Sep 042017
 

By Eric Toussaint, CADTM, 99GetSmart

Yanis Varoufakis, April 2015. via Flickr.

Yanis Varoufakis, April 2015. via Flickr.

In his book Adults in the Room, Yanis Varoufakis gives us his version of the events that led to the Tsipras government’s shameful capitulation in July 2015. In part two of a series of articles analyzing the book, Eric Toussaint examines Varoufakis’s questionable account of the origins of the crisis and his coziness with the Greek political class. 

In his latest book Adults in the Room, Yanis Varoufakis gives us his version of the reasons behind the Tsipras government’s shameful capitulation in July 2015. It essentially analyses the period 2009-2015, though it makes incursions into earlier periods.

In my first article on the subject of this book, I analysed critically the proposals made by Yanis Varoufakis before he became a member of the Tsipras government in January 2015, demonstrating that those proposals were doomed to fail. This second article covers the ties Yanis Varoufakis maintained with Greece’s ruling political class (both the PASOK, historically linked to social-democracy, and the conservative New Democracy) for several years.

On several occasions, Yanis Varoufakis mentions the broad range of his relations with members of the Greek political milieu. He stresses his past friendship with Yanis Stournaras (the current Governor of the Bank of Greece, an ally of Mario Draghi and of the private Greek and foreign bankers), his good relations in 2009 with George Papandreou (who implemented the policies leading in May 2010 to the first Memorandum of Understanding) and his relationship with Antonis Samaras (who led the Greek government after the second Memorandum of Understanding), and he devotes a large part of the first four chapters of the book to relating how a close collaboration, and at times a complicity, was formed with three Syriza leaders. Those leaders were Alexis Tsipras (who led the Greek people into the third Memorandum of Understanding) and Nikos Pappas (Tsipras’s alter ego, who became a Minister of state in the first Tsipras government), added to whom, along the way, was Yanis Dragasakis (before he became vice-Prime Minister of the first and second Tsipras governments). In this second part, I will deal with Varoufakis’s account of the start of the crisis in Greece and his relations with Greece’s traditional political class.

Varoufakis’s account of the events leading to the imposition of the first Memorandum of Understanding in May 2010 is highly questionable. While defending his position, at the same time he reinforces the official narrative according to which the cause of the crisis lies in the inability of the Greek state to deal with its public debt. While he condemns the sorry state Greece’s private banks had put themselves in, he puts the accent on the Greek state’s inability to deal with that situation and declares that Greece should have resorted to bankruptcy. He rules out the possibility that was “offered” to the state to refuse to take responsibility for the banks’ losses. His reasoning regarding the failure of the Greek state is based on the fact, according to him, that the liabilities (that is, the debts) of the private banks were the state’s responsibility, and that nothing could be done about that. The private banks’ liabilities were so extensive that the Greek state was incapable of assuming them. And yet, at certain points in history, States have refused to assume the losses of private banks. Iceland did it beginning in 2008 when its private banking sector collapsed, and with very positive results. Iceland victoriously stood up to the threats of Britain and Holland. 2

Saying that Greece is not Iceland and/or that Greece is part of the Eurozone is not enough to put an end to the debate. Varoufakis’s attitude, in reality, is economically and socially conservative. He condemns the Greek bankers, but the solution he proposed to Alexis Tsipras beginning in June 2012 consisted in transferring ownership of Greece’s banks to the European Union. 3

It is also clear that there was every reason to challenge the repayment of Greece’s public debt, which had increased greatly mainly in the 1990s due to the pursuit of illegitimate goals (excessive military expenditure, financing fiscal gifts to major corporations and wealthy citizens, financing reductions in corporate contributions to social security using debt, etc.) or to financing the debt under illegitimate conditions (abusive interest rates paid to banks), and using methods characterised by corruption and other illegalities (see Chapter 1 of the “Preliminary Report of the Truth Committee on Greece’s Public Debt”).

Varoufakis and the government of George Papandreou (PASOK) 2009-2011

In the autumn of 2009 a new Greek government was elected on the promise of higher spending as a means of helping the nation’s income mountain recover, but the new prime minister and his finance minister, from the PASOK social democratic party, did not get it. The state was irretrievably bankrupt even before they were sworn in. 4

It is false to say that the state was bankrupt. That statement reinforces the deceitful narrative that is put forward by the Troika and the dominant media.

What Varoufakis does not say is that Papandreou dramatised the public debt and the public deficit instead of making those who were responsible, both in Greece and abroad (that is, the private shareholders, the board members of the banks, and the foreign banks and other financial entities who contributed to generating the speculative bubble), bear the cost of the banking crisis. The Papandreou government falsified the statistics on Greece’s debt — not in the period before the crisis, in order to reduce it (as the prevailing narrative claims), but in fact in 2009, to increase it. That is demonstrated very clearly by the Truth Committee on Greece’s Public Debt in its June 2015 report (see chapter II, p. 17). Instead of blowing the whistle on the falsification, Varoufakis takes the statements made by Papandreou and his Finance Minister on the dramatic state of public finances at face value.

After the parliamentary elections of 4 October 2009, the newly elected government of George Papandreou illegally revised and increased both the public deficit and public debt figures for the period before the Memorandum of 2010. The public deficit estimation of 2009 was revised upward several times, from 11.9% of GDP in the first estimate to 15.8% in the final one. Andreas Georgiou, who was Executive Director of the Greek statistics bureau ELSTAT in 2009-2010 (despite the fact that he was still on the staff of the IMF), was sentenced by a court in August 2017. Here is what the French daily Le Monde wrote in its 1 August 2017 issue:

Andreas Georgiou, former head of the Greek statistics office, Elstat, a key figure in the saga of the false public-deficit figures at the start of the debt crisis, was sentenced Tuesday 1 August to a suspended prison sentence of two years. The Athens criminal court found him guilty of “breach of duty,” according to judicial sources. The former International Monetary Fund staff member was prosecuted for collusion with Eurostat (the EU’s statistics office, which is a Directorate of the European Commission) to inflate figures regarding Greece’s deficit and public debt for the year 2009. The presumed goal was to facilitate surrendering control of the country’s finances with the implementation of the first international financial assistance plan in 2010 – the third has been in force since August 2015. 5

Further, contrary to what Varoufakis claims, the private banks did not cut off credit to the Greek state in 2009; it was credit to the private sector that was interrupted during that year. In the fall of 2009, the Greek state was having no difficulty in raising funds. The financial markets cut off credit to the Greek state in 2010, after Papandreou dramatised the situation and at a time when the first Memorandum of Understanding was being launched.

Varoufakis explains at several points in Chapter 2 that despite obvious divergences, he maintained good relations with Papandreou: “In January 2010 in a radio interview I warned the prime minister, whom I knew personally and with whom I was on rather friendly terms, ‘Whatever you do, do not seek state loans from our European partners in a futile bid to avert our bankruptcy.’” 7

On this last point, Varoufakis is right — credit should not have been sought from the Troika. On the other hand, Varoufakis is wrong when he says that the Greek state should have declared itself bankrupt. An alternative, one that was contrary to the policy espoused by Papandreou and different from the one advanced by Varoufakis (bankruptcy of the state), was possible, and necessary.

Following their win in the 2009 elections thanks to a campaign during which they denounced the neoliberal policies of New Democracy, the Papandreou government, had it wanted to make good on its campaign promises, would have had to socialize the banking sector by organizing an orderly failure of the banks and protecting depositors. Several historical examples demonstrate that organizing such a failure and then starting up financial services again to operate in the interests of the population would have been quite possible. They should have taken the example of what had been done in Iceland since 2008 8 and in Sweden and Norway in the 1990s. 9 Instead, Papandreou chose to follow the scandalous and catastrophic example of the Irish government, which bailed out the bankers in 2008 and in September 2010 agreed to a European aid plan that had dramatic consequences for Ireland’s people. When in fact what was needed was to go even farther than Iceland and Sweden and completely and permanently socialize the financial sector. The foreign banks and big private Greek shareholders should have been made to bear the losses stemming from resolving the banking crisis and those responsible for the banking disaster should have been prosecuted. That would have allowed Greece to avoid the successive Memoranda that have subjected the Greek people to a dramatic humanitarian crisis and to humiliation, without any of it resulting in truly cleaning up the Greek banking system.

Varoufakis and Antonis Samaras

Several times, Varoufakis refers to the contact he maintained with personalities in the first rank of Greece’s political class, both members of PASOK and of the leading Conservative party, New Democracy.

One evening (in 2011; ed. note), on returning to our flat after yet another session at ERT, the Greek state radio and TV network, the landline rang. I picked the phone up to hear a familiar voice. It belonged to Antonis Samaras, then leader of the conservative New Democracy party, at the time Greece’s official opposition […] “We have never met, Mr Varoufakis,” he said, “but having just watched you on ERT I felt an urge to call. For I cannot remember the last time I was so touched by something so profound I heard someone say on television. Thank you for your stance.”

He was not the only member of the Greek establishment to approach me. Indeed, my campaign had led to many secret discussions with socialist ministers, opposition conservative members of parliament, trade union bosses and the like who felt I was on to something. Once I outlined my basic analysis, not one of them contested it. […] The conservatives, at least up until November 2011, were a happier lot: with their leader Antonis Samaras adopting an anti-austerity, anti-bailout position, they felt freer to endorse my musings. 10

After receiving a telephone call like this one from Samaras, some people would have asked themselves, “Isn’t it disquieting to receive compliments from one of the key leaders of the Conservative party?” But not Varoufakis.

The friendship between Stournaras and Varoufakis

Varoufakis devotes no less than four pages to describing his friendly relationship with Yanis Stournaras. 11 Between the late 1990s and the period of the Memoranda, Yanis Stournaras moved from PASOK to New Democracy. Varoufakis explains:

[It was he who] convince[d] Berlin and Brussels to let Greece into the euro. Once Greece was securely inside the euro, in 2000 the PASOK prime minister rewarded Stournaras with the Commercial Bank of Greece …. It was during this last phase of his career that we first met. Despite his busy schedule, Stournaras was always on hand to do his share of teaching, and to do it happily and devotedly. While our economic perspectives differed considerably, as did our politics, his commitment to the university and the good chemistry between us provided the foundation for a developing friendship. 12

Varoufakis tells how they spent the evening of the election of 4 October 2009, in which PASOK was victorious, together in Stournaras’s apartment. At that time, Stournaras was a high-ranking advisor of the “socialists” and beginning of 2010 had adopted Papandreou’s pro-Memorandum orientation. Varoufakis continues:

During that momentous year for Greece, 2010, Stournaras made a career move that raised eyebrows, becoming director of an economics think tank originally set up by Greece’s National Confederation of Industries, the largest and most established bosses’ guild in the land, traditionally affiliated to the conservatives of New Democracy.

This did not affect their friendship. A month before the May 2012 elections, Varoufakis was in Athens and called Stournaras:

We met the next day at a café in the lobby of a hotel at the foot of the Acropolis; we hugged …. Turning to business, I briefed him on the discussions I had just had in Berlin with officials from the European Central Bank and the German government, with financial journalists and the like. I also mentioned a conversation I had had with financier George Soros. I told Stournaras that Soros agreed with my assessment of the Greek situation as well as with the gist of my economic policy proposals for Europe as a whole.

Varoufakis explains that Stournaras and he did not reach an agreement on the viability of the Memorandum of Understanding but that they parted with promises to keep their friendship intact. Things went sour a few months later, when Stournaras accused Varoufakis of speculating with Soros on Greek debt securities. That is when their relationship was broken off. Meanwhile, Stournaras had become Minister of Development (May-June 2012). Following the elections in June 2012, he became Finance Minister of the Antonis Samaras government. Then, starting in June 2014, Samaras appointed him Governor of the Bank of Greece, a position he still holds.

I have made a point of summing up this passage in Varoufakis’s book because it is revelatory of the ease with which he moved about in the environment of the Greek political class. Even if he held no official position at the time, he maintained relations with key leaders, and some of his ideas were not rejected, to say the least, by the conservative leaders. Clearly this is not embarrassing to him, since he discusses it at length in the book.

Footnotes

|1| I gave my own analysis of the crisis of the Greek banks in “Banks are responsible for the crisis in Greece http://www.cadtm.org/Banks-are-resp…. See also Patrick Saurin, “La ‘Crise grecque’ une crise provoquée par les banques”, (in French).

|2| CADTM – “Iceland refuses its accused bankers ‘Out of Court’ settlements,” published 2 March 2016, http://www.cadtm.org/Iceland-refuse…

|3| Y. Varoufakis, Adults in the Room, Bodley Head, London, 2017, chap. 3, p. 65. I will return to this point in the next article.

|4| Y. Varoufakis, Adults in the Room, Bodley Head, London, 2017, Chapter 2, p. 31.

|5| Read the article (in French) at http://www.lemonde.fr/europe/articl… Note that this type of article is very rare in the daily Le Monde. Greece’s conservative press (in particular the daily Kathimerini) stresses the displeasure of the European Commission. The Commission’s spokesperson, Annika Breidthardt, announced on 1 August 2017 that the court’s decision was not in line with judicial precedent and reiterated that “[The Commission has] full confidence in the reliability and accuracy of ELSTAT data during 2010-2015 and beyond.”

|6| I will be publishing a further article on this matter before the end of 2017. I will show that several graphs published by official entities, including the IMF, are false.

|7| Y. Varoufakis, Adults in the Room, Bodley Head, London, 2017, Chap. 2, p. 31. On the following page, Varoufakis writes: “Convinced that our bankruptcy was assured whatever calming noises we emitted, I ploughed on. The fact that I had once written speeches for Prime Minister Papandreou caught the eye of the BBC and other foreign news outlets.”

|8| Renaud Vivien, Eva Joly, “Iceland refuses its accused bankers ‘Out of Court’ settlements”, published 2 March 2016, http://www.cadtm.org/Iceland-refuse…

|9| Mayes, D. (2009). Banking crisis resolution policy – different country experiences. Central Bank of Norway. http://www.norges-bank.no/Upload/77…

|10| Y. Varoufakis, Adults in the Room, Bodley Head, London, 2017, Chap. 2, p. 38-39.

|11| Y. Varoufakis, Adults in the Room, Bodley Head, London, 2017, Chap. 2, p. 68-72.

|12| The bank later changed its name to Emporiki and was bought out by the French bank Crédit Agricole.

Translated by Snake Arbusto in collaboration with Vicki Briault.

Author

auton5-c93f5Eric Toussaint is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy(2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.
Sep 032017
 

By Eric Toussaint, CADTM, 99GetSmart

Yanis Varoufakis (CC - Flickr - Marc Lozano)

Yanis Varoufakis (CC – Flickr – Marc Lozano)

Adults-in-the-room-c71f6In his latest book, Adults in the Room(https://www.theguardian.com/books/2…), Yanis Varoufakis gives us his version of the events that led to the Tsipras government’s shameful capitulation in July 2015. It essentially analyses the period 2009-2015, though it makes incursions into earlier periods.

With this voluminous work (550 pages), Yanis Varoufakis shows that he is a gifted narrator. At times he succeeds in moving the reader. His direct and vivid style makes it easy to follow events.

This initial article will cover the first four chapters of a book that comprises 17 in all. It deals with the proposals Varoufakis made before he became a member of the government in January 2015.

From the author’s demonstration, we can clearly see that his behaviour and the politico-economic orientation he defended contributed to the disaster. Yanis Varoufakis clearly claims to have played a major role in working out the strategy adopted by a handful of Syriza leaders — Alexis Tsipras, Yanis Dragasakis, and Nikkos Pappas, essentially — before their victory in the January 2015 election.

Varoufakis does not plead guilty. He is convinced that had Tsipras actually taken the orientation he proposed and which Tsipras had agreed to late in 2014, the result would not have been defeat for the Greek people.

But, contrary to the conviction Varoufakis expresses, an attentive reading of his book leads to the conclusion that he contributed to that defeat.

Varoufakis explains how he gradually convinced Tsipras, Pappas, and Dragasakis not to follow the orientation adopted by Syriza in 2012, then in 2014. He explains that along with them, he worked out a new orientation that was not discussed within Syriza and was different from the one Syriza ran on during the January 2015 campaign. And that orientation was to lead, at best, to failure, and at worst to capitulation.


The measures defended by Varoufakis

Varoufakis sums up the content of the agreement he made with Alexis Tsipras, Dragasakis and Pappas in November 2014 during a meeting in Tsipras’s apartment. The meeting had been organized by the Tsipras-Pappas-Dragasakis trio to convince Varoufakis to agree to become Finance Minister in the government that would shortly be formed by Syriza. “Alexis then delivered his offer, unassumingly and under Dragasakis’s watchful eye. ‘If we win, and there is no doubt we shall, we want you to become finance minister.’” |1|

Varoufakis sums up six priority measures he proposed to Tsipras, Dragasakis, and Pappas and to which they agreed. What these measures implied was that Greece would remain in the Eurozone.

Varoufakis writes: “I felt the need to recapitulate one more time what we had agreed our aims to be:”

  • Debt restructuring comes first.
  • Second, a primary surplus of no more than 1.5 per cent of national income and no new austerity measures.
  • Third, wide-ranging reductions in sales and business tax rates.
  • Fourth, strategic privatizations under conditions that preserve labour rights and boost investment.
  • Fifth, the creation of a development bank that would use remaining public assets as collateral to generate a domestic investment drive, and whose dividends would be channelled into public pension funds.
  • Sixth, a policy of transferring bank shares and management to the European Union…
  • Again they agreed, this time with greater conviction.  |2|

Varoufakis states clearly that these measures were to substitute for the measures in the Thessaloniki Programme Tsipras had presented in September 2014. Here is what he writes about that Programme:

  • Back in Austin, I heard on the news that Alexis had delivered a major speech in Thessaloniki outlining Syriza’s economic platform. Gobsmacked, I got hold of the text and read it. A wave of nausea and indignation permeated my gut. Straight away I went to work. The article that emerged less than half an hour later was used soon after its publication by Prime Minister Samaras to lambast Syriza in parliament: ‘Even Varoufakis, your economic guru, says that your promises are fake.’ And so they were.
  • The ’Thessaloniki Programme’ … promised wage rises, subsidies, benefits and investment paid for with sources of funding which were either imaginary or illegal. There were also promises we should not have wanted to fulfil. Above all, it was at odds with any reasonable negotiating strategy that kept Greece within the eurozone, despite advocating that it should remain there. It was in fact such a ramshackle programme that I did not even bother to criticize it point by point. Instead I wrote:
  • ‘How I would have loved a different speech from Alexis Tsipras, one beginning with the question ’Why vote for us?’ Before proceeding to answer it with ’Because we are promising you only three things: blood, sweat and tears!’
  • Blood, sweat and tears, which Winston Churchill promised the British people in 1940 as he was assuming the helm of government, in return for their support and help to win the war.  |3|

Taking Winston Churchill as a positive reference in a public criticism of the Thessaloniki Programme took some doing. It was Churchill who organized the bloody repression of the demonstrations and strikes that shook Greece in late 1944 when, under the Yalta agreements, Britain took control of the country by repressing the very forces that had freed the country from the Nazi occupation.

Let us examine the measures as Varoufakis outlines them:


1. Debt restructuring

Varoufakis proposes restructuring the debt without reducing the debt stock. This first, very moderate measure depended on the good will of the Troika. In fact it was mere wishful thinking. Without recourse to a suspension of payment, combined with other unilateral acts including conducting an audit of the debt (with citizen participation), it was impossible to force the creditors to accept a real radical reduction of the debt. Varoufakis’s main proposal regarding restructuring the debt, as he says himself, is in line with his “Modest Proposal for Resolving the Euro Crisis.” Putting that proposal, which consisted in mutualising the public debts of the Eurozone, into practice would have required a joint decision by the governments of the Zone to ease public finances and abandon austerity policies. This is technically possible, and is politically desirable from the point of view of boosting the economy and creating a new neo-Keynesian social contract. But despite the moderate nature of the proposal, it is totally incompatible with the policies of the majority of the governments concerned. One would have to be extremely naive to think that the government leaders in place in most European capitals could be favourable to a Keynesian stimulus. Basing a solution on such a hypothesis shows a total lack of awareness of the power balance and the motivations of European policymakers.

Varoufakis’s entire proposal regarding debt was and is unacceptable from a left-wing point of view because it presupposes evacuating any debate as to the legality and legitimacy of the debts whose repayment is being demanded of Greece

With regard to debt, Varoufakis’s most recent version of the proposal, issued in 2014-2015, does not call for questioning or reducing the debt owed to the IMF and to the private creditors, but rather for making an arrangement with the European partners on the following points:

  • 1. Our government would issue new perpetual bonds, with the same face value as the bonds the ECB owned, bearing a small interest rate but with no expiry or redemption date ;
  • 2. Existing debt obligations to Europe’s bailout fund would be swapped with new Greek government thirty-year bonds, again of the same value as the existing debt (so no formal haircut) but with two provisions: first, annual payments were to be suspended until the country’s income recovered to beyond a certain threshold; second, the rate of interest would be linked to the rate of growth of the Greek economy. |4|

Comment: These two proposals were just as unfeasible politically as was the idea of mutualising debt.

Moreover, Varoufakis’s entire proposal regarding debt was and is unacceptable from a left-wing point of view because it presupposes evacuating any debate as to the legality and legitimacy of the debts whose repayment is being demanded of Greece. Varoufakis’s proposal is in direct opposition to the position adopted by Syriza in 2012, which was to unilaterally suspend repayment and conduct an audit of the debt (I will return to this point later). Further — and this is important — in his proposal Varoufakis does not explicitly include the abandonment of the conditions imposed by the creditors.

Varoufakis himself recognises that his proposal is extremely moderate:

  • [These measures] were moderate and politically palatable to the creditors, as they included no outright haircut. They signalled to the public and to potential investors that the EU was accepting a new role: no longer the harsh creditor of an insolvent state, it would become a partner in Greece’s growth, as its own returns would be proportional to Greek nominal income growth.
  • …Not once did any official of the EU or the IMF articulate a criticism of the logic behind these proposals. How could they?
  • As the CEO of one of America’s largest investment banks remarked after hearing them, ‘You are offering them a deal that a Wall Street bankruptcy lawyer could have come up with.’

Comment: It is evident that this approach was also explicitly in opposition to a legitimate refusal to continue repayment of an odious debt.


2. “A primary surplus of no more than 1.5 per cent of national income and no new austerity measures.”

Comment: Committing to a primary surplus of 1.5% is totally incompatible with a true policy of stimulation of the economy, public and private employment, and purchasing power for the mass of the population. In Greece, a left-wing government which wishes to actually implement a stimulus policy and respond to a humanitarian crisis must apply a policy of deficit spending over a period of several years and refuse to secure a primary surplus.


3. Wide-ranging reductions in sales and business tax rates

Concerning this measure — which Varoufakis sums up as follows: “This would require sharp reductions in VAT and the corporate tax rate in order to re-energize the private sector” — he cites a question from Tsipras:

The belief that reducing corporate taxes will increase corporations’ contribution to revenues has never been demonstrated, and is more liberal incantation than reasoned argument

  • ’Why should business pay less?’ Alexis protested.
  • I explained that I thought the private sector should pay more in total tax revenue, but the only way to achieve an overall increase in their contribution at a time of next to no sales and with bankrupt banks unable to provide credit even to profitable firms was to reduce the corporate tax rate. Dragasakis stepped in to say he agreed, apparently allaying Alexis and Pappas’s initial consternation.

Comment: Promising an undifferentiated reduction in corporate taxes is simply incompatible with a politics of the Left. Tax rates must be increased for large corporations, and the increase enforced. But there is no reason why the tax rates on small companies can’t be lowered at the same time. In any case, the belief that reducing corporate taxes will increase corporations’ contribution to revenues has never been demonstrated, and is more liberal incantation than reasoned argument.
4. Strategic privatizations under conditions that preserve labour rights and boost investment

Varoufakis says:

  • When it came to privatizations, I continued, we would have to make compromises if we wanted an agreement with the EU and the IMF. Syriza’s blanket rejection of privatization would have to be replaced with a policy of considering them case by case. Fire sales of public holdings had to end, but there would be some assets, such as ports and railways, that we should make available conditional on a minimum level of investment, on the buyer’s commitment to granting workers proper contracts and the right to union representation, and on the state retaining a large, even if minority, shareholding, the dividends from which would be used to assist pension funds.

Varoufakis was favourable to the continuation of certain privatisations. This attitude condemned the government to submission to the major corporations, and in particular to foreign capital

Comment: Whereas Syriza was fighting to put an end to privatisations and to renationalise a group of companies that had been privatised, Varoufakis — as indeed would be his practice once he became Minister — was favourable to the continuation of certain privatisations. This attitude condemned the government to submission to the major corporations, and in particular to foreign capital. The effect was to reduce the public authorities to impotence.


5. Creation of a development bank

“Fifth, the creation of a development bank that would use remaining public assets as collateral to generate a domestic investment drive, and whose dividends would be channelled into public pension funds.” Varoufakis proposes the creation of a rump development bank as a consolation prize in exchange for the privatisations and the transfer of the Greek banks into the hands of the foreign creditors (see Proposal 6).

Varoufakis writes:

  • Meanwhile, those assets that were to remain under public ownership should be handed over to a new public development bank, which would use them as collateral in the raising of funds to be invested in these same public assets so as to boost their value, create jobs and enhance future revenues. They agreed on this too.

Comment: Varoufakis presents the creation of a public development bank in order to wash down the bitter pill of Proposals 4 and 6, which are in total contradiction with a left-wing strategy. Measure 4 consists in continuing the privatisations and Measure 6 in relinquishing the power the Greek public authorities still had over the Greek banks. Measure 5 served as a lure to make it appear as though the public authorities were going to set up a true public development instrument.


6. “Transferring bank shares and management to the European Union.” (sic!)

Varoufakis describes the idea as being “that these bankrupt banks be placed under the management and ownership of the EU. …this was an extraordinarily challenging proposal for a left-wing party that tended if anything towards nationalizing the banking sector.”

Comment: The Greek state was the principal shareholder of all the Greek banks and Syriza’s position was that the public authorities should actually exercise their power over the banks. In proposing to Tsipras, Pappas, and Dragasakis that the shares owned by the Greek public authorities should be transferred to the EU, Varoufakis was making an additional — and potentially tragic — step towards the complete abandonment of sovereignty.

In proposing to Tsipras, Pappas, and Dragasakis that the shares owned by the Greek public authorities should be transferred to the EU, Varoufakis was making an additional — and potentially tragic — step towards the complete abandonment of sovereignty

After summing up these six proposals that he claims were accepted by Tsipras-Pappas-Dragasakis, Varoufakis comes to the strategy a Syriza government should bring to bear in negotiating with the EU. He explains that if the EU decided to directly sabotage the government, the ECB would do the dirty work. It would cut off the cash flow to the Greek banks and require them to shut their doors, as was done in March 2013 in Cyprus, according to Varoufakis.

Varoufakis says that Tsipras-Pappas-Dragasakis agreed to respond in the following manner:

  • Their agreement had to extend also to my proposed negotiating strategy, complete with its key deterrent, the threat to haircut our SMP bonds, and the parallel payments system with which to buy time in the event of an impasse that would bring on bank closures.

I will return to this issue of negotiating strategy in a forthcoming article in which I will discuss the period that followed the elections in January 2015.

Varoufakis tells us that following the meeting with the Tsipras-Pappas-Dragasakis trio, he accepted the position of Finance Minister. Dragasakis, for his part, would occupy the post of Deputy Prime Minister and would directly supervise three key ministries, including Finance.

Part Two will be devoted mainly to the history of relations between Varoufakis and the Tsipras-Pappas-Dragasakis trio between 2011 and 2014.

Translated by Snake Arbusto in collaboration with Vicki Briault

Greek version @ http://contra-xreos.gr/arthra/1225-2017-08-16-18-09-00.html

Footnotes

|1| Yanis Varoufakis, Adults in the Room, Bodley Head, London, 2017, p. 98.

|2| Ibid., p. 102.

|3| Ibid., p. 88-89.

|4| This citation and all the following ones are from Chapter 4.

Author

auton5-c93f5Eric Toussaint is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy(2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.
Jun 272017
 

By Michael Nevradakis, 99GetSmart

Originally published at MintPressNews:

A homeless person changes clothes outside a bank in central Athens. Nearly one-in-four Greeks are unemployed and receive no benefits. Poverty rates have surged here since the start of the crisis in late 2009, with nearly 36 percent of the country living in financial distress. (AP/Thanassis Stavrakis)

A homeless person changes clothes outside a bank in central Athens. Nearly one-in-four Greeks are unemployed and receive no benefits. Poverty rates have surged here since the start of the crisis in late 2009, with nearly 36 percent of the country living in financial distress. (AP/Thanassis Stavrakis)

ATHENS (Analysis)– It has become an increasingly common sight on Greek streets, even in formerly prosperous neighborhoods. Elderly—and sometimes not so elderly—individuals rummaging through rubbish bins in search of scraps of food to eat. Beggars are now practically a universal sighting in Athens and other large cities.

More and more young Greeks are migrating abroad by the day, contributing to a “brain drain” that has totaled approximately 500,000 individuals since the onset of the crisis. In my neighborhood in central Athens, several parked cars are filled to the brim with a life’s worth of possessions, packed in boxes by individuals who have likely lost their homes and livelihoods and who now call their automobiles home. Everywhere, abandoned cars and motorcycles rust away on curbsides and sidewalks.

In another universe, the Greek coalition government comprised of the “leftist” SYRIZA and the “patriotic” Independent Greeks political parties is celebrating. Greece has, at the recently-concluded Eurogroup summit, once again been “saved.” In this latest agreement, an 8.6 billion euro tranche of “bailout” funds—a loan (not a “handout”) which had already been promised to Greece in previous agreements—was released and a long-delayed review of Greece’s “progress” under the austerity mechanisms was finally completed. Quite a cause for celebration!

Or is it? Out of the 8.6 billion, 7.7 billion euros will initially be disbursed, out of which 6.9 billion will be immediately paid back to Greece’s lenders: the European Central Bank, the International Monetary Fund and bondholders. In exchange for the release of these funds, which will be funneled right back to those who are releasing them, Greece’s government has agreed to achieve a primary budget surplus of 3.5 percent of its GDP annually through 2023, and thereafter to maintain primary budget surpluses of 2 percent annually from 2023 until 2060.

Until 2023, the Greek government has agreed to pay 27 billion euros (15 percent of Greece’s GDP) in debt service alone, and that figure increases to a 36 billion euro annual sum until 2060.

For the uninitiated: what does a primary budget surplus actually mean? It means that the state spends less than it receives in revenue. While this may sound like a fiscally prudent policy direction for Greece or any country to take, what this actually means in plain language is that in an economy that is shrinking, as with Greece, the amount of money being spent by the state each year on investment, social services, salaries, pensions and other vital services will perpetually decrease, furthering the austerity death spiral.

To provide some perspective, the IMF itself considers a primary budget surplus of 1.5 percent “realistic,” while the Central Bank of Greece, 92 percent of whose shareholders are not known, considers 2 percent a “realistic” target. In a study by economists Barry Eichengreen and Ugo Panizza that examined economic performance across 235 countries, it was found that there were only 36 cases in which countries were able to maintain a primary budget surplus of 3 percent of GDP for a five-year period, and only 17 cases where countries maintained a primary budget surplus of 3 percent of GDP across an eight-year period. Germany, often touted for its fiscal prudence, was not one of these countries.

For the SYRIZA-led regime in Greece, this is a cause for celebration. Prime Minister Alexis Tsipras publicly announced that “we got what we wanted” through this deal, which points the way towards Greece’s exit from the “supervision” of its lenders.

The newspaper Avgi, an official party organ of SYRIZA, announced for the upteenth time Greece’s impending “exit” from the economic crisis. And the Greek government is publicly touting the upcoming return of Greece to the international financial markets, ironically celebrating the prospect of Greece once again being able to attain more debt via borrowing, likely at usurious terms.

Unfortunately for Tsipras and his government, German Finance Minister Wolfgang Schäuble acted as a party pooper, putting a damper on the celebrations. Speaking publicly after the Eurogroup deal was reached, Schäuble stated that the agreement, which followed what were claimed by the Greek government to be fierce negotiations, was reached three weeks prior but was delayed because the Greek government requested additional time for PR reasons—in other words, to claim that hard negotiations took place.

Pensions, salaries see cuts as austerity steamrolls ahead

Indeed, if the rhetoric of the SYRIZA-led government is a guide to go by, then the successes have kept on coming. In February, the SYRIZA government reached yet another deal with its lenders to once again release “bailout” loan funds that already had been pledged to Greece from previous austerity agreements.

In this agreement, the government claimed that “not one euro” of new austerity would be enacted, as any austerity measures and cuts (including interventions to the tax system, which were previously claimed by the government to be “red lines” in its “negotiations” with lenders) would be offset by countermeasures in other areas, euphemistically referred to as “neutral fiscal balance” and “zero-sum fiscal interventions.”

In a “read my lips, no new taxes” moment for the Greek government, these declarations of “zero-sum fiscal interventions” and the “end of austerity” had only just barely been uttered when a host of new austerity measures were unveiled. Initially announced at 3.6 billion euros, these austerity measures now total 14.2 billion euros’ worth of cuts.

These include further reductions of 18 percent to already battered pensions, as well as salary cuts, tax increases, a cut in health expenditures, a further reduction of 50 percent to heating oil subsidies (in a country where the majority of households already cannot afford heating oil and have reverted to fireplaces and makeshift furnaces to keep warm), a reduced tax-free threshold and an increase in tax contributions, and the freeing up of home foreclosures and auctions.

