How China changed the game for countries in default

Robin Wigglesworth and Sun Yu  in The FT

Zambia, struggling from an economic and financial crisis compounded by the Covid-19 pandemic, first missed an interest payment on its international bonds. Two and a half years later it remains in limbo, unable to resolve the default on most of its $31.6bn debts. 

That an impoverished and vulnerable country has for so long unsuccessfully laboured to reach a deal with creditors and move on from the crisis is an illustration of the messy process to deal with government bankruptcies, which some experts fear has now broken down completely. 

The consequences could be severe for the spate of countries that have recently defaulted on their debts, and the topic has been high on the agenda of this week’s spring meetings of the IMF and World Bank in Washington. 

In her opening remarks at those meetings, the IMF’s managing director Kristalina Georgieva noted that about 15 per cent of low-income countries were already in “debt distress” and almost half were in danger of falling into it. 

“This has raised concerns over a potential wave of debt restructuring requests—and how to handle them at a time when current restructuring cases are facing costly delays, Zambia being the most recent example,” she told attendees.  

While domestic laws and judges govern the bankruptcies of companies and individuals, there is no international law for insolvent countries — only a chaotic, ad hoc process that involves working through a hodgepodge of contractual clauses and tacit conventions, enduring tortuous negotiations and navigating geopolitical expediency. 

A decade ago, US-based hedge fund Elliott Management exploited that landscape to notch up several lucrative victories by suing defaulters for full repayment of their debts. But this fragile patchwork is now under threat of unravelling completely due to the emergence of a new, disruptive, opaque and powerful force in sovereign debt: China. 

Some experts say Beijing’s lending spree to developing countries and refusal to play by western-established rules represents the single greatest impediment to government debt workouts and threatens to leave some countries in debt limbo for years. 

But Yu Jie, a senior research fellow on China at think-tank Chatham House, believes Beijing’s stance “is less about economic rationalities and more about geopolitical competition”. 

“The multilateral financial institutions are run largely by Americans and Europeans. China had hoped to be able to shape the agenda of debt relief, not to have it dictated by the west,” she says. 

Jay Newman, the former Elliott fund manager who successfully sued Argentina for $2.4bn after its 2001 debt restructuring, says the emergence of China as a significant player has left the entire system in uncharted waters. “You now have one big state creditor with the power to dictate terms and the patience not to make a deal if it doesn’t suit them. It has completely changed the game.” 

The new landscape 

In a grim sign of the times, Alvarez & Marsal — one of the world’s biggest corporate bankruptcy advisers — this year set up a sovereign practice for the first time. Underscoring its expectations for the business, it hired Reza Baqir, a former senior IMF official and governor of Pakistan’s central bank, to lead the new unit. 

The potential is clear. The latest IMF data from the end of February indicates that nine poorer countries — such as Mozambique, Zambia and Grenada — are already in what it terms “debt distress”, while another 27 countries are at “high risk” of falling into it. A further 26 more are on the watchlist. Baqir points out that there are also a lot of struggling state-controlled companies in these countries that will need help as a result. 

“The timing was right” for A&M to set up a sovereign advisory unit, he says. “Given that there are more than 50 countries in various stages of debt distress there is an opportunity for a more holistic approach.” 

Baqir is among those that say the debt restructuring process is broken, largely because it was primarily designed for a bygone era, when creditors were overwhelmingly western countries and western banks. 

Decades ago, the Paris Club was formed to co-ordinate between government creditors, while bankers formed the London Club to restructure their debts. Broadly speaking, western governments drove the process, and occasionally leaned on banks to accept painful settlements. It was largely improvised and often slow, but it mostly worked. 

But the decline of bank lending and the growth of the bond market shook things up in the spate of sovereign defaults that started in the early 1990s. Creditor co-ordination became trickier with myriad bondholders trading claims around the world, rather than just a handful of banks. 

Argentina’s default on $80bn of bonds in 2001 led to years of fights between Buenos Aires and investors such as Elliott, which refused to accept the terms agreed by other creditors. At one point the hedge fund famously seized an Argentine naval vessel when it docked in Ghana. Its reputation became such that bondholders would sometimes invoke the mere spectre of Elliott to scare countries contemplating a default, while policymakers used it as prima facie evidence of the sovereign debt restructuring system’s weaknesses. 

In the wake of the Argentine debacle the IMF responded by attempting to set up a kind of bankruptcy court for countries with itself as judge. But the sovereign debt restructuring mechanism foundered after attracting little support from the IMF’s biggest shareholders. Instead, the US championed the insertion of “collective action clauses” into bonds, which compel recalcitrant creditors to accept a restructuring agreement made by a majority. After Greece’s debt restructuring in 2012 these CACs were beefed up further. 

However, many bonds still lack these clauses. Moreover, they can only help ease a restructuring agreement once it is struck. Many experts point out that they do nothing to solve the biggest fundamental problem: countries are far too slow to seek a debt restructuring as they are wary of a messy process with the potential of worsening an economic crisis and the inevitable political humiliation of defaulting. 

“If I was a finance minister, I’d find it hard to tell my prime minister that we have a clean framework to work with,” says Baqir. 

When they are finally forced into a debt restructuring, the financial relief that countries secure is often too little to ensure a durable upswing. In the few cases where it does clean up their balance sheet, it sometimes only leads to another debt binge. 

This flawed process has now been further complicated — some say wrecked — by China’s vast lending programme across the developing world over the past decade. Many of these loans are opaque in size, terms, nature and sometimes even existence. 

The overall size of the lending programmes is hard to judge, given that China does not report most of it to the likes of the IMF, OECD or Bank for International Settlements. But AidData, a development think-tank based at William & Mary’s Global Research Institute, estimates that the loans amount to about $843bn. China is not a member of the Paris Club, and in most cases the loans are made by its myriad state-owned or merely state-controlled banks, muddling things further. 

It’s like the international financial policy community spent the past decade trying to clean up around the street light, oblivious to the mounds of rubbish piling up unseen around the rest of the darkened street, says Anna Gelpern, a professor of law and international finance at Georgetown University. 

“We spent 20 years focusing on contractual tweaks, assuming that bonds were the problem,” she says. “The problem is the state of global politics, and the fate of low-income countries just isn’t a big priority anywhere.” 

Life in default 

Zambia is a prime example. Of the roughly $20bn of external debt that the IMF tallied when forming its programme in 2022, $2.7bn was lent by international development banks, $1.3bn comes from various western governments, bank loans come to $1.6bn, local kwacha-denominated bonds held by non-residents are $3.3bn and international dollar-denominated bonds account for $3.3bn. But the biggest chunk is nearly $6bn owed to China. 

The IMF has reached a support agreement with Zambia that is conditional on its debt burden becoming sustainable. But other bondholders do not want any relief they offer to simply go towards paying off China. Beijing has in principle agreed to accept a “haircut” on its debts, but experts say it appears to not want anything it offers to go towards improving the recovery of private creditors, leading to the impasse. 

In the meantime, Zambia says it has accumulated about $1.2bn in arrears since its default. Including missed payments to various government contractors, the IMF has estimated that the arrears are actually nearly $3bn. 

Highlighting how China also appears to be leveraging these situations to undermine the western-designed global financial architecture, in January it called for international organisations such as the IMF and World Bank to participate in the debt restructuring. This would overturn half a century of convention that these organisations are “super-senior” creditors exempt from debt restructurings, as participating would imperil their ability to lend to other countries. 

One senior adviser to the Chinese government says that “there is no law that requires World Bank loans to be prioritised” and that the country was “not happy” with a practice that originated in an era when western countries were generally the only creditors. “If we allow the World Bank to take precedence over us, we need to have bigger voting rights and take larger stakes at the bank. China’s duty doesn’t match its rights in development finance.” 

Another increasingly common wrinkle in debt restructuring is what to do with domestic bonds, which local banks and financial companies have often gorged upon. Here too, Zambia is a good example. 

The $3.3bn of local currency bonds held by non-residents have also been cordoned off from the debt restructuring. Lusaka fears that reducing the value of kwacha bonds could wreck its banking industry and do more damage than they are worth. But some holders of other international bonds argue that they should also be included in the restructuring. 

