IOU: The Debt Threat and Why We Must Defuse It

I.O.U.

Noreena Hertz

The Debt Threat and Why We Must Defuse It

To Jonathan, Arabel and David

Thank you so much.

Table of Contents

Cover Page

Title Page

CHAPTER ONE Rock The Vote

THE BACKGROUND

CHAPTER TWO It’s Politics Stupid

CHAPTER THREE Backing the Bad Guys

CHAPTER FOUR Pushers and Junkies

CHAPTER FIVE Traders and Vultures

CHAPTER SIX Grey Men in Grey Suits

THE PRESENT

CHAPTER SEVEN Stop Not Making Sense

THE THREAT

CHAPTER EIGHT Can’t Pay Won’t Pay

CHAPTER NINE A Plague On Both Your Houses

CHAPTER TEN It’s Not Just Osama

THE BLUEPRINT

CHAPTER ELEVEN Truth, Reconciliation and Regeneration

Notes

Index

Acknowledgements

About the Author

By the same author

Copyright

About the Publisher

CHAPTER ONE Rock The Vote

‘And ye shall hallow the fiftieth year, and proclaim liberty throughout all the land unto all the inhabitants thereof: it shall be a jubilee unto you; and ye shall return every man unto his possession, and ye shall return every man unto his family.’

Leviticus 25:10 – as partially inscribed on the Liberty Bell

‘Who’s the Elvis here?’ asked the rock star impatiently. The question reverberated through Leslie Gelb’s book-filled office in the beaux-arts brownstone that houses the Council on Foreign Relations. The exasperated tone came from a man accustomed to addressing stadiums filled with fans hanging on his every word and syllable but it was far from an arrogant question.

Gelb had just finished his tutorial on the American power structure by laying out the great chain of influence – from David Rockefeller to UN Ambassador Richard Holbrooke to US Treasury Secretary Robert Rubin to former Chairman of the Fed, Paul Volcker to a number of key Republicans – that led from Wall Street to Washington and back again. Which only served to remind Bono that he was aiming to play in a very different league. Paul McGuinness, U2’s manager, had only just admonished him that it was one thing to lobby for the debt cancellation cause at music industry events but quite another to pilot the issue through the American political process. With these words still clearly ringing in his ears the star tried to find a shortcut towards his goal.

‘You know I’ve got a day job?’ asked Bono half jesting. It was entirely possible that the decidedly un-hip Gelb, then President of the United States’ premier foreign policy think-tank – a place that played host to many self-important investment bankers, foreign service officers, journalists and academic wonks but no conventional celebrities – had no idea why the young man was important.

But Bono’s attempt at humour cut him no slack, Gelb leaned across to him and repeated in rasping tones (he had lost his voice that day) that any one of the names he’d just listed ‘could basically stop this idea from getting off the ground.’ And if Bono truly wanted to get the United States to cancel all the debts owed to it by the world’s poorest countries, not to mention get the US to provide funds to cover monies owed to the World Bank, the IMF and regional development banks, he would need the support of every one of these American dignitaries – and that was just the beginning. Gelb broke the news that there was no single figure with enough clout to pull off such a complicated – and politically inert – manoeuvre. Developing world debt was a diverse issue with many constituencies. For the US government to orchestrate debt cancellation would require the kind of unanimity rarely seen in such a partisan climate. ‘There is no Elvis,’ Gelb finally answered, and ushered the rock star firmly out of the door.

Gelb had been right: there was no Elvis and there were no short-cuts. Eventually Paul Hewson, the Irish singer revered by millions as Bono, would travel back-and-forth across the Atlantic Ocean 30 times, painfully assembling a coalition from some of the world’s least sentimental politicians. After a year and a half beseeching and cajoling, he arranged for a dozen prominent Democrats and Republicans in Congress and the Clinton administration to support a package that pledged to cancel all the debts owed the US by the world’s 33 poorest nations, as well as cover part of what they owed the World Bank and IMF. It was the culmination of the first – and last – serious attempt by the ordinary people of the West to force politicians to address the painful legacy of Third World debt.