Protesting hospital staff sit in front of a wall that they built at the entrance of the Greek Finance Ministry with a banner depicting Greek Prime Minister Alexis Thipras , Deputy Health Minister Pavlos Polakis and Greek Finance Minister Euclid Tsakalotos wearing ties reading in Greek ''Ministry of broken promises" and " We drown in debt and bailouts" in central Athens. (AP/Petros Giannakouris)

Protesting hospital staff sit in front of a wall that they built at the entrance of the Greek Finance Ministry with a banner depicting Greek Prime Minister Alexis Thipras , Deputy Health Minister Pavlos Polakis and Greek Finance Minister Euclid Tsakalotos wearing ties reading in Greek ”Ministry of broken promises” and ” We drown in debt and bailouts” in central Athens. (AP/Petros Giannakouris)

In exchange, “countermeasures” that will be enacted in 2019 will only take place if Greece meets “fiscal targets” up until then, include minor tax cuts (such as a 70-euro reduction to the “unified property tax” which SYRIZA, prior to ascending to power, denounced as “unconstitutional”) and offering school lunches.

The Greek government, along with its bosses in Brussels and Berlin, continue to insist that tax increases will help, despite all economic evidence to the contrary. While revenues from the value-added tax (VAT) were at 16.3 billion euros when the VAT rate was at 19 percent, those revenues declined to 14.4 billion euros when the VAT was increased to 21 percent, and dropped further to 13.7 billion euros when the VAT was increased again to 23 percent. Today, the VAT for most goods and services is at 24 percent amidst an economic depression that has shown no real signs of abating.

While the SYRIZA-led government is congratulating itself for putting an end to austerity, the aforementioned unified property tax, which according to SYRIZA’s pre-election rhetoric was unconstitutional and to be abolished, will remain in effect at least until 2031. One year ago, in June 2016, a 7,500-page omnibus bill ratified by the Greek government without any debate transferred ownership of all of Greece’s public assets (ranging from water utilities to prime beachfront parcels of land) to a fund controlled by the European Stability Mechanism for the next 99 years.

The same bill also reduced the parliament to playing a rubber-stamp role, as it annulled the ability of the Greek parliament to formulate a national budget or to pass tax legislation, with automatic cuts to be activated if fiscal targets agreed upon with the country’s lenders are not met. Foreign experts working on the implementation of the austerity measures and privatizations in Greece were also, as of 2016, granted immunity from prosecution. If all of this seems exaggerated or far-fetched, consider a recent remark by the European Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici, who stated that “[The EU] often decide[s] Greece’s fate, in place of the Greeks.”

Move toward cashlessness benefiting “too big to fail” institutions

As all of this is taking place, Greek businesses—particularly small businesses—are being burdened further, required as of July 27 to install “point of sale” (POS) card readers and to accept payments via credit, debit or prepaid cards. Another law, which came into effect on January 1, pushes consumers towards card payments by setting a minimum threshold of spending at least 10 percent of one’s income via card in order to attain a somewhat higher tax-free threshold.

In a country where capital controls restricting withdrawals from bank accounts and ATMs have been in effect since June 2015, cash is being further withdrawn from the marketplace and is being delivered to a banking system that has already been recapitalized three times and is likely on its way towards a fourth taxpayer-funded “bailout,” keeping with the fine tradition of financial institutions that are said to be “too big to fail.” We are told, of course, that this is for society’s own good, in order to combat “tax evasion” and other terrible things.

As all of this has taken place, 14 profitable Greek regional airports of strategic and economic importance have been privatized—ironically by being sold to Fraport, itself owned by the German public sector. The port of Piraeus, one of the largest in Europe, has been completely privatized; sold for a pittance to Chinese-owned Cosco. Greek water and power utilities, having been transferred to the aforementioned fund controlled by the ESM, are among the next assets slated for privatization.

Foreclosures of homes are slated to be expanded to primary residences, leaving many households at risk of ending up on the streets, while come September, foreclosures are slated to take place electronically, in accordance with the Greek government’s agreements with its lenders. It should be noted that foreclosure auctions that take place in Greek civil courts each Wednesday have become one of the few remaining battlegrounds where citizens are actively, and often quite successfully, pushing back against one of the products of the economic crisis, preventing many foreclosures from occurring. Switching to electronic foreclosures would eliminate this “inconvenience.”

People queue in front of a bank for an ATM as a man lies on the ground begging for change, in Athens. (AP/Thanassis Stavrakis)

People queue in front of a bank for an ATM as a man lies on the ground begging for change, in Athens. (AP/Thanassis Stavrakis)

Other “inconveniences” are also being done away with in swift fashion. In August 2016, police in the city of Katerini arrested a father of three for selling doughnuts without a license, fining him 5,000 euros for the offense. In another case, a vendor selling roasted chestnuts in the city of Thessaloniki was surrounded by 15 police officers and arrested for the high offense of operating without a license. In the meantime, Greek television and radio stations—almost the entirety of which are vehemently pro-EU and pro-austerity and which greatly impact public opinion—operate without valid broadcast licenses.

The SYRIZA government, elected in part on pledges to “nip oligarchs in the bud” (including taking care of the issue of unlicensed broadcasters), has instead allowed oligarchs to shift their money to offshore tax havens, while collectively treating ordinary citizens and small business owners as being guilty of tax evasion. Former finance minister with the center-right New Democracy political party Gikas Hardouvelis was recently acquitted in court for failure to submit a declaration of assets.

In a December 2015 interview, Finance Minister Euclid Tsakalotos stated that the SYRIZA-led government “didn’t have time to go after the rich.” Unlicensed chestnut vendors, apparently, are another matter altogether, as are activists against the environmentally destructive and economically dubious gold mining operations in north Greece’s Skouries that are being conducted by Eldorado Gold with a Greek oligarch, Giorgos Bobolas.

In late May, the physically disabled 77-year-old Thodoros Karavasilikos was issued a 12-month suspended jail sentence for, apparently, physically assaulting 10 riot police officers in a protest against the Skouries mining operations. Furthering this war on the elderly, Dimitris Kammenos, a member of parliament with the “patriotic” Independent Greeks party which is co-governing with SYRIZA, stated in a televised interview in April that 100 euros that were being slashed from pensions were “better off being taken by the state” than to be “given by pensioners to their grandchildren to go out and have coffee.”

Civil unrest on the rise amid economic uncertainty

It can be argued that being a Greek citizen is a great disadvantage in Greece at the present time. In the blighted Athens suburb of Menidi, an 11-year-old Greek child was apparently killed by a stray bullet, said to have been fired from a residence of a Roma family. Civil unrest has followed in the area between the Greek and Roma populations, to which the SYRIZA-led government has somehow responded by proposing that Roma children be allowed to enter Greek universities and the police academy without taking entrance exams.

A protester reacts next to a flare outside the the Interior Ministry as thousands of striking municipal workers demonstrate in central Athens, June 22, 2017. Union officials want the left-led government to grant full-time, permanent state jobs to municipal workers employed on short-term contracts that have expired or are about to expire. (AP/Petros Giannakouris)

A protester reacts next to a flare outside the the Interior Ministry as thousands of striking municipal workers demonstrate in central Athens, June 22, 2017. Union officials want the left-led government to grant full-time, permanent state jobs to municipal workers employed on short-term contracts that have expired or are about to expire. (AP/Petros Giannakouris)

While migrants in Greece are receiving 400 euro monthly subsidies (greater than many salaries and pensions in present-day Greece) and free housing, thanks to assistance from the EU and numerous “well-meaning” non-governmental organizations, the same sensitivity has not been displayed to victims of a recent earthquake that severely impacted the island of Lesvos, one of the primary entry points for migrants. Instead, Kyriakos Mitsotakis, the leader of the center-right New Democracy, the main opposition party in Greece which is favored to win the next national elections whenever they take place, promised those whose homes were destroyed by the quake a two-year waiver of the unified property tax, should his party be elected.

Tourism, however, is said to be saving the day. Greece is said to be receiving record numbers of visitors, and the Eleftherios Venizelos International Airport in Athens is receiving a record number of passengers. These statistics are often repeated by the government and by Tourism Minister Elena Kountoura of the Independent Greeks political party, the minority partner in Greece’s coalition government. What is not said is who these tourists are, or what their real impact on the economy is.

Many of these tourists are visiting the country on package travel deals booked with overseas travel agencies, flying to and from Greece on foreign-owned charter airlines and staying in hotels which themselves are often owned by foreigners. Many of these hotels offer “all-inclusive” hospitality packages, often offering the very lowest-quality imported food and drink products in order to slash costs. While foreigners get to enjoy Greek resorts and sunshine at bargain rates, austerity-hit Greeks, battered by the crisis, cannot afford to—nor are they offered the same low rates provided to foreign visitors.

Most tourists on “all-inclusive” deals rarely venture away from their hotels, and businesses in tourist regions, ranging from convenience stores to restaurants, are seeing business suffer while their tax burden continues to increase. In a recent visit to Rhodes, one of Greece’s pre-eminent tourist destinations, I observed that the Old Town of Rhodes, perhaps the top tourist destination on the island, was almost deserted at 10:30 p.m. on a Friday night in a country that “stays up all night.” Tourists remained largely locked away in their all-inclusive resorts.

Greece’s “boom times” for tourism are evident by the country’s lack of a national air carrier, which has been the case ever since the previously state-owned Olympic Airlines was dismantled at the behest of the EU and purportedly for violating the European Commission’s competition rules. The privately-owned near-monopoly that has replaced it, Aegean Airlines, has somehow managed not to run afoul of such rules.

While Greece, one of Europe’s top destinations, does not possess any wide-body aircraft, countries such as Serbia and Rwanda do and are running nonstop flights to the United States. Aegean Airlines may not have long-haul flights, but it has delivered much-vaunted “foreign investment”—often touted as the cure-all for Greece’s economic ills, despite a major privatization push since the 1990s, which did not stop the crisis—as 25 percent of the airline is reportedly being purchased by Hainan Airlines of China.

Tourism Minister Elena Kountoura, apropos of nothing, recently brought us back to 2015 and to the referendum which took place that year, where 62 percent of voters rejected an EU-proposed austerity plan—only for the result to be overturned within days, as the SYRIZA-led government turned around and agreed to an even harsher austerity package, known as the third memorandum agreement, than the one voters had rejected.

The SYRIZA-led government has since agreed to a fourth memorandum agreement, but according to Kountoura, the negotiation that occurred in 2015 that led to the third memorandum—chock-full of austerity measures and the privatization of profitable assets—prevented 16 billion euros’ worth of austerity measures from being enacted.

No end in sight for bleak austerity

Unfortunately, two years after the “triumphant” referendum and rejection of austerity—which was promptly overturned and replaced with even harsher austerity—there seems to be no light at the end of the tunnel for the beleaguered nation. Nor does a political “savior” appear to exist. The aforementioned New Democracy party is part and parcel of the corrupt political duopoly, along with PASOK, which ruled Greece for 40 years after the fall of the military junta in 1974, and is vehemently pro-EU and pro-austerity (as long as they are the ones implementing the austerity and pro-Europe policies, instead of SYRIZA).

In previous elections, political “renegade” Vasilis Leventis and his Centrists’ Union political party were elected to parliament—likely as a protest vote. Leventis is famous for his supposed crusades against corruption and the two-party system, and for wishing cancer upon former Prime Ministers Kostantinos Mitsotakis (father of the current New Democracy leader) and Andreas Papandreou (father of George Papandreou, prime minister when Greece was led into the IMF-EU “bailout” and austerity regime) on live television in 1993.

A motorcyclist looks on as he drives next to a pile of garbage in Piraeus, near Athens, on Monday, June 26, 2017. Municipality workers have been on strike for almost a week , hindering trash collection across the country. (AP/Petros Giannakouris)

A motorcyclist looks on as he drives next to a pile of garbage in Piraeus, near Athens, on Monday, June 26, 2017. Municipality workers have been on strike for almost a week , hindering trash collection across the country. (AP/Petros Giannakouris)

Today, Leventis is calling for the installation of a “government of technocrats” (much like the non-elected government led by banker Loucas Papademos in late 2011 and 2012, which passed the second memorandum agreement with no popular mandate) and who has also stated recently that Greece “does not deserve to have its debt restructured.”

In reality, the entirety of parliament—despite the eight political parties which comprise it and which create the facade of political pluralism—can be described as being pro-austerity, pro-euro, and pro-EU. The same can be said of smaller political parties, currently outside of parliament and vying to gain public support.

These include parties founded by Panagiotis Lafazanis and Zoe Konstantopoulou—who as part of the first SYRIZA government of January-September 2015 voted in favor of numerous pro-memorandum and pro-austerity pieces of legislation and in favor of the pro-Europe corrupt former government minister Prokopis Pavlopoulos as president of the Hellenic Republic, who recently stated that Greece will remain in the EU “indefinitely and irrevocably.”

Two years after saying “no” to austerity, this is the state of affairs in Greece today. Poverty, fear, unemployment and a continued brain drain, as well as corruption, lies, and above all, an undying attachment to the EU and the Eurozone, at least on the part of the almost complete entirety of the country’s political class. That’s life today in a modern-day EU debt colony.

May 102017
 

By CADTM ANYA, 99GetSmart

Resolution of the Continental Assembly of the Committee for the Abolition of Illegitimate Debt - Abya Yala Nuestra América (CADTM AYNA / Latin America and Caribbean) on the situation in Venezuela

Resolution of the Continental Assembly of the Committee for the Abolition of Illegitimate Debt – Abya Yala Nuestra América (CADTM AYNA / Latin America and Caribbean) on the situation in Venezuela

During its 2017 Continental Assembly, held in Bogotá, Colombia from 24 to 27 April the Committee for the Abolition of Illegitimate Debt, in its South American, Latin American and Caribbean expression (CADTM / AYNA), discussed the situation in Venezuela, nationally and in the Latin America–Caribbean and worldwide context. This discussion stressed the themes and the goals which define the areas of activity of the CADTM, including the system of domination by government debt (internal and external), which is just one of the fundamental mechanisms used as an instrument of capitalist domination over the peoples of the world.

In this regard, in order to defend the sovereignty of the Bolivarian Republic of Venezuela and its people and the progress made during the Bolivarian revolution, we hereby express our conviction that to guarantee Venezuela’s sovereignty and to preserve the social, economic and democratic advances made, it is paramount that priority be given to meeting the needs of the people over the repayment of government debt (external and internal) as the path to resolving the current crisis and that the greater part of available resources be allocated to ensuring the country’s recovery and the respect of its independence.

Consequently, we reiterate our proposal to accompany popular initiatives aimed at obtaining the suspension of debt repayments in order to free resources needed elsewhere given the country’s present urgent situation, which threatens its process of emancipation. We are putting at the disposal of Venezuela’s people, of its social and popular movements and its national government, our experience in struggles related to debt and our expertise in conducting public and citizen debt audits in several countries (including Ecuador, Greece, Brazil and municipal audits in Spain), in order to contribute to making such an audit a reality in the Bolivarian Republic of Venezuela. Its purpose will be to detect illegitimate elements of the debt so that the country’s financial resources can be used for the benefit of its people and to guarantee their rights. We view the perspective of this audit as including financial debt but also environmental debt, historical debt and social debt, on the example of the proposal made publicly by Hugo Chávez in 2006 at the World Social Forum in Caracas. We reaffirm the appeal made by CADTM / AYNA (http://www.cadtm.org/CADTM-AYNA-appeals-to-the), which offered its support to the people and government of Venezuela for conducting such an audit at the World Assembly of the CADTM network in Tunis in 2016.

The conducting of this audit, which the CADTM network present in Venezuela (Red Venezolana Contra las Deudas or Venezuelan Network Against Debt) has long called for and which is now supported by the Platform for Public and Citizen Auditing (Plataforma por la Auditoría Pública y Ciudadanahttps://auditoria.org.ve), is closely linked to the exercise of the right to information in public affairs and the obligation to guarantee that right that is incumbent on civil servants of the State in conformity with the Constitution of the Bolivarian Republic of Venezuela, anti-corruption legislation and the laws empowering the population and providing for citizen oversight. Information and social participation are essential to democracy and popular sovereignty.

In consideration of the foregoing, we propose the creation of an International Commission in support of those who promote a public and citizen audit of debt in Venezuela.

Further, in light of the current economic situation faced by the Venezuelan nation, threatened by interference and intervention by the OAS [Organisation of American States] and the USA, we hereby express our categorical refusal of all forms of interference and interventionism that violate the sovereignty of Venezuela as a people and as a nation. We condemn with equal firmness all the threats and manoeuvres attempted against Venezuela in the service of outside interests and capitalist appetites. It is our hope that the conflicts in Venezuela will be resolved by peaceful, democratic and constitutional means, and not through violence.

Finally, we recommend the opening of a public debate in Venezuela on the question of debt and a public and citizen audit and on the sensitive issue of seeking alternatives to the rentier-extractivist model, an example of which is the Orinoco Mining Arc, |1| a project which is closely linked to the debt system and which raises profound concerns over its environmental and social-cultural impacts as well as its reliance on transnational capital.

It is our hope that the institutions will fully facilitate the democratic process so that all concerns, grievances, warning signals, results of enquiries and liberating alternative proposals can be heard.

Translation: Maud Bailly, Snake Arbusto, Mike Krolikowski

 

Footnotes

|1| Translator’s note: The Arco Minero del Orinoco [https://news.mongabay.com/2016/10/t…] is a “new strategic national development zone” created by Venezuelan President Nicolás Maduro by presidential order on 24 February 2016. This project sets aside an area covering nearly 112,000 sq. km. (larger than the total land area of Portugal), or 12 % of the national territory, to the exploitation of gold, diamonds, coltan, iron and other minerals by large national and transnational mining companies. The project has generated strong criticism due to its rentier-extractivist nature, since its goal is to obtain currency revenues in the short term at the expense of the environmental destruction of a significant proportion of the national territory rich in biodiversity and water reserves, and of the rights of the Amerindian peoples who live in the region.

Apr 042017
 

By Eric Toussaint, 99GetSmart

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Mexico is the only former colony which, in the 19th and the first half of the 20th century, won decisive victories over its creditors through its own determination. In 1861 Mexico repudiated a portion of the external and internal debt being demanded of the country and in 1867 overcame a large French expeditionary force. Under the pressure of an authentic popular revolution, starting in 1914 and for more than thirty years, Mexico once again suspended repayment of its debt. During that period, with popular mobilization and social progress reaching high and low points, profound economic and social reforms were put in place, and after the Second World War Mexico’s economy gained in strength. This little-known history deserves to be put into the spotlight because it should serve as inspiration for today. It shows that determined struggle by a country under the domination of the major powers and international finance can make major social advances. It also proves that no victory is definitive and irreversible, a fortiori if those who govern fail to defend it.

This study devoted to Mexico during the period from the early 19th century to the Second World War demonstrates how a peripheral State can successfully repudiate a debt even if its collectors are backed by the imperial powers and their gunboat diplomacy.

This article is the sixth in the series “Debt: The Subordination of Latin America.” The first two articles are: “How the South paid for the Northern crises and for its own subjugation” http://www.cadtm.org/How-the-South-paid-for-the, “How Debt and Free Trade Subordinated Independent Latin America” http://www.cadtm.org/How-Debt-and-Free-Trade. “What other countries can learn from Costa Rica’s debt repudiation”, http://www.cadtm.org/What-other-countries-can-learn; The USA’s repudiation of the debt demanded by Spain from Cuba in 1898, http://www.cadtm.org/The-USA-s-repudiation-of-the-debt; “History: the Policies of the United States toward its Neighbours in the Americas in the 19th and early 20th Centuries,” http://www.cadtm.org/History-the-Policies-of-the-United. To these should be added an article devoted to “Three Waves of Public-Debt Repudiations in the USA during the 19th Century,” http://www.cadtm.org/Three-Waves-of-Public-Debt

The series devoted to the Americas complements five earlier articles on the Mediterranean: “Newly Independent Greece had an Odious Debt round her Neck” http://www.cadtm.org/Newly-Independent-Greece-had-an, “Greece: Continued debt slavery from the late 19th century to the Second World War” http://www.cadtm.org/Greece-Continued-debt-slavery-from, “Debt as an instrument of the colonial conquest of Egypt” http://www.cadtm.org/Debt-as-an-instrument-of-the, “Debt: how France appropriated Tunisia” http://www.cadtm.org/Debt-how-France-appropriated.

The local dominant classes lent to the colonial Spanish State

Spain conquered Mexico with fire and sword beginning in 1519. |1| Madrid called its colony “New Spain.” The war of independence began in 1810 and ended in victory for independence in 1821. At the end of the 18th century, the local dominant classes, including the clergy, were lending to the colonial State and also to the home country at a rate of 5%. Mine owners, big landowners, rich Spanish merchants established in Mexico, and the Mexican clergy lent large sums to Madrid at an interest rate that varied between 5% and 6%. These loans, which financed Spain’s European wars, were raised by selling Spanish bonds to Mexico’s ruling classes to contribute to Spain’s war against England in 1782 and against revolutionary France in 1793-94. When Mexico’s war of independence began in 1810-11, the ruling classes cut off credit to the Spanish government in Mexico City and Madrid. The risks were too high. |2| Only the Spanish merchants residing in Mexico were still lending money to the colonial government in Mexico City in 1813, at a rate of 5%, |3| since they had every interest in seeing the independence movement defeated and because they were convinced that should the Spanish camp be defeated, they would be compensated by Madrid.

The struggle for independence was conducted, with a few exceptions, by well-off sectors of the population who were of European origin and who, following the example of the rest of Latin America, wanted to rid themselves of the colonial yoke. |4| As throughout the continent at that period, the movement was led by “creoles” – sons and daughters of parents of European origin born in the Spanish colonies. The leaders of the independence movement had little regard for the indigenous populations, who accounted for some 80% of Mexico’s six million inhabitants. |5| Following independence in 1821, Agustín de Iturbide, the new head of State, questioned whether or not the debt of the former colonial regime should be repaid. He envisaged three options: primo, repudiate the debt, since it was accumulated in the interests of the colonial power that had exploited the country; secundo, confiscate the Church’s property and sell it to repay the debt; tertio, issue bonds in London in order to pay off old debts. |6| In order to avoid conflict with the local ruling classes, who were the holders of a large portion of colonial debt, the President decided against repudiation. Similarly, to reassure the powerful clergy, he decided not to nationalize Church property.

Iturbide with the Trigarante Army in the capital on 27th of September (1821)

Iturbide with the Trigarante Army in the capital on 27th of September (1821)

So, against the interests of the people, Iturbide opted to borrow in London and devote a significant part of the proceeds from the bond issue to repaying colonial debt. Mexico’s ruling classes, or a large part thereof, had an interest in their country taking on foreign debt. The article “How Debt and Free Trade Subordinated Independent Latin America”, http://www.cadtm.org/How-Debt-and-Free-Trade, gives a brief analysis of Mexico’s bond issues in London in 1824-25. They set off a chain of events that were to unfold over the entire 19th century and strongly affect the country’s history in its relations with foreign powers. The terms of the loans were clearly abusive, as was their management.

In February 1824, Mexico issued bonds in London through the intermediary of the bank Goldsmith and Company. The conditions were harsh in that they gave Goldsmith abusive advantages. Whereas Mexico issued debt worth the equivalent of 16 million Mexican pesos (3.2 million pounds sterling – NB: hereinafter, pounds sterling = £), the country actually received only 5.7 million pesos or approximately, £1.14 million), or a mere 35% of the amount borrowed. Taking into account the interest to be paid whereas it actually received 5.7 million pesos, Mexico committed to repaying 40 million pesos (16 million pesos in capital and another 24 million pesos in interest, since the rate was fixed at 5%) over a period of 30 years. To express it simply, Mexico received 1 and had to pay back 7. Even at the time of the bond issue, Goldsmith made enormous profits.

In 1825, Mexico borrowed the same amount (16 million pesos or £3.2 million) from another financial firm, Barclay and Company, |7| and actually received 6.5 million pesos (£1.3 million). Again, over 30 years, Mexico committed to repaying 44.8 million pesos (16 million pesos in capital plus 28.8 million pesos in interest, since the rate was set at 6%).

Despite what the official narrative claims, the suspension of debt repayment by Mexico and other Latin America countries (and also Greece) beginning in 1827 was not the cause of the London financial-market crisis. It was the consequence. Neither was it caused by the upheavals which have continued to affect Latin America and other countries, such as Greece, until this day.

The crisis broke out suddenly in London in December 1825 as a result of the bursting of the speculative financial bubble that had swelled over the preceding years and mainly affected domestic British activities. In addition, egged on by the speculative fever, London bankers massively granted credits to countries waging independence struggles (the decisive battles fought by Simón Bolívar took place in Latin America in 1824, the Greek separatists were in a fragile position in their conflict with the Ottoman Empire, etc.) When the crisis started in London, the Latin American countries and Greece were repaying their external debts as normal.

In Mexico’s case, the two financial firms Goldsmith and Barclay that had issued Mexican bonds in 1824-25 had made considerable profits at the country’s expense. It should also be pointed out that Goldsmith had skimmed off the interest and the repayment of the capital corresponding to the years 1824-25 from the 1824 issue. But in addition, a quarter of the amount of the 1825 issue, made through Barclay, was used to repay Goldsmith for the year 1826! Goldsmith speculated on the Mexican bonds: whereas the bank had purchased them from Mexico at 50 % of their nominal value, it sold a great number to third parties at 58 % of their value. Later, in early 1825 when the market euphoria was at its height, the firm was selling them at 83% of their face value. |8| However, the firm of Goldsmith went bankrupt in London in February 1826, and Barclay and co. failed in August 1826. |9| Clearly, Mexico was not responsible for the failures; rather it was one of the victims. Due to Barclay’s failure, Mexico lost £304,000 that had been skimmed off by the firm to prepay the interest and the beginning of repayment of capital for the entire year 1826 and part of 1827.

The payment default of Mexico and many other countries that occurred on 1 October 1827 was caused by the sudden shut-off of credit that happened in December 1825. Up to then, through 1824-25, access to credit in London had been largely unimpeded. Mexico however, like the other debtor countries, had been counting on further credits from London in order to repay the preceding ones. The conditions the countries had agreed to on the loans made it impossible for them to continue repayment without new loans. In other words, the credit conditions of 1824-25 were so unfavourable to the newly independent debtor countries that they were unable to repay without further borrowing.

In the early 1830s, Lorenzo de Zavala, Mexico’s Minister of Finance, |10| stated that Mexico should have refrained from seeking credit in London because Mexico’s economic resources were sufficient. |11| Zavala, it should be noted, was president of the Constitutional Congress at the time of the bond issues of 1824-25. Lucas Alaman, who was minister in 1824, also recognized a posteriori, in 1852, that the London issue had been disastrous. |12| José Mariano Michelena, who replaced Borja Migoni, who had negotiated the 1824 and 1825 loans, in London in 1825 condemned the usurious rates. |13| And yet an author such as Jan Bazant, in a work published in 1968 and considered authoritative in academic circles, wrongly states that Mexico’s borrowing on the London market was a good choice and that, all things considered, the credit conditions were not so disastrous after all. |14| Bazant’s main argument consists of pointing out that other countries accepted conditions that were just as unfavourable. It is not a convincing argument. Objective criteria such as the issuance price, the actual interest rate, and the commissions paid must be considered. Mexico agreed to conditions it should have refused to accept. But in any event the 1824 Goldsmith loan was by far the most abusive of all those granted to Latin American countries during the 1820s. |15| That other governments accepted loans on conditions that were against the interests of their countries does not make those entered into by Mexico any more legitimate. Moreover countries like Paraguay and Egypt refused to resort to foreign borrowing during this same period, and managed very well without. It was when Egypt eventually did agree to massive foreign loans, in the 1850s, that its situation became disastrous. |16|

The close link between domestic and foreign debt 

In contrast with the loans they granted to the Spanish colonial State at rates of 5 to 6%, the local ruling classes extracted usurious rates (12% to 30%, and even more |17|) from the new Mexican State, with foreign loans serving in part to repay the domestic debt. The rich Mexicans (big landowners – latifundistas –, powerful merchants, or owners of mines) who lent to the State had every interest in seeing the Mexican authorities continue to seek foreign loans. These loans were then used in large part to repay internal debt; and they had other advantages: they were a source of profit for Mexico’s ruling classes, who themselves purchased the Mexican bonds abroad. They were a source of the foreign hard currency needed by Mexican capitalists for importing foreign products (capital goods, consumer goods, armaments, etc.)

By financing a whole range of the State’s activities through borrowing, the Mexico authorities avoided increasing the taxes paid by those same wealthy citizens.

The use to which the two bond issues of 1824-1825 were put is a good illustration of this: 25% of the total amount went to repay internal debt; 15% was used for arms purchases in London; 8% went to purchase tobacco from major Mexican producers (the tobacco was then re-sold by the State); and 52% was used to pay the State’s current expenditures (payment of back wages, pensions, administrative expenditure). |18| This means that 0% was used for investments in development or for social expenditure.

The example of Mexico is very interesting from the following point of view: Mexican capitalists took on English or French citizenship to avail themselves of the protection of the London or Paris governments. The pretext used by France, Britain and Spain to justify invading Mexico in late 1861 was precisely the necessity of securing repayment of the debts owed by Mexico to French, British or Spanish citizens. Yet in fact some of those citizens were in reality rich Mexicans residing in Mexico but who had adopted a European nationality to obtain the support of the European powers in their conflict against their own State. In the literal sense, they were what is called in Spanish “vende patria” (“those who sell out their country”).

The debt restructurings of 1830 and 1840

As pointed out above, Mexico suspended repayment of its foreign debt (the Goldsmith and Barclay loans in October 1827) and its government attempted to make use of internal debt by agreeing, in 1828, to extremely high interest rates – the local ruling classes were very demanding: on 1 June 1828, the Mexican capitalist Manuel Lizardi granted a loan at an annual rate of 536%; on 23 July 1828, Angel González lent at 232%. |19| We should add that nine years later, in London, Lizardi’s financial firm served as intermediary between the Mexican government and the holders of Goldsmith and Barclay securities, pocketing substantial commissions (see below). |20|

The country entered into negotiations with London creditors who in 1829 had created a Mexican bondholders committee. In 1831, the Mexican authorities made enormous concessions to creditors. Whereas the arrears of interest for the period between October 1827 and April 1831 amounted to £1.1 million, they agreed to that interest being turned into a debt of £1.6 million (this is called capitalization of interest or transformation of unpaid interest into outstanding capital).

How did things stand after the 1831 agreement between Mexico and the creditors? In 1824-25 Mexico received approximately £2.44 million, and repaid £2 million in the form of interest and capital repayment between 1824 and 1827, receiving no further funds until 1831, and found itself with a debt that had increased from £6.4 million to £6.85 million. In the case of the Goldsmith loan of 1824, between February 1824 and July 1827 Mexico paid back £1.57 million whereas it had received only £1.13 million in all. |21| Mexico should have repudiated the loan due to the unconscionable nature of the contract, especially since the Goldsmith firm went bankrupt in 1826. Yet in 1831 Mexico recognized an outstanding debt of £2.76 million on the Goldsmith loan. |22|

In 1831, Mexico resumed foreign-debt repayments for a period of one year. In 1837, whereas it had received no further external loans, Mexico struck a new agreement with the creditors in London. The debt grew yet again – from £6.85 million to £9.3 million. Mexico made interest and capital repayments from 1842 to 1844. New negotiations took place in 1846, during which Manuel Lizardi reaped considerable – and fraudulent – profits from his country for the benefit of the bondholders’ committee. Despite the payments made in 1842-44, Mexico’s debt increased from £9.3 million to a little over £10 million, without the slightest additional credit being granted. This was purely an accounting trick that increased the outstanding debt for the creditors’ benefit while giving Mexico some semblance of relief. The additional commission that went to Manuel Lizardi totalled £876,000. After pocketing that sum, Lizardi dissolved his financial firm in order to escape future litigation.

In 1847, the USA made war on Mexico in order to annexe an enormous portion of its territory. The USA took half of Mexico, annexing what are today the States of Nevada, Utah, Colorado, New Mexico, Arizona and California. Troops occupied the capital, Mexico City, for a time.

Territories lost by Mexico in favor of the United States in 1848

Territories lost by Mexico in favor of the United States in 1848

After the war, Washington paid compensation for the annexed territories (15 million Mexican pesos, or approximately £3 million). A large part of that amount then went to repay the internal debt to the local ruling classes and to resume repayment of foreign debt between 1851 and 1853 (still in repayment of the 1824-25 loans). |23|

The disastrous international conventions signed by Mexico between 1851 and 1853 with Britain, France and Spain

In December 1851, Mexico agreed to sign an international convention with Britain under which it recognized a debt and declared that it was ready to indemnify British subjects and firms who had suffered losses in the past when the Mexican authorities had suspended repayments on internal debt that had been bought up by British firms. This convention was imposed by coercion: if Mexico wanted to issue new bonds in London, it had to sign this international treaty. If it refused, Mexico faced British military intervention on the pretext of obtaining justice for its subjects. Apart from the fact that this convention was weighted in favour of British subjects and companies, granting them excessively high repayments, it contained a measure that was even more harmful and scandalous and which deserves a brief explanation: a firm owned by a Mexican capitalist had obtained, using this convention, the guarantee of a large compensatory payment on the grounds that its owner, Martinez del Rio, had acquired British citizenship in 1843. The Mexican firm that had purchased Mexican internal-debt bonds succeeded in internationalizing that debt through the naturalization of its owner. |24|

The same year, Mexico signed a similar convention with Spain. Two others were to follow during 1852-53 |25| ; and between 1851 and 1853, Mexico entered into three such conventions with France. |26| According to Jan Bazant, half of the debt recognized by Mexico by virtue of these international conventions was in reality held by Mexican capitalists who had acquired British or Spanish nationality.

Britain, France and Spain, in forcing these conventions on Mexico, created an international instrument of coercion. By signing, Mexico relinquished part of its sovereignty and gave the foreign powers an argument for declaring war over unpaid debts. Until then the Mexican courts had refused claims by British, Spanish or French subjects concerning internal debt. And foreign courts did not deal with claims from their own citizens and firms if they involved the internal debt of a sovereign nation like Mexico. In agreeing to sign these conventions, Mexico was agreeing that its internal debt be turned into external debt, and that foreign States represent private citizens. As explained above, Mexico also agreed to allow Mexican subjects (capitalists, as it happens) who had acquired foreign nationality to have their interests defended by foreign powers.

