corona crisis, had been an enormous shock to the Nigerian economy, for example. Combined with an unprecedented withdrawal of investments from developing and emerging countries, this development brought over 100 countries to the brink of State bankruptcy in the spring. They found themselves having to turn to the International Monetary Fund (IMF) for financial bailouts. The countries in Sub-Saharan Africa could be facing their first recession in 25 years.

The poorer, the worse the debt

Now caught in the debt trap are poor countries which for decades have suffered from capital flight, corruption as well as over-indebtedness and which – unlike some emerging countries – are not rated on financial markets as countries recommendable for investment purposes. Because of their own often very weak currencies, powerless central banks, inadequate tax collection and high levels of foreign currency debt, these countries are hardly able to pursue an independent economic policy let alone find autonomous responses to global crises. If they contract new loans on the financial markets – through new government bond issues, for example – the interest rates applied will be several times that paid by the Swiss Confederation, for example. Given the Swiss National Bank's negative interest rates, the Confederation is currently able to raise fresh capital at a zero-interest rate. This is possible thanks to Switzerland’s robust export economy, its financial centre and its low corporate tax jurisdictions. Banks, corporations and the export industry ensure a steady influx of capital, which outweighs capital outflows for imports and guarantees Switzerland a high level of creditworthiness.

How can poor countries in Asia, Africa and Latin America be helped out of this multiple crisis. It is well-known that tax flight, corruption and money laundering are rather tough political challenges that will certainly not be resolved any more quickly than usual in this crisis. If countries are finding it so difficult to achieve international cooperation in the direct medical fight against coronavirus, they are much less likely to achieve it around the highly controversial question of implementing a more equitable global tax system. And the fact that introducing such a system would be a highly plausible policy response to the global health crisis makes little difference. Few events before have so effectively brought home to the entire world the key role of the State in safeguarding the health of its citizens.

The debt question is a simpler one. If borrowers and lenders are able to reach agreement, debts are quickly settled. Billions of dollars would then be freed up for public investment in healthcare and social welfare. The forgiveness of all debts in the world’s 69 poorest countries for 2020 alone would mean an additional 25 million dollars in government coffers. This would immediately double the resources available for tackling the corona crisis. As one of the world's leading financial centres, Switzerland could make a key contribution here towards managing this crisis. Naturally these countries would again be facing the same problems next year. The medium-term restructuring of the debt regime is therefore warranted at a multilateral level.

Major Swiss banks under an obligation

There are basically three types of lenders in the world: private (for example banks, pension funds, asset managers, enterprises outside the finance industry or private individuals), multilateral – mainly the so-called Bretton Woods institutions, namely the World Bank and the International Monetary Fund (IMF) – and bilateral, that is to say countries that make loans to other countries. Switzerland has long ceased bilateral lending. Even IMF and World Bank policy approaches do not offer much else: the policy conditions attached by these multilateral institutions to their lending need urgent reform. In the light of the global climate, health and inequality crisis, they should no longer be promoting strictly classic economic growth irrespective of its social and environmental ramifications, but instead comprehensive sustainability within the meaning of the 2030 Agenda. For one thing, however, Switzerland has very little influence in the Bretton Woods institutions given its limited voting rights in them. And for another, it has – somewhat unsurprisingly – pursued a not very progressive course in those institutions for decades now.

That leaves private investors. According to data from the Swiss National Bank (SNB) and the Bank for International Settlements (BIS), there are currently 40 Swiss banks with a total exposure of 5.7 billion francs in the 86 poorest countries. Bearing in mind that World Health Organization (WHO) statistics show total health spending by the 69 poorest countries of just 19.7 billion, 5.7 billion is a very significant amount, and is equivalent to half of the Confederation’s international cooperation budget for the next four years.

Monumental corruption scandals in Mozambique and Papua New Guinea in recent years have illustrated the magnitude and potentially disastrous nature of the role of big Swiss banks as major lenders in the debt-ridden economies of poor countries. Seven years ago Credit Suisse extended loans worth over 2 billion dollars to the Mozambican Government – at the time equivalent to one-eighth of the South-East African country’s gross domestic product. Funds meant to be invested in the government-sponsored expansion of the fishing industry seeped away into the pockets of the deal's puppet masters and plunged the country into State bankruptcy. The consequences for the population were disastrous: "As a result of the economic misery, recent years have seen no tangible improvement in the fight against HIV or malaria. Infant and maternal mortality have remained high", wrote the online magazine Republic last year about the case. Besides, Mozambique's poorest regions were hit by a cyclone in the spring of 2019, and the affected population groups were left to fend for themselves in coping with the consequences. Hunger and malaria worsened. One can hardly imagine what might happen should the covid-19 pandemic begin to take hold there.

In Papua New Guinea for its part, the government borrowed 945 million francs from UBS in 2014 to acquire a stake in the country's biggest oil company, Oil Search Ltd. The Finance Minister opposed the deal, but the Prime Minister forced it through, allegedly by unlawful means and at great cost to the population. The case is still pending. "Whereas UBS made a profit of over 80 million francs on the loan transaction, it turned into a gigantic losing proposition for Papua New Guinea, as oil and gas prices collapsed just a few months after the closing of the deal and the government was forced to dispose of all its Oil Search shares at a loss. The deal and its consequences cost the financially weak island-state about 400 million dollars", the South-East Asia correspondent for SRF radio Karen Wenger reported a year ago in the Echo der Zeit programme. This is by no means chicken feed for a State with overall expenditure of 14 billion dollars.

In such cases, debt relief or the write-off of the relevant loans by major Swiss banks can be a blessing for the people of the countries concerned. Conversely, the banks would also be ridding themselves of undesirable credit risks: should the March 2020 rescue package mounted by the major Western central banks prove insufficient to stabilise the financial system in this crisis, the big banks too could again find themselves in a tailspin. And once again – as in the 2008 financial crisis – any bad loan not written off by that stage at the latest would be one too many.