“In the sovereign debt restructuring business we didn’t really think much about local debts,” says Lee Buchheit, a leading lawyer in the field. “There often wasn’t much of it, and we always assumed that the sovereign has a much broader palate of mechanisms it can use to deal with domestic debt.” 

But what to do about Zambia’s Chinese loans remains the thorniest issue and has risen to the highest levels in Washington and Beijing. US Treasury secretary Janet Yellen this year raised the stand-off with Chinese president Xi Jinping’s economic adviser Liu He, and said that it had “taken far too long already to resolve this matter” when she visited Lusaka in January. 

China’s exceptionalism? 

For the most part, experts say China seems mostly content with rolling its debts rather than restructuring them, handing out new loans to ensure that its domestic banks can be repaid in full. But it prefers to act alone, at its own pace, and feels no need for transparency. 

A recent paper by several economists, including Harvard University’s Carmen Reinhart, estimated that China has made 128 bailout loans worth $240bn to 20 distressed countries between 2000 and 2021. About $185bn was extended over the last five years of the study, and more than $100bn in 2019-21. 

Reinhart says that China’s lending stands out for its “extreme” opacity but stresses that its overall behaviour is not as unusual as some people say. “China is really playing hardball because it is a major creditor. US commercial banks also played hardball back in the 1980s,” she says. Baqir agrees, saying: “Whatever the colour or creed of a creditor, creditors think like creditors.” 

The Chinese government adviser also points to factors such as the country’s relative inexperience with debt workouts. “China is still at an early stage in coming up with its debt relief programme,” he says. 

Incomplete domestic financial reforms have also made it harder to offer debt relief to overseas creditors, while some Chinese banks are also struggling with big hits from the country’s wilting real estate sector. 

“We need co-ordination from the top level, which now has other priorities,” the adviser says. He also points out that the pressure on developing countries has intensified following a series of US interest rate rises, and that as a result Washington “should be responsible for the debt trap”. 

But whatever the root cause, most agree on the end result. “All of this [creditor] fragmentation is leading to paralysis,” says Sean Hagan, a former general counsel at the IMF who now teaches international law at Georgetown. 

 There are few solutions being floated around. The IMF in February announced a new Global Sovereign Debt Roundtable to bring together the full gamut of creditors and debtors, and hopefully thrash out ways to “facilitate the debt resolution process”. It is an initiative that few experts harbour much hope for. 

Buchheit likens the impact of an assertive new player on an already fault-riddled debt restructuring system to someone having a bad cold that a doctor struggles to treat, who is then impaled by a spear. “The cold hasn’t gone away, but the doctor is likely to focus more on the spear,” he says. 

Ironically, both Buchheit and Newman — who clashed many times over the years as the leading lawyer for and suer of bankrupt countries — advocate for the same basic approach: countries should restructure the debts they can, remain in default to China, and the IMF should drop its “kumbaya” approach and accept semi-permanent arrears to its biggest shareholders. 

But most expect Zambia-like debt limbo to be the likeliest outcome for a lot of countries. “I suspect this is going to be a recurring problem,” says Reinhart. “And the longer these countries are in the [debt] netherworld . . . the [more the] fabric of the country is affected.”  

What is a Default - A Pakistan Scenario

Asad Ejaz Butt in The Dawn

When Pakistan’s dollar reserves fell below $5 billion in December, and its credit default risk had reportedly become too high for analysts to ignore the possibility of an imminent default, the central bank made a policy decision to allow the opening of import letter of credits (LC) in a staggered manner to ensure spreading of the dollar reserve over a longer period of importing time.

The idea was to allow the government some diplomatic time to knock on the doors of friendly countries and multilateral organisations, including the International Monetary Fund (IMF). The Fund had dilly-dallied on the ninth review to force monetary authorities in Pakistan to take the first steps towards a few baseline reforms, including the relegation of the dollar to the markets. Markets that the central bank and the government regards as ripe with imperfections.

The rupee was finally devalued last week which automatically implied that it was left to a market that had the propensity to sell it to gain dollars. This provided IMF with the confidence to schedule the ninth review, which is now ongoing in Islamabad. It is likely that the IMF’s review will be completed, and default, as was predicted by some and wished by a few others, didn’t happen.

However, while the media thundered about the staggeringly high levels of inflation and alarmingly low levels of reserves, and analysts evaluated an infinitely large number of scenarios that would lead to a default, no one from the economists ever explained what a default meant and what would have happened to the economy if it took place. 

From the mid of November to the end of January, I was asked this question many times: “is Pakistan going to default, or has it already defaulted?” None of those asking the question seemed to know what it meant for a country to default and what would happen if it did. Last week, for the first time, someone asked me what Pakistan’s economy would have looked like under the influence of default.

Put in very simple terms, a default for a country like Pakistan with large exposure in commercial loans means defaulting against commercial debt. Bilateral debt can be rolled over, while debt from multilateral organisations often has long-term maturity cycles making a country’s default vulnerability depend primarily on commercial loans.

So, imagine if Pakistan’s reserves had declined to such low levels that it would have defaulted against its commercial debt. This would have led the central bank to refuse commercial lenders’ payments to repay or service their debt.

That would have reflected in the further downgrading of the country’s ratings by agencies like Moody’s and S&P, dampening the trust of other international lenders and, after that, the government’s ability to raise new commercial debt.

Since the dollar inflows would have declined due to limitations of debt inflows, you could have only imported as much as you exported plus the dollars that expat Pakistanis remit from all over the world. This would be like a situation where you are forced by circumstances to keep your current account deficit close to zero.

Many of the imports that you would not afford would be inputs to the industry. While that would impact exports, the slowdown would impact production in the non-exporting sectors, pulling down the overall level of production in the economy. The natural consequence of all of this is the classic saga of too much Pak­istani rupee chasing too few goods.

Inflation would have skyrocketed as the local currency that people would be holding would not translate into consumable items. Contraction in the economy due to production losses would have seen many people get laid off in a span of weeks, leaving some with money but nothing to buy and many without even money to buy. Economists call such situations characterised by slow growth but high unemployment and inflation ‘stagflation’.

This was played out in Sri Lanka in the summer of 2022. It suspended repayments on about $7bn of international loans due out of a total foreign debt pile of $51bn while it had $25m in usable foreign reserves.

Pakistan has around $3bn in reserves against an external debt pile of $126bn. Pakistan, in December 2022, was definitely headed in the Sri Lankan direction. However, we did not default and any chance of doing so has been left far behind.

Reviving even mere inches away from default is a world different to an actual default since, in the former case, you can resume business as usual as soon as a multilateral like the IMF returns with a few dollars in hand. However, in the latter case, even multilateral balance of payments support will take years to rebuild the economic edifice.

Pakistan didn’t default, and those who thought what happened to Pakistan in December of 2022 was a default must realise that a real default would have been much scarier than a few hundred LCs being opened with delay.

This piece is based on several conversations held with Mubashir Iqbal and Haider Ali.

Is the IMF fit for purpose?

As the world faces the worst debt crisis in decades, the need for a global lender of last resort is clearer than ever. But many nations view the IMF as overbearing, or even neocolonial – and are now looking elsewhere for help writes Jamie Martin in The Guardian

 
Last summer, after months of unusually heavy monsoon rains, and temperatures that approached the limits of human survivability, Pakistan – home to thousands of melting Himalayan glaciers – experienced some of the worst floods in its history. The most extensive destruction was in the provinces of Sindh and Balochistan, but some estimated that up to a third of the country was submerged. The floods killed more than 1,700 people and displaced a further 32 million – more than the entire population of Australia. Some of the country’s most fertile agricultural areas became giant lakes, drowning livestock and destroying crops and infrastructure. The cost of the disaster now runs to tens of billions of dollars.

In late August, as the scale of this catastrophe was becoming clear, the Pakistani government was trying to avert a second disaster. It was finally reaching a deal with the International Monetary Fund (IMF) to avoid missing payment on its foreign debt. Without this agreement, Pakistan would likely have been declared in default – an event that can spark a recession, weaken a country’s long-term growth, and make it more difficult to borrow at affordable rates in the future. The terms of the deal were painful: the government was offered a $1.17bn IMF bailout only after it demonstrated a real commitment to undertaking unpopular austerity policies, such as slashing energy subsidies. But the recent fate of another south Asian country appeared to show what happens if you put off the IMF for too long. Only weeks before, the Sri Lankan government, shortly after its own default – and after months of refusing to implement IMF-demanded reforms – was overthrown in a popular uprising.