Concretely, the domestic debts were replaced by Mexican government bonds that had international value and were repaid using customs revenues. The new external debt inherited from these conventions amounted to 14.2 million pesos (or a little less than £3 million). It’s important to make it clear that that amount does not correspond to any payment of funds to Mexico from foreign sources. Once again, it was simply a piece of accounting sleight of hand that transformed an internal debt into external debt. External debt, which before the conventions stood at 52.7 million pesos (a little more than £10 million) |27| corresponding to the unconscionable Goldsmith and Barclay loan of 1824-1825, increased by 14.2 million pesos to 66.9 million pesos. |28|

Clearly, in signing these conventions the Mexican authorities –comprised of representatives of the local ruling classes – acted against the interests of their country and of Mexico’s people.

We will see what advantages the foreign powers sought to gain from these conventions in the 1860s. Ten years later, the threat dramatically took concrete form when Mexican capitalists, beginning in 1861-1862, supported the French, British and Spanish invasion and backed France’s imposing of an Austrian prince as Emperor of Mexico. To permanently avoid the trap of international debt recognition conventions and the accompanying abandonment of sovereignty, the Mexican Congress adopted a decree prohibiting them in 1883 (see below).

The Revolution of Ayutla and the struggle between Liberals and Conservatives

In 1855, the dictatorship of the conservative Santa Anna was overthrown by the Revolution of Ayutla and the Liberal Party came to power.

On the right, Juan Álvarez, named by the Plan of Ayutla as one of the 3 leaders of the forces of the liberation

On the right, Juan Álvarez, named by the Plan of Ayutla as one of the 3 leaders of the forces of the liberation

In order to promote the development of a capitalist bourgeoisie in Mexico, the Liberals wanted to expropriate land belonging to the clergy and the indigenous communities. |29| The laws passed to this effect are referred to as the Reform, and were reaffirmed in the Constitution of 1857. In reaction, the Conservative Party, representing the interests of the clergy and large landowners, launched the War of the Reform against the Liberals in power, with the support of Pope Pius IX. The Liberal Benito Juárez, who had become president in 1858, was overthrown by Conservative generals. General Zuloaga, commander of the military garrison in the capital, usurped the presidency. Benito Juárez was forced to leave Mexico City and organized armed resistance against the usurpers from the North, while enjoying support from all over the country. Between 1858 and 1 January 1861, two governments coexisted – the Conservative government, which remained in Mexico City, and the Liberal one, whose seat moved about according to the needs of the war.

The scandal of the Jecker bonds issued by General Zuloaga, the usurper president

In 1858, the Finance Minister of the Conservative president of the period attempted to conduct a major operation to restructure/convert the internal debt for a total of 57 million pesos. The new bonds began to sell at 5% of their nominal value, after which the price fell to 0.5%! Mexico indebted itself to the tune of 57 million pesos and in return received only 443,000 pesos (less than 1% of the nominal value of the issue!) and some older bonds. It was a total fiasco for the treasury, but a gold mine for the bond purchasers. And in particular for the Swiss banker Jean-Baptiste Jecker, |30| established in Mexico City since 1835. A large shareholder in silver mines (the Taxco and Mineral Catorze mines), he had purchased a large number of bonds at between 0.5% and 5% of their value. One year later, Mexico issued more bonds internally using Jecker’s services. Jecker acquired bonds for a total value of 15 million pesos, and in exchange paid Mexico’s public treasury 618,927 pesos (approximately 4% of the value of the bonds) and bonds issued the previous year with a nominal value of 14.4 million pesos but which he had bought for next to nothing. The total cost of the operation for Jecker was 1.5 million pesos (that is, the purchase of a large part of the bonds issued in 1858 and the new 15-million-peso issue of Jecker bonds).

On 3 November 1858 Benito Juárez issued a decree from the city of Veracruz, revealed to the citizens of Mexico City by the clandestine press, which said:

Benito Juárez

                  Benito Juárez

“Benito Juárez,

Constitutional interim President of the United States of Mexico, hereby informs all inhabitants of the Republic that: By virtue of the powers vested in me, I deem it appropriate to decree the following: Any person who, directly or indirectly, shall give aid to the individuals who have refused obedience to the supreme Constitutional government by supplying money, food, ammunition or horses, shall through that act alone forfeit the full value of the amounts or the goods that shall have been delivered to them, and will in addition be liable to pay the Treasury a fine amounting to twice the amount of money, or twice the value of the goods that shall have been supplied.

Issued at the Palace of the General Government at Veracruz, 3 November, 1858.” |31|

Jecker and the local capitalists who were financing the illegal government had been warned.

Repudiation of the internal debt and suspension of payment of the external debt in 1861

Having defeated the Conservatives’ army, Benito Juarez triumphantly entered the capital on New Year’s Day 1861. Juárez and his government repudiated the internal loans contracted by the usurpers between 1858 and the end of 1860.

Nevertheless, he offered to compensate Jecker for the amount he had actually spent, or 1.5 million pesos. Jecker refused and sought the support of France in order to guarantee maximum profit. Emperor Napoleon III was looking for a pretext for launching new colonial conquests: he wanted to take possession of Mexico (whose territory was three times bigger than France) and its silver mines. The French government demanded that Mexico repay the bonds held by Jecker (who, remember, was a Swiss national) and Mexican bonds held by French citizens at face value. The fallacious nature of the argument they used becomes even more obvious when we learn that France granted French citizenship to Jecker in March 1862, whereas the invasion had already begun three months earlier, in early January of 1862 (see below).

France had already attacked Mexico in 1839

France had already used the pretext of damages caused to its citizens in Mexico to obtain trade advantages. In the chaotic post-independence period, French merchants in Mexico suffered losses, and some had even been killed during the disturbances.

In September 1838, the pastry shop of a Frenchman, Remontel, was looted in Tacubaya. Louis-Philippe’s France demanded 600,000 pesos (3 million francs) for damages and in compensation for “forced loans.” When the Mexican authorities refused, France sent in a squadron which took possession of San Juan de Ulúa and destroyed the port of Veracruz. The Mexicans referred to this intervention as the Guerra de los pasteles (Pastry War) to show the disproportion between the pretext and the effects.

Indeed the war did have consequences for Mexico, who had to rebuild the port of Veracruz and lost customs revenue while the port was out of service. It was forced to sign the Treaty of Veracruz, in March 1839, under which it agreed to pay the 600,000 pesos being demanded, but above all granted trade advantages to France, in particular for importation of fabrics and luxury products.

Jecker went bankrupt in May 1860, and among his assets the liquidators found Mexican bonds from 1858 and 1859 for an amount of 68 million pesos, which means that Jecker had only sold a small number of them, despite what he claimed. |32| This brings to mind what the French banker Erlanger did regarding the Tunisian bonds issued in Paris in 1863, (see http://www.cadtm.org/Debt-how-France-appropriated). It should also be pointed out that the Duke of Morny, Napoleon III’s half-brother and President of the National Assembly, later acquired 30% of the Jecker bonds. |33|

As indicated earlier, Benito Juárez, after emerging victorious from the power struggle between Liberals and Conservatives in late 1860, attempted to restore order to the country’s finances. Britain recognized him as President in February 1861 with the hope that his government would resume repayment of the debt stemming from the Goldsmith (1824) and Barclay (1825) loans, honour the convention of 1851, and take on the debts contracted since then by the successors. |34| But in May 1861, Benito Juárez decided to suspend repayment of the debt outstanding from the Goldsmith and Barclay loans for one year. In July 1861, he extended the suspension of payment to two years. No payments were made to Britain, France or Spain, who had backed the usurping Conservative presidents between 1858 and 1860.

The French invasion and occupation of Mexico (1862-1867)

On 31 October 1861, Britain, France and Spain entered into an international convention under which the three colonial powers agreed to use force against Mexico to obtain payment of its debts. |35| The conventions signed by Mexico between 1851 and 1853 were cited as justification for the aggression. The US executive attempted mediation: Washington offered to lend Mexico the money it needed to resume payments to Britain, France and Spain. But the US Senate finally rejected that proposal |36| and preparations for invasion continued. The Spanish landed in December 1861, the British on 4 January 1862, and the French four days later. The French expeditionary corps was by far the largest. In the end, only France pursued the invasion. Britain and Spain were opposed to France’s plan to conquer Mexico, abolish the Republic, and install a monarchy. The British and Spanish officially objected to France’s totally disproportionate demands and declared the convention of October 1861 null and void.

Maximilien 1st, emperor of Mexico.

Maximilien 1st, emperor of Mexico.

The British and Spanish withdrew from Mexico in April 1862. The French troops took a year to reach the Capital and occupy it to install – with the support of part of the local ruling classes – a Catholic monarchy. Prince Maximilian of Austria was proclaimed Emperor. During his reign, which lasted until 1867, he unsuccessfully sought popular support by launching certain social reforms.

Maximilian of Austria was clearly a puppet emperor serving France’s interests. Recognition of the Jecker debts contracted by the Conservative presidents in 1858-1860 was among his first acts. Another consisted in issuing a new international loan in Paris and London for 200 million French francs (40 million pesos, or £8 million). |37|

The new loan was successful only in Paris, where it was managed by two banks, the Crédit Mobilier and Fould-Oppenheim & Cie. The Crédit Mobilier had been founded in 1852 and benefited from the protection of Bonaparte. |38| The Fould-Oppenheim & Cie bank was directly tied to Napoleon III’s Finance Minister Achille Fould, who was the brother of the bank’s owner. The conditions of issuance were similar to those of the Goldsmith loan of 1824. Whereas Mexico indebted itself for 200 million francs, the sale of the bonds brought in only 100 million francs, a large part of which remained in France. Maximilian of Austria issued a second loan in Paris in April 1864 for 110 million francs (22 million pesos). The entirety of that amount remained in France. |39|Maximilian sought a final loan in early 1865 for 250 million francs (50 million pesos). |40| Of the total debt of 560 million francs contracted by Mexico, only 34 million francs actually arrived in Mexico. |41| More than half of the amount borrowed went directly to the French ministry of Finance. As for Jecker, he received 12.6 million francs.

The international military expedition sent by Napoleon III ended in bitter defeat; the French troops withdrew in February 1867. |42| During his brief reign, Maximilian, acting entirely as France’s surrogate, tripled Mexico’s foreign debt. Once Benito Juárez returned to the presidential palace in Mexico City and permanently ended the occupation, he repudiated all debts contracted by Maximilian of Austria and had him executed in June 1867. He also reaffirmed the repudiation of the interior debt contracted between late 1857 and late 1860 by the Conservative presidents Zuloaga and Miramon.

During the struggle against French occupation, in 1865 the government of Benito Juárez had contracted a debt with the United States amounting to 3 million pesos. That debt was honoured. Clearly the regime of Benito Juárez needed Washington’s support against the other colonial powers. It is also clear that Washington again adopted an imperialistic policy toward Mexico once the War of Secession was ended. As we shall see further on, the strategy used took the form of a policy of investments, in particular in railways. Later, Washington again resorted to military intervention after the Mexican Revolution broke out in 1910.

After Benito Juárez returned to power, Britain pressured him to resume repayment of the former foreign debt stemming from the convention of 1851. Mexico answered that this convention was no longer valid, since in the interim Britain had participated in a military expedition against Mexico in 1862 and then recognized the occupying regime of Maximilian of Austria. |43|

As for the outstanding debts corresponding to the Goldsmith (1824) and Barclay (1825) loans, Mexico did not repudiate them but made no payments until 1886.

And regarding the convention of 1852-53 with France, Mexico held that it was no longer valid in light of the invasion. Note that France eventually accepted Mexico’s position, and that diplomatic relations were fully restored between the two countries in 1880 without France demanding that former debts be recognized. This constitutes an important victory for Mexico. France did not want to lose the possibility of investing in Mexico and understood that to persist in making unacceptable demands on Mexico would get it nowhere.

We shall see that the government of Porfirio Díaz later adopted a policy toward France and other powers that was against the country’s interests where external debt was concerned.

The Porfirio Díaz regime (1876-1910) and the return to massive indebtedness

Young Porfirio Diaz

Young Porfirio Diaz

A new period in Mexico’s history began in 1876 when General Porfirio Díaz (a Liberal who had served under Benito Juárez) violently overthrew the Liberal government of Sebastián Lerdo de Tejada, who had succeeded Benito Juárez in 1872. This was the beginning of the Porfiriato, an authoritarian Liberal regime that would “modernize” the country by opening it much more to foreign capital, encouraging the accumulation of capital by a national bourgeoisie through expropriation and the accelerated development of capitalist relations of production, without completely ending pre-capitalist forms of exploitation.

The Porfiriato extended the Liberal reforms begun by Benito Juárez using even more authoritarian methods. |44| From that point of view, there was continuity. |45| On the other hand, whereas Juárez and Mexico had defied creditors’ demands for repayment of internal and external public debt, Porfirio Díaz adopted a policy that favoured the creditors. His government recognized old debts, including some that had been repudiated by Congress and by the Juárez government.

Mexico in 1880

Mexico in 1880

Between 1880 and 1884, Díaz handed power to General Manuel González, a faithful collaborator. During this period major debt restructuring was conducted, leading to a new cycle of massive indebtedness. The Porfiriato lasted until the Revolution of 1910. Between 1888 (the date of the first international bond issue during the Porfiriato) and 1910, Mexico’s external debt was multiplied by a factor of 8.5, increasing from 52.5 million to 441.4 million pesos, and internal public debt doubled.

A most edifying calculation

In 1883, when Mexico’s Congress adopted the law establishing the limits of the debt to be renegotiated with the creditors, it came to approximately 100 million pesos. Between 1888 and 1911, Mexico paid approximately 200 million pesos in interest and capital repayment and its total public debt (external and internal) reached 578 million pesos. |46| In other words, Mexico paid back twice what it owed and ended up six times more indebted. The amount actually received by Mexico was extremely small, because the increase in the debt was essentially the result of juggling accounts during successive restructurings. In addition, the funds actually received were very badly spent, generally in the form of subsidies to capitalist railway owners (see below).

Despite this catastrophic bottom line, several authors considered to be authorities on debt have praised the Porfiriato. William Wynne writes: “The advent of President Díaz to power in 1877 marked the commencement of an era of peace and strong government, and in 1885-86, a definitive and workable settlement of the early loans was embodied in a comprehensive scheme of financial readjustment. With this accomplished, a new chapter began to be written in the country’s foreign debt history, indeed, in the whole social and economic life of the nation. A succession of new loans was contracted and applied in a fair measure to the building of railways and public works, while foreign capital in considerable amounts was employed privately in the exploitation of the rich natural resources.” (p. 3-4) |47|

Jan Bazant, in the conclusion of his book on debt in Mexico, writes: “During the Porfiriato, material progress could not be attained by other methods than those employed – methods which consisted in considerable growth of foreign debt and foreign investments, as in other countries.” (p. 240) |48|

These two citations clearly demonstrate their authors’ bias. They do not hesitate to embellish the Porfiriato and the regime’s policies of indebtedness, which in reality were catastrophic for the country and its population.

Caught again in the machinery of debt 

Mexico ceased repayments of foreign debt in 1861 from Benito Juárez’s arrival in Mexico City and through 1888. |49| Note that the Juárez government, in the late 1860s, had the good sense to buy back a large quantity of the bonds affected by the conventions entered into with Britain in the early 1850s |50| at 10% of their value. For one thing, the cost of repurchase was low, and also, since the operation removed the bonds from circulation, the country saved money on interest payments and avoided future claims.

Porfirio Diaz in 1902

Porfirio Diaz in 1902

After he took power, General Porfirio Díaz sought to restructure the old debts in order to enrich the Mexican capitalists who held a large share of them and to improve relations with the major foreign powers. This he managed to do in 1888.

Since the Mexican Constitution did not allow him to be re-elected indefinitely, he passed on the presidency to General Manuel González between 1880 and 1884. González furthered negotiations with the creditors. In 1883, he succeeded in persuading the Mexican Congress to allow the government to negotiate new loans while acknowledging part of the old foreign debt – in particular that part related to the outstanding amounts of the Goldsmith (1824) and Barclay (1825) loans. The decree adopted by the Congress on 14 June 1883 |51| clearly repudiated the following debts: all debts contracted by the illegitimate (usurper) governments, those contracted by General Zuloaga and his successor, Miramon, between 17 December 1857 and 24 December 1860, and those contracted or renegotiated by Maximilian of Austria. |52|

One very important provision of the decree was that regardless of the origin of the credit and the nationality of the creditors, the debt must remain within Mexican jurisdiction, without the possibility of being granted any international dimension nor any revenue of the State being furnished to repay it. In including this provision, Congress wanted to deny the foreign powers the possibility of attacking Mexico under the pretext of forcing compliance with an international convention on external debt. Declaring that the debt must remain Mexican meant that in case of litigation with creditors, foreign or domestic, the only competent jurisdiction was Mexico’s. Declaring that no particular revenue of the State could be seized in repayment of debt protected Mexico’s right to make repayments only if it considered that it had the resources to do so. The limitations set by the law clearly show that for the majority of Congress members and Mexican public opinion, it was inconceivable to resume repayment of certain debts that were deemed “illegitimate” or “impure,” in the terms used in public debate by the main protagonists of the period.

The Decree of 14 June 1883, then, has twofold significance: on the one hand, it authorized the government of Manuel González to renegotiate old foreign debt; on the other, the legislature established constraints, limiting the concessions the government could make in meeting creditors’ demands.

On 1 June 1884, the government of Manuel González violated the Decree of 14 June 1883 by entering into an agreement with the international creditors in order to repay debts stemming from the conventions signed with Britain in the early 1850s. |53| The agreement with the creditors was finally submitted to Congress for ratification in November 1884. This caused major disturbances among parliamentarians and in the streets. |54| The members of Congress who opposed the agreement demanded a prior audit of the debts in order to determine their validity and legitimacy and decide what should be repudiated. The government attempted to force the agreement through Congress, causing major protests. Students led the demonstrations, and the repression resulted in one death. The debate in Congress was suspended, but that did not stop the González government, and then that of Porfirio Díaz, from entering into an agreement with the London Convention creditors, compensating them at a highly favourable rate and within a very short time. |55| As we have seen, at least half of the so-called “London” debt was held by Mexican capitalists. It is highly probable that 30 to 50% of the London bonds were held by Manuel González himself and by his brother-in-law, Ramon Fernandez, Mexico’s ambassador to France. |56|

The difficulties González encountered in Congress at the end of his term of office and the street demonstrations, all echoed by the press of the period, clearly show that debt was a central element in the national debate and that the orientation adopted by the government was rejected by a large part of the population.

Following these major incidents, Porfirio Díaz began his second term on 1 December 1884 and further reinforced the budgetary policy aimed at repaying the debt and seeking new loans.

In 1888, the restructuring of debt inherited from the Goldsmith and Barclay loans

Finally, Mexico issued new foreign debt in 1888, two thirds of the proceeds of which went to repay the balance of the Goldsmith and Barclay debt, by then more than 60 years old.

Let us bear in mind that in 1824 and 1825, Mexico had received £2.7 million (approximately 13.5 million pesos) from the Goldsmith and Barclay loans. Subsequently, it repaid £5.1 million (more than twice the amount actually received), including £4 million in payment of interest and £1.1 million in repayment of capital.

In 1888, Mexico used £5.4 million (27 million pesos) to repay the balance of the Goldsmith and Barclay debt. This was an out-and-out swindle. It went against the interests of the nation and served the narrow interests of the Mexican capitalists who held part of the old bonds. |57| Of course, foreign bondholders also benefited. And it was all at the expense of the Mexican Exchequer.

The 1888 bond issue, according to many major authors such as Jan Bazant, put an end to the 1824-25 debts, whereas in reality that old debt was replaced by a new debt of 34 million pesos |58| which Mexico was forced to repay until 1910, and whose balance was included in the debt renegotiations that took place between 1922 and 1942.

We can in no way agree with Bazant’s assessment, to wit: “With the 1888 loan the chapter of the 1824 and 1825 loans is closed. […] We can conclude that despite the many complications these loans had brought about for the country, in the final analysis they were a beneficial operation.” |59|

The 1824-1825 loans, restructured for the last time in 1888 (bearing in mind that they had already been restructured four times between 1830 and 1850 |60|) were a terrible yoke borne by the Mexican people.

Consequences of the Porfiriato debt policies

During the Porfiriato, the government imposed budgetary measures in order to produce sufficient financial leeway to cover debt repayments. Austerity measures included lowering public sector wages, increasing taxes and refusing any social spending.

Seven bond issues were made. The first one, in 1888, was essentially, as we have seen, to cover the reimbursement of previous bond issues. Those of 1899 and 1910 were again for similar repayments. That of 1893 was for general government costs. The 1889, 1890 and 1904 borrowing went straight to funding Mexican and foreign investors building railways.

By observing the nationalities, the localities and the names of the foreign banks providing the Porfiriato loans, we can trace the rise of big capital and the newly developing international financial centres. While the 1824-1825 issues were made in London by English bankers, or in Paris by French bankers the 1888, 1893, 1899 agreements were made in Berlin with German bankers (Bleichroeder, Deutsche Bank, Dresdner Bank). As of 1899 American banks make their presence felt, notably JP Morgan (now the biggest bank in the US) and in 1910 the French came back in force, under the banner of the Banque de Paris et des Pays-Bas (today the biggest bank in France: BNP Paribas). |61|

What is also striking is that the return of Mexico to the European Financial markets in 1888 as a borrower coincides with a general rise in European bank lending to Latin American countries. Since 1873, and into the 1880s, European financial markets had been through a crisis that cut the flows of credit and were only just finding a renewed interest in lending to peripheral countries. They were particularly drawn to feverish Latin American railway investments, whether in Argentina, Brazil, Uruguay or Mexico.

Mexican indebtedness furnished regular, juicy incomes to Mexican and foreign capitalists holding Mexican debt which, as we shall see, was used to lavish gifts on big private railway companies. These companies, after having furnished their owners with quick profits, were at their own request, nationalized at great cost to the State. To cover these costs the State resorted to more borrowing.

Contrary to affirmations that the State’s foreign borrowing was beneficial, enabling the economy to open up and assuring the construction of infrastructures, there are convincing arguments that it would have been possible to financially stimulate real development useful to the population without resorting to borrowings rife with extortion, fraud and embezzlement. Old illegitimate debts should have been cancelled. (In this case the first two loans would have been unnecessary and so would the second two – taken on to service the first two). The private railway companies that built the infrastructure should not have been subsidized. Rather, it should have been built as a public service project with other priorities than the exportation of commodities and the importation of finished products from Europe or the US. Taxes could have been levied on the incomes and fortunes of the richest and on the profits of the mining companies in order to avoid, as far as possible, recourse to borrowing. What should have been done is organize agrarian reform, stimulate domestic industrial production, promote the domestic market and develop the educational system.

The Porfiriato agricultural policy

Under the Porfiriato, grabbing the land of the Campesinos, villages and indigenous peoples was institutionalized by surveying companies charged with establishing the boundaries of unclaimed lands. The government sold the lands to the bourgeoisie and paid the surveying companies for their work with stretches of the land that they had themselves delineated. But these lands were rarely unused; they were usually common property. The bourgeoisie, with the help of the vast repressive means of the State and private militias, waged a fierce war against the poorly armed peasantry, who possessing only their land and access to water, fought desperately. Peasant rebellions were put down and the haciendas of the big landowners spread over ever greater territories in spoliation of the villages. The process permitted, at the same time, to dispossess the population of its common property and to create a class of peasantry possessing only their labour which they were soon forced to sell to Capitalists to gain their livelihoods. |62|

Adolfo Gilly said of these violent spoliations: “This accelerated process of accumulation dependent on precapitalist economic structures coincided with a worldwide phase of capitalist expansion, which distinguished it from the classic primitive accumulation process. From this aspect the phenomenon showed certain resemblances with the extermination of the Indians in the US, and other resemblances with imperialist countries’ colonial wars; it was in fact a colonial war waged by a bourgeois government against its own people.” |63|

In a society that was still largely agricultural, Mexican capitalism developed primarily around the haciendas, vast agricultural properties formed around a walled-in central structure containing the owner’s villa, employees’ quarters and other buildings necessary for the functioning of the domain (administration block, church, granaries etc.). While the hacienda was brought to Mexico by the Spanish colonists, it considerably spread under the Porfiriato. According to Adolfo Gilly, because of its capacity to use and occupy neighbouring lands, the hacienda “is remarkably adaptable to produce or labour market changes, able to contract into a certain self-sufficiency or expand to exterior markets depending on the economic conjuncture.” |64| It employs workers of different kinds such as peones, indentured peasants bound to the hacienda by debts, and day labourers taken on as needed. As well as this combination of different social relations of production, the political power in the hacienda is held by the ruling class, which completes the strong central power of the Porfiriato at a local level.

As a good demonstration of the catastrophic nature of the Porfiriato agricultural policy, from the point of view of the general population: corn is the Mexican staple diet and local growers know very well how to produce it, but in 1891-92, Mexico had to import vast quantities of corn from the US to avoid famine. |65| The problem was that the big land owners preferred to use the land intensively for other uses such as cattle, sugar, coffee, tobacco and sisal.

A 19th century Mexican historian, Francisco Bulnes, denounced the government’s 28 favourites to whom they sold 50 million hectares (235 million acres) of land that were then sold on to foreign companies. Bulnes claims that half of the State of Lower California was sold to an American capitalist of German origin for next to nothing. Three million hectares (7.4 million acres) of excellent land in the state of Chihuahua were made over to a certain Hearst. The Rockefellers and the Aldriches are said to have obtained enormous amounts of land in the State of Cohuila. |66|

In 1910 land ownership was highly concentrated. Mexico had a population of a little over 15 million inhabitants in a territory of 197 million hectares (486 million acres). 834 land owners between them possessed nearly 168 million hectares (415 million acres) of that. |67|

The railways

General Ulysses S. Grant, former President of the United States and holder of a concession to build a railroad line from Mexico City to Oaxaca, declared in 1880:

“The Mexicans have a country of vast resources, and these [rail-] roads will develop them to the mutual benefit of both republics. We are now buying […] sugar, coffee, tobacco and numerous other articles from countries […] where they are largely produced by slave labor. We are constantly paying into their treasuries a large amount annually for duties, and we give them back nothing but sterling exchange. […] Mexico is not only our neighbor, but she is a Republic. If fostered, she can produce nearly all of those articles, and will take in exchange what our manufacturers produce. They will take from us cotton goods, locomotives, cars, railroad iron, rolling-stock, all the machinery necessary to the running of a railroad, agricultural implements, wagons, carriages, musical instruments, jewellery, clocks, watches, and a thousand and one other things too numerous to mention.” |68|

Map of Mexico’s railways in 1903

Map of Mexico’s railways in 1903

Before the liberal Porfirio Díaz replaced his predecessor, the equally liberal Sebastián Lerdo de Tejada had been less willing to allow Washington to spread its railway infrastructure deep into Mexico. Referring to the semi-arid regions that separated Mexico from the US he declared, “Between the strong and the weak, let’s leave the desert”. |69| But Porfirio Díaz threw the doors wide open to the interests of Mexico’s northern neighbour.

The first railway line was inaugurated in 1873 and serious extensions went on from 1880, when the infrastructure counted 1,086 km, to the end of the Porfiriato in 1910. The infrastructure grew to 9,558 km in 1890, 14,000 km in 1900 and 19,025 km in 1910. |70| Construction and exploitation was trusted to US and British companies who enjoyed many advantages: abundant State subsidies, free transfer of land, requisitioned and badly paid work force, exonerations from taxes and duties, even the organization of their own private police forces.

A quarter of the federal State revenue was allocated to subsidising private railway companies. |71| By 1890 half of the domestic debt was allocated to subventions for capitalist owners of the railways (37 million pesos out of a debt of 74 million pesos). |72| Public subsidies covered between half and two-thirds of real construction costs. Grants were paid by the kilometre.

Karl Marx writing about railways in 1879

According to Karl Marx, “There is no doubt that in the colonies and in semi-colonial States the introduction of railways has accelerated the social and political disintegration, as in the more advanced States, the final development and thus the final change in capitalist production was faster. In each State, except in England, the governments enriched and supported the railway companies at the cost of the Exchequer. In the United States they were freely granted the ownership of vast tracts of public land, not only the land necessary for railway construction, but also several kilometres along either side (…). They became the biggest of the landowners, just at the time when immigrant farmers were seeking to create their farms along the railways to ensure the convenient transport of their produce […] Railways initiated a dynamic for the development of foreign trade, but trade in the countries that produced mainly raw materials for export came at the cost of increasing hardship for the labouring masses. .[…] The new indebtedness taken on by governments for the railways has increased their tax burden.” (Letter from Karl Marx to Danielson, 1879, cited by A. Gilly, p. 281, CADTM translation.)

The railways’ first goal was to favour external trade routes, so that the lines could be connected to the US network. All the regions they crossed were integrated into the budding capitalist economy, pushing up land prices and intensifying the spoliation of the peoples, as previously mentioned, while destroying their pre-capitalist life styles. Politically, railways also permitted the central authorities to affirm their power as they could quickly intervene in a rebellious region. |73|

At the beginning of the 1900s the two main rail networks were owned by private US companies. |74| In 1904 Mexico purchased one of them from the Speyer bank for $9 million. Previously, the Mexican government had borrowed to subsidize this network and now borrowed a further $40 million, of which, only $16 million ever appeared in the Mexican Exchequer. This $40 million loan was to be repaid at 5% interest over a period of fifty years, the final repayment scheduled for 1954. |75| In 1909 Mexico financed the purchase of the other network from its US owners by borrowing from US banks associated with the railway’s owners.

Purchasing rail networks brought 13,744 km under the management of the Mexican State or two-thirds of the total Mexican infrastructure. In fact the Mexican and US owners wanted to sell off their interests because the systems were no longer as profitable as when the State was massively subsidising them. |76| The State purchased them at high prices and to do so borrowed from the banks that owned much of the network.

Gilly also wrote “Considered together, the development of a domestic market, the integration of the economy into the New World economy and the development of capitalist production under the Porfiriato are one and the same phenomenon, the remarkable dynamism of which is borne out by several observations. Along with the railways the whole communications system progressed: the telegraph, which ran along the rails; roads, ports, postal services. Cities inaugurated drinking water and electric street lighting networks.” |77|

Foreign investment

Foreign capital investment is essential to industrialize the country:

“Around 1884, foreign investment in the country amounted to 110 million pesos. In 1911, it reached 3,400 million pesos […]. These investments were in the following sectors: railways 33.2% ; mining 24%; oil 3.1%; public debt 14.6%; commercial 4.9%; banking 3.6%; electricity and public services 7% ; agriculture, stock-breeding and forestry 5.7% ; industry and transformation 3.9%. 62% of total foreign investment came from Europe (90% of which was British or French) and 38 % from North America. However, Mexico represented only 5.5% of European foreign investment whereas it took 45.5% of US foreign investments.” |78|

Towards the end of the Porfiriato, when drilling started for the oil that had been discovered in 1901, the investments came from Britain and the US.

The end of the Porfiriato and the beginning of the 1910 Revolution

“For a generation Porfirio Díaz ruled Mexico with an iron hand. During that period he transformed a turbulent and bandit-ridden land into a peaceful and law-abiding country in which life and property were secure.” |79| For William Wynne, jurist and author of this opinion, the rights to be defended are those of capitalists seeking to grab the country’s and people’s resources. A dictatorship such as that of Porfirio Díaz helps this along and by doing so gains this kind of approval. In Wynne’s opinion it is fundamental that the country get into debt and the creditors be repaid without the legitimacy or legality of the loans being contested. Wynne saw the Porfiriato measures as positive.

In fact, there was such a widespread process of dispossession, spoliation and exploitation that revolution was brewing and ready to burst. It started by a rejection of Porfirio Díaz’s authoritarianism but from the beginning it included social and identity issues. The communities of despoiled indigenous peasants wanted justice. They wanted the return of lands that had been stolen from them, so as to regain their livelihoods. The workers wanted better labour laws and political rights. Other social sectors, victims of capitalist development under the Porfiriato, made demands and eventually joined the revolution that set its mark on the Mexico of the 1910s.

Emiliano Zapata

Emiliano Zapata

Revolution broke out in response to calls to resistance when in 1910 the by now very unpopular General Porfirio Díaz, at the age of 80 and in power since 1876, was again re-elected. The calls were notably made by Francisco I. Madero, son of a wealthy capitalist family, |80| who had founded the National Anti-re-election Party in 1909.

After a difficult start, the uprising, which had met its first successes in the north of the country, spread to other regions, notably to Morelos (south of the capital) where the indigenous leader Emiliano Zapata and his companions fought for the restitution of common lands plundered by big landowners. The successes of the revolution forced Porfirio Díaz to resign in May 1911 and go into exile in Europe. |81|

Once elected president in October 1911, Madero tried to channel the ongoing revolution. He refused the agrarian reforms demanded by Emiliano Zapata |82| and his partisans but he also annoyed US conservatives. He was assassinated in February 1913 after a coup d’état set-up by the US Embassy and led by General Victoriano Huerta, who Madero had put at the head of the Strategic Military Command. William H. Taft was president of the USA |83| and had direct interests in several US conglomerates active in Mexico. |84|

Victoriano Huerta

Victoriano Huerta

In 1911-12 Mexico borrowed $20 million from the Speyer bank in New York who, as we have seen, had previously granted loans to the Porfirio Díaz regime in 1904 and 1909. The 1912 loan was partly used to pay the interest on the first loan and was to be repaid in record time in 1913. After Madero’s assassination, the usurper, Huerta, managed to raise the equivalent of 58 million pesos in Paris in June 1913. The US banks were clearly becoming aware of the extent of the revolution and the dangers it represented for them; whereas European banks jumped at the chance to lend to the dictator during the euphoric period that preceded the First World War. French banks (mainly the Banque de Paris et des Pays Bas and Société Générale) subscribed 45 % of the total amount, German banks (including Deutsche Bank) 19% and an English bank also subscribed for 19%. The New York banks JP Morgan and Kuhn Loeb only subscribed 12%. Speyer did not take part in the loan but supported it as the funds would be used to pay the loans it had granted in 1911-12. By January 1914 Huerta was in a financial stranglehold and suspended debt repayments. |85| Mexico did not resume payments until 30 years later after having won an enormous victory against its creditors (see further on). Mexico did not resort to foreign banks again until the second half of the 1950s (US banks became Mexico’s principal lenders).

