Jan 112017
 

By Eric Toussaint, CADTM, 99GetSmart

arton14379-8baf0

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

arton14163-8f4ab

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.

PNG - 78.9 kb
(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

arton13476-467b6

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.

JPEG - 122.7 kb
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!

JPEG - 81.1 kb
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.
JPEG - 47.6 kb
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.

JPEG - 91.3 kb
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.

9-4-bc0de

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.

 

Apr 202016
 

By Eric Toussaint, 99GetSmart

Belgian and French bank Dexia was bailed out in 2012

Belgian and French bank Dexia was bailed out in 2012

NINE YEARS after the outbreak of the financial crisis that continues to produce damaging social effects through the austerity policies imposed on victim populations, it’s time to take another look at the commitments that were made at that time by bankers, financiers, politicians and regulatory bodies. Those four players have failed fundamentally in the promises they made in the wake of the crisis–to moralize the banking system, separate commercial banks from investment banks, end exorbitant salaries and bonuses, and finally finance the real economy. We didn’t believe those promises at the time, and for good reason. Instead of a moralizing of the banking system, all we’ve had is a long list of misappropriations that have been brought to light by a series of bank failures, beginning with that of Lehman Brothers on September 15, 2008.

Since 2012 alone, the list of bailouts includes: Dexia in Belgium and in France (2012, the third bailout), Bankia in Spain (2012), Espírito Santo (2014) and Banif (2015) in Portugal, Laiki and Bank of Cyprus in Cyprus (2013), Monte dei PaschiBanca delle MarcheBanca Popolare dell’Etruria e del Lazio and Carife in Italy (2014-2015), NKBM in Slovenia (2012), SNS Reaal in Holland (2013) and Hypo Alpe Adria in Austria (2014-2015), and those are only a few examples. The most intolerable thing is that the public authorities have decided to pay ransom to these banks by having the citizens bear the consequences of the low dealings of their directors and shareholders. A separation or “ring-fencing” between commercial banks and investment banks remains no more than wishful thinking. The so-called banking reform undertaken in France in 2012 by Pierre Moscovici, the French Finance and Economy minister, turned out to be a sham. As for bankers’ remunerations, the ceiling on the variable compensation adopted by the European Parliament on 16 April, 2013, had as its immediate consequence…an increase in the fixed compensation and recourse to an exemption clause provided for in the law.

No measures designed to avoid further crises have been imposed on the private finance system. Governments and the various authorities meant to ensure that the regulations are respected and improved have either shelved or significantly attenuated the paltry measures announced in 2008-2009. The concentration of banks has remained unchanged, as have their high-risk activities. There have been more scandals implicating the 15 to 20 biggest private banks in Europe and the United States–involving toxic loans, fraudulent mortgage credits, manipulation of currency exchange markets, of interest rates (notably, the LIBOR) and of energy markets, massive tax evasion, money-laundering for organized crime, and so on. The scandal of the Panama papers shows how banks are using the tax heavens. The Financial Times reported that the British prime minister, David Cameron, had intervened personally to prevent offshore trusts from being dragged into an EU-wide crackdown on tax avoidance.

The authorities have merely imposed fines, usually negligible when compared to the crimes committed. These crimes have a negative impact not only on public finance but on the living conditions of millions of people all over the world. People in charge of regulatory bodies, such as Martin Wheatley, former director of the Financial Conduct Authority in London, have been sacked for trying to do their job properly and being too critical of the behavior of banks. George Osborne, the Chancellor of the Exchequer, dismissed Martin Wheatley in July 2015, nine months before the end of his five-year contract.

Although obviously to blame, no bank director in the United States or Europe (with the exception of Iceland) has been convicted, while traders, who are mere underlings, are prosecuted and sentenced to between five and 14 years behind bars.

As was the case for the Royal Bank of Scotland in 2015, banks that were nationalized at great public expense to protect the interests of major private shareholders have been sold back to the private sector for a fraction of their value. Salvaging the RBS cost £45 billion of public money, while its reprivatization will probably mean the loss of a further £14 billion.