The correlation of Pakistan’s crises – exceptionally devastating floods and the threat of economic meltdown – was partly bad luck. But it was also emblematic of a challenge faced by many countries at the forefront of the climate crisis: how can they afford to deal with extreme weather events and prepare themselves for the coming disasters, while suffering under crippling debt loads and facing demands for austerity as the price of relief?

Pakistan and Sri Lanka are only two of the many countries currently facing conditions of severe debt distress. Covid-19 delivered a major blow to many low- and middle-income countries that had borrowed heavily during the era of low interest rates beginning with the 2008 financial crisis. As the costs of public health and welfare rocketed, economies were locked down and tourism collapsed, which meant that tax revenues plummeted. The pandemic also disrupted global supply chains, leading to shortages of many goods and higher prices. These inflationary pressures were then exacerbated by Russia’s invasion of Ukraine. Meanwhile, the decision of the US Federal Reserve to raise interest rates to reduce US inflation has pushed the value of the dollar to its highest level in 20 years. This has made the debt of countries that borrowed in dollars – many do – more expensive since their currencies are worth less, while further increasing the cost of their imports. Rising US interest rates have also encouraged investors to pull capital out of riskier emerging markets at a historic rate, since safer dollar investments now produce higher returns.

The result is that the world economy faces the possibility of one of the worst debt crises in decades, threatening deep recessions, political instability, and years of lost growth. At the same time, the increase in extreme weather events – stronger hurricanes, recurring droughts – makes life even harder for states that already dedicate a large portion of their revenues to servicing foreign debt. In the midst of this turmoil, the IMF has become more involved in bailing out countries than it has in years. Over the last few months, the value of its emergency loans reached a record level, as a growing number of states turned to it for help, including Bangladesh, Egypt, Ghana and Tunisia.

Broadly speaking, the way the IMF works is by collecting financial resources from members and then offering them short-term assistance in the case of financial hardship. Based in Washington DC, the institution is staffed by representatives of ministers of finance and central bank governors from around the world. Because voting power is weighted by each state’s financial contribution, the US, as the IMF’s largest shareholder, exercises outsized influence over its major decisions and can veto proposed reforms to its governance. But as an international body that counts nearly every sovereign state as member, the IMF plays a unique role in the world economy. It’s the only institution with the resources, mandate and global reach to help almost any country facing severe economic distress.

But in exchange for its help, the IMF typically insists governments do what they find most difficult: reduce public spending, raise taxes and implement reforms designed to lower their debt-to-GDP ratios, such as cutting subsidies for fuel or food. Unsurprisingly, politicians are often reluctant to undertake these measures. It’s not just that the reforms often leave voters worse off and make politicians less popular. National pride is also at stake. Bowing to demands from an institution dominated by foreign governments can be seen as humiliating, and an admission of domestic dysfunction and misgovernance.

 

On the rare occasions that the IMF criticises the policies of a wealthy European state, this too can embroil the institution in domestic political conflicts. In September, the IMF’s criticism of Liz Truss’s proposed tax cuts provided ammunition to her political opponents and contributed to a slump in the pound’s value. The decision to sack chancellor Kwasi Kwarteng was taken while he was attending the IMF’s annual meeting in Washington DC, where the institution’s leading officials did little to mask their disapproval of his policies. In future histories of the fall of Truss, the IMF is likely to play a not insignificant role.

Despite all this, the IMF is not the kingmaker it once was. After reaching the height of its powers in the 90s, when its name became synonymous with the excesses of neoliberal globalisation and US overreach, the IMF has faced increasing resistance. It’s still the only institution that can guarantee assistance to nearly any country experiencing extreme financial stress. But the decline of US power, emergence of alternative lenders, and the IMF’s reputation as a domineering taskmaster has left it an anomalous position. It is much needed and little loved, enormously powerful and often ineffectual in getting states to agree to its terms. If predictions are correct that the world is entering an extended period of economic turmoil, this will only increase the need for some kind of global lender of last resort. Whether the IMF is up to the task depends on whether it has learned from its chequered history.

One of the most remarkable aspects of the IMF was what, in theory, it was supposed to accomplish when it was established – and how quickly it departed from this initial vision. The creation of the IMF was agreed at the Bretton Woods Conference of July 1944, when representatives from more than 40 countries met to rewrite the rules of the world economy. Led by the world-famous British economist John Maynard Keynes and his US counterpart Harry Dexter White, their aim was to create an international monetary system that stabilised currencies and facilitated a return to freer trade. National currencies would be set at fixed but adjustable rates to the dollar, which was in turn convertible to gold at a fixed rate of $35 per ounce.

The role of the IMF in this system was to help member states suffering from short-term balance-of-payments problems, while its partner organisation, the World Bank, made long-term loans for reconstruction and development. Crucially, in this original vision, the IMF would help members weather financial instability without browbeating them into undertaking painful policies such as cutting budgets or raising interest rates in the middle of a recession. This marked a break with the previous gold standard system, which from the late 19th century had provided predictable and stable exchange rates for countries that kept the value of their currencies fixed to a specific quantity of gold. This stability had come at the cost of being able to implement expansive national economic policies during a crisis. By contrast, officials involved in the creation of the IMF insisted that it avoid developing what Keynes referred to as “grandmotherly powers”, meaning finger-wagging, moralising strictures that unduly curtailed the freedom of member states.

Shortly after the end of the second world war, however, European representatives in the IMF’s executive board discovered that – despite an apparent wartime consensus shared by their more powerful US counterparts – the IMF was going to readopt an unpopular practice associated with earlier periods of financial imperialism: attaching policy conditions to its loans. To their chagrin, the institution would be authorised to intervene in sensitive domestic matters concerning fiscal and monetary decisions. US representatives were wary of allowing members access to the dollar without strings attached. And because the IMF had been designed in ways that gave the US unparalleled control over its activities, their prerogatives held sway. It was not in Europe that the IMF first deployed these interventionist powers, though; it was in the so-called third world, beginning in South American states such as Chile, Paraguay and Bolivia in the 50s.

After the collapse of the Bretton Woods system in the early 70s, when Richard Nixon removed the US dollar’s peg to gold, the IMF appeared to be out of a job. But it quickly took on new prominence in making bailout loans to financially unstable states. These loans came with demands for major structural reforms (privatisation, deregulation, the removal of tariffs) in addition to fiscal and monetary restraint. What made the IMF so mighty was that other creditors – whether commercial banks such as Citibank, or foreign governments – often considered a prior arrangement with the institution as a sign of a country’s creditworthiness. When the Soviet Union collapsed in the early 90s, the IMF undertook its most ambitious task yet, overseeing the transition of nearly-formerly Soviet republics to capitalism. In the process, it became, as the political scientist Randall Stone put it, the “most powerful international institution in history”.

As the IMF reached the height of its influence in the 90s, however, it sparked a global backlash that continues to this day. And the place where that backlash began was in Asia.

The Asian financial crisis is poorly remembered in the west, having been overshadowed by the 9/11 terrorist attacks and the “war on terror”. But it was an enormously consequential event, and its impact would reshape the global economy over the next 25 years. It began in the summer of 1997, when the collapse of the Thai baht sparked a financial panic that spread quickly throughout the region. As investors dumped one shaky currency after another, the panic became self-perpetuating, wreaking havoc from Indonesia to South Korea, and to countries as far off as Russia and Brazil.

The IMF quickly stepped in to offer rescue loans to the worst-hit countries, including Thailand, Indonesia and South Korea. The conditions of these loans included the institution’s perennial demands for austerity and tighter monetary policies – even though none of these governments had run significant deficits, nor seen much inflation in their economies in the run-up to the crisis. The IMF also insisted on a long list of reforms designed to liberalise their economies and, in particular, to dismantle practices and institutions derided as corrupt and inefficient forms of “crony capitalism”. In South Korea, the IMF set its sights on the country’s huge conglomerates, or chaebol, such as Hyundai, which enjoyed close ties to the state and domestic banks. In Indonesia, the IMF called for uprooting the vast system of patronage that enriched the family of long-ruling autocrat Suharto, such as the lucrative national clove monopoly, which produced a key ingredient of the kretek cigarettes popular in Indonesia, and was controlled by one of Suharto’s sons.

