2013 February 20 Wednesday
How California Governments Rack Up Huge Debts

Capital appreciation bonds don't even have interest payments due for many years.

Since 2007, hundreds of school districts and community colleges across California have used capital appreciation bonds to raise nearly $7 billion for various construction projects, according to data from the state treasurerís office. The bonds have allowed school districts that are short on cash to finance classroom renovations and new athletic facilities while delaying payment for years, or even decades.

Someone who owns a house in a California city who expects to own it for many years until retirement needs to know whether their local government is taking steps now that'll cut the value of their house 10 or 20 years from now. Local governments that go bankrupt depress housing prices and cut services.

Rampant financial irresponsibility is going to collide with limits to growth and cause much larger debt defaults than we've seen in the last 5 years.

Share |      By Randall Parker at 2013 February 20 08:03 PM 

McNeil said at February 21, 2013 6:12 PM:

After this truthful post, I still don't see how you can critizice left-wing governments. Your implicit contradictions on where you stand, amaze the s... out of me. So what are you Randall? A liberal, capitalis, socialist, fascist, progressive, conservative? What? what is it? Where do you stand? What is straight and what is crooked for you?

I'll give you real data,

An economist by training, Rafael Correa won his first election in 2006 with the slogans aimed at struggle against poverty and building socialism of the 21st century. He inherited the country in a completely dysfunctional state after neoliberal reforms of Lucio Gutierrez, and in 2008 faced the global financial crisis, whose consequences were devastating for Ecuador. Oil prices that account for 62 percent of exports and 34 percent of the state budget revenue fell by nearly 80 percent. The revenue from other export sectors and Ecuadorians working abroad has also dramatically declined. However, in 2010 the country's GDP grew by 3.6 percent, and in 2011 by 7.8 percent, according to the CIA World Factbook.

Public debt in December of 2011 was $10 billion, less than 10 percent of the country's GDP. According to the Central Bank of Ecuador, in 2012 unemployment was at 5 percent, a record low indicator in the region over a 25-year period. The poverty rate declined to 16 percent (versus 25.5 percent on its peak in September of 2009).

The level of foreign investment was low. For example, in the first half of 2012 from 94 billion dollars invested by the U.S. in Latin America, only 265 million were invested in the economy of Ecuador. The president of Ecuador is not concerned. "We are developing steadily without foreign investment," said Correa. Indeed, public spending on education adjusted for inflation has more than doubled since 2007. Spending on health care and other social budget items, including subsidized housing loan program, has also increased.

What measures has Correa taken to get the country out of the crisis in record time and send it on a path of sustainable development? In December of 2008, he defaulted on sovereign debt of Ecuador, with a total nominal value of about 3.2 billion U.S. dollars, which accounted for 30 percent of Ecuador's foreign debt. In May of 2009, Ecuador bought back 91 percent of their impaired bonds through an international auction. The problem of debt was solved. Today, only 1 percent of the country's GDP is spent on servicing the national debt. Then, in late 2009, the government ended 13 bilateral investment treaties that were not beneficial for the country, including those with the United States, and in November of 2010, revised 15 of 24 oil contracts and provided the rental payments of up to 80 percent, compared to 18 percent in the previous scheme. Oil revenues in the six years allowed doubling social spending by 25 percent and increasing GDP by 50 percent.

McNeil said at February 21, 2013 6:14 PM:

Correa made another brilliant step by nationalizing the Central Bank and forcing it to return assets held abroad in the amount of over $2 billion. A tax on transferring money abroad was introduced. Banks are required to keep 60 percent of their liquid assets in the country. A program of preferential mortgage loans was launched, and now this money is coming back, fuelling the economy. This was Correa's way to provide the country with liquid assets in the shortest possible time. The government abolished the monopoly of banks and large oligarchic structures on the media. This important step allowed providing informational support to the reforms.

"You cannot cover the sun with your finger and deny radical changes in the country," Correa said in his recent campaign rally. "We jumped into a departing train, there are jobs and health, we have gained dignity, justice, and sovereignty," said the President. The President of Ecuador has shown the world how to build a modern state by taking natural resource rents through taxes, nationalizing the central bank, imposing restrictions on the movement of bank capital, getting rid of the national debt and preventing its increase, and increasing the regulatory role of the government in the export sectors of the economy.

These advances allowed Ecuador along with other governments in Latin America (Brazil, Argentina, Uruguay, Bolivia, Nicaragua, Cuba, and others) to confront globalization by the transnational capital and create a scheme of socialism of the 21st century, the future model of human existence. This is precisely why it is strongly discredited by the neoliberal West through its media that fiercely criticizes Rafael Correa, Cristina de Kirchner, Dilma Rousseff, Hugo Chavez, and Daniel Ortega.

Get real Randall will ya!

bbartlog said at February 21, 2013 6:33 PM:

'much larger debt defaults than we've seen in the last 5 years.'. Ah, what debt defaults *have* we seen in the last five years? Only one of any size that comes to mind is Iceland. For the most part, I think you can assume that the central banks will make sure that the bondholders get paid, whether in California or elsewhere. I wouldn't count on any large defaults. Which does piss me off since it involves a huge transfer of wealth from the responsible to the irresponsible, indirectly via inflation; but I guess it's nothing new.

SF said at February 21, 2013 10:12 PM:

"62% of export income was oil . . ." With Brent now at $113.53/barrel, you wouldn't have to be an economic genius to engineer a turnaround. I hope he doesn't cripple the goose that lays the golden eggs like Chavez. Oil production has gone way down in Venezuela.

AMac said at February 22, 2013 12:02 PM:

McNeil --

You neglected to cite Lyuba Lulko. Here: Pravda.ru, 'Ecuador builds nation of the future'.

Do you have any original thoughts to contribute?

Paul Rain said at February 22, 2013 2:55 PM:

McNeil: Keep citing more left-wing governments, you jackass. 64% of GDP from exports is shit, when 100% is worth shit. $10 billion in debt might mean that you have a healthy economy- or in the real, unfortunate world, that your nation is both utterly untrustworthy and has sweet fuck all to borrow against.

Randall Parker said at February 23, 2013 9:52 AM:


A country that made more money due to high commodity prices made more money due to high commodity prices. It didn't soar due to wise political leadership. The high commodity prices are caused by very smart and very hard working Chinese people creating a market economy that raises demand for metals, oil, coal, soy, corn, wheat, and other commodities. South American countries benefit from the Chinese market economy regardless of whether their governments happen to be nationalizing industries or putting on price controls

Regards de Kirchner's restrictions on currency exchange, Correa's grab of assets: These things do not have much positive long term impact. What would help: less government corruption, less debasing of currencies, less seizing of private savings so that people do not lose their incentive to save.

I give de Kirchner and her late husband credit for reducing Argentina's total debt. Though Argentina's government is exaggerating the extent of the debt reduction. Also, as Harvard Law prof Phillip Greenspun points out, Argentina is still pretty poor and some of its people are deluding themselves that Uncle Sam is to blame. Argentina's people are the problem. They ought to clean up their country and not tolerate government corruption. But monitoring a government takes a lot of work and the vast majority can't be bothered. Being civic minded takes lots of hard work. Look at the people who spew in the comments section of my blog without doing research first to back up their assertions. Why? Laziness. From laziness comes bad government and corruption.

Debt reduction by default: Yes, that works. It also means that basically the government took a lot of money from international investors and then didn't give it back. I continue to be amazed at the suckers who buy the sovereign debt of Latin American governments. How many centuries of defaults does it take to realize that these serial defaulters are bad investments?

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