Lastly, as to whether banks are now financing the real economy, the efforts deployed by the central banks have failed to spark, as yet, even the beginnings of a real recovery of the economy.

Because we feel, in particular in the light of Greece’s experience, that banks are an essential element of any project for social change, we propose that immediate measures be taken to attain the following six goals:

1. Restructure the banking sector

2. Eradicate speculation

3. End banking secrecy

4. Regulate the banking sector

5. Find an alternate means of financing public expenditures

6. Strengthen public banks

In a second part, we will develop our arguments in favor of socializing the banking sector.


– – – – – – – – – – – – – – – –
I. IMMEDIATE MEASURES

1. Restructure the banking sector


Radically reduce the size of banks
 in order to eliminate the “too big to fail” risk systemic banks [1] represent.

Separate commercial banks from investment banks
. Commercial banks will be the only financial institutions authorized to take in savers’ deposits and to receive public support (public underwriting of savings deposits and access to cash from the central bank). These commercial banks will be authorized to grant loans only to private individuals and local and national companies and public entities. They will be prohibited from conducting activities on the financial markets. What that means is that they will not be allowed to engage in securitization: loans will not be able to be turned into tradable securities and commercial banks must keep the loans they grant on their books until full repayment is made. The bank that has granted a loan must bear the risk for that loan.

Investment banks must not be entitled to public underwriting; in case of failure of a bank, all losses will be borne by the private sector, beginning with the shareholders (on the totality of their assets; see below).

Prohibit credit relations between commercial banks and investment banks
. Following Frédéric Lordon’s principle of imposing a real “apartheid” between commercial banks and investment banks, under no circumstances will a commercial bank be allowed to be involved in a credit relation with an investment bank. [2]

2. Eradicate speculation


Prohibit speculation
. As Paul Jorion proposes, speculation must be prohibited. “In France speculation was authorized in 1885, and in Belgium in 1867. As a matter of fact speculation was defined very clearly by the law aimed at ‘prohibiting wagering on the upward or downward movement of financial securities.’ With such a prohibition, anyone who practices speculation would be guilty of an infraction; whether they’re in Bank X or Bank Y would make no difference.” [3] That could include sanctions on banks that speculate on their own account or on the behalf of their clients.

Acquisition of tangible property (raw materials, commodities, land, buildings, etc.) or securities (shares, bonds or any other security) by a bank or other financial institution with the intention of speculating on its price will be prohibited.

Prohibit derivatives
. This means that banks and other financial institutions who want to cover themselves against various types of risks (associated with exchange rates, interest rates, payment defaults, etc.) will have to go back to using traditional insurance contracts.

Require banks to request authorization before placing financial products on the market
. Investment banks will have to submit any new financial instrument to the oversight authorities (this does not apply to derivatives since they will have been outlawed) for authorization before they are placed on the market.

Separate consulting activities from market activities
. We are also in agreement with the Belgian economist Eric de Keuleneer, who proposes separating consulting activities from market activities: “It is not right for banks to take on risky debt whilst advising their customers about the quality of these debts, or that they are currently able to speculate on gold, whilst ‘selflessly’ advising their customers to purchase gold. ” For that, he proposes re-creating brokerage activities.

Prohibit high-frequency trading and shadow banking. Strictly limit what can be included in off-balance-sheet entries. [4] Prohibit short sales and naked shorting
.

3. End banking secrecy


Prohibit over-the-counter financial markets
. All transactions on financial markets must be recorded, traceable, regulated and controlled. Until now, the main financial markets have been over-the-counter–that is, they are subject to no oversight whatsoever. This is true of the FOREX market ($5,300 billion each day), [5] the derivatives market, the markets for raw materials and agricultural products, [6] etc.