By intervening in sectors that had little to do with the currency crisis, the IMF appeared to be announcing the scale of its ambition. It wanted to transform what had, until then, been widely considered well-run economies. In particular, it seemed dead set on overturning what was known as the “Asian Model” of economic management, characterised by state-led investment in specific industries and firms. This approach had yielded impressive results in several countries, not least Japan, which then boasted the world’s second-largest economy. But it was widely seen by western officials and investors as anachronistic. To them, the crisis had rung the death knell for this Asian statist alternative to the Anglo-American laissez-faire approach.

This reformist zeal made the IMF unpopular across much of Asia. People were especially infuriated by demands to lift restrictions on foreign ownership of domestic firms. As US and European corporations swooped in to buy up financial institutions in Thailand and South Korea at steep discounts, many denounced the IMF as neo-colonial. In China, which was spared from the worst of the crisis, the state-owned People’s Daily newspaper accused the US of “forcing east Asia into submission”. Even Raghuram Rajan, who became the IMF’s chief economist in 2003, later admitted that the institution’s handling of the crisis had left it vulnerable to charges of financial colonialism.

Meanwhile, austerity measures such as cutting subsidies to fuel and foodstuffs like rice and flour, in countries undergoing severe cost of living and unemployment crises, fed growing political turmoil. The crisis was especially dire in Indonesia. As the rupiah continued to plunge into 1998, the country was gripped by political discontent and violence, as mob attacks on the ethnic Chinese minority led to scores of deaths. In Jakarta, the military fired on student protesters at Trisakti University, killing four and fanning the flames of riots spreading across the country. When Suharto raised fuel prices to fulfil IMF demands to produce a budget surplus, opposition intensified. In May 1998, he was forced from office.

At the time, defenders of the IMF insisted Suharto had been the author of his own downfall, claiming he had refused to implement reforms quickly enough to halt a crisis caused by his own corruption. But other contemporaries recognised that insisting he instantly uproot the entire system of patronage on which his regime relied was an impossible demand. “It’s crazy to ask people to commit suicide,” one diplomat remarked at the time.

Looking at images of Suharto signing the terms of an agreement with the IMF in January 1998, as the institution’s managing director, the French economist Michel Camdessus, loomed over him, it wasn’t hard to see this as a humiliating surrender of sovereignty. And it did not take conspiracists to recognise that the US Treasury and many western investors wanted Suharto gone, despite the opposition of the state department and Pentagon to anything that threatened the stability of a US strategic partner in the Asia-Pacific region. While the IMF didn’t plot Suharto’s removal, there was little question that US Treasury officials had come to see regime change as the only salvation for the Indonesian economy. As Camdessus himself later admitted: “We created the conditions that obliged Suharto to leave his job.”

To some American observers, Indonesia had proven an iron law of history: that the growing material prosperity of a citizenry would inevitably cause them to reject autocratic rule. What happened to Suharto, they said, would eventually happen to the Chinese Communist party. (Some predicted the exact year – 2015 – that China would see its equivalent popular uprising.)

What went less commented on was the obvious wakeup call the crisis and its political effects delivered to other governments. The lesson was clear: make yourself able to resist a crisis of financial globalisation and, if it comes, be sure you can deal with it on your own. 

For many states, the Asian crisis was a warning. In the event of a future financial crisis, they wanted to avoid calling in any institutions that might interfere in their domestic affairs. One way to do this was to build up huge stockpiles of foreign currency reserves. At a moment of crisis, these reserves can be used to defend a currency’s value, pay off foreign debts and import necessities. China led the way, but South Korea, Brazil, Mexico and others followed. From 2000 to 2009, the total value of China’s reserve assets grew by nearly $1.8tn. Today, it’s well over $3tn – a figure higher than the total GDP of the entire African continent.

For some countries, accumulating these reserves has been key to a strategy of export-led development, since doing so can help hold down the value of a national currency and thus make exports more competitive. But for most states, the aim has been insurance against financial turmoil. And in some cases, it’s worked remarkably well. The accumulation of currency reserves helped many emerging market economies escape the worst of the global financial crisis that began in 2008. While the IMF played a major role in bailing out Greece in the 2010s, it did comparatively little elsewhere. It was not invited back to countries where it had become so controversially involved in the 90s, such as South Korea and Russia.

One striking consequence of this currency stockpiling is that capital now moves in huge quantities from poorer countries to wealthier ones, rather than vice versa. This is because much of the world’s supply of reserves are held in US dollars, which countries tend to invest back into the safe haven of US treasury bills. Doing so guarantees a nearly bottomless global demand for US government debt and helps ensure the continued centrality of the US dollar to the global economy. The fact that China sits on such a huge stockpile of US treasuries has long generated anxiety about the political leverage this might give Beijing over Washington, since a sell-off would be catastrophic to the value of the dollar. But because it would also be catastrophic to the Chinese economy, the threat has never been close to realisation.

Not all states can afford to pile up currency in this way. For those that can, it is not painless, since it diverts resources away from public investment. Some economists have wondered why governments opt for it, suggesting that the opportunity cost of reducing public investment may outweigh the possible savings of averting a financial crisis. But hoarding these assets is not just a matter of economics. It’s also political and strategic policy designed to guarantee states the kind of autonomy that Indonesia, Thailand and South Korea bargained away during the 1997-98 crisis. Seen in this way, there’s little price that’s not worth paying for full sovereignty. The historian Adam Tooze has aptly referred to the strategies pursued by emerging market economies since the 90s as programmes of “self-strengthening” – a term originally used to describe the efforts of states like China and Japan in the late 19th century to reform their government administrations, militaries and economies to resist the incursion of powerful western empires.
 

Take Russia, a country that experienced a long and painful engagement with the IMF in the 90s. After defaulting on its sovereign debt in 1998, Russia, under its new president Vladimir Putin, began to amass a stockpile of reserves in the 2000s, facilitated by rising oil prices. By 2008, it sat on such a huge war chest that it could spark an aggressive war with Georgia without much concern for the financial repercussions. Russia appeared to have won new strategic independence.

A similar calculus was likely at play with Putin’s decision to invade Ukraine this year. But in one of the most far-reaching countermoves of Putin’s enemies, the US and its G7 partners targeted the foreign assets that were owned by the Russian central bank, but which they ultimately controlled. In late February, more than $300bn of Russian assets were immobilised in a move designed to paralyse Russia. The same tactic had been used just a few months earlier, when the dollar assets of the Afghan central bank had been frozen to hobble the Taliban in the wake of Kabul’s fall.

In Russia’s case, this strategy failed to end the war. And some worry it will backfire, encouraging states to rethink holding US dollars as a guarantee of economic stability. If the Asian financial crisis had the effect of turning countries away from the IMF and towards stockpiling reserves, the war in Ukraine may similarly push them away from the dollar as the reserve currency of choice. Were this to happen, the impact would be seismic. The dollar would be dethroned, losing its status as the world’s principal safe haven-asset. More likely, others argue, is further diversification away from dollars to other currencies. The ambitious US and European financial sanctions against Russia may prove, over time, to have similar effects to the IMF’s response to the Asian financial crisis: encouraging states to reconsider how they guarantee their autonomy in a global economy whose infrastructures they do not control.

Over the past decade, the IMF has made significant efforts to repair its reputation. In the wake of the global financial crisis, it became routine for IMF officials to publicly acknowledge that austerity could be counterproductive and that tackling inequality had become one of the institution’s central concerns. The selective use of once-taboo policies such as capital controls to restrict the flow of foreign capital into and out of a national economy was reconsidered, while demands for far-reaching domestic structural reforms were supposedly a thing of the past. When the official IMF publication Finance and Development ran an article in 2016 with the provocative headline Neoliberalism: Oversold?, many media outlets reported it as a sign of the institution undergoing a significant transformation. “What the hell is going on?” was how one longtime critic of neoliberalism, the Harvard economist Dani Rodrik, greeted news of its publication.