The Mexican revolution 1910-20

The Mexican revolution had deep-seated implications. The principal protagonists were the indigenous peasantry (who made up the majority of the population), while the workers’ role, although important, was only secondary. |86| Nevertheless, the repression of the miners in 1906 in Cananea, in the east of the State of Sonora, and of the workers of Río Banco, at Veracruz, had exacerbated popular discontent and contributed to creating the conditions that led to the revolution.

Pancho Villa and his escort, 1911

Pancho Villa and his escort, 1911

The movement led by Zapata was the most advanced among the population. It was very widespread in the State of Morelos and became the “Commune of Morelos”. Zapata and his movement promoted, as of November 1911, the Ayala Plan which went much further than President Madero’s, known as the Saint Luis de Potosi Plan.

While Madero went no further than to revise decisions through which the Porfiriato plundered vast stretches of land at the expense of indigenous communities and Campesinos, the Ayala Plan called for arms to put an end to private ownership of the vast stretches of land. Zapata and his Plan called for the redistribution of the land to the smallholders who worked it, and for the land seized by aggressively applied laws going back to 1856, to be returned to the communities who had been dispossessed. The war-cry was “Reform, Liberty, Justice and Law”.

Madero organized the repression of the Zapatista movement that he wanted to destroy as well as against socialist and anarchist movements in the north. The elimination of Madero by Huerta was welcomed by the ex-Porfirists, the Catholic Church and the armed forces. The repression against the popular movements intensified.

Venustiano Carranza

Venustiano Carranza

Venustiano Carranza, a liberal leader and admirer of Benito Juárez, called for the overthrow of General Huerta and so made a momentary alliance with the Southern Liberation Army and with Pancho Villa, |87| who had created the Northern Division near the US border. Carranza repudiated the debt Huerta had signed in 1913. Meanwhile, the democrat Woodrow Wilson succeeded William Taft as US President. Taft’s policy concerning Huerta was not the same; he considered him a usurper and preferred to await the outcome before granting US recognition. To sway the balance, Wilson sent 44 US navy ships to block the port of Veracruz on the pretence of preventing German arms supplies from reaching Huerta.

Although the social ideas and objectives of Pancho Villa |88| were less progressive than those of the Zapatistas, the two groups came to an agreement in order to influence the process. Their armies met in Mexico City at the end of November 1914. The two leaders came together at the presidential palace on 6 December 1914, in opposition to Carranza.

Finally, after much difficulty and several battles against Huerta’s and Pancho Villa’s troops, who represented opposite sides, Carranza gained the advantage and Huerta was forced into exile in July 1914, after which, Washington recognized Carranza as de facto President. From then on the US intervened directly to end the threats from Zapata and Villa, whose intentions were a threat to the interests of its big businesses (plantations, mining, oil, etc.).

To help Carranza destroy Zapata’s social basis and organize his assassination Washington sent him 53,000 rifles in 1915. Carranza launched an offensive against Zapatista resistants: mass executions and deportations took place, villages were destroyed, a 100km long trench was dug around the capital city to protect it against Zapatist attacks and chemical weapons supplied by Washington were also used. |89| Yet despite the magnitude of the atrocities committed the objective completely failed. The Zapatista army was again operational within a year.

Furthermore, on 15 March 1915, the US sent an expeditionary force of 12,000 troops (5,000 according to some authors), under General Pershing, to the State of Chihuahua to eliminate Pancho Villa. Among the other officers were two future generals, Patton, who made their names at the battle of the Ardennes in the winter of 1944, and Eisenhower, who was to become 34th President of the United States of America after the Second World War. The operation was a fiasco; Pancho Villa’s resistance won through.

The failure to quell Pancho Villa’s forces and the Zapatista movement was clearly due to the enormous popular support the two movements enjoyed. Fierce repression could not end it for as long as the revolutionary momentum lasted, which it did until 1918-1919.

In order to consolidate his power, Carranza passed social measures applicable to rural as well as to urban sectors. He was well aware that to take the sting out of the Zapatista movement it was necessary to meet some of the popular demands.

When the capital was retaken without hostilities after the Zapatista and Villista troops’ voluntary withdrawal (neither had ever had the intention of taking power or of occupying the capital), Carranza applied his new measures to the rural and urban sectors and made agreements with the trade unions which included the distribution of humanitarian aid. He supported the electricians’ union against their bosses and arrested tradesmen and 180 priests. The leaders of the “Worldwide Workers” Anarchist unions signed an agreement with Carranza and the influential General Obregon to join the war against Pancho Villa in exchange for concessions. |90| On 6 January 1915, Carranza passed a law of agrarian reform of limited application with the intention of alienating Zapata’s and Villa’s rural base.

A year after the pact with the Anarchists Carranza ended the concessions. He no longer had any use for them; Villa’s Northern Division had been destroyed. Repression started against the workers and the unions. Repression quashed a great general strike that began in Mexico City on 31 July 1916. |91| At the same time, during July and August 1916, there was a massive offensive against the Zapatistas in the State of Morelos.

In spite of all these tragic and unpopular acts, in January 1917 Carranza managed to consolidate his power and give it a cloak of legitimacy by adopting what was, for its day, one of the world’s most socially advanced constitutions. This constitution included some elements of the Ayala Plan. It stated that the Nation should keep control of its natural resources, and that the Peasantry should have access to the land. It announced an agrarian reform and social rights (an eight hour day, union rights, the right to strike, a minimum wage, limitations on the work of women and children).

Letter from Emiliano Zapata to the Russian Revolution dated 14 February 1918.

It would be wrong to imagine that Emiliano Zapata limited his visions to Mexico and the Campesinos. The following extracts of his letter to the Russian revolutionaries clearly show the importance he gave to solidarity between the two great revolutions of the time and the necessity of cooperation between workers and peasants:

“We would win much, Humanity and Justice would win much, if all the peoples of the Americas and the older European Nations understood that the cause of the Mexican Revolution and the cause of Russia incarnate and represent the cause of Humanity, the supreme interest of all the oppressed peoples […]

Here as there, there are inhuman masters, who, greedy and cruel from father to son, brutally exploit the great masses of the peasantry. Here as there, enslaved men, men of broken spirit, are starting to awaken, to cry out, to act, to revolt.

It is not surprising that the proletariat of the World applauds and admires the Russian Revolution, in the same way that they will join, sympathize and support our Mexican Revolution as soon as they realize what its goals are […].

This is why the diffusion and propaganda effort that you have undertaken in the name of truth is so interesting; this is why you should go to all the associations and workers’ centres in the World to have them realize the importance of taking on the double task of raising the awareness of the worker’s struggle and forming the peasantry’s class consciousness. It must not be forgotten that because of their interdependence, the emancipation of the workers cannot succeed unless it goes hand in hand with the liberation of the peasantry. Otherwise, the bourgeoisie will always be able to get the upper hand by setting one against the other, for example, using the ignorance of the peasants to combat and restrict the workers’ rightful anger, or enrol unaware workers to fight their country brothers.”

We can see here why the Mexican ruling classes and the US government wanted to be rid of Emiliano Zapata. |92|

In April 1919, Carranza managed, through trickery, to have Zapata assassinated.

In 1920, Carranza was ousted by the General Alvero Obregon, a key collaborator. Some months later, on 1 September 1920, Obregon was officially elected President with more than one million votes. He had the support of union leaders, particularly those of the Confederacion Regional Obrera Mexicana(CROM, the Regional Confederation of Mexican Workers), a trade union founded in 1918. In 1920, Obregon persuaded Villa to lay down his arms and demobilize his remaining loyal soldiers. In return, he would receive a pension and his grade of regimental General in the federal army would be recognized. Villa too was assassinated, in 1923.

The revolutionary dynamic petered out during 1918-1919. The most ardent and visionary men and women, such as Emiliano Zapata and his partisans, were either eliminated or absorbed by the capitalist system. The country had a very progressive constitution but it was only partially applied and the local ruling classes quickly started to work towards abolishing the important concessions they had been forced into during the revolution.

Successive governments gradually buried the great social conquests achieved between 1911-1917 but they resurfaced in force as of 1934 (see further on). The governments also sought compromise with the creditors from 1921.

Debt renegotiations from 1921

Between 1922 and 1942 (20 years!), extended negotiations were held with a consortium of creditors chaired by one of the executive officers at JPMorgan.

In February 1919, a cartel of banks to which Mexico owed money was set up and called the International Committee of Bankers on Mexico. It was chaired T. W. Lamont, who represented JPMorgan and brought together banks from the US, the UK, France, the Netherlands, Belgium, Switzerland and Germany.

In 1921, President A. Obregón invited T. W. Lamont to Mexico to start negotiations that resulted in an agreement in June 1922. |93| It was a bad agreement for the country that clearly showed the government’s political orientation. It was close to the Porfiriato policy in terms of indebtedness, i.e. its subjection to the interests of local ruling classes and of international banks that were creditors for both external and internal debts.

Through this agreement President Obregón and his government acknowledged a public debt of US$ 500 million. In 1910 it had amounted to 220 million which, with additional loans after that date, i.e. those contracted by the usurper Huerta between 1911 and 1913, came to a total of US$ 30 million (The 20 million lent by Speyer Bank had been paid back with a loan contracted in Paris in 1913). President Obregón thus agreed to acknowledge a debt that was twice the amount actually due. |94| On top of that, he agreed to add 200 million as default interest. |95| It was a thorough betrayal of the country’s and the Mexican people’s interests, especially since the debt contracted by dictator Porfirio Díaz (US$ 220 million) as well as loans by the usurper Huerta (US$ 30 million) clearly constituted odious debt. They had been contracted against the interests of the people with the full knowledge of the creditor banks. |96|

The Mexican Congress, controlled by the president, sanctioned the agreement and Mexico started paying back in 1923, but the amounts to be paid were so high and the fiscal deficit so deep that on 30 June 1924, Obregón suspended debt repayments. Mexico resumed negotiations with Lamont from JPMorgan and these resulted in another agreement in 1925, which was again sanctioned by Congress. To resume repayments, the new Mexican president, Plutarco Ellias Calles (in office from December 1924 to November 1928), negotiated a credit line with the Committee of Bankers. Some payments took place in 1926, but in 1927 Mexico again suspended repayments.

In 1928 the Committee of Bankers sent a commission of experts to analyze the situation. In their report the experts criticized the government for its social spending, particularly in public education. They considered that Mexico had invested too much in irrigation works and in setting up a system of public credit for farmers. They acknowledged that in order to avoid another revolution, public expenditure was necessary but estimated that government spending had been excessive. |97|

Negotiations between the government and the Committee of Bankers were resumed. Another agreement was signed in 1930 but for the first time since 1922 many MPs were opposed to ratification. Four MPs from the State of Chihuahua even introduced a bill demanding a ten-year moratorium on debt repayment so as to use the money for socially useful expenditure. |98| The government rather than run the risk of a minority in Congress, did not put the agreement with the Committee of Bankers to the vote.

Meanwhile export revenues declined as a consequence of the October 1929 Wall Street crisis and the project of resuming debt repayments was perceived with increasing anger by the population. In January 1932, Congress voted a law that cancelled the latest agreement between the government and the Committee of Bankers. Eventually on 1st September 1933, President Abelardo Rodriguez announced that Mexico would not resume repayment of its external debt.

Lázaro Cárdenas’ presidency (1934-1940) prepares the 1942 victory against creditors

In December 1934, Lázaro Cárdenas started a presidential mandate that was extended until December 1940. Over those six years Cárdenas carried out major left-wing reforms, some of which made it possible to implement for the first time some of the revolutionary aspirations of the years 1910-1917 and the 1917 Constitution.

Lázaro Cárdenas became president in a context of social struggle such as workers’ strikes. His orientation was quite different from that which had prevailed since 1920. He opposed his predecessor Plutarco Ellias Calles. He refused to resume negotiations with the Committee of Bankers.

Lázaro Cárdenas

Lázaro Cárdenas

One of the first measures Cárdenas took concerned the reform of public education. Article 3 of the Constitution as modified in December 1934 stipulated that state education was to be “socialist in character”, and that as well as excluding any religious doctrine it was to fight fanaticism and prejudice. Schools had to foster among the young a “rational and accurate” perception of the universe and of social life. The explanation given of the rationale behind the bill introduced to the Chamber of Representatives was that a socialist education as set down in Article 3 did not mean an immediate transformation of the economic system but the preparation of the human material needed to carry the revolution forward and consolidate its work. Indeed the country’s future belonged to the socialist youth, educated and trained in Mexican schools. It was incumbent upon those young people, the text said, to fulfil the aspirations of Mexico’s oppressed and labouring classes. Though the implementation of these principles was limited due to the system’s inertia, they had a deep and lasting impact on Mexican society.

Land Reform

According to one of the provisions in Article 27 of the 1917 Constitution, which provided for land to be expropriated by ejidos, |99| Lázaro Cárdenas expropriated some 45 million acres that had previously belonged to big Mexican landowners and foreign companies. He distributed this land to indigenous agrarian communities in the form of traditional collective properties known as ejidos. So the land was no longer the property of private individuals. Apart from meeting the fundamental demands formulated by Emiliano Zapata and in the Ayala plan, the aim was to give back to local communities what they had been robbed of and to promote a self-sufficient kind of farming that would meet the needs of the local markets. The farming communities that received land could use it as they pleased but were not allowed to sell it. Those ejido communities developed decision-making procedures to run the land. Cárdenas’ government created a public bank, Banco Nacional de Crédito Ejidal or Banjidal (the National Bank for éjido Credit) and also financed the training of technicians to improve the yield of the land. Cárdenas’ land reform differed from the policies of former governments which had only restored a limited quantity of land to private individual owners.

Nationalization of oil and railways

The 1936 railway workers’ strike resulted in the complete nationalization of the railways.

In 1938, the nationalization of oil was brought about by a strike of the workers in the oil industry. Oil extraction, which had started at the end of the Porfiriato, was in the hands of UK and US companies. Paragraph 4 of Article 27 in the 1917 Constitution stated that oil-field reserves were the property of the nation. In 1937, oil workers began a determined confrontation with the owners of the oil companies who would not grant the pay-rise demanded by the workers. On 18 March 1938, Lázaro Cárdenas stepped in to put an end to the confrontation by expropriating the oil companies. He added that within ten years foreign owners would be compensated. This infuriated foreign capitalists and the UK severed its diplomatic relations with Mexico so as to put maximal pressure on its government. |100| Cárdenas did not budge. He created the public company Petróleos Mexicanos (Pemex). Cárdenas’ decision was met with huge enthusiasm in the population. Pemex (let us recall) was privatized sixty-five years later, in 2013, in the context of hardening neoliberal policies.

International policy

Cárdenas’ government was also one of the few to provide the Spanish Republicans with weapons, thus breaching the blockade by the British and French governments. Churchill vehemently decried Mexico’s position. Cárdenas’ government also welcomed and supported 40,000 Spanish Republicans after they were defeated by Franco, who had been massively armed by Nazi Germany and Fascist Italy. Cárdenas also hosted Trotsky, the Russian revolutionary persecuted by Stalin to whom no European government was willing to grant either a visa or a right to extended residence. |101| Cárdenas befriended the Russian exile, which did not prevent one of Stalin’s agents from murdering Trotsky in Mexico City in August 1940.

Cárdenas was also very popular because as soon as he became president, he cut his salary by half, left the traditional presidential palace (Chapultepec Castle, the former residency of New Spain’s viceroys) to move to a less ostentatious place called Los Pinos and converted the former castle into a national museum of Mexican history. At the end of his mandate, his fellow citizens could see that he had not accumulated any riches for himself.

To sum up, we can say that although Lázaro Cárdenas did not try to break away from capitalism, he carried out structural reforms that improved the people’s living conditions. They partly met fundamental demands formulated during the 1910-1917 Revolution and strengthened the country’s sovereignty over its natural resources. Cárdenas also conducted an anti-imperialist international policy that supported solidarity among peoples.

The 1942 victory against creditors

Cárdenas’ refusal to resume debt payment or even negotiations with the international Committee of Bankers brought victory. His former Defense Minister, Manuel Ávila Camacho, was elected to take over as President and Cárdenas became Defense Minister.

From 1941, as he wanted to improve the US relationship with Mexico, President Franklin Delano Roosevelt insisted that US bankers, starting with JPMorgan, give up and acknowledge the Mexican government’s repudiation. In December 1941 Washington was about to enter the Second World War and needed the support of its Mexican neighbour (as well as that of Brazil, another country that had stopped paying its debt). The agreement that put an end to the conflict between the international Committee of Bankers and Mexico was an act of surrender on the part of the banks. While the Committee demanded payment of debts estimated at US$ 510 million (capital and interest), the final agreement mentioned payment of less than US$ 50 million: a cut of over 90%.

Moreover, what is most remarkable is the rate used for compensation of default interest: 1/1,000 for delays before 1923, 1/100 for 1923-1943. |102| Now in many debt restructuring agreements in the 19thcentury or in the first half of the 20th century, all default interest was turned into owed capital. Let us recall that the agreement signed between Obregón and the international Committee of Bankers in 1922 meant that Mexico acknowledged a debt of US$ 500 million! And 20 years had gone by. By agreeing to pay a debt of US$ 50 million (capital and default interest included), the Mexican government won a resounding victory.

There is more: security holders had to hand in their securities and have them registered and stamped by the Mexican authorities before they could claim any compensation! Bankers had to register securities with the Mexican government: this was unprecedented. Note also that German banks that were part of the international Committee of Bankers were not allowed to register their securities because they were perceived as helping an enemy power.

Better still, from 1940 onward Washington tried to buy Mexican oil even though Mexico had paid no oil compensation. The Sinclair oil company started buying oil from the public company Pemex. Sinclair, that had demanded US$ 32 million of compensation, finally settled for US$ 8 million compensation partly paid with dollars Pemex had received from Sinclair in payment for 20 million barrels of oil over four years. Eventually a general agreement was reached and Mexico promised to pay US$ 23 million as compensation for all the US oil companies that had been expropriated in 1938. |103|

Thanks to the agreement on its debt, to other political measures taken under Cárdenas and to the general context after the Second World War, Mexico was able to unfold a policy of economic development while carrying out a strict form of protectionism until the 1950s. Mexico did not borrow from private banks again until the late 1950s.

Final remarks and conclusions 

Mexico is the only former colony that managed to defeat its creditors on its own in the 19th and first half of the 20th centuries. In 1861, Mexico repudiated a large portion of the debt that was claimed and gained complete victory in 1867. Next, less than twenty years later, ruling classes and the dictator Porfirio Díaz managed to backpedal, which is typical of the collusion and duplicity of the upper classes in a dominated country who see their own interest in submission to European or US imperialist powers.

When Porfirio Díaz was eventually overruled and a genuine popular revolution took over, Mexico again suspended debt payments for over thirty years (from 1914 to the end of the Second World War) and simultaneously implemented in-depth social and economic reforms. The victory over Mexico’s creditors was complete albeit not final.

The present paper shows how important it is to understand what occurred in Mexico between its independence in 1821 and the end of the Second World War. The other country that succeeded in repudiating its debt on its own was the USSR in 1918. The common point with Mexico is the coincidence of a revolutionary process and debt repudiation. There are also differences: 1. the Bolshevik government simply wiped the Tsarist debt away; |104| 2. at the time of the 1917 revolution Russia was an imperialist power, though a declining one, while Mexico was a former Spanish colony that was eyed greedily by the US and ascending European imperialisms. The other countries that successfully repudiated debts were major powers such as the US |105| – or were protected by one of them – as was the case of Costa Rica, protected by the US against the UK in the early 1920s. |106| This is why the Mexican experience is unique and deserves to be more widely known. |107| Yet very little has been published about it. Dominant thinking hardly wishes Mexico’s real history to be acknowledged. Among left-wing movements we have a lot of catching up to do and it is to be hoped that this article will play its part.

Acknowledgements: The author is grateful to Victor Isidro, Nathan Legrand, Carlos Marichal, Alejandro Manriquez, Silvia Elena Meza, Damien Millet and Claude Quémar for their comments and/or their help in locating sources.

The author is fully responsible for any mistakes that may occur in this paper.

Translation: Snake Arbusto, Vicki Briault Manus, Mike Krolikowski, Christine Pagnoulle.


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Footnotes

|1| Prior to the Spanish conquest, the population of present-day Mexico was between 18 and 25 million. Less than a century later, in around 1600, it had fallen to approximately 3.5 million (source: Jean Batou, see fn 5). According to a lower estimate by Angus Maddison, Mexico’s population was 7.5 million in 1500 and diminished by two thirds after the Spanish conquest, to some 2.5 million in 1600. Source: Angus Maddison, L’économie mondiale : statistiques historiques, (The Global Economy: Historical Statistics) OCDE, Paris, 2003, p. 120. Thomas Calvo, a specialist in Hispanic America, gives the following figures for the population of the Aztec empire and its dependencies prior to the Spanish conquest: 17.5 million inhabitants, of which the Northern territories: 2.5 million; central Mexico: 15 million; Chiapas: 0.8 million. Source: Thomas Calvo, L’Amérique ibérique de 1570 à 1910 (Iberian America from 1570 to 1910), Nathan Université, 1994, p. 14.

|2| See Jan Bazant, Historia de la deuda exterior de Mexico 1823-1946, (History of Mexican Foreign Debt 1823-1946), El Colegio de México, Centro de Estudios Históricos, Mexico City, 1995, p. 18-19.

|3| See Bazant, p. 21, and Alaman, p. 323.

|4| There had been uprisings of indigenous peoples several times during the preceding centuries, and some, such as the Yaquis of Sonora in Mexico, continued their struggle after independence, because they derived no benefit from it.

|5| Evolution of Mexico’s population between 1600 and 2015 (in millions of inhabitants): 1600: 3.5; 1700: 4.0; 1800: 5.7; 1850: 7.7; 1895: 12.7; 1910: 15.1; 1940: 19.6; 1950: 25.8; 1990: 86.0; 2000: 97.4; 2015: 121.7. Source: Jean Batou through 1990 (p. 171) and official statistics from 1895 (date of the first official census).

|6| See Bazant, p. 27-28.

|7| The full name was “Barclay, Herring, Richardson and Company” – not to be confused with Barclays, the high street bank.

|8| See Morning Chronicle, London, 8th February 1825, cited by William Wynne, “State Insolvency and Foreign Bondholders.
Selected Case Histories of Governmental Foreign Bond Defaults and Debt Readjustments.” Vol. 2., 1951, p. 5.

|9| J. Bazant, p. 48.

|10| Lorenzo de Zavala, who had participated in the struggle for independence, was a big landowner in Texas. He turned against his country in 1836 when he took part in the funding of an independent republic of Texas. In retaliation, Mexico stripped him of his nationality. The United States annexed Texas in 1845.

|11| J. Bazant, p. 39.

|12| L. Alaman, p. 983.

|13| J. Bazant, p. 39.

|14| J. Bazant, p. 233

|15| This can be seen from the table compiled by Bazant himself, p. 46.

|16| See “Debt as an instrument of the colonial conquest of Egypt” http://www.cadtm.org/Debt-as-an-instrument-of-the

|17| J. Bazant, p. 45.

|18ibid., p. 234.

|19ibid., p. 54.

|20| J. Bazant, p. 67-70

|21ibid., p. 53

|22ibid., p. 58

|23| In 1853, under new pressure and the expansionist ambitions of the US, Santa Anna sold the territory of Mesilla (a transaction known as the “Gadsden purchase”) for $10 million .This amount was devoted to fighting the liberal rebels (the Ayutla Plan) who wanted to overthrow Santa Anna, who had managed to remain in power until 1855.

|24| William Wynne, State Insolvency and Foreign Bondholders. Selected Case Histories of Governmental Foreign Bond Defaults and Debt Readjustments. New Haven: Yale University Press, Vol. 2., 1951, p.16. See also J. Bazant, p. 96.

|25ibid., p. 16-17.

|26ibid., p. 18.

|27| J. Bazant, p. 96.

|28| In 1856, the internal debt of 41 million pesos was more than half the total amount of the external debt, which was 68.6 million pesos. Total public debt, internal and external, was 109.6 million pesos. J. Bazant, p. 97.

|29| According to recent research by Mexican historians, the indigenous communities resisted fairly well against the application of the laws adopted as from 1856 aimed at putting their ancestral lands up for sale. While feigning to accept the laws, they managed to protect themselves. It was only later, during the long presidency of Porfirio Díaz, that expropriation of land became widespread.

|30| See his biography at https://fr.wikipedia.org/wiki/Jean-… (in French only). This biography may only be approximate.

|31| Cited by Émile de Kératry, La créance Jecker : les indemnités françaises et les emprunts mexicains, (Jecker Bonds : French Compensation and Mexican Loans), Librairie internationale, 1867, p. 17, accessible at: http://gallica.bnf.fr/ark:/12148/bp… (in French).

|32| E. de Kératry, p. 30 and W. Wynne p. 20.

|33| J. Bazant, p. 100. See also E. de Kératry, op. cit.

|34| W. Wynne, p. 21.

|35| W. Wynne, p. 25.

|36| It should be remembered that the War of Secession began in April 1861 and ended in April 1865.

|37| 1 peso = 5 French francs; 1 pound sterling = 5 pesos; 1 pound sterling = 25 French francs.

|38| The Crédit Mobilier suffered the same fate as the French expedition into Mexico, failing in 1867.

|39| J. Bazant, p. 103.

|40| This final fraudulent loan provoked such protest that Napoleon III compensated the holders of the bonds for a total of 87 million French francs. It is certain that some of the beneficiaries of this compensation had taken part in the fraud. And it is equally clear that the amount of 87 million francs increased France’s public debt for the benefit of the rich individuals who had acquired the bonds. See J. Bazant, p. 103; W. Wynne, p. 30.

|41| Calculations by J. Bazant, p. 105, based in particular on É. de Kératry.

|42| Of the 38,493 troops France sent to Mexico, 6,654 – one sixth of them – died of wounds or of disease. In 1863, the Khedive of Egypt supported France by sending a battalion of 450 soldiers to the Mexican Empire, including many Sudanese, whose resistance to tropical diseases was supposedly higher. From 1864-1865, Austria-Hungary sent 7,000 men (Poles, Hungarians, etc.) in support of the foreign aggression. Belgian soldiers also took part. Source: https://en.wikipedia.org/wiki/Frenc…. The King of Belgium, Léopold II (who reigned from 1865 to 1909), having colonial ambitions, sought to obtain advantages from the conquest of Mexico. He began carrying out his colonial projects in 1885 with the conquest of the Congo. Charlotte, Léopold II’s sister, was the wife of Maximilian of Austria. She actively supported Bonaparte’s projects and those of her father, Léopold I.

|43| W. Wynne, p. 29.

|44| Porfirio Díaz’s slogan, “Order and Progress,” is evidence of his belief in the Positivist ideology that was well established in Latin America during this period.

|45| It should be made clear that Benito Juárez did not actively seek to better the living conditions of the peonesand other peasants. Benito Juárez did away neither with the semi-slavery the peones lived under because of their inherited debts nor with the private prisons and the bodily mutilations at the haciendas. This failure to defend the peasants and indigenous communities and the attacks on their communal lands resulted in uprisings, notably that of the Chamulas in Chiapas in 1869; the resistance movement led by Julio Chávez López (based on socialist/anarchist principles) in the late 1860s in Chalco and Texcoco; and the continued struggle of the Yaqui people in the State of Sonora.

|46| Calculated by the author based on Jan Bazant (in particular p. 147, 160, 175, 176, and 272).

|47| W. Wynne, p. 3-4.

|48| J. Bazant, p. 240.

|49| With one single exception – repayment of the three-millions peso loan contracted in 1865 with the United States by the government of Benito Juárez for purchasing armaments used to overcome the French occupation. Repayment of this loan ended in 1893.

|50| J. Bazant, p. 109.

|51| See the text of the decree: http://cdigital.dgb.uanl.mx/la/1080… , p. 326 to 328.

|52| Jeff King, The Doctrine of Odious Debt in International Law. A Restatement, University College London, 2016, p. 72-73.

|53| J. Bazant, p. 127.

|54| See the press of the period: El Monitor, Mexico City No. 278, 19 November 1884; El Nacional, Mexico City, No. 242, 19 November 1884; La Libertad, Mexico City, No. 243, 31 October 1884.

|55| W. Wynne, p. 45.

|56| J. Bazant, p. 134.

|57| Furthermore, in violation of the repudiation pronounced by Benito Juárez in 1867 and the Decree of June 1883, the government agreed to include in the compensation payment of a part of the cost of the bonds issued by Maximilian of Austria to the creditors under the restructuring of the “London” debt. See J. Bazant, p. 130.

|58| The new debt, the consequence of repayment of the balance of the Goldsmith and Barclay loans, in fact amounted to 34 million pesos because in order to actually borrow 27 million, Mexico was forced to recognize a new debt that was greater than that amount, since the new issue was sold for less than its nominal value and a commission had to be paid to the German bank Bleichroeder, which managed the loan.

|59| J. Bazant, p. 237.

|60| J. Bazant, p. 234-235; W. Wynne, p. 7-13.

|61| W. Wynne, p. 57.

|62| In the late 19th and early 20th century, capitalist development was not based on a ’free’ work force only, as it combined capitalist productive relations (waged labour) with pre-capitalist forms of exploitation, and even certain forms of slavery. Entire indigenous communities were deported to forced labour on tobacco and sisal plantations.

|63| A. Gilly, p. 21.

|64ibid., p. 28.

|65| W. Wynne, p. 51.

|66| J. Bazant, p. 177.

|67| A. Gilly, p. 36.

|68| The Papers of Ulysses S. Grant, Vol. 30: October 1, 1880 – December 31, 1882 edited by John Y. Simon, Southern Illinois Univ. Press, Carbondale, 2008

|69| J. Bazant, p. 123.

|70| A. Gilly, p. 32.

|71| J. Bazant, p. 125.

|72| J. Bazant, p. 141-142.

|73| Several years later the revolutionaries made full use of the railways to move troops.

|74| J. Bazant, p. 165.

|75| J. Bazant, p. 167-169.

|76| This was happening in many countries throughout the World at that time.

|77| A. Gilly, p. 33-34.

|78ibid., p. 35.

|79| W. Wynne, p. 59.

|80| Madero studied in Baltimore, at the HEC in Paris, the University of California, Berkeley, and Culver Academy in Indiana.

|81| During his exile Porfirio Díaz lived at Interlaken in Switzerland, then in Paris. He was received with honours in Germany by Guillaume II, who was about to let loose the First World War. He visited Egypt and spent time in Rome and Naples. He died on the 2 July 1915 in Paris and is buried in Montparnasse cemetery. In exile he was well considered and provided for. Some Mexican neoliberal nabobs wish to have his remains returned to Mexico.

|82| Emiliano Zapata (1879-1919) was the revolutionary who carried the rights of the indigenous communities the furthest. His armed struggle was intrinsically linked to the popular masses particularly in his home state of Morelos. His programme went beyond the the concerns of the rural masses even if they were his main concern.

|83| Concerning the policies of US President (1909 – 1913) Taft see: http://www.cadtm.org/what-other-countries-can-learn

|84| J. Bazant, p. 181.

|85| W. Wynne, p. 64.

|86| During the porfiriato, the workers first organized in the mines, then on the railways. In the former the proletariat had the benefit of the revolutionary trade union experience of the US miners. The worker’s movement was also nourished by class struggles from many parts of the World, notably the experience of the Paris commune in 1871. Socialist publications appeared: El Socialista in 1872, La Comuna in 1874, that later became La Comuna mexicana. The first labour confederation; “The Great Circle of Workers”, implanted in the textile industry and the crafts, appeared in 1872. This organization started to dissolve in 1879, separating into factions supporting two different bourgeois candidates in the 1880 elections. Adolfo Gilly wrote: “this decomposition of the Great Circle marked the end of the epoch and coincided with the beginning of the period of impetuous capitalistic development of the 1880s-90s, when the young industrial proletarian movement produced a more authentically union-based organization, especially in the railways, mines and textile industries” (A. Gilly, p.41). Despite the fierce repression of the Porfirio Diaz regime there were 250 strikes between 1876 and 1911. Whether they were successful or not they developed the political organization of the productive forces against the contradictions of capitalism and prepared the explosion of revolution that occurred in 1910. Anarchist tendencies had a real influence on the revolution. They were most expounded by the Flores Magon brothers. In 1911 one of the brothers, with the support of anarchists of various nationalities, including a hundred or so internationalists from the US organisation, “Industrial Workers of the World”, took part in occupying two poorly-defended Mexican villages close to the US border, Mexicali (pop. 300) and Tijuana (pop.100). For five months the commune of Lower California experimented with libertarian communism, the abolition of private property, collective working of the land and among other experiments, the grouping of producers, before being invaded. That was the end of the attempt to establish a socialist libertarian republic.

|87| Pancho Villa (1878-1923) was a smallholder whose relations with the justice system were strained after conflicts with big landowners. He was an outlaw and lived by various means including cattle-rustling in the mountain regions. It was in the unequal struggle against Porfirio Diaz’s rural police that he developed his great fighting skills. Moreover Villa rapidly showed a strong gift for military organization not only in his relations with his foot soldiers but also with regard to his commanding officers. This ability to organize won him over the labour sectors in the North, mainly miners and railway workers who joined his army. This is no mere detail: the railwaymen in Villa’s army were central to his use of the railway for movements of revolutionary troops. Source: A. Gilly, p. 90.

|88| Nevertheless, when Pancho Villa was the the governor of the State of Chihuahua in 1913 he applied radical measures favouring the people to the detriment of the interests of the local ruling classes. See Paco Ignacio Taibo II, Pancho Villa, Roman d’une vie, (Life Story of Pancho Villa), Paris: Petite bibliothèque Payot, 2012, Volume 1, Chapter 23.

|89| See Jan Martinez Ahrens, « Toda la municion contra Zapata » (All ammunition against Zapata), El Pais, 24 December 2016, (in Spanish).

|90| According to Adolfo Gilly, this decision to sign a pact did not win the approbation of the general assembly that was held on 8 February 1915. There was strong opposition. Nevertheless 9000 “workers” formed the red battalions, including an “Anarchist first aid corps”, in Obregas’ army that fought against the Northern Division. See A. Gilly, p. 157-159.

|91| A. Gilly, p. 179.

|92| in A. Gilly, p. 228-229.

|93| W. Wynne, p. 66-67.

|94| J. Bazant, p. 239. J. Bazant, who is as a rule in favour of any compromise with creditors, says this amount of 500 million is simply incredible.

|95| W. Wynne, p. 68.

|96| A reasoned definition of odious debt can be found in the online article by Éric Toussaint, “The Doctrine of Odious Debt: from Alexander Sack to the CADTM”, http://www.cadtm.org/The-Doctrine-of-Odious-Debt-from

|97| W. Wynne, p. 77.

|98| W. Wynne, p. 82. See also the New York Times of 30 November 1930.

|99| An ejido is the name given in Mexico to a communal property by a group of indigenous farmers who work the land together. In an ejido, the principle is that members of the community be granted the land’s usufruct with no legal possibility of selling or ceding it. In 1993, President Salinas de Gortari, who carried forward the neoliberal policies initiated by his predecessors, had the Constitution modified so as to enable massive sales of ejidos. One of the aims of the Zapatista uprising on 1 January 1994 was to question this government policy.

|100| Diplomatic relations between the two countries were restored in October 1941 because London was looking for allies against Nazi Germany and feared a possible alliance between Mexico and Berlin.

|101| Another element that substantiates Cárdenas’ sympathy for revolutionary movements, though not at a time when he was president, is that he helped Fidel Castro and Che Guevarra to get out of prison a couple of weeks before sailing to Cuba in the Granma. Fidel and the Che had been emprisoned in Mexico City after the Batista government had told the Mexican authorities that some guerrillas were operating in the country. While in prison, Fidel managed to have the warden release him and him alone, after which, in an audience with Cárdenas, he enlisted his help to liberate the other prisoners. Cárdenas showed some empathy with Fidel’s project.

|102| W. Wynne, p. 97 and table p. 106.

|103| W. Wynne, p. 94-95.

|104| See Eric Toussaint http://www.cadtm.org/Demystifying-Alexander-Nahum-Sack

|105| See “Three Waves of Public-Debt Repudiation in the USA during the 19th Century”, http://www.cadtm.org/Three-Waves-of-Public-Debt as well as “The USA’s repudiation of the debt demanded by Spain from Cuba in 1898: What about Greece, Cyprus, Portugal, etc.?”, http://www.cadtm.org/The-USA-s-repudiation-of-the-debt

|106| See ‘What other countries can learn from Costa Rica’s debt repudiation’, http://www.cadtm.org/What-other-countries-can-learn. We must emphasize that Costa Rica did repudiate the debt claimed by Britain in a sovereign and unilateral way. Had the US not then given the country its support, the Costarican people might yet have been victorious in resisting almost certain aggression from Great Britain. Similarly in the case of Cuba, the army of Cuban independence fighters (the mambis) might have got the better of Spain, had the colonizing country tried to make them pay for their independence.

|107| The same applies to what happened in the USSR, which will be developed in another article.

auton5-c93f5Author

Eric Toussaintis a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy(2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.