But what was it about the debt of developing countries that motivated Bono to go to so much effort? Aren’t all countries in debt? The United States certainly is. It owes $3 trillion, around 10 times what Africa owes, but Bono wasn’t campaigning to cancel that.

The difference is this. The US may be the world’s most highly indebted nation, but it can afford to service its loans, for now at least. The world’s poorest countries in Africa, Asia, and Latin America cannot. Because to do so they have to pay an unacceptably high price, mainly at the expense of their poor or sick. Botswana, in which 40 per cent of adults are now HIV positive, pays more today on debt servicing than it can afford to pay on health care or provision. Niger, the country with the highest child mortality in the world, continues to spend more on debt servicing than on public health. Countries that can’t afford to provide basic health care, education or shelter to their people have to use their pitiful resources, including, in many cases, all their aid flows, to repay debts typically racked up by authoritarian, unelected regimes long since gone. Children in Africa die every single day because their governments are spending more on debt servicing than they do on health or education. The injustice of this situation made Bono mad.

It made him mad too that most developing countries had become so indebted only because the world’s superpowers had callously used them as pawns in the days of the Cold War. And that the rich world continues to lend to dictatorships and corrupt regimes in the poor, despite the fact that it is the ordinary people who live under them who bear the cost. It made him even angrier that the West continues to lend monies to the developing world under the condition that they use them to buy arms, or military hardware. And that to the traders on Wall Street and the vultures who hover over highly indebted countries, debt is just another product to be bought and sold, regardless of the damage their actions so often cause.

But this still doesn’t explain why a rock star turned political lobbyist? Bono could’ve kept his politicking confined to music biz events, and still played a part.

To understand that, we must understand the state of the debt cancellation movement in 1999, the year Bono and Gelb met. In Europe, it enjoyed a very high profile. From inauspicious beginnings at Keele University in central England, in just a few years it had evolved into a broad based alliance – the Jubilee Coalition – which counted churches, the Mothers Union, the British Medical Association, trade unions and aid agencies amongst its members. In Britain, 500,000 ‘Cancel the Debt’ postcards had been sent to Gordon Brown, the British Chancellor of the Exchequer, including one from his own mother; in Italy, rival soccer teams wore debt relief t-shirts; on the same day that Frank Sinatra died, 70,000 Jubilee supporters formed a human chain around the G8 Summit of the world’s wealthiest democracies, to protest against the shackling of the developing world by its rich world creditors.

In the United States, however, despite the support of various religious groups, the Jubilee coalition had almost no profile, and its campaign – to get the world’s richest countries to commemorate the millennium by cancelling the debts owed them by the world’s poorest countries – had completely failed to take off. But without the US making a serious commitment to debt relief, the whole Jubilee campaign would falter. The $6 billion debt owed to the US by the poor countries was an albatross around their already scrawny necks. More critically, there could be little progress towards cancelling the $70 billion the world’s poorest countries owed the World Bank, the IMF, and regional development banks unless America played a major role.

Jamie Drummond, a young British debt campaigner, who had been charged with getting the United States more engaged, decided to think outside the envelope. He saw that there wasn’t time to rally the kind of mass public support that had proven so effective in getting debt on to the European political agenda. It was early 1999 and the millennium clock that marked the deadline for the Jubilee campaign was ticking very loudly. And so he decided to go a completely different route.

In the States, celebrity was, he figured, the quickest way of entering doors and ramping up support. And Bono, the Irish singer, whose band U2 had sold over 100 million records, and who was known for his staunch support of human rights, the environment and development issues was, Jamie believed, his man.

Luckily, Jamie’s father had a useful neighbour on the west coast of Ireland. Through Chris Blackwell, the legendary founder of Island Records, Drummond managed to reach Bono.

Bono was excited. He cared about Africa. After headlining at Bob Geldof’s revolutionary Live Aid concert in 1985, which raised $70 million for famine-stricken Ethiopia, he and his wife Ali spent a summer working in an orphanage there. Bono had seen first hand the immense strain of repayment of debt and thought it absurd that, for every dollar of government aid the West sent to developing nations, several times that amount was coming back to them in debt repayments. But perhaps what clinched it for Bono was that he was also, despite his rock and roll pedigree, a deeply religious man, and the biblical notion of ‘Jubilee’, the idea that you have the right to begin again, appealed to him with its combination of moral force and profound simplicity.