But in practice, the IMF’s transformation has itself been oversold. As the scholars Alexander Kentikelenis, Thomas Stubbs and Lawrence King showed in an article from the same year, the IMF, despite these rhetorical shifts, continued to insist on just as many, if not more, of the same structural reforms of borrowers as ever – sacking civil servants, cutting pensions, lowering minimum wages. A 2020 study by the Global Development Policy Center at Boston University found something similar. Today’s IMF, it noted, recognises that austerity constrains growth – while continuing to demand austerity from states in receipt of its aid.

Yet the Boston University study also reached another conclusion – one that shows how, despite itself, the institution may be undergoing real changes, not from ideological shifts alone, but from competition for its business. Researchers found that borrowers that had prior loan arrangements with China tended to get more lenient treatment from the IMF. Why? Probably because China does not make austerity or domestic reforms the price of its loans, which pushes the IMF to moderate its terms with clients that have access to this unconditional financing. Other studies have found a similar phenomenon at work at the World Bank.

China is now the world’s largest bilateral lender, a fact that has generated considerable anxiety in the west. Lending without policy strings attached is sometimes seen as Beijing’s way of buying goodwill with corrupt autocrats. China is also accused of “dept trap” diplomacy, by making loans to states to invest in unaffordable “white elephant” infrastructure projects. When these states can’t repay their debts, Chinese officials insist they give up valuable assets, like a 99-year lease over a strategic port, such as happened in Sri Lanka in 2017.

Critics of China have described Sri Lanka’s descent into financial and political turmoil as the logical end point of Beijing’s predatory lending. It’s true that the Rajapaksa brothers, who traded off ruling Sri Lanka from the mid-00s until this summer, pursued an extravagant programme of Chinese-financed infrastructure building. But when the Sri Lankan economy collapsed earlier this year, the government actually owed more money to private bondholders in Europe and the US than to China – despite the role Beijing had played in financing the country’s infrastructure boom. It’s too simple to see Sri Lanka solely as the victim of Chinese debt diplomacy.

Today, many are looking for clues on the nature of China’s role as lender in how it navigates its first global debt crisis. Over the last few years, it’s started making more emergency bailouts, setting itself up even more as a direct alternative to the IMF. But even critics of the IMF see the institution – with its broad membership, global reach and public aims – as playing a meaningfully different role in the world economy from a state actor like China, which – like all states – will make loans largely for the sake of its strategic aims and national interests. This is why many reformers calling for changes to the international financial system – such as Mia Mottley, the prime minister of Barbados – still focus on the IMF. Despite its history of missteps, and close ties to US foreign policy objectives, the institution is still seen as being uniquely able to provide something approximating a global financial safety net.

Given its continued dominance of the IMF, it is from the US that the greatest pressure to actually reshape the institution will have to come. There are signs that the current global crisis is forcing political change. In October, just before the annual meeting of the IMF and World Bank, the former Treasury secretary Lawrence Summers called on the institution to develop new, unconditional ways of providing financial assistance to states facing extreme pressures, as central banks raised interest rates. The political stigma involved in traditional IMF forms of lending, Summers suggested, was pushing states away from the institution when they needed it most. 

It was extraordinary to see Summers making this case. During the Asian financial crisis, Summers had been deputy secretary of the US Treasury. He had played a leading role in coordinating Washington’s response to the crisis through the IMF. He had even met with Suharto in Jakarta to personally convince him to agree to its terms. But now, the world economy needed a kind of financial assistance, Summers implied, that moved past the legacy of the interventionist IMF, whose powers he himself had once helped to unleash. This year’s annual meetings, which failed to consider ambitious measures to rescue the world economy, he claimed, would be remembered as nothing more than a “missed opportunity”.

As the Fed’s decisions threaten a new wave of global economic instability, these meetings may also be remembered for something else entirely: as an illustration of the paradoxical nature of US power in the third decade of the 21st century – mighty enough to break the world, but not to put it back together again.

There is a global debt crisis coming – and it won’t stop at Sri Lanka

Foreign capital flees poorer countries at the first sign of instability. The pandemic and Ukraine war ensure there is plenty of that around writes Jayati Ghosh in The Guardian





This January, even before Sanjana Mudalige’s salary as a sales worker in a shopping mall in Colombo, Sri Lanka, was slashed in half, she had pawned her gold jewellery to try to make ends meet. Ultimately, she quit her job, because the travel costs alone exceeded the pay. Since then, she has shifted from using gas for cooking to chopping firewood, and eats just a quarter of what she did before. Her story, reported in the Washington Post, is one of many in Sri Lanka, where people are watching their children go hungry and their elderly relations suffer for lack of medicines.

The human costs of the crisis only really captured international attention when the massive popular upsurge earlier this month, known as Aragalaya (Sinhalese for “struggle”), led to the peaceful overthrow of President Gotabaya Rajapaksa. His family had ruled Sri Lanka with an iron fist, albeit with electoral legitimacy, for more than 15 years, and is now being blamed by both national and international media for the desperate economic mess the country is in.

But blaming the Rajapaksas alone is too simple. Certainly, the aggressive majoritarianism that they unleashed, along with the alleged corruption and major economic policy disasters of recent years (such as drastic tax cuts and bans on fertiliser imports), were crucial elements of the economic debacle. But this is only part of the story. The deeper and underlying causes of the crisis in Sri Lanka are barely mentioned by most mainstream commentators, perhaps because they reveal uncomfortable truths about the way the global economy works.

This is not a crisis created by a few recent external and internal factors, it has been decades in the making. Ever since its “open economic policy” was adopted in the late 1970s, Sri Lanka has been Asia’s poster boy for neoliberal reform, much like Chile in Latin America. The strategy was the now-familiar one of making exports the basis for economic growth, supported by foreign capital inflows. This led to a significant increase in foreign currency debt, something the IMF and the Davos crowd actively encouraged. 

In the period after the 2008 global financial crisis, as low interest rates in advanced economies led to the availability of cheap credit, the Sri Lankan government relied on international sovereign bonds to finance its own spending. Between 2012 and 2020, the debt to GDP ratio doubled to around 80%, with a growing share of this in bonds. The payments due on these debts kept rising in relation to what Sri Lanka could earn from exports and the money sent back home by Sri Lankans working abroad. The disruptions caused by the pandemic and the war in Ukraine made matters much worse, by causing export earnings to fall and sharply increasing the price of essential imports including food and fuel. Foreign exchange reserves plummeted – but the government had to keep paying interest even when it could not import essential fuel.

Looked at in this light, it is clear that Sri Lanka is not alone; if anything, it’s just a harbinger of a coming storm of debt distress in what economists call the “emerging markets”. The past period of incredibly low interest rates in the advanced economies meant that more funds flowed to “emerging” and “frontier” markets from the richer world. While this found cheerleaders in the international financial institutions (IFIs), it was always a problematic process. This is because, unlike in places such as the EU and US, capital leaves low- and middle-income countries (LMICs) at the first sign of any problem.

And these countries were much more battered economically by the pandemic. Advanced economies were able to provide massive countercyclical measures – think of the UK’s furlough programme – because financial markets effectively allowed and even encouraged them to do so. By contrast, LMICs were prevented from increasing fiscal spending by much – because of those same financial markets, which threatened the possibility of credit downgrades and capital flight as government deficits grew larger. Plus they faced significant declines in export and tourism revenues and tighter balance of payments constraints. As a result, their economic recovery has been much more muted and economic conditions remain mostly dire.

The half-hearted attempts at debt relief, such as the moratorium on debt servicing in the first part of the pandemic, only postponed the problem. There has been no meaningful debt restructuring at all. The IMF bewails the situation and does almost nothing, and both it and World Bank add to the problem through their own rigid insistence on repayments and the appalling system of surcharges imposed by the IMF. The G7 and “international community” have been missing in action, which is deeply irresponsible given the scale of the problem and their role in creating it.

The sad truth is that “investor sentiment” moves against poorer economies regardless of the real economic conditions in specific countries. Private credit rating agencies amplify the problem. This means that contagion is all too likely, and it will affect not just economies that are already experiencing difficulties, but a much wider range of LMICs that will face real difficulties in servicing their debts. Lebanon, Suriname and Zambia are already in formal default; Belarus is on the brink; and Egypt, Ghana and Tunisia are in severe debt distress.

