The consequences of debt

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Dear Editor,

Thank you for printing ‘Stupid (taxpaying) Palagis’ well researched letter regarding the government debt. 

So what happens if a country defaults on its loan obligations? 

Well, actually it’s not as uncommon as one might think (Greece, Greenland, Argentina to name a few) and although there’s no textbook checklist to follow there’s some similarities in each case. The good news is that the sun still comes up the next day. 

The farmer still feeds his chickens and tends his taro. 

In fact the subsistence farmer is probably the least effected in the short term and ironically those most affected are the rich business people with lots of local currency in the bank.

Initially the government will restructure the loan, typically by extending the loan period. If Stupid Plagi’s calculations are correct it appears that this step has already been taken. 

If this is not successful and the government still cannot service the debt then the pain begins. To reduce interest payments the government devalues the currency. For example if there’s 50% devaluation an interest payment of a million tala effectively only costs the government half a million tala.

At a hint of this happening rich people withdraw their tala from the bank and convert it to say, US$ before the tala becomes worthless. 

To stop a run on the banks the government may put limits on the daily amount that can be withdrawn or even close the banks for a period of time as happened in Greece. 

A devalued tala also means that imports like oil and therefore electricity become more expensive and generally it also leads to hyperinflation.

Of course this scenario isn’t much fun for anyone least of all the government and to avoid it happening I think they will resort to Plan B which is to lease large assets like the airport and water front project to their lenders in exchange for debt forgiveness. 

When this happens Samoa will be owned by foreign interests on 99 year renewable lease agreements and colonisation through stealth will begin with our new masters.

 

Pika T

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