Jan 112017
 

By Eric Toussaint, CADTM, 99GetSmart

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The present study shows that the Greek crisis that broke out in 2010 originated in private banks, not in excessive public spending. The so-called bail-out was designed to serve the interests of private bankers and those of dominant countries in the Eurozone. Greece adopting the euro played a major role among the various factors that contributed to the crisis. The analysis developed here was first presented in Athens on 6 November 2016 during a meeting of the Truth Committee on Greek Public Debt.

At first sight, between 1996 and 2008, the development of Greece’s economy looked like a success story! The integration of Greece within the EU and from 2001 on within the Eurozone seemed successful. The rate of Greece’s economic growth was higher than that of the stronger economies in Europe.

This apparent success actually concealed a vicious flaw, just as had been the case in several other countries – not only Spain, Portugal, Ireland, Cyprus, the Baltic Republics and Slovenia, but also Belgium, the Netherlands, the United Kingdom, Austria…, countries that had been badly hit by the 2008 financial crisis. |1| Not forgetting Italy, which was caught up by the banking crisis a few years after the others.

In the early 2000s, the creation of the Eurozone generated significant volatile and often speculative financial flows |2| that went from economies of the Centre (Germany, France, the Benelux, Austria…) towards countries of the Periphery (Greece, Ireland, Portugal, Spain, Slovenia, etc.).

Major private banks and other financial institutions in economies of the Centre loaned huge sums to the public and private sectors in the economies of the Periphery for it was more profitable to invest in those countries than on the national markets of the economies of the Centre. A single currency (the euro) boosted those flows since it did away with the danger of the local currency being devaluated in case of crisis in countries of the Periphery.

This resulted in a private credit bubble mostly involving real estate (mortgages), but also consumer credit. The assets of banks in the Periphery increased significantly, albeit in terms of debt.

In Ireland, the crisis broke out in September 2008, when major banks went bankrupt in the wake of Lehman Brothers in the United States. In Spain, Greece and Portugal, the crisis started later, in 2009-2010. |3|

When the private credit bubble burst in 2009-2010 (in the context of international recession resulting from the US subprime crisis and its contamination of banks in the European economies of the Centre), private banks had to be massively bailed out.

These bail-outs led to a huge increase in public debt. Indeed the use of public money to bail out banks and other institutions turned out to be very costly.

It is now clear that banks should not have been bailed out, which meant socializing their losses. Banks should have used bail-in mechanisms: organize an orderly kind of bankruptcy and call upon major private shareholders and creditors to pay for sanitizing the situation. The opportunity should also have been seized to socialize the financial sector, i.e., to expropriate the private banking sector and turn it into a public service. |4|

However, there were strong ties, when not actual connivance, between Eurozone governments |5| and the private banking sector. Governments thus decided to use public money to bail out private bankers.

Since States in the Periphery could not afford the financial cost of bailing-out their banks so as to protect the French and German banks, governments of the Central economies (Germany, France, the Netherlands, Belgium, Luxembourg, Austria, etc.) and the European Commission (sometimes with the help of the IMF) implemented the notorious Memorandums of Understanding (MoUs). Thanks to those MoUs, major private banks and other private financial institutions in Germany, France, countries of the Benelux and Austria (i.e. the private financial sector of the Central economies) could reduce their exposition in economies of the Periphery. Governments and European institutions used this opportunity to reinforce the offensive of capital against labour as well as to reduce the possibility for people to actually use their democratic rights throughout Europe.

The way the Eurozone was constructed and the crisis of the capitalist system are accountable for the crisis that can be observed in countries of the Periphery since 2009-2010.

Steps that led to the 2010 Greek crisis 

From 1996, under the auspices of PM Kostas Simitis (PASOK), Greece has committed itself deeper and deeper to the neoliberal model that had first been implemented in 1985 when Andreas Papandreou, after a promising start, shifted away from left-wing positions two years after François Mitterrand. |6|

Between 1996 and 2004, during Kostas Simitis’ two terms as PM, an impressive programme of privatizations was implemented (which recalls Lionel Jospin’s Socialist government in France – 1997-2002 – also carrying out major privatizations which right-wing parties and employers had been dreaming of since the 1980s).

Greece went farther than most EU countries in reducing corporate taxes. Measures were adopted that directly undermined social conquests won between 1974 and 1985, notably in terms of labour conditions and stability. Similarly, the Socialist government favoured a deep-seated deregulation of the financial sector (which also occurred in other EU countries and in the US); this resulted in an increase in its importance in the economy.

Greek banks settled in the Balkans and Turkey, which reinforced a deceptive sense of achievement.

During this period, the rate at which the Greek GDP increased was higher than the average EU rate, GDP per capita was catching up on the average, and the Human Development Index was improving. Growth was significant in some cutting-edge sectors such as optical and electrical equipment and computers. Yet in fact as they further integrated Greece into the EU and the Eurozone, Greek leaders and private corporations increased the country’s dependence and reduced any actual possibility for economic and social development.

How banks developed and how the Greek economy was financialized before it entered the Eurozone

Until 1998, 70% of the Greek banking system was public. Loans handed out by banks amounted to about €80 billion while deposits amounted to €85 billion, which indicated a healthy economy (see below). That situation was to change radically. Between 1998 and 2000, public banks were sold at heavily-discounted prices to private capital and four major banks emerged, covering 65% of the banking market: |7| the National Bank of Greece, Alpha Bank, Eurobank and Piraeus Bank. Among those four banks only the National Bank of Greece was still under indirect public control.

During those same two years under socialist PM Kostas Simitis’ leadership, deregulation was thriving in the banking sector as indeed in other parts of the world. Let us remember that in 1999 Bill Clinton’s Democrat administration repealed the Glass-Steagall Act, which had been voted in by the Roosevelt administration to counter the 1933 US banking crisis. This meant the end of separating deposit banks from business banks and accelerated the deregulation process that led to the 2000-2001 and 2007-2008 crises. In Greece, the government supported private banks (which decreased return on deposits) through an aggressive communication campaign to prompt middle-class households, companies and pension funds to invest on the stock market; so the government did not tax capital gains. This casino-like kind of economy resulted in a stock-market bubble that burst in 2000, with tragic losses for many households, small and medium-sized companies and the pension scheme, which had invested heavily. |8| We also have to keep in mind that the stock-market bubble made it possible for rich investors to launder their dirty money.

Rise in Greek private and public debt from 2000-2001

Private debt increased hugely in the first decade of the new millennium. Lured by the very attractive conditions offered by banks and the whole private commercial sector (mass retail, the automobile and construction industries, etc.), households went massively into debt, as did the non-financial companies. Moreover the shift to the euro |9| had led to a significant increase in the cost of living in a country where buying basic food takes up about half of a family’s budget. This private debt was the driving force of the Greek economy as it was in Spain, Ireland, Portugal, Slovenia and other countries of the former Eastern bloc that joined the EU. Thanks to a strong euro, Greek banks (and Greek branches of foreign banks) could expand their international activities and cheaply finance their national activities. They took out loans with a vengeance. The graph below (Fig. 1) shows that Greece’s accession to the Eurozone in 2001 boosted an inflow of financial capital, in the form of loans or portfolio investments (Non-FDI in the chart, i.e. inflows which do not correspond to long-term investments) while long-term investments (FDI–Foreign Direct Investment) remained stagnant.

Figure 1 – Flow of financial capital into Greece (1999-2009)

greek-banks-01-dc22d

In $ million. Source: IMF |10|

With the vast amounts of liquidity made available by the central banks in 2007-2009, Western European banks (above all the German and French banks, but also the Belgian, Dutch, British, Luxembourg and Irish banks) as well as Swiss and US banks lent extensively to Greece (to the private sector and to the public authorities). One must also take into account that the accession of Greece to the euro bolstered the faith of Western European bankers, who thought that the big European countries would come to their aid in case of a problem. They did not worry about Greece’s ability to repay the capital they loaned and considered that they could take very high risks in Greece. History seems to have proved them right so far: the European Commission and, in particular, the French and German governments have given their unfailing support to the private banks of Western Europe. But in allowing the socialization of the banks’ losses, European governments have placed their own public finances in a critical position.

In the chart below (Fig. 2) we see that the countries of Western Europe first increased their loans to Greece between December 2005 and March 2007 (during this period, the volume of loans grew by 50%, from less than 80 billion to 120 billion dollars). After the subprime crisis started in the United States, loans increased dramatically once again (+33%) between June 2007 and the summer of 2008 (from 120 to 160 billion dollars). Then they stayed at a very high level (about 120 billion dollars). This means that the private banks of Western Europe used the money which was lent in vast quantities and at low cost by the European Central Bank and the US Federal Reserve in order to increase their own loans to countries such as Greece. |11| Over there, where the rates were higher, they could make juicy profits. Private banks are therefore largely responsible for Greece’s excessive debt.

Figure 2 – Evolution of Western European banks’ exposure to Greece (in billions of dollars)

greek-banks-02-13a0b

Source: BIS consolidated statistics, ultimate risk basis (from Costas Lapavitsas et al. The Eurozone Between Austerity and Default)

As shown in the following pie-chart (Fig. 3), Greek debts are overwhelmingly held by European banks, mostly French, German, Italian, Belgian, Dutch, Luxembourg and British.

Fi Figure 3– Foreign holders (almost exclusively foreign banks and other financial companies) of Greek debt securities (end of 2008 |12| )

greek-banks-03-750ae

Source: CPIS in Costas Lapavitsas et al. The Eurozone Between Austerity and Default

A survey conducted by Barclays on Greece’s external debt in the third term of 2009 shows that the distribution was approximately the same (note that the currency used below is the US dollar). |13| The next graph (Fig. 4) is particularly interesting in that it shows that large French insurance groups were highly exposed, as were Luxembourg-based hedge funds. |14|

Figure 4 – Creditors of the Greek debt

Greece’s public debt amounted to about $390 billion by the end of the third term of 2009. Close to three quarters of that debt is held by foreign institutions, the majority of them European.

Source: http://www.nytimes.com/2010/04/29/b…

greek-banks-04-53e6d-jpgIn a book published in 2016, Yanis Varoufakis describes what led German, French and other foreign private banks to make massive loans to Eurozone countries of the European Periphery, with their governments’ support. According to Varoufakis, once they felt sure countries of the Periphery would not leave the Eurozone, French and German bankers started treating all borrowing countries as presenting exactly the same level of risk, or of solvability, which was nonsense. Worse still, since they knew they would get their money back, they soon found out that “it was more lucrative to lend to persons, companies and banks of deficit member States than to German or Austrian customers” since in those countries people “displayed the deep-seated aversion to debt that recent memory of poverty engenders.” Indeed ideal customers (borrowers) are not yet indebted and have some personal property such as “a farmhouse or an apartment in Naples, Athens or Andalusia.”

Varoufakis relies on information gathered during a conversation he had in 2011 with a man called Franz, who worked for a German bank. Franz, he writes, “went to some lengths to impress upon me the suddenness and force with which his bank targeted the European Periphery. Its new business plan was straightforward: to secure a higher share of the Eurozone market than other banks, the French banks in particular, which were also on a lending spree.” Those countries with a significant trade imbalance offered bankers three major advantages: (1) there was room for a lot of lending; (2) exports to deficit countries “were now immune to devaluations of the defunct, weaker currencies”; (3) they could charge much higher interest rates in deficit countries since interest rates indicate the price of money, and money is cheaper in exporting countries such as Germany than in importing countries such as Greece. |15|

A private credit bubble caused by Greek and foreign banks with government complicity

The Greek banks pushed their customers to borrow massively to finance their consumption. As the graph in Fig. 4 shows, household loans increased fivefold between 2001 and 2008; whereas business loans increased two and a half fold. On the other hand, over the same period, Greek banks reduced their loans to public administrations.

Figure 5 – Credit to domestic residents by Greek banks (2001-2008)

greek-banks-05-72746

Source: Bank of Greece

The big increase in Greek household, business and financial company debt is visible in Fig. 6 where the graph shows how total Greek debt developed between 1997 and 2009 alongside the reduction of public debt from 70 to 42%.

Figure 6 – Greek debt by sector of issuer (% of total) 
NB pour la mise en ligne il faut aller prendre le graphique original dans l’étude de Lapavitsas afin que la légende dans le graph soit en anglais.

greek-banks-06-38ec4

Source: Bank of Greece, QEDS, IMF (from Costas Lapavitsas et al.The Eurozone Between Austerity and Default)

Table 1 clearly shows the big increase in bank lending to households and business.

Table 1. Bank lending tendencies to households and business between 12/1998 and 12/2010 (in millions of euros).

GREECE 1998 2000 2001 2008 2010
Events 1 June 1998: Creation of ECB 19 and 20 June 2000: The European Council praises Greece for its good management 1 January: Greece joins the Eurozone The impact of the 2007 crisis starts to be felt 1stMemorandum of May 2010
Home loans 7,007 11,164 15,516 77,386 80,155
Personal loans 3,035 5,511 7,852 36,412 35,061
Business loans 32,731 42,999 50,908 132,457 123,243
TOTAL 42,773 59,674 74,276 246,255 238,459

Source : Bank of Greece |16|

Table 2 shows that the increase in deposits was much inferior to the increase in credit shown in Table 1.

Table 2. Deposit and repurchase agreement tendencies of households and businesses in Greece between December 1998 and December 2010 (in million of Euros).

GREECE 1998 2000 2001 2008 2010
Household deposits 71,843 88,644 103,388 185,424 173,510
Corporate reserves 13,315 20,611 25,574 42,196 36,094
TOTAL 85,158 109,255 125,962 227,620 209,604

Source : Bank of Greece

In 1998, deposits on bank accounts were more than twice the amount of the loans that banks had granted to private-sector activities, an indication of a healthy situation. By 2008 the situation had seriously deteriorated: deposits were far less than the sums on loan. |17| The Greek Banks had taken advantage of the easy money supplied by French, German and other foreign banks.

Greek banks increased their borrowing from foreign banks six-and-a-half fold, from €12.3 billion to €78.6 billion, between 2002 and 2009. If we include other private external sources of financing (investment funds, money-market funds, insurance companies) the respective figures are €19 billion and €112 billion.

And that’s not all: the Greek banks were short-term borrowers on foreign interbank markets (what is more, most of the deposits in Greek banks were short-term and of course, as we have seen, they were also among the financial resources into which banks dipped) in order to finance medium- and long-term loans to their borrowers, especially for property purchase and development, or for durable goods (such as household equipment or cars), making them vulnerable to the tendencies of the financial markets and movements of deposit withdrawals.

However, this deterioration undermining banks’ balance sheets was not at all reflected by their profitability curves. In 2005, according to a study by the Greek Central Bank, banking profits had gone up by 198%, whilst their taxes decreased by 18.8%. The ROE |18| reached the extraordinary ratio of

26% while the European Union average was 17.4%.

This short-term profiteering attracted the attention of French banks, which took over Greek banks in order to facilitate and stimulate their investments in what they considered to be a new Eldorado. |19| In March 2004, Société Générale acquired a majority holding (50.01%) in the Banque Générale de Grèce, which was renamed Geniki Bank. In August 2006 Crédit Agricole S.A. took over Emporiki Bank S.A. In a press release at the time, Georges Pauget, CEO of Crédit Agricole S.A., justified the move by saying “…this acquisition […] gives us access to a growing market in a rapidly expanding region”. |20| René Carron, Chairman of Crédit Agricole S.A., declared: “I’m delighted with the success of the Emporiki offer and would like to express my thanks to the Greek government and other shareholders for showing their confidence and support for this offer. This transaction is a major step in our international strategy and will contribute to our objective to increase our net banking income on non-French operations”.

The announcement by the government, at the beginning of 2005, that construction resulting from building permits issued after 1st October 2006 would no longer be exempt from VAT, created a building boom accompanied by an explosion in the number of mortgage loans that overtook the whole country – even though housing demand was amply satisfied. According to the statistics office, ELSTAT, in 2001, the country had 11 million inhabitants for 5.4 million homes, 1.4 million of which were unoccupied. This contributed to the private-loan speculative bubble. |21| In 2011, there were 6.4 million homes, of which 2.5 million were unoccupied. |22|

The banks weakened during 2008-2009 because of the excessive risks they took and the credit bubble they caused

In September-October 2008, following the failure of Lehman Bros. in the US and the effects on Western European banks (failures in Belgium, Germany, Iceland, Ireland and the UK), mutual confidence between banks evaporated and interbank loans stopped completely – a phenomenon they called a “credit crunch” –, which put the highly dependent Greek banks into very hot water. Their shares plummeted during the second half of 2008 to levels 20% below their early 2007 quotations. At the same time the interest demanded for their borrowings increased by 500 base points – that is, 5%. |23|

The Greek banks only survived thanks to liquidities made available by the Bank of Greece under ECB rules that provide for massive cash-flow to all the Eurozone banks. (The same practice is followed by the Fed, the Bank of England and the Swiss central bank).

In the following graph (Fig. 7) the green line shows how the tendencies of the Greek banks to use this Eurosystem funding evolved. |24|

Figure 7 – Exposure of Greek banks to the government and liabilities to the BoG, in billions of Euros (2007-2010)greek-banks-07-c53f8

Source: Bank of Greece.

Nevertheless, changing the principal sources of funding is not particular to Greece – the same phenomenon has been noted in most Eurozone countries and beyond. Central banks became the favourite money supplier to private banks through 2008-2009.

In October 2008 the Greek banks were in crisis; the Karamanlis Government announced a €28 billion bail-out plan, of which €3.5 billion were used to recapitalize the banks and the remainder served as guarantees for further borrowing from the Central Bank. At the same time depositors were reassured in order to avoid a run on the banks (massive withdrawals that could cause banks to fail). These policies are not exceptional. As much in the US as in Europe, including Switzerland, governments have been providing massive capital and guarantees that have greatly increased public debt without durably improving the health of the banking sector.

Many Belgian, British, Dutch, French, German, Swiss and North American banks received substantial public aid through 2008-2009 and beyond. Between October 2008 and September 2012, total aid granted by the European Commission reached €5,059.9 billion – that is, 40.3% of EU GDP. According to an estimation by Professor James Felkerson, the US Fed granted aid to the tune of $29,614.4 billion to US and non-US banks.

In 2008, the Greek banks, along with their Cypriot, Portuguese and Spanish counter-parts, were not considered to be under threat, because unlike the banks in the US and the most developed European economies, they had not taken massive positions in the structured financial products that shook the US and Northern and Western European banking system to its foundations.

However, the banks in the peripheral Eurozone countries, too, were actually on the verge of defaulting and their governments did not have the resources needed to come to their rescue as effectively as the governments of the central economies and the United States had.

The particularities of the Greek banks

One of the particularities of the Greek banking situation is the combination of weak equity and an increase in credit repayment defaults.

In March 2009, the Greek banks’ equity totalled €28.9 billion – no more than 6.2% of their balance sheet, which totalled €473.1 billion. Loan loss reserves amounted to only €7.2 billion, much less than the amount necessary to cover the actual risk. In fact reserves amounted to only 3% of the €217.1 billion in loans granted, whereas the ratio of “Non-Performing Loans” (NPLs) was 6%. |25|

The insufficiency of assets was caused by paying oversized dividends to private shareholders between 2005 and 2008 (see above).

According to a memo in the European Parliament, bad debt risks had increased to 43.5% in Greece, in September 2015, and 50% in Cyprus.

greek-banks-08-b52e0

The amount of dubious debt in the Eurozone on 30 September 2015

The international crisis that badly hit the Greek economy in 2009 fragilized households and small businesses in particular to point where more and more fell into debt repayment arrears.

Bank deposits had become markedly inferior to outstanding loans, private cash-flow from banks and other financial institutions stopped, arrears increased, property prices slumped and capital fled (organized by, or at least with the complicity of, the banks), the Greek banks’ positions became inextricable. This was the consequence of the dangerous adventures that the Greek banks had entered upon with the complicity of the Greek government and under the laissez-faire attitude of the European regulatory authorities.

The reaction of the Greek banks to the crisis, which they had largely provoked themselves, and to the international recession affecting the Greek economy, aggravated the situation. Whereas the Central Bank made liquidities available to Greek banks under the pretext that they would be made available to households and businesses in order to stimulate the economy, the banks used these sums in entirely different ways, as the following graph, in Fig. 8, shows.

Figure 8. Greece, domestic credit growth, 2009 – 2015

greek-banks-09-4c200

Source: Bank of Greece

The Greek banks cut off lending to households and non-financial companies (made up mostly of the self-employed or of small- and average-size companies with no more than ten staff members |26|), who were in need of funds to finance their debt repayments, thus worsening their already dire difficulties. Of course, it must not be forgotten that the austerity policies imposed by the Troika and the Greek government from 2010 had already reduced household and small business incomes, pushing them further towards payment defaults.

The criminal practices of the Greek banks were even worse than those of the Northern and Western European banks. Here are a few noteworthy examples brought to light by Daniel Munevar:

In the case of the now-defunct Hellenic PostBank it is estimated that between 2006 and 2012 it lent around €500 million to prominent businessmen without securing any type of guarantee. |27| Eventually, once they became NPLs, the losses associated with them were directly passed on to the taxpayers. At the time, Alexis Tsipras denounced the bank scandal as a triangle of corruption involving leading companies, banks and political parties that exchange favours. |28| In the case of another defunct bank, the Agricultural Bank of Greece, it is now estimated that between 2000 and 2012 it extended 1,300 loans for a value close to €5 billion. |29| These loans were extended without any type of guarantee and were provided to government supporters in what amounted to a patron/client relationship.3 |30|

As scandalous as the above examples might be, probably the most iconic case of the corruption and excesses that characterized the Greek banking system before the crisis was that of the Marfin Popular Bank (MPB). In 2006, Marfin Investment Group (MIG), a Greek-based investment group led by Andreas Vgenepoulos, bought a minority stake at Laiki Bank in Cyprus. After this transaction was completed, Laiki was transformed into a new entity, MPB.

Vgenopolous then took the decision to undertake an IPO of MIG. To ensure the success of the initial offering, Vgenepoulos, who was a member of the boards of both companies, used more than €700 million in loans provided by MPB to support the initial price of the share offering of MIG in 2007. |31| By 2010, it is estimated that MPB had provided €1.8 billion in loans to entities related to MIG in Greece in what amounted to a clear conflict of interest. |32| Even though the BoG conducted an audit in 2009 that identified these problems and raised further questions regarding the management of the bank, the regulators did nothing to address these issues. By the time the Cypriot authorities took over the bank in 2011 it was estimated that MPB had a loan portfolio in Greece of 12 billion euros, most of it of dubious quality. |33| According to the Chairman appointed by the Cypriot authorities, Michael Sarris, the “single most important factor” dissuading investors from helping recapitalize the bank was not sovereign bonds but concern that further losses in the loan portfolio in Greece could materialize. |34|

Dramatizing public indebtedness and the deficit protects the interests of the private Greek and foreign banks who are responsible for the crisis

If we believe the rhetoric prevailing at the international level, the Memorandum of Understanding of 2010 constitutes the only possible response to Greece’s public-finance crisis. According to this deliberately misleading explanation, the Greek State supposedly gave Greeks the benefit of a generous system of social protection |35| in spite of the fact that they were paying no taxes (Christine Lagarde, remember, as Managing Director of the IMF, had stated that Greeks were paying almost no taxes – neglecting to point out that wage earners and retired persons in Greece have their taxes withheld at source3 |36|). For these facile moralizers, it was irresponsible public expenditure that supposedly led to a dramatic increase in public debt and the deficit. According to their narrative, the financial markets eventually became aware of the danger and refused to continue to finance Greece’s irresponsibility. Following that refusal, the narrative goes, the European governments, the ECB, the European Commission and the IMF decided, in a burst of generosity, to join together to come to the aid of the Greek people, even though they did not deserve such generosity, and at the same time defend the permanence of the Eurozone and the European Union.

In reality, as the Preliminary Report of the Truth Committee on the Greek Public Debt showed, the real cause of the crisis was the private banking sector, both domestic and foreign, and not public debt. Private debt was much larger than public debt.

Late in 2009, the Greek banks had to repay €78 billion in short-term debt to foreign banks, and if the other foreign financial entities (such as Money Market Funds |37| and investment funds) who had granted loans are taken into account, the amount to be repaid was in fact a total €112 billion. Remember that starting in September-October 2008, interbank lending had largely dried up. The Greek banks were able to continue to repay their external creditors at least in part thanks to the line of credit extended by the ECB and the Central Bank of Greece (see Figure 7 above – Exposure of Greek banks to the government and liabilities to the BoG, in billions of Euros (2007-2010)

Loans to the Greek banks from the ECB/Greek Central Bank varied between €40 and 55 billion. That represented between 6% and 8% of the line of credit extended by the ECB, whereas the Greek banks accounted for only 2% of assets in the Eurozone.

The directors of the ECB implied in Autumn 2009 that they planned to end that line of credit. |38| This caused a great deal of anxiety on the part of foreign creditors of the Greek banks and the Greek bankers themselves. Should the Greek banks not be able to continue repaying their debts to the foreign banks, a serious crisis could ensue. According to the major private foreign creditors of the Greek banks, the only solution that could avoid a failure of the Greek banks (and the losses that would have caused for the foreign banks) was for the State to recapitalize them and grant them guarantees for an amount well in excess of what was made available beginning in October 2008. That also implied that the ECB would maintain the line of credit it had extended them. George Papandreou, who had just handily won the legislative elections on 4 October 2009, realized that the Greek government alone would not have the resources to save the Greek bankers despite his good will towards (not to say complicity with) them. His opponents in New Democracy, who had just lost the elections, felt the same.

Instead of making those who were responsible, both in Greece and abroad (that is, the private shareholders, the board members of the banks, and the foreign banks and other financial entities who had contributed to generating the speculative bubble) bear the cost of the banking crisis, Papandreou dramatized the public debt and the deficit in order to justify an external intervention aimed at bringing in sufficient capital to face the situation the banks were in. The Papandreou government falsified the statistics on Greece’s debt – not in order to reduce it (as the prevailing narrative claims) but in fact to increase it (see the Box on Falsification). He wanted to spare the foreign (principally French and German) banks heavy losses and protect the private shareholders and top executives of the Greek banks.

He made the choice of resorting to “international aid” under the deceitful pretext of “solidarity” because he was sure he could never convince his electorate to make sacrifices in order to protect the big French and German banks… and Greek bankers.

Falsification of public deficit and public debt

After the Parliamentary Elections of 2009 (4/10/2009), the newly elected government of George Papandreou illegally revised and increased both the public deficit and debt for the period before the Memorandum of 2010. |39|

Hospital liabilities

The public deficit estimation of 2009 was increased through several revisions: the public deficit as a share of GDP increased from 11.9% in the first revision to 15.8% in the last.

One of the most shocking examples of falsification of the public deficit is related to the public hospitals’ liabilities.

In Greece, as in the rest of the EU, suppliers traditionally provide public hospitals with pharmaceuticals and medical equipment. Due to the required invoice validation procedures required by the Court of Audit, these items are paid after the date of delivery. In September 2009, a large number of non-validated hospital liabilities for the years 2005-2008 was identified, even though there was not a proper estimation of their value. On the 2nd of October 2009, within the usual Eurostat procedures, the National Statistical Service of Greece (NSSG) sent to Eurostat the deficit and debt notification tables. Based on the hospital survey traditionally carried out by the NSSG, these included an estimate of the outstanding hospital liabilities of €2.3 billion. On a 21stOctober notification, this amount was increased by €2.5 billion. Thus, total liabilities increased to €4.8 billion. The European authorities initially contested this new amount given the suspicious procedures under which it was compiled:

“In the 21st October notification, an amount of €2.5 billion was added to the government deficit of 2008 on top of the €2.3 billion. This was done according to the Greek authorities under a direct instruction from the Ministry of Finance, in spite of the fact that the real total amount of hospital liabilities is still unknown, that there was no justification to impute this amount only in 2008 and not in previous years as well, and that the NSSG had voiced its dissent on the issue to the GAO [General Account Office] and to the MOF [Ministry of Finance]. This is to be considered as a wrong methodological decision taken by the GAO.” |40|

However, in April 2010, based on the Greek government’s “Technical Report on the Revision of Hospital Liabilities” (3/2/2010), |41| Eurostat not only gave in to Greece’s new government demands about the contested amount of €2.5 billion, but also included an additional €1.8 billion. Thus, the initial amount of €2.3 billion, according to the Notification Table of the 2nd October 2009, was increased to €6.6 billion, despite the fact that the Court of Audit had only validated €1.2 billion out of the total. The remaining €5.4 billion of unproven hospital liabilities increased the public deficit of 2009 and that of previous years.

These statistical practices for the accounting of hospital liabilities clearly contravene European Regulations (see ESA95 par. 3.06, EC No. 2516/2000 Article 2, Commission Reg. EC No. 995/2001) and the European Statistics Code of Practice, especially regarding the principles of independence of statistical measurements, statistical objectivity and reliability.

It is important to highlight that a month and a half after the illegal increase of the public deficit, the Ministry of Finance called the suppliers and asked them to accept a 30% discount on the liabilities for the 2005-2008 period. Thus, a large part of hospital liabilities was never paid to pharmaceutical suppliers by the Greek government, while the discount was never reflected in official statistics. |42|

Public corporations

One of several falsification cases concerns 17 public corporations (DEKO). In 2010 ELSTAT |43| and Eurostat transferred the liabilities of the 17 DEKO from the Non-financial Corporations sector to the General Government sector. This increased public debt in 2009 by €18.2 billion.

This group of corporations had been classified as Non-Financial Corporations after Eurostat had verified and approved their inclusion in this category. It is important to emphasize that there were no changes in the ESA95 classificatory rules between 2000 and 2010.

The reclassification took place without carrying out the required studies; it also took place at night after the ELSTAT Board had left. In this way the president of ELSTAT was able to introduce the changes without questions from the Board members. Thus, the role of the national experts was completely ignored, in total contravention of ESA95 Regulations. Consequently, the institutionally established criteria for the reclassification of an economic unit under the General Government sector was infringed. |44|

Goldman Sachs swaps

Another case of unsubstantiated increase of public debt in 2009 is related to the statistical treatment of swaps with Goldman Sachs. The one-person ELSTAT leadership increased the public debt by €21 billion. This amount was distributed ad hoc over the four financial years from 2006 to 2009. This was a retroactive increase of Greece’s public debt and was done in contradiction of EC Regulations.

