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The Vicious Debt Cycle
Economy, Business And Markets

The Vicious Debt Cycle

Iran is facing a mountain of government debt estimated at 5,400 trillion rials ($179.2 billion), according to the Economy Minister Ali Tayyebnia. The figure is almost six times the accessible frozen assets that should be made available soon after the lifting of the sanctions.
The monumental debt has major consequences for the economy and for policy makers alike struggling with hard decisions to help improve the quality of life of the people.
Seyed Mahdi Barkchian, an economist at the prestigious Sharif University, recently compared the state of Iran’s economy to the long and painful Greek financial crises and stressed the compulsion for hard and painful economic decisions to get out of the present morass.
However, the good news is that the Tehran government’s commitment is local and not to foreign lenders. Nevertheless, the ballooning debt, which is the cost of government mismanagement and its army of minions, ought to be paid, come what may.
The decision of how to repay the debt is not only a pure economic decision to be left solely to technocrats with solutions not compatible with what the general public prefers.
What is clear is that any solution to the debt crises must start by preventing the current debt drivers including the habit of postponing repayment.
The problem is that aversion to debt repayment has indeed become a social norm where it seems there is an unwritten covenant wherein no one is willing to repay debt.  A sort of dangerous and vicious cycle.
For example, the government owes money to thousands of contractors who in turn are indebted to banks and the government or its institutions (for instance the insurance companies). Hence, the government has conditioned its debt repayment to contractors on including clearance of their debts. As the contractors have no money, it is impossible for them to repay debts to the government or pay other bills.
 As everyone is somehow unable (some say unwilling) to pay, it becomes a norm not to pay. The other point is the substantial high real interest rates that justify postponing debt as there is almost no effective penalty for late repayments, especially for the government.
Debt repayment reluctance can also be put at the doorstep of flaws in the bankruptcy laws that allow the big debtors to manoeuvre and is in critical need of reform. For example, once a bankruptcy decision is made, all delayed loans become current liabilities with a discount. However, these norms are allowed or tolerated simply because they also serve the interest of the ruling establishment. Hence, it would help if the government gathers some courage and takes action to redefine the legitimate interest of the state and the ruling establishment.
There is no disagreement that high levels of debt inhibit growth, but it would be naive to think that one needs to classify the debtors that deserve debt relief and then help them with more money or bailouts.
Experts are talking about deepening the debt market, which inevitably spreads out some of the burden to next years’ budgets. However, the debt market will not impair the political factors leading to or creating government debt. More importantly, there is need for a meaningful dialogue for debt repayment that emphasizes its cost and how it should or could be distributed.
The issue of moral responsibility of the creditors is another factor. When banks were lending they were well aware that most, if not all, of the money would not go into productive investment, but rather would be used to hang on to  economic power and hence would help top bankers to stay aligned with the powerhouses. Hence, to many, it doesn’t seem fair that ordinary taxpayers foot the bill. Thus, the creditors should also be subject to the full force of the law that prevents them from malpractices or going beyond their legal mandate.
The present government does not seem to tire when it comes to blaming its predecessor and the harsh economic sanctions, which are understandable. However, this approach does not help nor solve the problems. What is of utmost importance is the establishment of special courts and reforming bankruptcy regulations that penalize and raise the cost for debt defaulters making a mockery of the law. Finally, the debt-burdened government should come up with a workable format to ease its debt burden.
In the meantime, when issuing Treasury Bills to repay contractors it would have helped if their liabilities were deducted from the payments and there was no condition on the eligibility of the T-Bills. At the same time the government could have better negotiated with them and reduced its debt in the form of tax breaks or other incentives.
The government debt to banks seems to be pending and waiting for the much-needed banking reforms. However, there is no report on its progress and it seems to have been given a back seat on the government’s list of priorities. This further indicates the preference to further delay the debt repayments up until the parliamentary elections in late February. Remember the phrase: cross the bridge when you come to it!?

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