End banking secrecy
. Banks must be required to communicate all information regarding their directors, their various entities, their customers, the activities they conduct and the transactions they carry out for their customers and on their own account. Similarly, banks’ accounting must also be legible and comprehensible. Lifting bank secrecy must become a basic democratic imperative for all countries. Concretely, that means that banks must make available to the tax authorities: a list of names of beneficiaries of interest, dividends, capital gains and other financial revenues; information on the opening, modification and closure of bank accounts in order to establish a national directory of bank accounts; all information on movements of capital into and out of the country, including in particular identification of the order giver.

Prohibit transactions with tax havens
. Banks must be prohibited from engaging in any transaction with a tax haven. Failure to comply with the prohibition must be subject to very heavy sanctions (including the possible revocation of the banking license) and heavy fines.

4. Regulate the banking sector


Require banks to radically increase the volume of their own funds (equity) in relation to their total assets
. [7] Whereas equity is generally less than 5 percent of a bank’s assets, we believe that the legal minimum should be raised to 20 percent.

Prohibit socialization of the losses
 of banks and other private financial institutions. This means prohibiting public authorities from guaranteeing private debt with public funds.

Restore unlimited liability of major shareholders in case of bank failure
. The cost of a failure must be recoverable from the total assets of the major shareholders (be they individuals or corporations).

In case of bank failure, the deposits of clients of the commercial bank must continue to be guaranteed by the State, up to the limit of a reasonable amount of savings for an upper-middle household (estimated today at 150,000 euros–and subject to democratic debate).

Tax banks heavily
. Banks’ profits must be strictly subject to legal provisions regarding taxation of companies. In fact, the rate banks currently pay is very significantly below the legal rate, which itself is far too low. Banking transactions involving currency [8] and financial securities must be taxed. Short-term bank debt must be taxed in order to promote long-term financing.

Systematically prosecute bank directors who are guilty
 of financial crimes and misdemeanors and revoke the banking licenses of institutions that do not comply with the prohibitions and are guilty of misappropriation.

Find another way to save banks
. In addition to the measures mentioned above–unlimited liability for major shareholders (covering all their assets), guarantees on deposits up to 150,000 euros and prohibition of guaranteeing private debt against public funds–a mechanism needs to be created for orderly failure of banks, consisting of two structures: A private bad bank (owned by private shareholders and incurring no cost for the public authorities) and a public bank to which deposits, as well as safe assets, are transferred. Certain recent experiments can serve as inspiration–in particular the measures taken in Iceland since 2008. [9]

5. Find other ways of financing public debt

Require private banks to hold a quota of public-debt securities.

The central banks should again grant loans at zero interest to public authorities. Unlike the current practice of the ECB as a result of the European treaties, the central bank would be able to provide zero-interest financing to the State and all public entities (towns, hospitals, social-housing entities, etc.) in order to conduct socially equitable policies in the context of the environmental transition.

6. Strengthen existing public banks
 and re-create them in countries where they have been privatized (they would of course be subject, like all other banks, to the concrete measures discussed above). In France, in 2012 a collective called “Pour un Pôle Public Financier au service des Droits!” (“Toward a public financial institution to protect our rights!” [10]) that supports the creation of a public banking structure. The serious disadvantage of this project is that it fails to get to the root of the problem in that alongside an insignificant public banking sector, private banks and a cooperative sector, which is cooperative in name only, would continue to exist. In Belgium, where the government privatized the last public banks in the 1990s, in 2011 the State bought back the bank “part” of Dexia, of which it is 100 percent owner. Dexia Bank has become Belfius and still has private status. Belfius needs to become a true public bank and the concrete measures formulated above need to be applied. The State paid 4 billion euros–an amount the European Commission itself considered quite unreasonable. What should have been done is this: Belfius should have been created at no cost to the public finances as a public banking institution funded by the deposits of the Dexia Bank’s customers and all the safe assets. The bank should have been placed under citizen control. The working conditions, jobs and income of the personnel should have been guaranteed while the remuneration paid to the directors should have been sharply reduced. The board members and directors should have been barred from holding a position in a private institution. Charges should have been pressed against the directors of Dexia by the ministry for the criminal wrongdoings they committed. Report No. 58 filed by the French Senate on the Société de financement local (SFIL) evaluates the cost of Dexia’s failure at approximately 20 billion euros (13 billion for France, including 6.6 billion earmarked for recapitalization, and the rest to cover part of the early repayment penalties on toxic loans; 6.9 billion euros for Belgium, corresponding to the nationalization of Dexia Bank Belgium and the recapitalization of Dexia) as of the date of the report. On 1 February, 2013, France created a 100 percent public structure (with the State owning 75 percent, the CDC 20 percent and the Banque Postale 5 percent) in order to acquire 100 percent of the Dexia Municipal Agency (a subsidiary of Dexia Crédit Local), which became the Caisse Française de Financement Local (CAFFIL).