‘Great ideas have a lot in common with great melodies,’ recalls Bono. ‘They have a certain clarity, a certain inevitability, and an instant memorability. And I couldn’t get this one out of my head. I knew it was right, and that the time was right for this and I couldn’t let it go.’

But while the pierced and sunglasses-wearing rock star might have been able to fill giant stadiums, Bono was a nobody as far as American politics was concerned. If he was to play a part in putting debt relief on the US political agenda, he needed help. So he phoned a woman he thought might be able to do just that. Bono knew Eunice Shriver – the founder of the Special Olympics, and daughter of Rose and Joseph Kennedy – from a charity recording project, describing her as a ‘Hibernophile’, a person who knows more about Irish culture and politics than most Irish people. She told him that she’d love to help, and suggested that he get in touch with her son: ‘I think Bobby would be good at this,’ Bono recalls her saying. ‘And I knew Bobby, but hadn’t thought to ring him. And he was good. He was more than good.’

For while Bono had passion, Bobby had political savvy. Shriver immediately knew that in order to get the United States to really commit to debt cancellation, it was essential that not just the Democrats, but also the Republicans, right-wing journalists and, most importantly, Wall Street blessed their proposal. With this in mind, one of the first things Bobby did was set up the meeting between Bono and the well-connected Gelb.

But Bobby also knew that Bono couldn’t just go and meet the men on Gelb’s list until they both knew their subject back-to-front. ‘I had been minding my own business,’ Bobby recalls, ‘making records, producing movies, when I got Bono’s call. I knew nothing about debt, but I did know I wasn’t going to Washington with him, or to see anyone at all, unless we really knew what we were doing. We really had to know what we were doing.’ So Shriver picked up the phone to ‘a guy I knew who was doing a lot of work on this subject.’ That guy was Jeffrey Sachs, one of Harvard’s most famous economics professors.

‘I called Jeff up and I said, “I have this friend that I did the Christmas record with, a musician called Bono, and if he comes over to Cambridge, will you spend a couple of days with him and try to get him up to speed on the actual numbers?”’

Sachs was forthcoming. ‘Sure I wanted to meet Bono,’ he recalls. But debt cancellation had been something he had been advocating for years, to little avail and he was sceptical of the impact the musician could have. ‘It’s never going to work,’ Bobby remembers him saying. ‘No one in Washington will pay any attention to you. We can’t get anyone to pay attention to this issue.’

But by the end of their two-day crammer session Sachs felt differently. Shriver recalls Sachs’ palpable excitement: ‘He said, “This guy is a very persuasive guy you know, maybe something can be done.”’

With Bono thoroughly briefed, it was time for Shriver to start spinning his Rolodex.

His first call was to James Wolfensohn, the head of the World Bank, a man who Bono had been trying to meet ever since Jamie Drummond had first approached him, but with no luck. Shriver, however, had worked for Wolfensohn some 10 years back, in between leaving law school and entering the music business. ‘So I called Jim and his office put me through to him in London and I said, “I’m sure you’ve heard of this Jubilee debt relief thing?” And he said, “Of course.” And I said, “I have this friend who’s a singer, who is a sort of activist on this debt thing – and he’d like to meet you.” And he said, “Oh no, I don’t have time for that.” And I said, “Jim, he’s in Dublin. You’re in London. Why doesn’t he come over tomorrow? It’s Sunday. You have nothing to do on Sunday.” And he said, “Okay, tell him if he can be at the Berkeley Hotel at noon, I’ll have lunch with him.” I called Bono, and said, “If you can be at the Berkeley at noon tomorrow, Wolfensohn will have lunch with you.” And Bono said, “Wow, can I bring Geldof?” [the knighted lead singer of the Boomtown Rats and founder of Live Aid], and I said, “It’s up to you, man. It’s your lunch. Whatever you want.” And I called Wolfensohn back and said that Bono would be there at 12 and was going to bring this other guy.’

