Dear Mr Soros,
Yesterday ( 26th Jan 2012), CNBC covered your speech at Davos with your quote ‘the Heavily indebted countries that now are in a position of a Third World country that it is too heavily indebted in a foreign currency.’
Knowing you from some of your work, I was quite surprised to hear the term ‘Third world’ from you.
The term 'third world country' was created in the days of the cold war to denote that countries that neither subscribe to Capitalistic nor Soviet models. The term is generally used with the negative connotation as they were poorer. Not only the term is out-of-date since the Soviet era is over, but also ‘We have only have one world, whether some people like it or not’ . We all share it with others with other inhabitants of this planet.
The term ‘developing nations’ could have been a better alternative. Especially given your background in nurturing open societies, the mentioned term was not expected out of you.
I am a citizen of India. I neither like my country referred to as ‘Third World ‘ nor any other country referred that way.
Secondly, coming from the developing part of the world, we don’t want to be compared with failed nations in Europe for the following reasons:
· The current state of the poorer countries and the developing nations can be attributed to the external aggression and colonial rule from Europe that plundered them. But these western nations that are getting bailed out their own bad governance. These nations simply failed to live within their means.
· We are hardworking people and not ‘hardly working’ category that live on government hand-outs in Europe
· We don’t run the huge governments (that even overtake soviet models in some cases) that nurture entitlement culture in the name of social welfare.
Coming to the third part and the most interesting part of the statement, i.e. ‘owning debt in foreign currency’.
The above scenario is not favourable to the borrower because the borrower cannot manipulate the currency in which the debt is ‘to be’ paid off. Majority of the western nations today enjoy the ‘skewed model’ for own in debt in their own currency. It’s not only the whole model is skewed in the borrower's favour but also the mountains of debt have grown higher than ‘the Alps’. These debt mountains are often described in dollar value, % of annual GDP, etc. But the term that we have not heard much in sovereign debt episode of the current crisis is the ‘per capita debt’. I think the above term describes the magnitude of the problem.
As of year 2011, the per capita debt of Ireland is 500,000 U.S dollars whereas the per capita debt of Ethiopia is 51 U.S dollars. Let’s keep aside the hypothetical belief that many countries like Ireland will grow out of this mountain of debt and repay it.
What I infer from the per capita debt figures is that ‘if Ireland had to have a fire sale of national assets to pay its debt obligations tomorrow then it will not be very different from the present day Somalia.’ (I don’t have anything against my Irish brothers; I have just picked up a country from the top and bottom of the debt rating list.)
Just because a country is located in the Europe does not mean that it cannot be poor. It is sad that Greece and few other nations that lived beyond its means will default eventually. At the same time, it is also unreasonable to expect the rest of the world to pay their bills.
The current crisis, we have gone from bailing out companies to bailing out countries. Now are we are at the stage of bailing out continents. We need to fix this debt culture before we get stage of bailing out the whole planet.
The current debt levels are not only sustainable for many of the countries, but also they are ‘too big to bail out’.
In addition to current debt, the western economies have bigger holes in their budgets in the form of social security obligations. Their debt problems get more complicated with higher social issues like higher percentage of broken families, alcoholism, falling number of marriages and lower number of children that are born.
If you consider the amount of debt piled up by countries, ‘the rich countries are not really rich and poor countries are not really poor’. The western countries have had their share favourable terms in the international financial & political arena for a reasonable amount of time. I would like make the point by quoting by George Orwell ‘All animals are equal, some animals are more equal than others' from the novel 'Animal farm'. But this trend will not continue for ever,
The countries in the eastern hemisphere will start dictating terms by
· Not deciding to buy any of the debt from the west and can start selling their current debt to the western central banks (that are already actively buying sovereign debt)
· Reducing the forex reserves in currencies by moving to commodity reserves
· Economic unions with local settlements that does not involve western currencies
· The whole concept in which currencies are traded in pairs may change
· - The idea of a reserve currency itself will be challenged (not that just whether the reserve currency is U.S Dollar / Euro)
The next meeting to save the capitalism might not even be anywhere in the western hemisphere (forget about meeting again in Bretton Woods).