Many countries with lower per-capita income and significant absolute poverty are facing stagflation. Billions of people are increasingly unable to afford a basic nutritious diet, and cannot meet basic health expenses. Material insecurity and social tensions are inevitable.

The situation can still be resolved, but it requires urgent action, especially on the part of the IFIs and G7. Speedy and systematic debt resolution actions to bring in private creditors and other creditors, such as China, are needed, as is IFIs doing their own bit to provide debt relief and ending punitive measures such as surcharges. In addition, policies to limit speculation in commodity markets and profiteering by big food and fuel companies must be put in place. Finally, the recycling of special drawing rights (SDRs) – essentially “IMF coupons” – by countries that will not use them to countries that desperately need them is vital, as is another release of SDRs equating to about $650bn to provide immediate relief.

Without these minimal measures, the post-Covid, post-Ukraine global economy is likely to be engulfed in a dystopia of debt defaults, increasing poverty and sociopolitical instability.

Message from Sri Lanka

Jawed Naqvi in The Dawn

ONE can see a few instructive lessons from the painful turbulence underway in Sri Lanka. The most crucial of these for neighbours and beyond is the resounding message that there are limits to socially divisive policies any government or state can pursue, particularly to mask the distress brought about by bad economic prescriptions. In other words, sooner or later people catch on.

The jostling is already on between narratives about the crisis. The dominant narrative about an economic collapse as the trigger for mass protests is a tautology. Another perspective, inevitably, is focusing on the ousted Rajapaksa government’s refusal to vote with the US against Russia over Ukraine. The last-minute call to Vladimir Putin for help, chiefly with oil, will be interpreted in myriad ways.

There will be comments also about the need for the IMF to fix things urgently. The problem is this had happened to India when the Gulf War induced economic instability with oil prices nudging a veteran pro-Soviet India into becoming a darling of the West. The prescription the IMF gave Manmohan Singh required secrecy. It had to be kept away from parliamentary scrutiny. The Ayodhya movement of L.K. Advani was activated to occupy the nation’s attention, away from the IMF-induced pain that inevitably comes with its trickle-down economic advisory.

Be that as it may, Ranil Wickremesinghe looks the man of the moment for the US. Never mind that he lost the last election when his party couldn’t win a single seat. He came into parliament through the backdoor, the national list.

Would that work for the purpose of evicting China from its perch in Colombo? If the Western purpose falters, there could be worse awaiting the hapless country. So, here we are. The president who courted China’s economic worldview and refused to vote against Russia has fled. (Remember Kyiv in 2014?) And Wickremesinghe, nephew of Sri Lanka’s first pro-US president J.R. Jayewardene, has taken charge, and is threatening to quell the protests by force if necessary.

There’s always a backup script if things go wrong. The ousted president was a close ally of the Bodu Bala Sena. The Sinhalese chauvinist group has cast itself in the image of India’s RSS, a Muslim and Christian-hating Buddhist clone of the Hindutva order. Other similarities between India and Sri Lanka are eerier. Remember how prime minister Solomon Bandaranaike was assassinated by a Buddhist monk angered by his quest for a friendly pact with the minority Tamils? The murder bore an uncanny resemblance to Gandhi’s assassination by Hindu supremacists hostile to his alleged appeasement of Muslims. 

Certain things about Sri Lanka’s heart-wrenching mess one can do little about, among them being the fact that Covid-19 waylaid the tourism industry, the island nation’s economic backbone. Small-scale entrepreneurs, critically the garment exporters, took a hit. The resultant cap on foreign imports coupled with an outlandish nationwide move to switch to organic farming, (mainly to mask the slashing of fertiliser imports) wrecked the prospects of an early recovery from pandemic-induced setbacks. The horror could strike Sri Lanka whose human development indices are far ahead of its neighbours.

Decades before Gen Musharraf sealed his military support against the Tamil Tigers, India and Sri Lanka bonded as close friends. Former president Chandrika Kumaratunga particularly treasures an old picture of Nehru hoisting her in the air. Later Indira Gandhi stopped Sirimavo Bandaranaike from quitting during a Sinhalese communist insurrection in 1971, the year Mrs Gandhi would go to war with Pakistan. “Indu called me to say under no circumstances was I to resign.” The Janatha Vimukthi Peramuna insurrection would have rattled any government. It was the first of two unsuccessful armed revolts conducted by the communist group against the socialist United Front Government of Sri Lanka. The revolt lasted two months before Indian troops helped quell it.

I met Mrs Bandarnaike when she was in the wheelchair with paralysed toes. It was a peep into the India-Sri Lanka backstage. Her son Anura Bandaranaike was a devotee of India’s healer-guru Sai Baba of Pattapurthi. On his advice, the mother flew to Puttaparthi. The Sai Baba promised quick recovery but it was a tall claim. The Buddhist press was up in arms over the leader of their country falling prey to the ‘mumbo jumbo’ of an Indian guru.

It didn’t help that India was firmly in the Soviet camp while its neighbours had cosy ties with China and the US, both allies against Moscow. Pakistan, Bangladesh, Nepal and Sri Lanka led the movement for Saarc, the South Asian club that met in Dhaka for the first summit in 1985. Gen Ershad, its host, would later tell me that it was a collective effort by India’s neighbours to deal with Delhi jointly. “We were allergic to India,” Ershad told me bluntly in a TV interview. “So we decided to deal with India jointly.”

Sri Lanka is in a serious quandary today and does not have the emotional wherewithal to deal with the IMF’s conditionality that always comes. The protesters represent Sri Lanka’s multicultural bouquet. There’s just no room for dividing them again. Nor is there stomach for more IMF pills.

Palitha Kohona, Sri Lanka’s ambassador in Beijing shared the fears with the Global Times. The patience is running thin.

“In some cases, it’s difficult because the belt is already on the last notch. Sri Lanka has a state-funded healthcare system from birth to death. Some are worried that the IMF might recommend that we tighten the healthcare system. Our education system is also free from grade one to university level. This might be another area that the IMF might recommend pruning. But these may add to the unrest, which is already hampering the recovery of the country and unsettle any government, which takes over in the next few weeks. We have to deal with these issues, and it’s not going to be easy for Sri Lanka.”

Inflation: How Markets Fail?

 

Why Sri Lanka attackers' wealthy backgrounds shouldn't surprise us

Recent history shows that people with comfortable lives can easily be drawn towards violent extremism writes Jason Burke in The Guardian

 

Security forces at the Colombo home of the spice exporter Mohamed Yusuf Ibrahim, whose sons were among the Easter Sunday attackers. Photograph: MA Pushpa Kumara/EPA


When police and soldiers in Sri Lanka set out on the trail of the attackers who killed more than 350 people in a series of bombings on Easter Sunday, they did not expect to find themselves in Dematagoda, one of the wealthiest neighbourhoods in Colombo.

Within 90 minutes of the attack, as hospitals struggled to cope with the huge number of casualties, the security forces were closing in on a three-storey house with a BMW parked outside.

Two brothers lived there with their families: 38-year-old Inshaf Ibrahim, a copper factory owner, and Ilham, 36. Their father, Mohamed Yusuf Ibrahim, one of the most successful businesspeople in the island nation’s Muslim community, made a fortune exporting spices. The two brothers were also involved in the jewellery trade. They were both among the attackers.

When police moved in, there was another blast. It is unclear whether the top floors were wired with explosives or if the elder brother’s wife, Fatima, had set them off. The couple’s three children were instantly killed.

On Thursday, police confirmed that Mohamed Yusuf Ibrahim had been detained.

“They seemed like good people,” a neighbour told reporters from her rundown home opposite the Ibrahim family residence in the capital. 

In an interview with CNN, Sri Lanka’s prime minister, Ranil Wickremesinghe, said the suspected bombers were upper and middle class, and were well educated abroad, a profile he described as “surprising.”

His surprise was widely shared. In the Sri Lanka, the wider region and beyond, many still find it very difficult to understand how those with comfortable lives can be drawn into extremism, and kill themselves and hundreds of innocent people.

The question has been asked many times before. In Europe, it became an issue in the 1970s when relatively well-off young men and women in Germany, Japan, Italy or the US began to engage in violent activism. With the spread of suicide tactics in the 1980s and early 1990s, it seemed more perplexing than ever.