The lunch was a disaster. ‘Afterwards Wolfensohn called me,’ recounts Bobby, ‘and he was furious because Geldof had yelled at him the whole time.’ Bono confirms it. ‘Yeah, Bob was like, you fucking this and you fucking that, and how can you fucking sit here in your fucking seat, you prick. And Jim Wolfensohn is a real debonair sort of gentleman, and he looked over at me with that look of “help” on his face. But we got on.’

‘He liked Bono,’ says Shriver. ‘He thought he was bright. And said that if he wanted to work on trying to get money for debt relief he would do what he could to help.’

Game on.

Next up was the highly influential central banker and former Chairman of the Federal Reserve, Paul Volcker. ‘Volker laughed at me when I first raised the idea of debt cancellation,’ recounts Bono. ‘Just laughed out loud – ha ha! He said, “I hate this idea. I hated it in 1968, I hated it in 1972, I hated it in 1985, and I hate it now. You’re from Ireland, aren’t you? You should stick to fishing.”’ But Bono would not rise to the bait. He patiently explained that the Jubilee campaign was different. It wasn’t just about cancelling the debt, he told Volcker, it was a one-off opportunity to level the playing field, to put right the relationship between North and South, a relationship that had been wrong for far too long. His patience paid off. ‘At the end of a very long meeting,’ Bono recalls, ‘Volcker said “Give me your phone number.” And he not only made a few calls on my behalf. He helped. It may have been behind the scenes, but he actually helped.’

After Volcker came Rockefeller, the wise old man of Wall Street, and former Chairman of Chase Manhattan Bank. ‘That meeting went really well,’ Bobby remembers. ‘We discussed then-current initiatives, and the problems with these. We corresponded back and forth for several months.’ And after Rockefeller came Holbrooke and after Holbrooke, Bob Hormats, Vice Chairman of Goldman Sachs.

Bono and Bobby were ready to hit DC.

Robert Rubin, the US Treasury Secretary at the time, was evasive. ‘I just couldn’t get to him,’ recounts Bono. ‘I even said I would swim to wherever he was at one point.’ Rubin was a devotee of Alexander Hamilton, America’s first Treasury Secretary, who famously insisted after the War of Independence that the individual states repay all their debt. Rubin, not surprisingly, was dead set against debt cancellation. But when they did eventually meet, thanks to Hillary Clinton’s intervention, Rubin, although clearly never going to be an advocate, indicated that he would not stand in their way.

Word got to Bono and Shriver that Larry Summers, the Treasury Secretary-in-waiting might be more proactive. Summers had formerly been the Chief Economist at the World Bank, and development was a known passion of his. But, again, just getting the meeting wasn’t easy.

‘I didn’t particularly see why I had to hang out with a singer I’d never heard of,’ Summers recounts. ‘But the young women on my staff told me I had to see him.’

‘It’s true. Larry had no idea who Bono was, nor had he heard of U2,’ confirms Sheryl Sandberg, Summers’ Chief of Staff at the time. ‘It was a cause of great hilarity in the office. But I was his Chief of Staff, which meant that requests came through me, and I would then make recommendations as to who the Secretary should or should not see. As a cabinet member, your time is the only commodity you have, so we took the scheduling process very seriously. And when this request came in, I was like, we’re doing this meeting, we’re not going to have a normal conversation.’

But Summers wanted to lie low. About to be sworn in as Treasury Secretary, the last thing he needed was a gossip item about him meeting a pop star, perfect ammunition for his political enemies already labelling him a liberal flake. The meeting could not take place in his office. Instead, it was set up in the White House offices of Gene Sperling, the Head of the National Economic Council, across the street from the Treasury.

‘There were about six of us round the table when Bono walked in, wearing jeans and sunglasses, which is not what you’d expect in the White House,’ recounts Sandberg, ‘especially as Larry didn’t really get that he’s, like, a rock star.’

‘I didn’t feel I had a very good meeting with Larry,’ says Bono now. ‘I didn’t think the pitch went very well. It wasn’t one of my better days, and he was drumming on the table with his fingers while I was talking, distracted.’