In total, it is estimated that as a result of these technically unsupported adjustments, the budget deficit for 2009 was increased by an estimated 6 to 8 percentage points of GDP. Likewise, public debt was increased by a total of €28 billion.

We consider the falsification of statistical data as directly related to the dramatization of the budget and public debt situation. This was done in order to convince public opinion in Greece and Europe to support the bail-out of the Greek economy in 2010 with all its catastrophic conditionalities for the Greek population. The European parliaments voted on the “rescue” of Greece based on falsified statistical data. The banking crisis was underestimated by an overestimation of the public sector’s economic problems.

As for European leaders like Angela Merkel and Nicolas Sarkozy, who had already implemented plans to bail out private banks in their respective countries in 2008, they agreed to launch a programme that was purportedly to “aid Greece” (and which was to be followed by programmes of the same type in Ireland, Portugal and Spain) and under which the private banks in their countries could be paid with public funds. Repayment of the bail-out of bankers, then, would be done on the backs of the Greek people (and the peoples of the peripheral countries who would get caught up in the same system). |45| All this on the pretext of aiding Greece out of solidarity. The “aiding Greece” narrative is nothing but a sordid and deceitful cover-story to hide what was in reality socialisation of the banks’ losses. The Truth Committee on the Greek Public Debt, in its Preliminary Report of June 2015, threw light on the mechanism that was put in place starting in 2010 (see in particular Chapters 2, 3 and 4).

Yanis Varoufakis denounces the swindle in his own words: “But this was not a bail-out. Greece was never bailed out. Nor were the rest of Europe’s swine—or PIIGS as Portugal, Ireland, Italy, Greece and Spain became collectively branded. Greece’s bail-out, then Ireland’s, then Portugal’s, then Spain’s were rescue packages for, primarily, French and German banks.” (…) “The problem here was that Chancellor Merkel and President Sarkozy could not imagine going back, once more, to their parliaments for more money for their banker chums. So they did the next best thing: they went to their parliaments invoking the cherished principle of solidarity with Greece, then Ireland, then Portugal and finally Spain.”4 |46|

Yet an alternative was possible, and necessary. Following their win in the 2009 elections thanks to a campaign during which they denounced the neoliberal policies of New Democracy, the Papandreou government, had it wanted to make good on its campaign promises, would have had to socialize the banking sector by organizing an orderly failure and protecting depositors. Several historical examples demonstrate that organizing such a failure and then starting up financial services again to operate in the interests of the population would have been quite possible. They should have taken the example of what had been done in Iceland since 2008 |47| and in Sweden and Norway in the 1990s. |48| Instead, Papandreou chose to follow the scandalous and catastrophic example of the Irish government, which bailed out the bankers in 2008 and in September 2010 agreed to a European aid plan that had dramatic consequences for Ireland’s people. When in fact what was needed was to go even farther than Iceland and Sweden and completely and permanently socialize the financial sector. The foreign banks and private Greek shareholders should have been made to bear the losses stemming from resolving the banking crisis and those responsible for the banking disaster should have been prosecuted. That would have allowed Greece to avoid the successive Memoranda that have subjected the Greek people to a dramatic humanitarian crisis and to humiliation, without any of it resulting in truly cleaning up the Greek banking system. The chart below shows the evolution of payment defaults on credits and throws light on why the situation of the Greek banks remains highly precarious, whereas their directors have faced no legal consequences and most of them have remained in their positions since the crisis began. In Iceland, remember, several bankers went to prison.

Figure 9 – Greece, evolution of NPLs as% of total loans, 2009 – 2015

greek-banks-10-49678

Source: IMF

NPLs increased greatly between 2010 and 2015 for three main reasons:

  1. Banks were not forced to recognize losses (which would have amounted to cancellation of the debts).
  2. The brutal austerity imposed by the Troika, by radically reducing the income of the majority of the population and causing the failure of hundreds of thousands of small and medium companies, made it impossible for a growing number of households and SMEs to continue repaying their debts.
  3. The banks’ decision to stop granting new loans or refinancing existing ones only encouraged households and companies to default on repayment.

Why private banks want to purchase public debt 

The fable according to which the weakness or crisis of private banks is brought about by too high a level of public debt and the risk of suspension of payment by States does not hold up against the facts.

Since the EU has been in existence, not a single member State has gone into payment default, despite the fact that the list of banking crises gets longer every day.

On the other hand, what the dominant media and governments don’t tell us is that for private banks, lending to a State is highly profitable and free of risk. Added to that is the fact that the more sovereign debt a bank holds, the easier it is for it to comply with the rules set by the regulatory authorities. That point requires a technical explanation.

To adhere to the rules that were in force in 2008-2009, the Greek banks, like all European banks, needed to prove that their equity amounted to 8% of their assets. But, as said earlier, in March 2009 their equity only totalled 6.2% of their assets. To reach the 8% required by the authorities, they began buying sovereign debt.

In calculating that ratio of 8%, the regulatory authorities allow banks to weight the assets they hold according to the risk they represent. Sovereign debt held by banks is considered less risky than debt with private individuals or companies. That being the case, banks have every interest in lending more to public authorities than to private individuals or companies, and especially SMEs, which are considered riskier than major corporations. Of course, they can decide to lend to private individuals and SMEs anyway, but when they do they’ll demand very high interest rates.

That’s why, beginning in late 2008 and 2009, the Greek banks continued to increase their lending to the Greek government while at the same time gradually cutting off new loans to households and SMEs. Between 31 December 2008 and 31 December 2010, the Greek banks increased loans to the Greek public authorities by 15%, which proves that they considered such loans more secure.

The next illustration shows why banks who wanted to prove their robustness had every interest in buying public securities rather than continuing to grant loans to households and private individuals.

01-17-39f9f

The illustration above represents the assets of a bank before and after weighting for risks. The column on the left represents the actual assets held by the bank – that is, the loans it has granted. In the example given, which corresponds to an observed average, for 4 units of equity (the capital), the bank lent 100 units to private individuals, companies, States, etc.

For each of these categories of assets, the bank will apply weighting for risk and rely on that weighting to determine its ratio between equity and the total assets on its books. For example, loans to private individuals are weighted at 75%, which means that out of 28 units lent, only 21 will be counted in the weighted balance sheet. As a general rule, loans to States (sovereign debt securities) are weighted at 0% – in other words, they count for 0 on the weighted balance sheet! In fact, only loans to SMEs and companies that are rated low by the rating agencies are accounted for in their entirety, and even for more than they actually represent (weighting is 150% for companies rated below BB-).

Since the regulatory authorities take a bank’s weighted assets as the basis for determining whether it is keeping to the rules, it is in the bank’s best interests to lend to States rather than companies. This enables it to “deflate” its adjusted balance without affecting the true amount of loans granted, which are how it makes part of its profit.

Thus a bank with equity of only 4% of its assets can declare that the ratio actually comes to 10%, if there are enough public debts on its books. This will earn it praise from the regulatory authorities. |49|

All this explains the trajectory of the blue line in the graph we’ve already used. (See Figure 7 – Exposure of Greek banks to the government and liabilities to the BoG, in billions of Euros (2007-2010) above).

A sharp increase in the amount of credit extended by Greek banks to the government can be seen after September 2008. Previously fluctuating between €30 and 40 billion, it suddenly rose to over €60 billion by March 2010.

Note that before the speculative attacks on Greece began, it was able to borrow at very low interest rates. Mainly banks, but other institutional investors (such as insurance companies and pension funds) too, were falling over each other to lend it money.

This is how it came about that on 13 October 2009 Greece issued three-month Treasury bonds (T-Bills) with a very low yield of 0.35%. On the same day it issued six-month bonds at a rate of 0.59%. Seven days later on 20 October 2009, Greece issued one-year bonds yielding 0.94% |50|. Not until less than six months before the Greek crisis broke out did the foreign banks turn off the credit tap. The credit-rating agencies attributed a good rating to Greece and the banks which were lending to it, left, right and centre. Ten months later, to issue six-month bonds it had to commit to a yield of 4.65%, that is, eight times higher than before. This was a fundamental change of circumstances. In September 2009, the Greek Treasury issued six-year bonds at 3.7%, a yield close to those of Belgium or France, and not very far from Germany’s. |51|

There is one highly significant indication of the banks’ responsibility. In 2009, they demanded a lower yield from Greece than in 2008. In June-July-August 2008, before the shock produced by Lehman Brothers’ bankruptcy, the rate was four times higher than in October 2009. In the fourth quarter of 2009, yields reached their lowest point when loans of less than one year fell to below 1%. |52| Why were banks demanding lower yields when they should have realized that the risks were accumulating and Greece’s situation deteriorating?

The graph below shows that Greek and German interest-rates were very close between 2007 and July 2008. After that date, the rate paid by Greece can be seen to increase during the fourth quarter of 2008, after the government had announced its first plan to rescue Greek banks. (The markets then considered that the risks on public debt were higher, seeing that the authorities were willing to increase public debt to bail out the Greek banks.) From that moment on, German and Greek rates followed completely opposite trajectories. It is extraordinary to see that the rate paid out by Greece fell between March and November 2009, when the real situation of Greek banks and the international economic crisis which hit Greece so hard from 2009 (i.e. later than for the stronger countries of the Eurozone) should have led international and Greek banks to demand risk premiums. It was only after November 2009, when Papandreou decided to dramatize the situation and to falsify the public debt statistics, that the rates rose dramatically.

Figure 10 – Germany and Greece, 10-yr government bond yields (2007-2010)

greek-banks-11-fee8e

Source: St Louis Fed.

This may seem irrational, as it is not normal for a private bank to lower interest rates at a time of major international crisis, and to a country like Greece that is getting rapidly indebted. However it is logical from the point of view of a banker seeking to maximize immediate profits and convinced that in case of difficulty, the government will bail out his bank. After Lehman Brothers failed, the governments of the USA and Europe made available enormous amounts of liquidities to bail out the banks and kick-start credit and economic activity. Bankers seized this manna of capital to lend it to EU countries like Greece, Portugal, Spain and Italy, certain that in case of trouble, the European Central Bank (ECB) and the European Commission (EC) would come to their aid. From their point of view, they were right.

There is no denying that banks literally threw capital at countries like Greece (including lowering the interest-rates that they demanded), so determined were they that the money they were getting in massive quantities from the public authorities should be placed as loans to Eurozone States.

To go back to the concrete example mentioned above: when on the 20th October 2009 the Greek government sold three-month T-Bills with a yield of 0.35%, it was trying to raise the sum of €1,500 million. Greek and foreign banks along with other investors proposed €7,040 million, or almost five times that amount. Finally, the government decided to borrow €2,400 million. It is thus no exaggeration to claim that the bankers sought to lend as much as possible to a country like Greece.

Now let us go back over the sequence of increases in loans from Western European bankers to Greece over the period 2005-2009 as presented at the beginning of this study. The banks of Western European countries increased their loans to Greece (both in the public and private sectors) for the first time between December 2005 and March 2007. During this period, the volume of loans increased by 50%, from just below 80 billion to 120 billion dollars. Even though the subprime crisis had broken out in the USA, loans saw another sharp increase (+33%) between June 2007 and the summer of 2008 (from 120 to 160 billion dollars), thereafter remaining at a very high level (of about 120 billion dollars). The debts called in from Greece by foreign and Greek banks as a consequence of such frankly adventurous policies are marked by illegitimacy. The banks should have been forced to assume the risks they had taken.

The rescue of foreign and Greek banks thanks to the 2010 Memorandum 

The work of the Truth Committee on Greek Public Debt made evident the true motives of the Troika at the time of the First Memorandum in May 2010. The hearing of Panagiotis Roumeliotis helped to set the record straight. Roumeliotis had been a close advisor to the former PASOK Prime Minister Papandreou, a former Greek negotiator with the IMF and a personal friend of Dominique Strauss-Kahn, former chairman of the IMF, whom he met when he was a student in Paris. A few days before the hearing, I had had a private interview with Roumeliotis where I had informed him that I was in possession of secret IMF documents, including notes of a meeting that had been declassified by the Speaker of Parliament. Because they were very compromising, they had been hidden by the former Speaker of the Greek Parliament when they should have been included in an enquiry by the former government into financial delinquency. The documents proved that the decision by the IMF on 9 May 2010 to lend €30 billion to Greece (32 times the sum normally available to the country) was, as clearly expressed by several executive directors, primarily aimed at getting French and German banks out of trouble. This was clearly denounced by the IMF representatives from Brazil and Switzerland! |53| In reply to these objections the representatives from France, Germany and the Netherlands conveyed to the Board the commitments of their countries’ banks to support Greece and broadly maintain their exposure. This is what the French executive said during the meeting: “There was a meeting earlier in the week between the major French banks and my Minister, Ms. Lagarde. |54| I would like to stress what was released at the end of this meeting, which is a statement in which these French banks commit to maintain their exposure to Greece over the lifetime of the programme”. The German executive director said: “(…) these [German] banks basically want to maintain a certain exposure to the Greek banks, which means that they will not sell Greek bonds and they will maintain credit lines to Greece. When these credit lines expire, they will at least in part be renewed”. The Dutch executive director also made promises: “The Dutch banks, in consultation with our Minister of Finance, have had discussions and have publicly announced they will play their part in supporting the Greek government and the Greek banks”. |55|

It has become clear that these three directors deliberately lied to their colleagues to get the loan granted. |56| The loan was not made with the intention of aiding the Greek economy or the Greek people. The money was used to repay French, German and Dutch banks that between them held more than 70% of Greek debt at the time the decision was made.

Then once they had been paid, the banks stopped lending to Greece and shed their Greek securities on the secondary market Secondary market The market where institutional investors resell and purchase financial assets. Thus the secondary market is the market where already existing financial assets are traded. . The ECB, directed by the Frenchman Trichet, helped by purchasing those securities. The banks did exactly the opposite of what had been promised at the IMF. It must be mentioned that during the same meeting several directors criticized the IMF for changing, in a state of panic, IMF loan conditions. |57| Previously, the IMF could not grant a loan to a country unless the conditions made the debt sustainable. As the IMF directors knew perfectly well that lending €30 billion to Greece would not ease the Greek situation, but on the contrary, probably make it even more unsustainable, the rules were changed. Other criteria were adopted without consultation: henceforth, the IMF lends in order to avoid international banking crises. This proves that the real threat was the failure of the three main French banks (BNP Paribas, Crédit Agricole and Société Générale) and some German banks (Hypo Ral Estate and Commerzbank) which, seeking big profits, had lent too much to both the private sector and the Greek government, without applying normal prudential restraint.

If the IMF and the ECB did not want a reduction of Greek public debt in 2010, it was because the governments of France, Germany, the Netherlands and some other Eurozone countries wanted to give these banks time enough to sell off the Greek securities that they had bought and to generally disengage from Greece. And indeed, the foreign banks did get rid of their securities on Greece between March 2010 and March 2012, the date on which debt reduction finally took place (see below). If the Greek government of the time, under George Papandreou, accepted that the Greek public debt not be reduced at the time of the 2010 Memorandum, it was because it too wanted to give time to the Greek banks to sell off a large portion of their Greek securities which were likely to be devalued later when the French and German banks would have had time to disengage (see below). In any case, Jean-Claude Trichet, the French banker who was president of the ECB at the time, threatened to reduce Greek banks’ access to liquidities if the Greek government asked for debt reduction. That was what Panagiotis Roumeliotis declared at his hearing. |58|

Another criticism of the measures imposed on Greece by the IMF came from the Argentine representative, present at the same meeting in May 2010, who explained that the policies the IMF imposes on Greece cannot work. Pablo Pereira made no bones about what he thought of past and present IMF policies. “Harsh lessons from our own past crises are hard to forget. In 2001, somewhat similar policies were proposed by the Fund in Argentina. The catastrophic consequences are well known. (…) There is an undisputable reality that cannot be contested: a debt that cannot be paid will not be paid without a strong process of sustainable growth. (…) We are also too familiar with the consequences of “structural reforms” or policy adjustments that end up thoroughly curtailing aggregate demand and, thus, prospects of economic recovery. (…) It is very likely that Greece might end up worse off after implementing this programme. The adjustment measures recommended by the Fund will reduce the welfare of its population and Greece’s true repayment capacity.” |59|

On 15 June 2015, Panagiotis Roumeliotis testified before the Committee on this entire affair during the quite exceptional public hearing that lasted eight hours. I questioned him, as did the President of the Hellenic Parliament, and he answered us. Then members of the Committee questioned him and he replied to them. Mr. Roumeliotis’s answers amply confirmed the analysis presented above. Like all other important events in the Hellenic Parliament, the hearing was broadcast live on the parliamentary television channel. Audience ratings shot up.

In my introductory speech to the presentation of the Committee’s work that took place on 17 June I summarized the analysis that we made of the underlying reasons why the First Memorandum was imposed on the Greek people as from May 2010. The speech is available here. It was very well received. I would change nothing in this declaration.

History repeats itself

In a study conducted in September 2015 two economists, Carmen Reinhart and Christoph Trebesch, analysed the debt crises that Greece has been through since the 1820s and independence, from the perspective of dependence on external financing |60|. The two authors, academics with a favourable attitude towards the capitalist system, emphasize how the debt crises that have repeatedly hit Greece are mainly the result of inflow of private foreign capital followed by cessation of the flow. They claim that the crisis affecting Greece and other peripheral countries is not a public-debt crisis, but rather a crisis of external debt (p. 1). They draw a parallel with the external debt crisis that affected Latin America in the 1980s, pointing out the symmetry of situation between debtor countries and creditor countries once a crisis has broken. While Greece was plunged into economic depression after 2010, Germany went through a period of growth. Similarly, the countries of Latin America went through deep depression between the time when the crisis struck in 1982 and the early 1990s, while the economy of the United States, as creditor of the Latin American countries, gradually improved (p. 2).

They note that the most prosperous period for the Greek economy was between 1950 and 2000, when financing was mainly based on the country’s internal resources and did not depend on foreigners (p. 2).

On the other hand, they show that at each crisis of external debt that Greece has known (they list four major ones), when the capital flow from external private creditors (that is, banks) has dried up, the governments of several European powers have got together to lend public money to Greece and rescue the foreign banks. The coalition of powers dictated policies to Greece that served their own interests and those of a few big private banks with which they colluded. Each time, the aim of the policies was to free up the fiscal (budgetary) resources required to repay the debt. This meant a reduction in social spending and public investments. Thus through a variety of ways and means, Greece and the Greek people have been denied the exercise of their sovereignty. This is how Greece as a country has been kept subordinate and peripheral. My own historical research on Greek debt since the 1820s |61| reaches conclusions that are not very different. Carmen Reinhart and Christoph Trebesch insist on the need for a very significant reduction of Greek debt and they reject solutions that consist of rescheduling debt repayments (p. 17). For my part, in the present study, I conclude that the debt claimed by the Troika (the IMF, ECB and the European Commission) must be cancelled.

Conclusion

The Greek crisis that broke out in 2010 was caused by bankers (foreign and Greek) and not by excessive public spending on the part of a State supposedly too generous in social terms. The crisis was produced when the private foreign banks turned off the credit tap, firstly in the private sector, then in the public sector. The so-called aid plan for Greece was designed to serve the interests of private bankers and the dominant countries of the Eurozone. The debts claimed from Greece since 2010 are odious, as they were accumulated in the pursuit of objectives that clearly go against the interests of the population. The creditors were fully aware of this and exploited the situation. These debts must be cancelled.

This research examines in depth and confirms what the Greek Debt Truth Committee showed in 2015, both in its preliminary report of June 2015 and its September 2015 report on the Third Memorandum.

The next study will examine the development of the banking crisis between 2010 and 2016, the restructuring of Greece’s debt in March-April 2012 and the recapitalization of the banks.

Acknowledgements 

The author would like to thank the following for reading through the text and making suggestions: Thanos Contargyris, Alexis Cukier, Marie-Laure Coulmin, Romaric Godin, Pierre Gottiniaux, Fotis Goutziomitros, Michel Husson, Nathan Legrand, Ion Papadopoulos, Anouk Renaud, Patrick Saurin, Adonis Zambelis. He also thanks Daniel Munevar, who assisted him in his research and provided a series of graphs.

The author accepts full and sole responsibility for any errors that may occur in this work.

English translation by Snake Arbusto, Vicki Briault, Mike Krolikowski and Christine Pagnoulle

Footnotes

|1| German banks also had to be bailed out with public money, but considering the size of its economy and the resources the government could call upon, Germany was less shattered than other economies.

|2| These financial flows were volatile and speculative in that they were not intended for investment in the productive system of the targeted countries but mainly for consumer credit, mortgages and financial securities.

|3| In Cyprus the crisis broke out in 2012 and led to a Memorandum of Understanding in March 2013.

|4| See http://www.cadtm.org/What-is-to-be-…

|5| Papandreou in Greece, Zapatero then Rajoy in Spain, the Irish government, as well as (of course) Merkel, Sarkozy (then Hollande), the governments of the Benelux countries…

|6| Christos Laskos & Euclid Tsakalotos, Crucible of Resistance: Greece, the Eurozone & the World Economic Crisis, Pluto Press, London, 2013, pp. 18-21.

|7| We will see farther on that due to connivance with the Eurozone authorities and successive governments, those four banks achieved control over 98% of the Greek banking market from 2014 onward.

|8| Let us remember that at about the same time in the US, speculation in the dotcom field resulted in the bursting of the Internet (or new technology) bubble from March 2000. In just two years (2000-2001), benefits the 4,300 Nasdaq companies had accumulated since 1995 ($145 billion) disappeared into thin air.

|9| Greece entered the Eurozone on 1 January 2002.

|10| Graph taken from C. Lapavitsas, A. Kaltenbrunner, G. Lambrinidis, D. Lindo, J. Meadway, J. Michell, J.P. Painceira, E. Pires, J. Powell, A. Stenfors, N. Teles: The Eurozone Between Austerity and Default, September 2010, http://www.researchonmoneyandfinanc…

|11| The same phenomenon was in evidence at the same time in Portugal, Spain, Ireland and the Central and Eastern European countries.

|12| As presented in the pie-chart, the main holders of Greek debt securities (i.e. the banks in the countries mentioned) are France, Germany, Italy, Belgium, the Netherlands, Luxembourg and the UK, while other holders are put together in “Rest of World”. The chart comes from Lapavitsas, op. cit., p. 10.

|13| From an article in the New York Times (29 April 2010): “Germany Already Carrying a Pile of Greek Debt”, http://www.nytimes.com/2010/04/29/b… accessed on 1 November 2016.

|14| In the case of Greece, Greek pension funds were highly exposed, which meant a drastic reduction of income for retired people and for the social security system when the Troika enforced a 50% haircut on Greek debt securities in 2012 (see below).

|15| Source: Yanis Varoufakis, And the Weak Suffer What They Must? Europe’s Crisis and America’s Economic Future, Nation Books, 2016, pp. 147-8.

|16| This table and the following are from: Patrick Saurin, “La ‘Crise grecque’, une crise provoquée par les banques” (The ‘Greek Crisis’ a Bank-provoked crisis), http://www.cadtm.org/La-Crise-grecq… (in French)

|17| The increase in deposits by households and businesses mainly originated not from their own savings but from money lent to them by the banks. In other words the increase in household and small-business deposits is partly a consequence of their higher level of indebtedness.

|18| ROE, Return on Equity, measures the profitability of the equity of a company. It is a ratio that compares the equity to the result.

|19| See: Patrick Saurin, “La ‘Crise grecque’, une crise provoquée par les banques (The “Greek Crisis” a Bank-provoked crisis)”, http://www.cadtm.org/La-Crise-grecq… (in French). Retrieved 3 November 2016.

|20http://www.credit-agricole.com/modu… Retrieved 3 November 2016

|21| Source: Les Grecs contre l’austérité – Il était une fois la crise de la dette (Greeks Against Austerity – Once Upon A Time There Was A Debt Crisis), collective work, Le Temps des Cerises, Paris, November 2015 (in French)

|22| See: http://www.statistics.gr/el/statist… (in French).

|23| IMF (2009) “Greece: 2009 Article IV Consultation”. IMF Country Report No. 09/244. Retrieved from https://www.imf.org/external/pubs/f…

|24| The Eurosystem, of which the European System of Central Banks (ESCB) is a part, is directed by ECB rules, regulations and decisions. To achieve the goals of the ESCB, the ECB and the national Central Banks may intervene on the capital markets, by purchasing or selling on the spot or futures markets, by holding or otherwise managing securities and negotiable bonds in European Community or non-European Community currencies and in precious metals, or they may make credit agreements with other market actors based on appropriate guarantees for credit.

It is prohibited for the ECB or national central banks to grant loans, credit or overdrafts to public institutions or bodies of the European Community, whether they be national administrations, regional or local authorities, other public authorities, other bodies or public companies of member States; it is also prohibited for the ECB or the national central banks to buy the instruments of their own debt from these same institutions. Nevertheless, since 2010-2011 through different programmes, the ECB has been massively purchasing certain such instruments from the private banks, which suits the latter very well. Since 2015, in the framework of ‘quantitative easing’ policies the ECB has again increased its purchases of sovereign debt from private banks.

|25http://www.europarl.europa.eu/RegDa…)574400_EN.pdf

|26| According to Christos Laskos and Euclide Tsakalotos, of the 879,318 companies recorded (all activities included), 844,917 or 96.1% employed between 1 and 4 individuals! Still, according to the same authors, in 2010, 58.7% of the Greek work force were employed in companies with nine or fewer employees, whereas the EU average is 41.1%. Source: Christos Laskos & Euclid Tsakalotos, Crucible of Resistance: Greece, the Eurozone & the World Economic Crisis, Pluto Press, London, 2013, p. 46.

|27| GreekReporter. (2015). “Hellenic Postbank Scandal will Cost Greek State About 500 mln Euros”. Retrieved February 1, 2016, from http://greece.greekreporter.com/201…

|28| DW. (2014). “Greek bankers embroiled in corruption scandal”. Retrieved February 1, 2016, from http://www.dw.com/en/greek-bankers-…

|29| Ekathimerini. (2015). “Minister says ATE bank scandal is biggest of its type”. Retrieved February 1, 2016, from http://www.ekathimerini.com/200923/…

|30Ibid.

|31| Reuters. (2012). “Special Report: How a Greek bank infected Cyprus”. Retrieved February 1, 2016, from http://uk.reuters.com/article/us-gr…

|32| ThePressProject. (2014). “George Provopoulos: the most powerful man in Greece a few months ago, now a suspect in a bank probe”. Retrieved February 1, 2016, from http://www.thepressproject.gr/detai…

|33Ibid.

|34Op. Cit. 17.

|35| On the Greek pension system, see: Michel Husson, “Pourquoi les réformes des retraites ne sont pas soutenables” (“Why the pension reforms are not sustainable”), published 28 November 2016, http://www.cadtm.org/Pourquoi-les-r… (in French)

|36Le Monde, “Les Grecs se disent ‘humiliés’ par les propos de Christine Lagarde” (Greeks feel ‘humiliated’ by Christine Lagarde’s statements), published 27 May 2012, http://www.lemonde.fr/europe/articl… (in French)

|37| Money Market Funds (MMF) are financial companies in the USA and Europe, subject to little or no control or regulation since they do not hold banking licences.

|38| Ultimately, under the Memorandum of May 2010, the ECB agreed to allow the Greek banks to continue depositing Greek securities (both treasury bills, with a term of less than one year, and sovereign bonds for more than one year) for credit they would then use to repay their private foreign creditors, which thus afforded the latter total protection. It should be stressed that this line of credit played a very important role. The financial press barely mentioned it.

|39| The text of this Box is drawn from the Preliminary Report of the Truth Committee on the Greek Public Debt, June 2015, Chapter 2, http://cadtm.org/Preliminary-Report…

|40| European Commission, 2010. Report On Greek Government Deficit And Debt Statistics. Available at: http://goo.gl/RxJ1eq [Accessed June 12, 2015].

|41| Greek Government, 2010. Technical Report on the Revision of Hospital Liabilities.

|42| Press Release. Ministry of Health and Social Solidarity, 2010.

|43| In March of 2010, the office in charge of official statistics, the National Statistical Service of Greece (NSSG), was renamed ELSTAT (Hellenic Statistics Authority).

|44| Among a plethora of breaches of European Law, the following violations are especially and briefly described: the criterion of the legal form and the type of state involvement; the criterion of 50%, especially the requirement of ESA95 (par. 3.47 and 3.48) about subsidies on products; this violation led to false characterization of revenue as production cost; the ESA95 (par. 6.04) about fixed capital consumption; the Regulations about Capital Injections; the ESA95 definition of government-owned trading businesses (often referred to as public corporations) as not belonging to the General Government sector; the ESA95 requirement of a long period of continuous deficits before and after the reclassification of an economic unit.

|45| According to the dominant narrative, the “bail-out of the Greeks” is financed by the taxpayers of the Eurozone or of one country or another, when in reality it is the Greek taxpayers (and more precisely, the ones at the bottom of the ladder, because proportionally it is they who pay the most taxes) who will pay for it. The taxpayers in the other countries are guarantors of part of the credits that were extended to Greece.

|46| Yanis Varoufakis, And the Weak Suffer What They Must?: Europe’s Crisis and America’s Economic Future, Nation Books, 2016

|47| Renaud Vivien, Eva Joly, “Iceland refuses its accused bankers ‘Out of Court’ settlements”, published 2 March 2016, http://www.cadtm.org/Iceland-refuse…

|48| Mayes, D. (2009). Banking crisis resolution policy – different country experiences. Central Bank of Norway. http://www.norges-bank.no/Upload/77…

|49| For more on this, see: Eric Toussaint, Bancocracy, Resistance Books, IIRE/ CADTM, 2015, chapters 8, 9 and 12. See also: Eric Toussaint, “Banks bluff in a completely legal way”, published in English on 4 July 2013, http://www.cadtm.org/Banks-bluff-in…

|50| Hellenic Republic Public Debt Bulletin, No. 56, December 2009.

|51| On 1 January 2010, before the Greek and the Eurozone crises broke out, Germany had to promise an interest rate of 3.4% on ten-year bonds while by 23 May 2012, the rate for the new issue of ten-year bonds had fallen to 1.4%.

|52| Bank of Greece, Economic Research Department – Secretariat, Statistics Department, Bulletin of Conjunctural Indicators, No. 124, October 2009. Available at www.bankofgreece.gr

|53| After the Committee had made public the most important of these confidential documents, the totality were made entirely public on line: Office memorandum – Subject: Board meeting on Greece’s request for an SBA – May 9, 2010. The verbatim: “Minutes of IMF Executive Board Meeting”, 9 May, 2010; the report and record of decisions: “Board meeting on Greece’s request for an SBA”, Office memorandum, May 10, 2010.

|54| At the time, Christine Lagarde was still Minister in France’s Sarkozy government. She became the CEO of the IMF in 2011 after Dominique Strauss-Kahn resigned.

|55http://adlib.imf.org/digital_assets… 2010/EBM/353745.PDF p.68

|56| See the Office Memorandum of the IMF direction meeting held on 10 May 2010, at the end of point 4 page 3, “The Dutch, French, and German chairs conveyed to the Board the commitments of their commercial banks to support Greece and broadly maintain their exposures.” http://gesd.free.fr/imfinter2010.pdf

|57| See in the Office Memorandum of the IMF direction meeting held on 10 May 2010, point 7 page 3, that quite clearly states that several IMF executives reproached the direction for having quietly changed the rules. http://gesd.free.fr/imfinter2010.pdf

|58| Moreover Trichet adopted exactly the same attitude towards Ireland six months later in November 2010.

|59| From “Minutes of IMF Executive Board Meeting”, May 9, 2010. See the excellent article by Michel Husson, http://www.cadtm.org/Grece-les-erre…. (Greece: the IMFs ‘Mistakes’) (in French or Spanish.)

|60| Carmen M. Reinhart and Christoph Trebesch, “The Pitfalls of External Dependence: Greece, 1829-2015”, Brookings Papers, 2015.

|61| Eric Toussaint, “Newly Independent Greece Had an Odious Debt Round Her Neck”, published in English 26 April 2016, http://www.cadtm.org/Newly-Independ… and “Greece: Continued Debt Slavery from the End of the 19th Century until the Second World War” published in English 17 May 2016, http://www.cadtm.org/Greece-Continu…

Nov 062016
 

By Eric Toussaint, 99GetSmart

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In 1823, the government of the United States adopted the Monroe Doctrine. Named after a Republican president of the USA, James Monroe, it condemns any European intervention in the affairs of “the Americas.” In reality, the Monroe Doctrine served as cover for a policy of more and more aggressive conquests on the part of the USA to the detriment of the new independent Latin American States, beginning with the annexing of a large part of Mexico in 1840s (Texas, New Mexico, Arizona, California, Colorado, Nevada and Utah). North American troops occupied Mexico’s capital city in September 1847. It should also be pointed out that the government of the USA attempted to exterminate all native peoples, the “redskins,” who refused to submit. And those who did submit were still subjected to atrocities, and ended up on reservations.

Territories lost by Mexico in favor of the United States in 1848

Territories lost by Mexico in favor of the United States in 1848

In 1898, as we have seen, the United States declared war on Spain and took control of Cuba and Puerto Rico. 