Then came a new wave of Islamic militancy, with attacks of unprecedented lethality. None of the men who flew planes into the World Trade Center in New York in 2001 faced economic hardship. The leader of their organisation, Osama bin Laden, was the son of a construction tycoon.

One of the Easter Sunday bombers attended Kingston University in south-west London from 2006-07, where he studied aeronautical engineering, and then went on to study in Australia. From a wealthy tea trading family based near the central city of Kandy, he had attended top international schools – as had other bombers, it appears.

There are many examples of terrorists with good educational qualifications among Islamic militants. The current leader of al-Qaida, Ayman al-Zawahiri, is a qualified paediatrician, while two-thirds of the 9/11 attackers had degrees. One plot in Britain in 2007 was almost entirely composed by highly qualified medical personnel. 

A group of Bangladeshis linked to Islamic State that attacked a bakery favoured by westerners in Dhaka in 2016, killing 20 hostages, share a similar profile to the Sri Lankan bombers. Almost all were from wealthy, highly educated backgrounds.

Isis has claimed Sunday’s bombings – its most lethal attack since its emergence five years ago. The group’s leadership has a rather different composition. Many are religious clerics, or former Ba’ath party officials. But many of the volunteers who travelled to Syria and Iraq from countries such as Egypt or Tunisia were from comfortable backgrounds, too, as were many who travelled from the UK.

Sri Lanka attacks: police hunting 140 Isis suspects, says president


However, on close inspection, many of the terrorists who went to university never finished their degrees. Others earned qualifications from institutions with dubious or limited academic credibility; many British extremists fall into this category.

Mohammed Zahran Hashim, the rural Sri Lankan preacher who is thought to have been the leader of the Easter bombing attackers and was in touch with Isis overseas, had limited wealth and only a rudimentary religious education.

Both al-Qaida and Isis have attracted large numbers of foot soldiers from backgrounds that are marginal in diverse ways. This is true in the Middle East and south Asia, where minor tribal leaders, out of work craftsmen, smugglers, former militia members, minor government officials, and poor farmers’ children sent to free religious schools have all been drawn to Islamic militant ideologies.

In Europe, many of the men who carried out recent terrorist attacks in France and Belgium were petty criminals, living on the economic margins.

Taken together, this teaches us that neither education nor economics can help explain any one individual’s violent activism. The literature on radicalisation that has been produced since 2001 has yet to pinpoint a cause, and few experts think there might be one.

Instead there are many factors that are seen as creating a risk of radicalisation. When they combine, the risk becomes a clear and present danger. Terrorism, abhorrent though it may be, is a social activity. Ideas spread and are reinforced among peers, married couples, old school friends and families. These ideas are simple. They explain complex events, identities and histories through a rudimentary and binary narrative. Neither education nor wealth is proof against them, and nor is poverty or ignorance.

Herath's cold summer at Staffs

Scott Oliver in Cricinfo

The United Nations is yet to release the definitive figures on this matter, but there cannot be many countries with a higher per capita average of hours spent smiling each day than Sri Lanka. At the risk of ethnic stereotyping, they are a happy bunch. Not Rangana Herath, though, at least not when he's bowling. At least not when I was fielding to his bowling.

If you were to manufacture a range of international-cricketer teddy bears, Herath Mudiyanselage Rangana Keerthi Bandara Herath would surely be the biggest seller. But don't let those cartoonishly cute and pudgy contours fool you. Herath's on-field manner is that of a prickly, pernickety upcountry bureaucrat, who, for his own barely acknowledged pleasure, is going to keep you occupied for hours doing something of little consequence. Just business, see.

This air of sternness frequently escalated into a full-fledged scowl during his sole, truncated North Staffordshire and South Cheshire League campaign for Moddershall in 2009, when a combination of lacerating Atlantic winds, green pitches and abysmal close catching left him with the unflattering statistics of 112-27-333-14 from eight league outings. That's an average of 23.79. To put that into context, his current Test bowling average in his homeland stands at24.86.

As with his eventual emergence from the shadow of Muttiah Muralitharan to be Sri Lanka's strike spinner, Ranga had fairly big boots to fill. He had been signed to replace South Africa's Imran Tahir - 80 wickets at 11 in our title-winning campaign the previous summer - and if you were to ask the club's ultras which of the two would go on to become the world's second-ranked Test bowler, it would have been a no-brainer: Tahir went through sides like a cheap samosa, Herath like porridge.

But then, the logic behind the signing was a little counter-intuitively tilted towards batting prowess. Rigorous online scorecard perusal duly threw up a recent 88 not out for Sri Lanka A in a 50-over game in Benoni against South Africa A, coming in at 94 for 6 and seeing them past the victory target a further 200 runs ahead. Box ticked, although subsequent first-hand evidence revealed a biffer with three main shots in his repertoire: pull, sweep, slog (and hybrid forms of those strokes). The posh side was only really used for leading edges.

Said research also disclosed that he had a carrom ball, a fact gleefully divulged to the local media, as was a list of Herath's high-profile victims, all incorporated into an artfully casual observation-cum-de facto press release designed to tweak the fret glands of the league's batsmen: "Anyone who's got Trescothick, Chanderpaul, Ponting, Kallis, Inzamam and Steve Waugh out has to be able to bowl a bit, so the club's delighted with the signing, particularly if the long-range forecasts for a hot, dry summer are correct."

Neither the weather nor the performance forecasts proved accurate, sadly, although clearly he could "bowl a bit". That said, we didn't want Herath to bowl so well that he would be picked up by a county (as Tahir had been the previous July by Hampshire, where he was retained for 2009) or picked by his country, for whom he had played the most recent of his then 14 Teststhe previous December, taking 1 for 115 against Bangladesh, which was, I suppose, both a good and bad omen.

Herath took 2 for 92 on debut, followed by 2 for 71. He bagged his solitary five-for the following week in a low-scoring win on a sticky dog, and just five more scalps over the next four weeks. His only game on a dustbowl turned out to be his final game, in which the wiles of former England batsman Kim Barnett, aged 48, (dropped second ball by yours truly) held him at bay, although Barnett did adjudge Herath the third best spinner he'd faced, after Warne and Muralitharan.



Where the plumbers, plasterers, policemen and pot-washers of North Staffs had succeeded against Herath, the Pakistani batsmen of 2009 failed miserably © AFP



While I remained confident he'd eventually come good should the summer ever arrive, we had expected a whole lot more. Alas, it was a tale of moist pitches and missed chances. The tracks were just too green and greasy, rendering his carrom ball the proverbial ashtray on a motorbike. Indeed, his subtle variations were so subtle, it seemed that they no longer really counted as variations. Rather, the batsmen didn't perceive them as variations, which was problematic since the whole point was to get them to see things that weren't there as though they were.

Yes, the returns were meagre and the supporters increasingly restless, yet we refrained from resorting to that occasional club cricket expedient of "accidentally" trapping his fingers in the door. And a good thing too, for in the dregs of a damp June Herath received a phone call from the Sri Lankan selectors: Murali had a shoulder injury, and he was needed.

Where the plumbers, plasterers, policemen and pot-washers of North Staffs had succeeded, the Pakistani batsmen failed miserably. Just hours after stepping off the plane, Herath would bag his first Test Man-of-the-Match award, in Galle, adding a decisive second-innings spell of 11.3-5-15-4 to a couple of useful cameos with the bat as Sri Lanka won by just 50 runs. In thenext game, another victory, he pocketed a maiden Test five-for as Pakistan ceded nine wickets for 35, and he followed it up with another five-for in the third game. So much for our two-wickets-per-game pro! Perhaps, ultimately, it was just a warm-weather thing - you know, needing to have feeling in his fingers, neshness such as that.

Anyway, the Moddershall hardcore may have groused at the comparison with Tahir, yet watching Herath dismiss Virat Kohli, Ajinkya Rahane and Rohit Sharma in Kumar Sangakkara's farewell series, perhaps they would have understood, belatedly, how in that busy, shuffling approach and snappy, narrow pivot; in the chest-on delivery imparting all the revs (and the curve, the drop) from the shoulder; in the clever use of the crease (something Tahir, less guileful, more heavy artillery, didn't do) and round-arm variation that either undercut or would spin sharply; and in the lesser-spotted carrom ball, there were the makings of a useful operator. It's a shame, I guess, that he kept his best performances for the Test arena.