But those at the meeting remember it differently. Stephanie Flanders, Summers’ former speech writer was impressed. ‘He was massively informed on the subject,’ she recalls of Bono. ‘He was referring to a lot of turgid studies – documents on the debt issue, reports for Congress. Everyone was really impressed.’

Sandberg agrees: ‘He knew what all the acronyms were, he knew how the debt flows worked, he knew about capital risk.’ Summers himself sums it up: ‘He turned out to actually know a ton about debt.’

Finally, when the meeting was winding down, Bono, looking Summers straight in the eye, said: ‘I’ve been all over the world, and every single person says if I can get Larry Summers, I can get this done. Because if he wants this done, it’ll be done. So I’m here to get you.’

Sandberg remembers the surprise on the faces around the table. ‘It was kind of just like, whoa,’ she recalls. ‘Very few people come in with that much force and speak to the Secretary of the Treasury in that way. And it was very inspirational. I think we all wanted to believe that something like this could happen, that it was worth fighting for.’

‘Bono had an effect on me,’ admits Summers. ‘His presence suggested there was a big constituency out there who cared about debt.’ So although his response at the meeting was a non-committal – ‘let me think about it’ – Summers turned to Flanders when Bono had left the room, and said: ‘I think the Administration has just had its consciousness raised. This guy’s right. We have to fix this.’

The first step was getting then President Bill Clinton to pledge to cancel 100 per cent of the debts owed to the US by the world’s poorest countries – a goal that Professor Sachs had persuaded Bono to push for. Although various debt-relief programmes had been in place for the past few years, thanks largely to the British Treasury’s championing of the cause, they had only required that creditors cancel a percentage of what they were owed, rather than the whole amount. Debtor countries, therefore, never actually received what they needed to become solvent.

One hundred per cent debt cancellation would send a clear signal to the international community that the to-ing and fro-ing on debt relief wasn’t working. It would also set the standard for other creditors to follow suit.

‘Cancellation,’ not ‘relief of the debt was a distinction that had been made explicit a few months before, after Bono met with Sandy Berger, Clinton’s National Security Adviser, the morning the US had gone into Kosovo. ‘He hadn’t been to bed,’ Bono remembers. ‘He’d been up all night, he was bleary-eyed, and Clinton had sent me down to meet him, you know talk to him about it. So I’m sitting there and he was scrunching his red eyes, saying, “Run that by me again? Debt relief, debt relief. God, that just sounds so wrong in this environment. You’re a songwriter – can’t you come up with something better than that?” And I said, “Debt Cancellation,” and he said, “That’s better. Relief sounds like a handout. Cancellation sounds like justice.”’

Selling the idea of cancelling debt to Clinton wasn’t hard. The President had just come back from the G8 meeting of the richest developed nations in Cologne, where debt relief had been high on the agenda. He had already pledged to contribute to funding the IMF and World Bank’s debt relief efforts, and also to increase the amount of American debt that would be cancelled. But cancelling all the debts owed to the US was another matter. Could the United States really afford it?

It was up to Summers to convince the President.

‘I remember a frantic weekend in which Larry, Gene [Sperling who’d facilitated the first meeting with Summers] and Gene’s niece who he was minding, had come in on the Saturday to do the numbers and try to make it happen,’ recounts Bono. ‘Busy, busy people coming in on a Saturday to get shouted at and reasoned with. Trying to work out what it’d actually cost to cancel these debts. The extent to which they could be written down so that we could meet the 100 per cent cancellation objective.’ (For, given that there was no real possibility of their ever being repaid in full, these debts could be discounted so as to reflect a realistic market value.)

‘And we did it,’ says Summers with a smile. ‘In the last 36 hours we worked out that we could afford to do this.’ By writing down the value of their loans by approximately 90 per cent, the real cost to the United States of cancelling the $6 billion debts owed would only amount to around $600 million.

On September 29, 1999, at a speech at the World Bank, with Summers’ numbers in his back pocket, President Clinton announced that the United States would cancel 100 per cent of the $6 billion debt owed it by the world’s poorest 33 countries – the first country in the world to make such a huge commitment.