In 1902, in contradiction of the Monroe Doctrine, Washington did not come to the defence of Venezuela when it was the victim of armed aggression by Germany, Britain, Italy and Holland with the goal of forcing the country to repay debt. Then the United States intervened diplomatically to see to it that Caracas resumed debt repayment. This attitude on the part of Washington gave rise to a major controversy with Latin American governments, and in particular with the Argentine Minister of Foreign Affairs, Luis M. Drago, who declared: “The principle I would like see recognized is that] a public debt cannot give rise to the right of armed intervention, and much less to the occupation of the soil of any American nation by any European power.” This principle was to become known as the Drago doctrine. The debate among governments ended in an international conference at The Hague which led to the adoption of the Drago-Porter Convention (from the name of Horace Porter, a United States soldier and diplomat) in 1907. It called for arbitration to be the first means of solving conflicts: any State signing the Convention must agree to submit to an arbitration procedure and participate in it in good faith, failing which the State demanding repayment of its debt would have the right to use armed force.

In 1903, President Theodore Roosevelt organised the creation of Panama, which was separated from Colombia against the country’s will. This was done to allow the Panama Canal to be built under Washington’s control.

In 1904, the same president announced that the United States considered itself to be the policeman of the Americas. He pronounced what is known as the “Roosevelt Corollary to the Monroe Doctrine”: “Chronic wrongdoing, or an impotence which results in a general loosening of the ties of civilized society, may in America, as elsewhere, ultimately require intervention by some civilized nation, and in the Western Hemisphere the adherence of the United States to the Monroe Doctrine may force the United States, however reluctantly, in flagrant cases of such wrongdoing or impotence, to the exercise of an international police power.” |1|

Theodore Roosevelt (center, left) and the “Rough Riders” in Cuba, 1898

Theodore Roosevelt (center, left) and the “Rough Riders” in Cuba, 1898

In 1915 the United States invaded Haiti under the pretext of recovering debts and occupied the country until 1934. Eduardo Galeano writes: “the United States occupied Haiti for twenty years and, in that black country that had been the scene of the first victorious slave revolt, introduced racial segregation and forced labor, killed 1,500 workers in one of its repressive operations (according to a U.S. Senate investigation in 1922), and when the local government refused to turn the Banco Nacional into a branch of New York’s National City Bank, suspended the salaries of the president and his ministers so that they might think again” |2|.

Other armed interventions by the United States took place during the same period, but an exhaustive list would be too long.

US military interventions in Latin America, 1898 - 1939

US military interventions in Latin America, 1898 – 1939

This brief summary of the intervention and policies of the United States in the Americas in the 19th and early 20th centuries gives us an understanding of Washington’s true motives in the debt repudiations in Cuba in 1898 (see The USA’s repudiation of the debt demanded by Spain from Cuba in 1898: What about Greece, Cyprus, Portugal, etc.?) and Costa Rica in the 1920s (see What other countries can learn from Costa Rica’s debt repudiation).

General Smedley Butler, author of “War is a Racket"

General Smedley Butler, author of “War is a Racket”

In 1935, Major General Smedley D. Butler, who took part in many US expeditions in the Americas, writing during his retirement, describes Washington’s policies as follows: “I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903.” |3|

Translated by Snake Arbusto

Footnotes

|1https://en.wikipedia.org/wiki/Roose…

|2| Eduardo Galeano, Open Veins of Latin America: Five Centuries of the Pillage of a Continent, Monthly Review Press, 1973, translated by Cedric Belfrage, online editionop. cit., p. 108.

|3| Published in Common Sense, November 1935. See Leo Huberman, Man’s Worldly Goods. The Story of the Wealth of Nations, New York, 1936. Note that an American military base in Okinawa bears the name of Smedley D. Butler. His confession cannot help but remind one of John Perkins’s Confessions of an Economic Hit Man. The shocking story of how America really took over the world, Ebury Press, 2005.

Eric Toussaint

Eric Toussaint

Eric Toussaint is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.

Jul 232016
 

By Eric Toussaint, CADTM, 99GetSmart

Bolivar Boulevard, Venezuela - Luis Robayo/AFP

Bolivar Boulevard, Venezuela – Luis Robayo/AFP

From the start of the struggle for independence, Simón Bolívar |1|, like other independentist leaders, launched a policy of internal indebtedness (which ended up benefiting the local ruling class) and external indebtedness toward Britain and its bankers. In order to borrow abroad, he engaged part of the nation’s wealth as collateral and agreed to free-trade agreements with Britain. The bulk of the sums borrowed never reached Latin America because the bankers in London skimmed off enormous commissions, charged actual interest rates that were abusive, and sold the securities for well below their face value. Certain Latin American representatives appointed by the independentist leaders also withheld large commissions at the source, or else simply stole part of the amounts borrowed. As for the rest, another large share of the borrowed amounts was used directly to purchase weapons and military equipment from British merchants at exorbitant prices. Out of what eventually made it to Latin America – that is, only a small percentage of the loan amounts –, large sums were misappropriated by certain of the new authorities, military leaders and the local dominant classes. A series of quotations from Simón Bolívar accompanied by commentary by Luis Britto clearly show that the Libertador gradually became aware of the debt trap into which he and the new independent States had fallen. Simón Bolívar did not seek to enrich himself personally by taking advantage of his functions as head of State, unlike many leaders who came to power thanks to struggles for independence.

The terms of external indebtedness were highly favourable to Britain 

In November 1817, Simón Bolívar appointed a special envoy to London to obtain external financing on credit. In the letter of accreditation he wrote, he granted enormous powers: “And in order that he may propose, negotiate, adapt, conclude and sign in the name and under the authority of the Republic of Venezuela any pact, convention and treaty founded on the principle of its recognition as a free and independent State, and in order to provide support and protection, stipulating to that end all the necessary conditions for indemnifying Great Britain for its generous sacrifices and provide it with the most positive and solemn proofs of a noble gratitude and perfect reciprocity of services and of sentiments” (Luis Britto, p. 395). Luis Britto |2| makes the following comment: “The accreditation is conceived in very broad terms: it is possible to agree to “any condition necessary.” The representative and the lenders may make use of it with the greatest freedom.” (Britto p. 395). Initially, the debts contracted were exclusively to serve the war effort.

Referring to the creation of Gran Colombia (Venezuela, Colombia, Panama, Ecuador) in 1819, Britto notes: “This integration has as its consequence the amalgamation of the debts contracted by each of the political bodies. Accordingly, Article 8 of the Constitution clearly stipulates: “All debts which the two peoples have contracted separately shall be recognised jointly and severally as the national debt of Colombia; and all the goods of the Republic shall be collateral for their repayment.” Britto continues: “Not only were the debts constitutionally consolidated; by virtue of the Constitution, all public commodities of the nascent political body were to constitute guarantees. Unfortunately this operation was not carried out with the transparency that would have been desirable, since the registers of the operations were incomplete and confused.”

Rosa Luxemburg, nearly a century later, considered that these loans, while necessary, had served as an instrument of subordination of the young States being created: Though foreign loans are indispensable for the emancipation of the rising capitalist states, they are yet the surest ties by which the old capitalist states maintain their influence, exercise financial control and exert pressure on the customs, foreign and commercial policy of the young capitalist states.” |3| I have analyzed the link between the policy of indebtedness and free trade agreements in the first half of the 19thcentury in Latin America in “How Debt and Free Trade Subordinated Independent Latin America,”.

The new elites profit from internal debt and refuse to pay taxes 

The British Consul, Sir Robert Ker Porter, mentions conversations with Simón Bolívar in his journal, and in the entry for Wednesday 15 February, 1827, observes that “Bolívar confesses to an internal debt of 71 millions of dollars, in paper, to be paid by the Govt. Hundreds of individuals have speculated deeply, and most usuriously in the paper…” According to the Consul, the paper was sold for US dollars by persons in urgent need at 60% of its value, and in certain cases 25% and even 5% of its face value. He goes on to explain that according to his sources almost no officials had kept any cash, spending it all in this “immoral and antipatriotic speculation.” He says that Vice-President Santander is said to possess two million in these bonds, which he is said to have purchased for $200,000 (see Britto, op. cit. p. 378). Luis Britto adds the following comment: “These speculators are in turn closely related to numerous officers and republican politicians, who are making large fortunes at the expense of the blood of their troops” (p. 380). And he adds: “The mere announcement of rigorous tax measures strikes fear into the hearts of civil servants like the Intendant Cristóbal Mendoza, who suddenly tendered his resignation.” (p. 380).

The national debt will oppress us 

The words written by Simón Bolívar in a letter sent on 14 June, 1823 to Vice-President Francisco de Paula Santander (the one mentioned by the British Consul in his notes in 1827) are striking: “In the end we will do everything, but the national debt will oppress us.” And, referring to the members of the local ruling class and the new powers: “The national debt engenders a chaos of horrors, calamities and crimes and Monsieur Zea is the spirit of evil, and Méndez the spirit of error, and Colombia is a victim whose entrails these vultures are tearing to shreds: they have already devoured the sweat of the Colombian people; they have destroyed our moral credit, and in exchange we have received meagre support. Regardless of the decision taken regarding this debt, it will be horrible: if we recognise it, we cease to exist, and if we do not… this nation will be the object of opprobrium.” (Britto, p. 405). We see clearly that Simón Bolívar, who had become aware of the debt trap, rejects the prospect of repudiation.

Two months later, Simón Bolívar again wrote to Vice-President Santander on the subject of the debt and referred to the situation of the new authorities in Peru: “The government of Riva Agüero is the government of a Catilina associated with that of a Chaos; you cannot imagine worse scoundrels or worse thieves than the ones Peru has at its head. They have devoured six million pesos in loans, scandalously. Riva Agüero, Santa Cruz and the Minister of War alone have stolen 700,000 pesos, solely in contracts let for equipping and embarking troops. The Congress has demanded to be shown accounts and has been treated like the Divan of Constantinople. The manner in which Riva Agüero has behaved is truly infamous. And the worst thing is that between the Spanish and the patriots, they have brought about the death of Peru through their repeated pillaging. The country is the most costly on earth and there is not a maravedí left for its maintenance.” (in Britto, p. 406)

Simón Bolívar, pushed to the wall by the creditors, was prepared to cede public commodities to them. In 1825, he offered to repay the debt by transferring a part of Peru’s mines, which had been abandoned during the war of independence (see Britto p. 408 and following); in 1827, he attempted to develop a quality tobacco crop to sell to Britain to pay the debt (Britto, p. 378-382); in 1830 he offered to sell unused public land to the creditors (Britto, p. 415-416).

Simón Bolívar threatens to denounce the oppressive debt system to the people 

On 22 July, 1825, Simón Bolívar wrote to Hipólito Unanue, Peru’s Prime Minister: “The masters of the mines, the masters of the Andes of silver and gold, are seeking loans of millions in order to poorly pay their little army and their miserable administration. Let all this be told to the people, and let our abuses and our ineptness be forcefully denounced, so that it may not be said that government protects the abominable system that is ruining us. I repeat, let our abuses be denounced in the “Government Gazette”; and let pictures be painted there that offend the imagination of the citizens.” (Britto, p. 408).

In December 1830, Simón Bolívar died in Santa Marta (on the Caribbean coast of Colombia), at a time when Gran Colombia was in strife and abandoned by the ruling classes of the region.

Translated by Snake Arbusto and Christine Pagnoulle

Thanks to Lucile Daumas for her French translations of quotations in Spanish, which served as basis for the English translations (by CADTM).

Footnotes

|1| Simón Bolívar, who was born 24 July, 1783 in Caracas, Venezuela and died on 17 December 1830 at Santa Marta, Colombia was a Venezuelan general and politician. He is an emblematic figure, with the Argentine José de San Martín and the Chilean Bernardo O’Higgins, of the emancipation of the Spanish colonies in South America from 1813. He participated decisively in the independence of present-day Bolivia, Colombia, Ecuador, Panama, Peru and Venezuela. Bolívar also played a part in the founding of Gran Colombia, which he wished to see become a great political and military confederation including all of Latin America, and of which he was the first President.

The honorary title of Libertador was given him initially by the Cabildo of Mérida (Venezuela), then ratified in Caracas (1813), and is still associated with him today. Bolívar encountered so many obstacles in bringing his projects to fruition that he referred to himself as “ the man of difficulties” in a letter to Francisco de Paula Santander in 1825.

As a major figure of universal history, Bolívar is today a political and military icon in many countries in Latin America and around the world, who have given his name to many squares, streets and parks. His name is also borne by a State of Venezuela, a department in Colombia, and even a country – Bolivia. Statues of him are found in most large cities in Latin America, but also in New York, New Orleans, Lisbon, Paris, London, Brussels, Cairo, Tokyo, Québec, Ottawa, Algiers, Madrid, Tehran, Barcelona, Moscow and Bucharest.

Wikipedia entry: https://en.wikipedia.org/wiki/Sim%C3%B3n_Bol%C3%ADvar

|2| Luis Britto García is a Venezuelan man of letters, playwright, historian and essayist born in Caracas on 9 October 1940. In 2010 he published, in Spanish, a work devoted to Simón Bolívar: El pensamiento del Libertador – Economía y Sociedad, BCV, Caracas, 2010 http://blog.chavez.org.ve/temas/libros/pensamiento-libertador/. In May 2012, Luis Britto García was appointed to the Venezuelan Council of State, “the highest circle of advisers to the president,” by President Hugo Chávez. See: https://en.wikipedia.org/wiki/Luis_Britto_Garc%C3%ADa

|3| Rosa Luxemburg. 1913. The Accumulation of Capital, London, Routledge and Kegan Paul Ltd, 1969, Chapter 30 II, p. 89 https://www.marxists.org/archive/luxemburg/1913/accumulation-capital/

Author

Eric Toussaint is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography:
https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.
Jun 302016
 

By Pierre Gottiniaux for CADTM, 99GetSmart

Street art in loiza, Puerto Rico - photo by Denise Rowlands (CC)

Street art in loiza, Puerto Rico – photo by Denise Rowlands (CC)

The island of Puerto Rico, which is part of the Commonwealth of the United States, is staggering under the weight of an unsustainable debt of nearly $73 billion. Its neo-colonial legal structure prevents it from restructuring its debt and protecting itself from the rapacious creditors who have already begun to secure their positions, working in the shadows to get Washington to make the “right decisions”– meaning those that will bring the island’s population to their knees. And yet, a debt audit commission is now revealing that a large part of Puerto Rico’s public debt was issued unconstitutionally and could be considered illegal under US law.

Causes of the indebtedness

The USA has made Puerto Rico into a tax haven for its companies, who also use the island as a pool of cheap labour. Puerto Rico provides a full tax exemption for US companies that are based there, and also the possibility of returning revenue to their parent companies without paying taxes. But that tax advantage, which a large number of companies were profiting from, ended in 2006 by decision of the federal government. That led to a large number of companies and investors – and therefore employers – leaving the island.

Puerto Rico provides another advantage to investors, and it is still in force: a tax exemption on revenues from public debt securities. That exemption is in force for all American public entities, but in the case of Puerto Rico it provides a unique, threefold advantage: exemption from federal taxes, state taxes, and local taxes, even for non-residents of Puerto Rico (whereas for US states – Puerto Rico being a territory and not a state – the exemption from state and local taxes is only applicable to residents of the state and/or municipality where the investment is made). That’s what we mean by a threefold exemption. And it amounts to threefold losses for the government of Puerto Rico. US investment funds have taken full advantage of this system.

Another major cause of the growth of Puerto Rico’s debt is the difference in treatment between the social-security systems: The Puerto Rican government receives significantly less from the federal government, proportionally, than the 50 states, for a population who are much poorer on average and therefore much more in need of such support. And this is despite the fact that the island’s population pays the same taxes as “continentals.” The compensatory outlay the government has been forced to make in recent decades accounts for over a third of Puerto Rico’s current debt ($25 billion out of $73 billion) |1|. Many cuts have already been made to public and private social-security programmes (cuts in wages, increased payroll taxes, lower coverage rates, etc.), with devastating consequences, because behind those programmes there are women and men who can no longer afford to receive care (see the “People are literally dying because of Wall Street greed” video campaign) |2|.

Another factor is the crisis in 2007, which made investors wary of anything that might involve risk; Puerto Rico’s situation, a year after the end of the tax advantage mentioned above, was not an encouraging one. The sudden recession in 2009, which followed the crisis of 2007, also heavily impacted Puerto Rico’s tourist industry, further shrinking an already strangling economy. Lastly, the failure of Detroit in 2013 prompted many investors to shun public debt securities, because they were suddenly no longer considered “untouchable” – that is, exempt from restructuring and payment default.

For all these reasons – and the list is not exhaustive – Puerto Rico’s budget has been in deficit for 16 consecutive years and the government has been borrowing to compensate. In exchange for the loans, it has imposed austerity measures aimed at reducing the deficit, with the sole result of plunging the population into ever-increasing poverty, forcing an ever-increasing number of people to emigrate. Puerto Ricans have US citizenship and can therefore travel and take up residence freely throughout the country. The result is that the island’s population is inexorably dwindling, year after year, aggravating the situation further; Puerto Rico’s demographic balance is now negative. And needless to say, the first ones to leave are university graduates, since there are no longer any employment opportunities for them on the island. That only accelerates the deterioration of the situation and is dragging the government – and the population who suffer the consequences – into a deepening spiral of indebtedness and austerity.

The sovereignty problem 

Puerto Rico is a semi-colony of the United States, and its sovereignty is extremely limited. Those limitations are particularly flagrant regarding management of her debt. The federal government has excluded Puerto Rico from filing under Chapter 9, the law that applies to insolvent local governments, which Detroit made use of in 2013. The island’s government tried to pass a law in 2014 called the Recovery Act which would have allowed it to restructure its debt, but the US Supreme Court struck down the law on 13 June 2016. |3|

The question of Puerto Rico’s sovereignty is debated regularly, but there are many obstacles to implementing it. In a referendum held in 2012, a majority of the population voted in favour of statehood – full incorporation into the USA – as opposed to the current status of unincorporated territory or Commonwealth. Most Puerto Ricans have family in the USA and are attached to the country, and therefore massively reject the option of becoming an independent nation. But the federal government, and the American population in general, reject the idea on the grounds that statehood for the island would cost them too much – refusing to deal with the issue of who is responsible for Puerto Rico’s economic situation. And indeed, just days before it struck down the Recovery Act, in early June 2016 the Supreme Court of the US’s rejection of a petition |4| by Puerto Rico’s government reaffirmed the island’s subordinate status.

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(results of the 2012 referendum – source Wikipedia)


The threat of default

Concretely, the government of Puerto Rico has already been in default of payment since 2015, but on bonds that are not senior debt since they are not guaranteed by the constitution. On 1 July, if nothing changes, Puerto Rico will default on a senior debt of $2 billion – a default which could set off a wave of judicial reprisals on the part of the creditors, who will inevitably go to court to force repayment of their debts. And, even if Puerto Rico manages to scrape up the money to repay that debt by 1 July, which is highly unlikely, it would automatically result in non-payment of wages and pensions and the shutdown of hospitals and public services, because the government doesn’t have the cash necessary to cover that amount, and could only do it by robbing other budget items.

Who holds Puerto Rico’s debt?

The system of threefold tax exemptions on Puerto Rico’s debt securities made them extremely attractive for US investors, beginning with the numerous investment funds that operate almost exclusively by purchasing municipal bonds and have a large impact on the local economy. There are also a large number of pension funds throughout the USA.

But since the Puerto Rico debt crisis deepened, in 2014, and the ratings assigned by the bond rating agencies began to slip, new participants have gotten into the game – the “vulture funds,” who purchase Puerto Rican debt securities on the secondary market at a fraction of their value (on average 30 cents on the dollar, or 30% of face value), demanding exorbitant interest rates (up to 34%). These funds have a very specific goal: They wait until Puerto Rico defaults on its debt, and then file suit to demand payment of the face value of the securities (the “dollar” they acquired for 30 cents). It’s what they specialise in. They’ve done it with Argentina, with Greece… with all countries who experience over-indebtedness, and it’s made them billions.

The main solution currently being proposed

Currently, the “solution” that has the most chance of actually being adopted is a bill passed by the House of the Representatives of the USA on 9 June 2016, known under the name PROMESA (for Puerto Rico Oversight, Management and Economic Stability Act), which means “promise” in Spanish. The bill has had wide bipartisan support — as much from Republicans as from Democrats —, and in particular from presumed presidential candidate Hillary Clinton. And for good reason, since the bill, which still needs approval from the Senate, is aimed at restructuring only a part of the Puerto Rican bonds in circulation, and the vulture funds are obviously concentrating on another part, which will not be restructured but has the same guarantees under Puerto Rico’s constitution. That is one of the criticisms raised by its detractors, who include Bernie Sanders |5|, the Democrat Senator from Vermont and candidate for the Democratic presidential nomination in 2016, numerous trade unions, and small investors in Puerto Rico, who rightly feel that there is a prejudice towards big investors. But that’s not the only reason.

The PROMESA bill, if does not undergo modifications when it goes before the US Senate, will impose a “fiscal oversight board” made up of seven members, four of whom will be appointed by the Republican Party, two by the Democratic Party, and one by the President, and only one of whose members will be required to be a resident of Puerto Rico. This board will have greater powers than those of the island’s government, in the economic sphere but also in terms of general governance – which harks back to the colonial period, when the governor of the island was an officer of the United States army appointed by the President. It is also reminiscent of the international financial commissions set up in Tunisia in 1869 |6| and in Greece in 1898. |7|

The fiscal oversight board would have the task of negotiating the restructuring of a portion of Puerto Rico’s debt and taking the measures demanded by the creditors to “clean up” the island’s economy, which would mean deepening and extending the austerity measures taken in recent years and which have already caused the closing of 150 schools, the loss of 20% of the jobs on the island, the emigration of nearly 50,000 persons per year, the explosion of inequalities, etc. |8| Currently, more than one out of two children in Puerto Rico already lives below the poverty threshold. The board would fire even more schoolteachers, close more schools, and reduce the minimum wage (there is talk of reducing it to $4.25 an hour for people under age 25) or even eliminate it outright, etc.

Alternatives

There is a coalition in Puerto Rico, bringing together trade unions, community organisations, and activists, which defends the idea of an audit of the debt, on the grounds that a large part of Puerto Rico’s public debt may well be illegal. The coalition, called Vamos4PR (“Let’s Move 4 PR”), has the ear of the government of Puerto Rico, which decided in July 2015 to set up a debt audit commission with the task of analyzing the issuance of Puerto Rican bonds over the last 45 years. Unfortunately, due to a lack of funds, the commission — made up of 17 persons (elected officials, representatives of financial institutions, trade-union representatives, and researchers) — was only able to begin its work in January 2016. It has just filed an initial “pre-audit” report which will serve as the basis for future work, but already provides serious evidence of the illegality of a portion of Puerto Rico’s debt. The audit analyzes the two most recent issuances of Puerto Rican debt securities, in 2014 and 2015 (see the report below this article).

This report comprises extremely important items of information and provides strong arguments in favour of repudiation of a large part of Puerto Rico’s public debt. One can only regret that it is not receiving more discussion and media attention. In any case, the report reveals that a large portion of Puerto Rico’s debt was contracted in flagrant violation of the Commonwealth’s constitution and can therefore be considered illegal.

  • – Puerto Rico issued multimarket bonds in 2014 in order to finance its deficit, but the constitution requires that the Commonwealth maintain a balanced budget and prohibits the government’s using credit to compensate for a budget deficit. Yet Puerto Rico has borrowed more than $30 billion to finance its deficit since 1979. That debt might well be considered illegal by a court.
  • – The constitution requires that Puerto Rico spend no more than 15% of its revenues on debt service; the government devotes between 14% and 25% of its budget to debt repayment. If the final audit demonstrates that Puerto Rico devotes more than 15% of its budget to debt, then the debt could be declared illegal by a court. At that point a determination would have to be made as to what portion of the debt exceeds the limit.
  • – The constitution prohibits the issuance of securities with a maturity greater than 30 years. However the government of Puerto Rico, like most countries, “rolls over” its debt – that is, when a debt reaches maturity, instead of the repaying it, the government contracts another debt to finance the preceding one. The commission gives the example of a debt issued in 2014 to repay a debt issued in 2003, which had itself been issued to refinance a debt from 1987. So the commission will have to determine whether the practice in question is constitutional or not.

The commission will also examine possible illegitimate aspects of the debt, even though it doesn’t identify them as such in its report. Puerto Rico holds approximately 37 billion in CABs – Capital Appreciation Bonds –, which are bonds of a particular type, for which the issuer pays the interest and repays the capital only when the security reaches maturity. For example, one of the bonds Puerto Rico must repay on 1 July is a CAB issued in 1998 with a nominal value of $14 million, for which the estimated total payout is $38 million once the interest is included. The commission will examine this practice in its final report.

A final question the commission will attempt to answer has to do with productivity and the debt’s contribution to economic growth. Puerto Rico has a GDP/debt ratio of 96%. Since the recent increase in the debt has had no positive effect on the economy whatsoever, the commission will analyze the economic impact of the successive debt issues in detail.

Conclusion

It is clear that the PROMESA law will not improve the situation of Puerto Rico’s people, but will worsen it. The federal government is making no attempt to determine the reasons for the island’s over-indebtedness, instead arguing that poor management by a government that overspends requires that the situation be taken firmly in hand, without concessions. And yet there are many reasons why repudiation of the debt may well be justified, and they have been revealed by the audit commission which has in fact only begun a serious analysis of the debt. However the private interests hiding behind this “debt crisis” are powerful and know how to make themselves heard in Washington, which is why there appears to be no possibility of moving beyond the crisis in a positive way without strong popular mobilisation and real political determination.

Translated by Snake Arbusto

Footnotes

|1http://www.nytimes.com/2015/08/03/u…

|2https://www.thenation.com/article/e…

|3| See AFP wire of 13 June, 2016, “USA: Porto Rico débouté en justice sur sa dette”, available (in French) at: http://www.romandie.com/news/USA-Po…

|4http://www.theatlantic.com/politics…

|5| See in particular http://cadtm.org/Un-candidat-aux-presidentielles-US (in French) and also http://cadtm.org/Sen-Bernie-Sanders-From-Greece-to
Concerning the situation in Puerto Rico, Bernie Sanders argues for an audit of the debt that would determine which debts were contracted in violation of the constitution and for extending Chapter 9 to Puerto Rico to enable the island to restructure its debt while being protected from legal action by its creditors.

|6| See http://cadtm.org/Debt-how-France-appropriated

|7| See http://cadtm.org/Greece-Continued-debt-slavery-from

|8| See in particular http://cadtm.org/Puerto-Rico-en-lutte-contre-la (in French) and also http://cadtm.org/Puerto-Rico-must-escape-the-debt

Author

Pierre Gottiniaux CADTM Belgium

 

May 252016
 

By Eric Toussaint, CADTM, 99GetSmart

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Part Two of the series “Greece and debt: two centuries of interference from creditors”

This series of articles analyses Greece’s major debt crises by placing them in the international economic and political context, an approach that is systematically absent from the dominant narrative and very rarely present in critical analyses. Since 1826, a series of major debt crises have profoundly marked the lives of the Greek people. Each time, European Powers formed a coalition to impose new debts in order to repay the earlier ones. This coalition of Powers dictated policies to Greece that corresponded to their own interests and those of the few big private banks and large fortunes. Each time, those policies were aimed at extracting the tax resources necessary for repayment of the debt and entailed a reduction in social spending as well as decreased public investments. In a variety of ways, Greece and the Greek people were denied the exercise of their own sovereignty. With the complicity of the Greek ruling classes, this kept Greece in a subordinate, peripheral condition.

Recall of Part One, published 12 April 2016 http://cadtm.org/Newly-Independent-Greece-had-an: Newly Independent Greece had an Odious Debt round her Neck

Modern Greece was born shackled to debt from bond issues (in 1824, 1825 and 1833) which together amounted to 245% of her GDP. Three major European Powers (Britain, France and Russia) formed a coalition that amounted to the first Troika, imposed a monarchy, putting a Bavarian prince on the throne, and subjugated the country through debt. The Troika systematically defended the interests of the big banks in London and Paris, ensuring that they would extract maximum profit from the odious debt demanded of Greece. The Greek people, who had to foot the bill for a spendthrift, bellicose monarchy, rebelled on several occasions. While they succeeded in ousting the despot in 1862 and instituting a Constitution granting them certain civil and political rights, they were not able to free themselves of the burden of debt. The major Powers kept Greece in a position of subordination, denying the Greek people the exercise of their sovereignty. The monarchy and the local ruling classes systematically attempted to divert popular discontent towards nationalism and hostilities with the Ottoman Empire.

Introduction to Part Two

According to the dominant version of history, whether untruthful or simply mistaken, during the 1880s Greece was re-admitted onto the financial markets thanks to an 1878 agreement with the creditors who held their 1824-1825 |1| debts and to policies of radical public expenditure reduction. Greece then made heavy use of fresh borrowing and significantly increased its public spending. This, the story goes, was the cause of the 1893debt crisis and suspension of payments. Greece’s inability to manage its borrowing seriously is said to have led the big Powers to impose a financial control commission to oversee the Greek budget. This story is false!

The following translated extract from Le Monde dated 16 July 2015 is an example of what is widely said: “But, as today, the country was rife with clientelism and tax avoidance by the notables. Immediately after Greek independence, the King Otto, the first king of Greece, who was imposed by the European Powers, introduced costly major works projects. The civil service took on any warm body, the army was superbly equipped… It was all paid for by generous loans [sic] from western countries. The government lost control: in 1893, almost half of the country’s tax revenues were devoted to paying the interest on the debt”. |2|

Another example can be found in the 20 June 2015 issue of the Swiss financial magazine Bilan: “Thanks to the agreement that was ratified in 1878, Greece could once again, in 1879, borrow on the financial markets. Over the next fourteen years Greece borrowed the equivalent of almost 530 million French francs from Paris, London and Berlin creditors. Less than 25% of the sums were invested in infrastructures to develop the country. The rest went on military expenditure to finance Greece’s confrontations with its neighbours (with mixed military fortunes)”. |3|

The true part of the story is that the bankers again lent money to Greece. It is also true that the Monarchy spent a lot and waged expensive military campaigns against the Ottoman Empire. Most commentators, always ready to side with the creditors (like the Le Monde journalist who did not hesitate to mention ‘generous loans’, a real oxymoron) |4|, also point out that taxes were inefficiently collected.

Now let’s see what really happened: during the 1880s the bankers of the great Powers (British and French but also German, Belgian, Dutch, etc.) were favourable to lending to countries that were normalising their payments situations. They imposed one condition: the old outstanding debt must be restructured and repaid. Most of the countries who had had repayment defaults accepted these conditions that are very favourable to creditors who then opened their purses to lend money so that countries would have the means to repay old debts. Big capital, then experiencing a new phase of expansion in the dominant countries, was attracted to the new investments and lending possibilities offered by massive capital exports to peripheral countries. This was the beginning of the imperialist phase of world capitalism. |5|

Greek Bond - 1880

Greek Bond – 1880

Other debt restructuring of the same period

Debt restructuring that took place during the 1878-1890 period concerned Greece, Costa Rica, Paraguay, Peru and the Ottoman Empire.

The Greek debts from 1878 onwards. In 1878, the outstanding debts from 1824-1825 were restructured. The creditors obtained that Greece repay the equivalent of the amount she had received in 1824-1825. There was therefore no real debt reduction and Greece recommenced the payments of interest and capital. |6| Between 1879 and 1890 Greece entirely repaid the restructured debt. The debt had not been reduced because new debts were taken on in order to pay the old ones, which meant both series of debts were repaid during the 1880s.

The Costa Rican debt restructuring of 1885. In suspension of payment since 1874, Costa Rica agreed, in 1885, to a debt restructuring satisfactory to its creditors: along with £2 million they gained possession of a part of the railways and 568,000 acres of land.

The Paraguayan debt restructuring of 1885. Paraguay, which was also in suspension of payment since 1874, agreed to pay its creditors £800,000 and to concede to them 2.5 million acres of land.

The Peruvian debt restructuring of 1890. The Peruvian debt restructuring of 1890 was the biggest restructuring of debt for a Latin American country. The terms were very unfavourable for Peru: the creditors repossessed two million tons of guano (a natural fertiliser), gained possession of the whole public railway system, a shipping line on Lake Titicaca, the mines of Cerro de Pasco and, to top it all, a new loan was agreed to fund the repayment of the remainder of the debt in suspension of payment. Finally, it was in 1926 that Peru finished paying the restructuring of 1890 after the suspension of payments that started in 1876.

The restructuring of the Ottoman Empire’s debt. Following a payment default by the Ottoman Empire in 1875, the debt was partially restructured in 1881. The creditors demanded maximum repayment. To achieve this, a financial commission of experts appointed by the “great powers” was established. As Louise Abellard wrote: “An institution was created in 1881, by imperial decree, under the name of ‘The Ottoman Public Debt Administration’. This Administration gained absolute and irrevocable control over several Imperial revenues (customs and excise, taxes on alcoholic beverages, stamp duties, fishing rights, tax on silk, tobacco and salt monopolies, etc.). These revenues were to be allocated by the Administration to the payment of compensation to the creditors holding bonds issued before the default. The Administration was piloted by Europeans (British, Dutch, French, Germans and Italians) directly representing their nations’ creditors. Entirely independent of the Ottoman authorities, they were an instrument of absolute guarantee for the creditors who thus had the assurance that the old and the new investments would be reimbursed. Up to a point, the holders of the bonds, through the Administration, acted directly on Ottoman finances, in their own favour, until perceived prejudice was fully compensated (up to the end of the Empire). The Administration’s prerogatives were progressively extended to the role of guarantor for infrastructure contract payments (particularly railways)”. |7|

Debt restructuring permitted the imperialist countries to launch a new cycle of indebtedness and capital expansion

The debt restructuring that was carried out during the 1880-90s was the means by which the creditors embarked on a new phase of spreading the over-abundant capital available in the central countries (UK, France, Belgium Netherlands, Germany, etc.) all around the world. The granting of new loans was aimed at setting the repayment pump back into motion, since the countries in default needed fresh liquidities in order to repay their defaulted debts. Investments and loans were the vehicles used. In several cases, as we saw earlier with Latin American countries, restructuring took the form, partly, of property exchanged against outstanding loans. The principal criteria of the bankers, and other investors, was not at all the well-being of the debtor country and their ability to manage the funds they were loaned, or even to repay them, but the creation of maximum profitability. Their decisions were based on the necessity to invest all the funds at their disposal in making maximum profit as well as maintaining the country in a state of indebtedness and financial dependence. The creditors were assured that in case of non-payment their own country’s governments would intervene, by military means if necessary, to force the debtor country to keep up repayments and if necessary, colonize it.