On Cricket Commentary - WHY CONTEXT MATTERS

Mukul Kesavan in The Telegraph

The idea that we should respond to cricketers in purely cricketing terms is a piety that cripples commentary on the game. Cricket commentary’s organizing conceit — that at every turn in a Test there is a technically optimal choice to be made — produces formalist bromides that explain neither the course of the match nor the performances of its main characters. A good example of the technicist fallacy was Michael Holding’s criticism of Sri Lankan bowling tactics during the second innings of the second Test at Headingley. The Sri Lankan pacemen were bowling short at Joe Root (picture) who wasn’t comfortable. He was hit on the splice, on his gloves, on the body which encouraged the Sri Lankans to work him over for about half an hour. This provoked Holding into Fast Bowling Piety One: bowling short is all very well but you have to pitch it up to take wickets. Coming from Holding, one of the great West Indian quartet that unnerved a generation of batsmen with scarily fast and lethally short bowling, this was greeted in the Sky commentary box with general hilarity. Holding insisted that the tales of West Indian bouncer barrages were overstated and offered as proof the number of batsmen who were out lbw or bowled. Botham, from the back of the box offered an explanation: the balls must have ricocheted off their faces on to the stumps. Nasser Hussain spoke up to make the point that Joe Root seemed to have provoked the Sri Lankans while they were batting, and they, in turn had decided to see if they could sledge and bounce him into submission. Given Root’s visible discomfort, Hussain argued that a short burst of intimidatory bowling was a reasonable tactic. In response Holding produced his clinching cautionary tale: opposing fast bowlers once peppered Michael Clarke with short balls and he ducked and weaved and got hit but he had the last laugh by scoring more than 150 runs in that innings. Middle-aged desis recalled a very different precedent: the 1976 Test in Sabina Park where the West Indian pace attack led by Holding hospitalized three top order Indian batsmen with a round-the-wicket bouncer barrage and battered Bedi’s hapless team into surrendering a match with five wickets standing because the batsmen who weren’t injured were terrified. Holding was a member of the West Indian team that ruthlessly ‘blackwashed’ England after Tony Greig stupidly provoked the West Indians by promising to make them grovel. His inability to see that Mathews’s targeting of Root was a symptom of an angry team’s determination not to take a step back was a sign of how completely the conventions of cricket commentary can distract intelligent commentators from the real contest unfolding in front of them. Sri Lankan teams have long felt slighted by the ECB’s habit of offering them stub series or one-off Tests early in the English season. They have been treated like poor relations and this time round they felt not just patronized but persecuted by the reporting of Sachithra Senanayake’s bowling action during the ODI contests that preceded the two-Test ‘series’. It was this sense of being hard done by, this collective determination to be hard men, not game losers that played a part in Senanayake’s Mankading of Jos Buttler, in Angelo Mathews’s refusal to withdraw Senanayake’s appeal and in the public support that Sangakkara and Jayawardene gave Senanayake when Cook and Co. threw a hissy fit afterwards. And it was this keenness to give as good as they got that spurred the Sri Lankan captain to go after Joe Root who had been noticeably chirpy in the field. That passage of play, with the Sri Lankans bouncing and sledging Root and Root battling it out, was the series summed up in half a dozen riveting overs. This is not to argue that short pitched bowling is more effective than pitched up bowling when it comes to taking wickets: merely to suggest that producing axiomatic pieties as a commentator without accounting for context is pointless. If Mathews had persisted with a failed tactic over the best part of the day as Cook did when Mathews and Herath were building their rearguard action, Holding might have had a case. But he didn’t, so Holding’s inability to recognize that this spell of short pitched hostility was a flashpoint in this two Test struggle for superiority is a good example of the way in which orthodox nostrums glide over the action they are meant to illuminate. It wasn’t just Holding who lost the plot in the Sky commentary box, so did David Lloyd. When Mathews began sledging Root and, in spite of remonstrating umpires, calmly carried on sledging Root, a historically minded commentator might have seen him as a worthy heir to Arjuna Ranatunga, that smiling, pudgy, implacable eyeballer of umpires, winder-upper of oppositions and, by some distance, Sri Lanka’s greatest captain. But all Bumble saw was a captain who, because he was sledging Root, had lost focus and lost control of the match. So what for the rest of the world was a spell of purposeful hostility with Mathews testing Root’s will to survive, was for Lloyd, a failure by the Sri Lankan captain to focus on his main job, thinking Root out. Just as Mathews’s sledging was read without context, the larger contest between England and Sri Lanka went unframed. On the one hand there was the English team backed up by a prosperous, hyper-organized cricket board which surrounded its Test team with a support staff so large that journalists joked about it, and on the other there was a Sri Lankan team at war with its board, whose players frequently went unpaid and whose principal spinner, Rangana Herath, had to apply for leave from his day job before going on tour. I learnt more about the Sri Lankan team from one brilliant set of vignettes on Cricinfo (“The Pearl and the Bank Clerk” by Jarrod Kimber) than I did through 10 days of Test match commentary. Do television commentators do any homework? Are they interested in the individuals in the middle or are the players they describe just interchangeable names on some Platonic team sheet? Virtually every commentator in the world is now a distinguished ex-cricketer; are these retired champions meant to embody totemic authority, to exude experience into a microphone, or should they pull information and insight together to tell us something that we can’t see or don’t know already? One answer to that leading question might be that ball-by-ball commentary has, by definition, a narrow remit. The answer to that, of course, is that you can’t take a form that originated with radio where the commentator had to literally describe the action in the middle and transfer it to a different medium without redefining it. Sky Sports’s stab at redefinition consists of more graphical information. We have pitch maps and batting wagon wheels which are useful, but surely the rev counter on the top right hand corner of the screen is an answer looking for a question. Does the fact that Moeen Ali gets more revs on the ball than Rangana Herath does make him the better spinner? Sky’s little dial seems to think so. The best human insights on the Sri Lankan-England series came from Shane Warne and he wasn’t even in the commentary box. The series cruelly confirmed his criticisms of Alastair Cook’s captaincy: having moaned about Warne’s unfairness and huffed about Buttler’s Mankading, Cook led his team to defeat with all the grit of a passive-aggressive Boy Scout. In the Sky box, we had Mike Atherton who earned a 2.1 in history at Cambridge but you wouldn’t known it from his commentary: he was as indifferent to time and context as his fellow commentators. Ian Botham was, as always, the Sunil Gavaskar of English commentary while the point of Andrew Strauss’s strangled maunderings escaped foreigners in the absence of subtitles. The one exception to the tedium of Sky commentary was Nasser Hussain simply because he was alert to the politics of a cricket match, to the personal and collective frictions that makes Test cricket the larger-than-life contest that, at its best, it sometimes is. I like to think that the reason for this is that he’s called Nasser Hussain and has an Indian father and an English mother so he can’t pretend that cricket is a self-contained country. Pace Holding, the rehearsal of textbook orthodoxy might be a necessary part of cricket commentary, but it ought to be a baseline on which good commentators improvise, rather like the tanpura drone that provides soloists with an anchoring pitch. Too often, though, cricket commentary amounts to just the drone without context, insight or information. If English commentators are frustratingly literal and narrow, their Indian counterparts make Holding and Co. sound like John Arlott channelling C.L.R. James. Policed by the BCCI, desi commentators are so mindful of their contractual obligations and so formulaic in their utterances that they could be replaced by bots without anyone noticing. Watching a cricket match glossed by the BCCI’s Own, is unnervingly like playing the FIFA video game with automated commentary, where software produces the appropriate cliché whenever the onscreen action supplies the necessary visual cues. Readymade words for virtual football are bad enough but canned commentary on real cricket needs a special place in hell. Tracer bullets, kitchen sinks, cliff hangers, pressure cookers, sensible cricket, best played from the non-striker’s end, give the bowler the first half hour, leg-and-leg… it never stops, and its petrifying banality turns live cricket into lead. With five Tests to play, this is going to be a long, hot summer. Welcome to purgatory.