In Tunisia, the Ottoman Empire and in Greece, international supervisory bodies with far-reaching authority were created by the creditor Powers (amongst whom France and Britain always occupied important or even highly privileged positions). Greece was in this position from the very beginning, as illustrated by the 1832 convention passed with Britain, France, Russia and the Kingdom of Bavaria, which created the Greek Monarchy and gave absolute priority to debt repayment. |8| An International Financial Control Commission was imposed on Tunisia in 1869 before it went under direct French control in 1881. In the Ottoman Empire the creditor Powers installed twenty local offices throughout the territory (from Yemen to Thessalonika), and employed 5,000 civil servants. Greece’s subordination to the creditor Powers – in fact written into its international “birth certificate” – has changed in form over time but still remains today: from the interference by the British, French and Russian ambassadors in the council of ministers in 1843, |9| to the creation of the International Finance Control Commission in 1898 (which functioned up to the Nazi invasion), not to forget the International Financial Enquiry Commission created in 1857 to watch over the repayment of the 1833 debt.

The impact of the international financial and economic crisis of 1890-1891 on Greece

In November 1890, the City of London was in a situation comparable to that which occurred again in the US in 2008 and which triggered off the failure of Lehman Bros., a credit crunch, an international banking crisis and a worldwide economic recession in 2009. On 8 November 1890 the London bankers held an emergency meeting to plan action, should Baring Bros. fail. On 10 November, the bankers met with the government, who established contacts with the other big Powers in order to coordinate reactions to the crisis. Baring Bros. (unlike Lehman Bros.) was saved, but the financial and economic crisis of 1891-1892 was profound. Among those who took part in saving Baring Bros. was the Rothschild bank (present in London, Paris and other European capitals and an important player in Greek debt), JP Morgan (already the biggest US bank) and JS Morgan (established in London and parent to JP Morgan, with whom they later merged). |10|

Nowhere in the articles on the 2015-2016 Greek debt crisis published by the chief organs of the international press are references to the 1893 Greek debt crisis to be found; nor any link to the international financial and economic situation and the suspension of payments decreed by the Greek Parliament at the time. The crisis that had its origins in London caused an economic recession, a fall in international trade, an international credit squeeze… Greece experienced a serious drop in its exportations and so was deprived of the foreign currency essential to funding its debt repayments. Exports of currants, which represented two thirds of Greek exports, fell by 50% between 1891 and 1893. There were two reasons for this sharp drop: 1. The international crisis and the reduction of demand in the richest countries; 2. The decisions taken in the UK, France and Russia to impose import duties on the currants entering their markets. This was in total contradiction of their own dogma professing free trade and the removal of all import-export duties. |11| The fall in revenue and blocked access to loans from British, French and German banks left Greece no option but to suspend payments. Fifty-six percent of Greece’s revenue was devoted to debt repayments. |12| Another contributing factor was a fall in the value of Greek currency against the pound sterling and other strong currencies. With a devalued currency, the real cost of the foreign debt became unsustainable.

The commentators who accuse Greece of being a country that goes easily into payment default should learn that in the 19th century, Spain suspended payment six times, the Austro-Hungarian Empire five times, Portugal three times, Prussia twice and Russia once. |13|

The military conflict against the Ottoman Empire and the restructuring that followed

The Greek monarchy and the local elite launched a disastrous military conflict against the Ottoman Empire in 1897. Evidently, the great Powers manoeuvred the two parties into war |14| in order to take advantage of their mutual weakening and increase their influence over them, particularly by using their debts. The conflict was costly and the great Powers imposed their will on Greece as much as on the Ottoman Empire. The peace treaty was signed in Constantinople (now Istanbul) on 4 December 1897 under the supervision of the UK, France and Russia (the Troika of the time, in place since 1830), the Austro-Hungarian Empire, Germany and Italy. |15| In 1898 another loan was made to Greece (see Box: The 1898 Bond Issue…) The Troika was again the guarantor of the loan. The loan was granted within the framework of the peace treaty and covered a big indemnity paid by Greece to the Ottoman Empire. The great Powers did good business; as they had control of the Ottoman Empire’s finances, they saw to it that the Ottoman Empire’s creditors were paid. Greece and the Ottoman Empire had the same creditors!

The 1898 Bond Issue and the subjection of Greece to International Financial Control

The Law of Control voted by the Hellenic Parliament on 26 February 1898 is identical to the draft bill drawn up by the International Financial Control Commission (IFC). Greece was obliged to accept all the creditors’ conditions. Under this Law, the IFC controlled all state revenue dedicated to servicing:
- the 1833 loan guaranteed by France, Great Britain and Russia;
- foreign loans incurred by the Greek State between 1881 and 1893;
- the new loan that Greece took on to repay the preceding ones and to pay war reparations to the Ottoman Empire.

The 1898 loan was composed of two parts:

1) A loan for war indemnity to Turkey covering 92 million French francs (4 million Turkish pounds) plus 2.3 million francs (100,000 Turkish pounds) that Greece had to pay for damage to private property.

2) A further loan to cover former debts and the deficit of the year 1897 to enable the debt to be repaid. This came to a total of 55 million francs distributed as follows:
- 26 million francs to cover the Greek State’s budget deficit for the year 1897;
- 2.5 million francs for payments owed by the Greek Government in 1898 to holders of the former foreign debt;
- 26.5 million francs to repay the floating debt or to convert it to gold.

The total new loan taken on by Greece thus came to 123.5 million francs (28.5 + 95), plus the 26.5 million francs of debt conversion. To this amount a further 20 million francs were to be added, in the form of loans as and when required, to cover the total deficit of the following years.

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Extract from the report of the International Finance Commission from 1898
Article 4 of the Law of Control drawn up by the IFC and meekly adopted by the Hellenic Parliament on 26 February 1898 stipulated that the Commission’s administrative costs, fixed at a maximum of 150,000 francs and including a sum of 60,000 francs to cover the fees of the six Delegates, should be deducted from the product of the revenues concerned. The six delegates represented Great Britain, France, Russia, the Austro-Hungarian Empire, Germany and Italy.The IFC obliged Greece to repay 39 million drachma per year while the average total income of the State (barring loans) came to approximately 90 million drachma. That meant that 43% of State revenue went directly to debt payments. Note that no part of the new loan was intended to strengthen the country’s economy, develop its infrastructure or improve public education. The new loan was intended exclusively to pay off former debts, indemnify Turkey (which in turn needed the indemnity to repay her creditors, who happened to be the same as Greece’s) and to pay off Greece’s current deficit.

The IFC members emphasized that on average the total budget of the Ministry of Education and Cults barely attained 3.5 million drachma, while the civil list (or emoluments of the sovereign) came to 1.3 million, the budget for the police 1.7 million and the Defence (war) budget 15 million. In the IFC’s reference budget there was no specific post for public health. The railway budget was a ridiculous 84,350 drachma (7.5% of the civil list). Note that the IFC forced an IOU of more than 4 million drachma upon Greece, for the heirs of King Otto who had been overthrown by the people in 1862. The annual charge that repaying this debt incurred came to 200,260 drachma, or 2.5 times the country’s railway budget!

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Extract from the report of the International Finance Commission from 1898 – administrative costs of Greece 1892 – 1896
The Commission made it quite clear that in the future, the Greek State budget would make no provision for major public works such as improvement of sea-ports and new railway lines. The Commission considered that any undertaking likely to significantly aggravate budget charges should be postponed until such time as the country’s finances had reached stable equilibrium. This is an explicit acknowledgement of the creditor Powers’ intention to maintain Greece in a permanent state of economic underdevelopment.In Article 11 of the Law, the IFC lays claim to the following for debt repayments:
- all revenue from stamp duty, about 10 million drachma;
- all revenue from import duties collected by the Piraeus Customs, i.e. about 10.7 million drachma;
- all revenue from duty on tobacco, i.e. about 6.6 million drachma;
- all revenue from duty from the monopolies on salt, oil, matches, playing cards and cigarette paper, to which were added all revenue from the emery mine at Naxos (an island in the Cyclades), i.e. about 12.3 million drachma in total.
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Extract from the report of the International Finance Commission from 1898
Who did the IFC entrust with the task of collecting revenue from the monopolies? The monopolies over salt, oil, matches, playing cards and Naxos emery were administered by a Greek-registered joint-stock company entitled Société de régie des revenus affectés au service de la dette publique hellénique or Company for the Control of Revenues Assigned to the Service of the Hellenic Public Debt (an ancestor of TAIPED |16|). The creditors obliged Greece to place this company under the direct supervision of the International Financial Commission and to make it a sort of instrument or organ of control. Furthermore, a designated member of the international Commission would be authorized to attend sessions of the Board of Administration and the General Assembly and the Commission would be able to veto any measure it judged illegal or damaging to the interests with which it had been entrusted. |17|Article 24 stated that all monies received by the Company designated in Article 14 should be entirely paid into the Régie’s accounts at least once a week. Should the revenues mentioned above prove insufficient, the IFC had the right to deduct revenue from the Customs at Laurium (whose gross product was estimated at 1.5 million drachma), Patras (2.4 million), Volo (1.7 million), and Corfu (1.6 million), in accordance with Article 12 of the Law.

IFC members could go in person to the various offices and establishments of all the services whose revenue was concerned, to check on the full implementation of the legal and regulatory measures. They were entitled to see on demand all books, accounts and accountancy documents (Article 36). Article 38 asserted that the Law of Control itself could only be modified with the agreement of the six Powers.

The conclusions of the International Financial Control Commission’s report provide a fine example of lies and hypocrisy: “In summary, the Commission was inspired in its work by the benevolent attitudes of the Powers where Greece is concerned. In satisfying the legitimate demands of the current creditors, it has taken fully into account the financial difficulties with which the country is faced. At the same time, while it has endeavoured to surround the collection and the use of the revenues set aside for the service of the debt with such guarantees as may afford every security to capitalists, it has been at pains to conserve, to the extent possible, the independence of the Hellene nation and of her Government. The future of Greece now depends on her own wisdom. If she applies herself to being industrious, calm and peacable, to improving her Administration, to developing her agricultural resources, encouraging her nascent industry and extending her trade relations, her financial situation will rapidly recover; her beneficent influence will gradually extend into the sphere of action which is reserved for her and, aided in this noble task by the sympathies of the Powers, she will succeed, through courageous and patient efforts, in conquering in Europe’s East the rank to which the glorious memories of her past entitle her.” |18|

This is typical of the discourse used by the European Commission and the governments of the creditor countries even now, in the 21st Century.

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Extract from the report of the International Finance Commission from 1898 – Conclusions
Sources:
- the diplomatic document (in French): Arrangement financier avec la Grèce, travaux de la Commission internationale chargée de la préparation du projet / French Ministry of Foreign Affairs – Paris, 1898, 223 pages,
http://gallica.bnf.fr/ark:/12148/bp… consulted on 1 May 2016;
- the text of the Greek law implementing the dictates of the international Financial Commission, consulted on 1 May 2016.

It is to be noted that from 1870 the German bankers and Germany were increasingly involved in the Balkans and the Ottoman Empire. The Greek defeat of 1897 was partly due to the military reinforcements and advice that the Ottomans had received from German officers (including generals) sent by Berlin. Bankers and diplomats were active in Athens and Constantinople. Among the countries keen to increase their influence in Athens after independence, Germany was omnipresent alongside the Troika. |19| No sooner had the peace treaty been signed and new loans granted to Greece, than the IFC imposed a new set of conditions on Greece. The Commission took up residence in Athens and took control of a large part of the Greek budget, which continued to be devoted to debt repayments. The Greek government had no authority to change the use of the income or modify taxation, without the agreement of the IFC. This bears a close resemblance to the present situation. The Commission remained in place up to the Nazi occupation of Greece in 1942! |20|

On top of the indemnity that Greece had to pay to the Ottoman Empire and that was diverted to the Great Powers, a large part of the new loan was to be used to continue repayments to the Troika countries for the 1833 loans. These repayments went on until the 1930s. According to calculations made by the economists Josefin Meyer, Carmen Reinhart and Christoph Trebesch (who are regularly associated with IMF research projects), only 25% of the sums borrowed by Greece between 1894 and 1914 were spent on regular projects (debt repayments apart) and investments. Forty percent went on debt repayments and banking commissions. The remaining 35% became military expenditure (the principal suppliers of armament were also the principal creditors and this situation persists today). |21| My own estimates show a much smaller portion of the borrowing being used for regular spending – no more than 10-15%.

Conclusions on the debt restructurings that took place in 1878 and 1898

These facts indicate that the debt resulting from the restructurings of 1878 and 1898 must be considered odious debt. The restructuring of 1878 required Greece to resume repayment of the debt contracted in 1824-1825, whereas that debt was illegal given that its terms were so overwhelmingly favourable to the creditors. This restructuring made repayment of the debt just as unsustainable and could only lead to a new crisis, which broke out in 1893. The restructuring of 1898 served to increase by several degrees the level of coercion exercised on the Greek government and its people, notably through the creation of the IFC. It enabled the six major Powers to grab a very large share of the government’s revenues while maintaining Greece in a situation of dependence toward its creditors.

An editorial comment published in the French daily Le Figaro in May 1898, describes the creditors’ strategy fairly clearly: “The maxim of the old policies was: Divide and Conquer. It has been partly replaced by the new rule: Lend them money to keep your foot on their necks. It would be interesting to make a study of it, for poor Greece, as we have had occasion to study it in Egypt, of that subtle invention of modern genius: the lender’s stranglehold on the borrower, substituted for brutal conquest using old-fashioned bayonets; judicial counsel imperceptibly becoming a counsel of wardship, of government, at first gentle and collective, then harsh and personal, for the benefit of the richest, the most tenacious, the most adroit members of the directory. We would like to observe, at its origin, the tying and the tightening of this noose of silver, the imperial instrument our century has made into its most effective weapon for political aggrandisement.” |22|

It is also important to conduct a study to determine what portion of foreign debt (debt issued in foreign currencies on the foreign financial markets, which must be distinguished from Greek loans in the local currency) was purchased by wealthy Greeks, whether residing in Greece or part of the wealthy Greek diaspora living in Istanbul, Alexandria, Smyrna and Paris. |23| It is certain that these powerful Greek elites had invested a significant part of their financial wealth in Greek securities. What that implies is that it was not in their interest to encourage their friends who succeeded one another in the Greek government to take a firm attitude with the creditors (see the Conclusions as well as the end of the inset with excerpts from Constantine Tsoucalas’s work).

Excerpt of a voucher issued by Greece in 1914, part of a loan of 500 million francs to repay previous loans

Excerpt of a voucher issued by Greece in 1914, part of a loan of 500 million francs to repay previous loans

A few keys to understanding the social and political evolution in Greece from just before the start of the First World War

Excerpts from the book by Constantine TsoucalasThe Greek Tragedy. |24| The selected excerpts give an idea of the development of social movements and the reforms won during the late emergence of a peripheral capitalist state.

“The successive tax increases on essential goods put the main burden on the workers and the middle classes, who had by now begun to organize in commercial guilds and unions. In March 1909 thousands of shopkeepers had violently demonstrated, in Athens and Piraeus, against the unequally distributed taxation. On 14 September a huge rally of over 50,000 (out of a population of under 200,000) shook Athens. While declaring their full confidence in the ‘revolution’, the Athenians went beyond the officers’ (that is, the new authorities who had just come to power [note by Eric Toussaint]) intentions. The demands for a system of progressive income taxation, the protection of production, the transformation of the civil service into a body of true public servants by the abolition of the spoils system rampant till then, an improvement in the workers’ standard of living, and a ban on usury as a criminal offence expressed the class antagonism that had been politically silent for so long. At the same time, the organization of the workers had been strengthened by the creation of numerous trade unions, and the discontent among the peasants had been growing since 1898, when the crisis in the currant trade, which had constituted a staple export, had reduced large strata of the agrarian population to misery. Unrest was especially strong in Thessaly, where the demand for agrarian reform of the large ‘estate-system’, inherited from the Turks, led to a series of violent peasant revolts, between 1905 and 1910, which had been bloodily repressed.”

(…)

“The elections of 1910 were a triumph for the new Liberal party. Venizelos formed his first cabinet, which consisted almost entirely of new men. A period of intense reconstruction and radical reform thus began.”

(…)

“The prerequisite for the reform programme of the Liberals was a constitutional reform. The constitution of 1864 was fully revised, individual liberties guaranteed, and the foundations of a ‘State of Law’ were laid. However, though some of the formal prerogatives of the monarchy were curtailed, the real powers of the King remained ambiguous, a fact which was to have explosive consequences.

On this institutional framework, Venizelos launched an impressive legislative programme. Land reform was the most urgent and difficult problem. A constitutional amendment (1911) was promulgated authorizing expropriation with compensation–though not without bitter opposition from the still powerful landowner class.”

(…) 

“Low wages were exempted from confiscation in cases of debt (1909), the trade union federations of Athens and Piraeus were recognized (1910), Sunday was made a compulsory rest day (1910), a new and rapid procedure was introduced for the adjudication of disputes between workers and management (1912), joint unions between workers and employers were forbidden (1914), and the newly established unions of workers were permitted to negotiate and sign collective labour contracts. Finally a compulsory general labour insurance scheme was introduced in 1914.”

“The fiscal system was also reorganized on a more equitable basis. Progressive taxation of income was introduced in 1911 and death duties were reorganized and greatly increased in 1914.”

Following the First World War at the end of the Ottoman Empire, Germany and Austria-Hungary were beaten, and the Greek monarchy and ruling classes thought that part of the Great Idea – Greece’s annexation of a part of Turkish Asia Minor – was about to be realised. This led to the disastrous military adventure of 1922, during which the Greek army attacked the Turkish army in its territory in Asia Minor. The result was a human and military disaster.

In 1922, “…the attempt to launch a general offensive against Kemal’s stronghold in Ankara ended in disaster. In August 1922, the Greek Army was smashed and fled in disorder before the Turks, who pursued its remnants into the sea, slaughtered thousands of Greeks, and finally set fire to Smyrna in the midst of indescribable chaos. Hundreds of thousands of Greeks were forced to flee to the neighbouring islands or the Greek mainland.”

(…)

“Ten years of war (1912-1922) had resulted in the creation of a country totally different from what it had been before. Greek territory doubled and the population grew even more spectacularly. The 1,500,000 refugees, whose social and economic integration was to constitute the greatest and most urgent problem of the country, changed the population structure completely. The urban population was greatly augmented, especially in the Athens district and the few large towns, where a numerous urban proletariat was created for the first time. Thus while in 1908 only 24 per cent of the population lived in towns of over 5,000 inhabitants, the percentage had risen to 27 per cent in 1920 and to 33 per cent by 1928. Greater Athens grew from 452,919 inhabitants in 1920 to 801,622 in 1928.”

(…)

“The urban scene had also changed drastically after the war. The long years of fighting, the influence of the Russian Revolution, and especially the tragic conditions of the urban refugees, led the working class to organize on a more radical basis. The General Confederation of Trade Unions was created in November 1918, and the Greek Socialist Party a week later. In 1922 it adhered to the Comintern, and two years later it became the Communist Party of Greece.”

(…)

“The total decay of the Ottoman Empire and the Egyptian Khedivate during the latter half of the nineteenth century enabled the Western powers to impose upon them a quasi-colonial status. It was the Greek merchants and bankers who were the major beneficiaries of this development, and between 1880 and 1910 colossal fortunes were made in the Mediterranean periphery. If the 1922 crisis eradicated the Greek element from Turkey and Bulgaria, their position remained unchallenged in Egypt and to a certain extent in Rumania, where the most influential Greek financiers continued to make their fortunes. Typically, many of the closest advisers of Venizelos in the economic and banking field belonged to this group. This undoubtedly helps to explain Venizelos’s automatic obedience to British and French diplomatic interests. It also provides a deeper understanding of the reluctance of Greek capital to centre its interests upon domestic development.”

Greece - 1832-1947

Greece – 1832-1947

8-5-1042f-1The debts from the 1920s to the Second World War
The defeat of Greece’s military adventure into Turkish territory in 1922 had dramatic effects on the civilian population. Approximately 1.5 million Greeks, the majority of whom had been living in Turkey, were forced to cross the Aegean under catastrophic conditions and return to Greece, which had lost the part of the Ottoman territory she had been granted after the First World War under the Treaty of Sèvres. |25| This massive influx of refugees led the Greek authorities to request aid from the League of Nations (the “ancestor” of the UN), which granted loans to Greece between 1924 and 1928 for a total amount equivalent to 20% of Greece’s GDP at the time. As guarantee, the League required that harsh austerity policies be applied. Both the League of Nations’ representation in Greece and that of the IFC, created in 1898, were dominated by the creditor powers, in particular Britain.

Repayment of the loans granted by the League of Nations was added to a series of other repayment obligations – the continuation of the repayment to Britain and France of the remainder of the debt of 1833 (Russia has received no repayments since the Bolshevik Revolution of 1917), repayment of the debt of 1898, and repayment of the war loans granted during the First World War by Britain, the USA, Canada and France (these war loans amounted it 55% of Greece’s GDP). |26| The total debts owed by Greece were more than 100% of her GDP, and the amount paid each year accounted for more than 30% of the revenues in the Greek budget and approximately 10% of GDP. That gives an idea of the effort imposed on the Greek people and on the country’s economy.

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For as long as the international economy was undergoing a phase of growth, as during the period 1898-1913 and the 1920s, Greece was able to post a primary budgetary surplus and cover its debt repayments (that is, under IFC constraints, it managed to generate revenue in excess of expenditures excluding debt service, which meant that it could use the surplus for repayments). Greece also received capital inflows, as during any period of growth of the world economy. The creditors granted Greece new loans so that she could repay the old ones.

Greek Bond - 1925

Greek Bond – 1925

The situation changed radically starting in 1930-1931 when the effects of the new international crisis that broke out on Wall Street in October 1929 began to be felt. Greece’s revenues from exports (mainly tobacco and currants) again collapsed, several Greek banks failed in 1931, and Greece’s currency was devalued by 50% following the British decision to suspend the exchange system based on the gold standard. |27| This devaluation automatically doubled the external debt as expressed in the local currency. The State was forced to double the amount of revenues set aside for repayment of the external debt in foreign currencies. As a result, in 1932, Greece had to partially suspend repayment of the debt.

Once again, if we focus on Greece while isolating her from the international context, we are likely to wrongly interpret what has taken place, just as a great many commentators have done. Yet it needs to be kept in mind that in 1932 the UK, France, Belgium, Italy and other countries also decided to suspend repayment of war debts between themselves and the USA. Germany suspended repayment of its debt to private creditors starting in February 1932 and, in May 1933, announced suspension of payments to all creditors. Hungary, Latvia, Romania and Yugoslavia were also in suspension of payment. Not to mention fourteen Latin American countries. What is systematically ignored by the dominant media is the fact that even after the moratorium decreed by Greece in 1932, she continued to make debt repayments under the tutelage of the IFC.

The International Financial Commission’s effects 

The daily Le Monde, cited earlier, says about the IFC’s actions: “In spite of everything, the result is far from being negative: It assisted a young Greece in taking control over its tax revenues and limiting the misappropriation of foreign capital by the local elite. It also contributed to the establishment of reforms that were indispensable for the country’s modernisation.” How is it possible for someone to write such a thing? The IFC exercised a true, permanent diktat over Greece’s finances for the benefit of the creditors, which prevented Greece from defining a development project and kept the country under the yoke of structural subordination.
According to Meyer, Reinhart and Trebesch, the actual yield obtained by the holders of Greek securities purchased abroad and denominated in foreign currencies and which were in suspension of payment at one time or another is between +1% and +5%. That’s a pretty high yield for the government bonds of a country that has the reputation of being a poor payer! How can this positive yield be explained? The actual interest rates were high, the debt stock was not reduced and, despite the repeated periods of suspension of payment, the country most often continued the repayments. As a matter of fact, even during the Great Depression of the 1930s, Greece, even though officially in partial suspension of payment, devoted a third of her revenues to debt repayment, which corresponds to 9% of Greece’s GDP, while during the same period Romania and Bulgaria were devoting, respectively, 2.3% and 3% of their GDP to debt service.

Conclusions

The analysis conducted in this article is not aimed at exonerating Greece’s governments and dominant class of their responsibilities. Quite to the contrary, the decision made by the successive Greek governments and by the dominant class to cave in to the requirements of the creditors and the major powers had terrible consequences for the Greek people. The Greek capitalist class, who were specialists in the realm of finance and international trade, constituted a bourgeoisie that was largely deterritorialised and never had either a true national project nor the will to promote development based on a real industrial fabric. Due to this very fact, its interests were inextricably linked to the interest of the country’s creditors. At times it even constituted a large percentage of the totality of those creditors, which explains its complicity with the representatives of the creditor powers. This is a constant fact from the 19th century up to today.

During the period we have examined here, Greece has constantly been dominated by foreign European powers. Foreign debt has been a permanent weapon used to exercise that domination. Yet as we see, that debt was clearly illegitimate, odious, illegal and unsustainable.

We’ve also seen that the successive debt crises are very closely linked to the international context and that many other peripheral countries have been subjected to the same treatment. The analysis must therefore be pursued in other areas of the world and justice must be done for all peoples subjected to debt.

Bibliography for Part Two: 
- Beloyannis, Nikos, Foreign Capital in Greecehttp://iskra.gr/index.php?option=co…
- Truth Committee on the Greek Public Debt, Preliminary Report of the Truth Committee on Public Debt, Athens, 2015 http://cadtm.org/Preliminary-Report-of-the-Truth
- Delorme, Olivier. 2013. La Grèce et les Balkans, du Ve siècle à nos jours, 3 volumes, Gallimard, Paris, 2013
- Driault, Edouard and Lhéritier, Michel. 1926. Histoire diplomatique de la Grèce de 1821 à nos jours, 5 volumes, Presses universitaires de France (PUF), Paris, 1926.
- Levandis, John A. 1944. The Greek Foreign Debt and the Great Powers, 1821-1898, New York: Columbia University Press.
- Luxemburg, Rosa. 1913. The Accumulation of Capital, London, Routledge and Kegan Paul Ltd, 1951
- Mandel, Ernest. 1972. Late Capitalism, New Left Books, London 1975
- Mandel, Ernest. 1978. Long Waves of Capitalist Development, The Marxist Interpreta­tion, Based on the Marshall Lectures given at the University of Cambridge, Cambridge University Press and Editions de la Maison des Sciences de l’Homme, Paris, 141 p.
- Marichal, Carlos. 1989. A Century of Debt Crises in Latin America, Prince­ton, Princeton University Press, 283 p.
- Marx-Engels, La crise, col. 10/18, Union générale d’éditions, 1978, 444 p
- French Ministry of Foreign Affairs. Arrangement financier avec la Grèce : travaux de la Commission internationale chargée de la préparation du projet, Paris, 1898, 223 pages. http://gallica.bnf.fr/ark:/12148/bp…
- Pantelakis Nikos, “Crédits et rapports franco-helléniques 1917-1928”, in Actes du colloque tenu en novembre 1989 à Thessalonique, Institut d’histoire des conflits contemporains, Paris 1992
- Reinhardt, Carmen and Rogoff, Kenneth, This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press, 2011.
- Reinhardt, Carmen M., and Sbrancia, M. Belen. 2015 “The Liquidation of Government Debt” Economic Policy, no. 82: 291-333
- Reinhardt, Carmen and Trebesch, Christoph. 2015. The Pitfalls of External Dependence: Greece, 1829-2015
- Sack, Alexander Nahum. 1927. Les effets des transformations des États sur leurs dettes publiques et autres obligations financières, Recueil Sirey, Paris.
- Tsoucalas, Constantine. 1969. The Greek Tragedy, Penguin Books Ltd, Harmondsworth.

Translated by Snake Arbusto, Mike Kolikowski and Vicki Briault Manus

Acknowledgements: The author’s thanks for review and suggestions go to: Thanos Contargyris, Olivier Delorme, Pierre Gottiniaux, Jean-Marie Harribey, Daphne Kioussis, Damien Millet, Nikos Pantelakis, Claude Quémar, Patrick Saurin, Yannis Thanassekos, Eleni Tsekeri.

The author accepts full responsibility for any errors that may occur in this work.

Footnotes

|1| See the first part of this series for an analysis of Greek debts and the 1878 agreements, http://cadtm.org/Newly-Independent-Greece-had-an

|2http://www.lemonde.fr/economie/arti… (in French)

|3http://www.bilan.ch/argent-finances… (in French)

|4| In rhetoric, an oxymoron, from the Greek ὀξύμωρος (oxúmōros – de ὀξύς, “sharp, spiritual, witty” and from μωρός, “silly, stupid”, to signify “clever stupid”) is a stylistic device that brings together two terms (a noun and an adjective) of opposing signification in an apparently contradictory form, such as: a bright obscurity or a murky transparency.

|5| Amongst the classical authors, see on imperialism: Rudolf Hilferding (Finance Capital, 1910), Rosa Luxemburg (The Accumulation of Capital, 1913), Vladimir Lenin (Imperialism, the Highest Stage of Capitalism, 1916), Nicolai Bukharin (Imperialism and World Economy, 1915), Ernest Mandel (Late Capitalism, 1972), Samir Amin (Unequal Development: An Essay on the Social Formations of Peripheral Capitalism) New York: Monthly Review Press.

|6| See Carmen M. Reinhart and Christoph Trebesch: The Pitfalls of External Dependence: Greece, 1829-2015, p. 24. Greece received £1.3 million in 1824-1825; in 1878, she agreed to repay £1.2 million plus interest.

|7| See Louise Abellard, “L’Empire Ottoman face à une ‘Troika’ franco-anglo-allemande : retour sur une relation de dépendance par l’endettement” (The Ottoman Empire and the British-French-German Troika: an enquiry into debt dependency), 17 October 2013, (trans. CADTM) http://cadtm.org/L-Empire-Ottoman-face-a-une-troika(in French)

|8| See: http://cadtm.org/Newly-Independent-Greece-had-an

|9| See: http://cadtm.org/Newly-Independent-Greece-had-an

|10| See Marichal, Carlos. 1989. A Century of Debt Crises in Latin America, Princeton, Princeton University Press, 283 p. Chapter 6.

|11| See Carmen M. Reinhart and Christoph Trebesch: The Pitfalls of External Dependence: Greece, 1829-2015, p. 25.

|12| See Edouard Driault and Michel Lhéritier, Histoire diplomatique de la Grèce de 1821 à nos jours (The Diplomatic History of Greece from 1821 to Today) (in French), Presses universitaires de France (PUF), 1926, 5 tomes. The 56% figure is taken from Tome IV, p. 296. The description of the Greek situation is very interesting.

|13| Idem, Tome IV, p. 301.

|14| This thesis is well-argued by Edouard Driault and Michel Lhéritier, in Tome IV, p. 385 and following. The two authors tell a very detailed version of the conflict and its outcome. cf. chapter VII.

|15| See the peace treaty and numerous annexes (all in French): http://gallica.bnf.fr/ark:/12148/bp…

|16| TAIPED is the Greek acronym of the Hellenic Republic Asset Development Fund created by the Troika in 2010 to organize privatization. The funds thus garnered are to be used entirely for debt repayment.

|17Arrangement financier avec la Grèce, travaux de la Commission internationale chargée de la préparation du projet / French Ministry of Foreign Affairs – Paris, 1898, p. 33. (in French only).

|18| Translation: CADTM

|19| From the end of the 1890s Germany was Greece’s principal export partner.

|20| See Carmen M. Reinhart and Christoph Trebesch, The Pitfalls of External Dependence: Greece, 1829-2015, p. 15.

|21| See Table 9 from Carmen M. Reinhart and Christoph Trebesch, The Pitfalls of External Dependence: Greece, 1829-2015, p. 14

|22| Eugène-Melchior de Vogüé, “Livres Jaunes” in Le Figaro, 2 May 1898

|23| According to Driault and Lhéritier, whose conclusions are based on other serious work, the Greek securities issued in France were purchased almost exclusively by Greeks residing in France and not by the French. See Edouard Driault and Michel Lhéritier, Histoire diplomatique de la Grèce de 1821 à nos jours, Presses universitaires de France (PUF), 1926, tome IV, p. 304, note 1.

|24| All passages in italics are taken from: Constantine Tsoucalas, The Greek Tragedy, Penguin Books Ltd, Harmondsworth, 1969.

|25| This question of what is known as the “Asia Minor catastrophe” is still the subject of intense debate today, both in the public sphere and among historians who have deconstructed the official narrative.

|26| There is not space enough here for a critical analysis of the debts demanded of Greece by the Allied powers following the First World War, but the author feels that a large share of these debts may be considered illegitimate. For an introduction to the problem, see Nikos Pantelakis, “Crédits et rapports franco-helléniques 1917-1928” in Actes du colloque tenu en novembre 1989 à Thessalonique, Institut d’histoire des conflits contemporains, Paris 1992 (in French).

|27| The Gold Standard is a monetary system in which the unit of account or monetary standard corresponds to a fixed quantity of gold. Advocates of the Gold Standard feel that it improves resistance to the expansion of credit and of debt. Unlike a fiat currency, a currency backed by gold cannot be issued arbitrarily by a government. Beginning in 1929 and the start of the Great Depression, British gold reserves were reduced to the point where the liabilities of the Bank of England were well in excess of its gold reserves. In September 1931, it decided to suspend the external convertibility of the pound and allow it it float freely. Germany, Austria and Norway followed shortly after the decision. The United States withdrew from the system in 1933.

Author

94895e0e28aa2fe25dfe55787b762569Eric Toussaint is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France. He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc. See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.