– – – – – – – – – – – – – – – –
II. SOCIALIZE THE BANKING SECTOR

Putting the concrete measures we have mentioned above into practice would constitute progress in resolving the crisis in the banking sector, but the private sector would continue to occupy a dominant position.

Perennial long-term measures are also needed
.

If the experience of the last few years demonstrates anything, it’s that banks must not be left in the hands of capitalists. If, through popular mobilization, we can see to it that the measures discussed above
 (which are open to further discussion in order to improve and complement them) are applied, capital will do everything possible to recover part of the ground it will have lost, finding multiple ways of getting around the regulations, using its powerful financial resources to buy the support of lawmakers and government leaders in order to deregulate, once again, and increase profits to the maximum without regard for the interests of the majority of the population.

Socializing the banking sector under citizen control is necessary

Because capitalists have demonstrated just how far they are willing to go, taking risks (risks whose consequences they refuse to be held accountable for) and committing crimes for the sole purpose of increasing their profits, because their activities regularly result in heavy costs borne by society as a whole, because the society we want to build must be guided by the pursuit of the common good, social justice and the reconstitution of balanced relations between human beings and the other components of nature, the banking sector must be socialized. As Frédéric Lordon proposes, a “total deprivatizationof the banking sector” [11] needs to be carried out. Socialization of the banking sector in its entirety is recommended by the labor federation Sud BPCE in France. [12]

Socializing the banking sector means:

expropriation, without compensation (or compensated by one symbolic euro), of large shareholders (small shareholders will be fully compensated);

granting a monopoly of banking activities to the public sector, with one single exception: the existence of a small cooperative banking sector (subject to the same fundamental rules as the public sector).

creating a public service for savings, credit and investment, with a twofold structure: a network of small ‘high street’ branches, on the one hand, and on the other, specialized agencies in charge of funds management and financing of investments not handled by the ministries in charge public health, education, energy, public transport, retirement, the environmental transition, etc. These ministries will be provided with the budgets necessary to assure their investments and efficient functioning. The specialized agencies will intervene in areas and activities that are beyond the competence and spheres of action of the ministries in order to ensure that all needs are covered.

defining, with citizen participation, a charter covering the goals to be attained and the missions to be carried out and which places the public savings, credit and investment entities at the service of the priorities defined by a democratic planning process;

transparency in the financial statements, which must be shown to the public in understandable form.

The word “socialization” is used in preference to “nationalization” or “state ownership” to make clear the essential role of citizen oversight, with decision-making shared between directors, personnel representatives, clients, non-profit associations, local officials and representatives of the national and regional public banking entities. Therefore, how that active citizen oversight will be exercised will need to be defined by democratic means. Similarly, the exercise of oversight over the banks’ activities by workers in the banking sector and their active participation in the organization of the work must be encouraged. Bank directors must issue an annual public report on their stewardship. Preference must be given to local, quality service, breaking with the policies of externalization currently being pursued. The personnel of financial establishments must be encouraged to provide authentic counseling to the clientele and to break with current aggressive sales policies.

Socializing the banking sector and making it a public service will make it possible:

–for citizens and public authorities to escape the influence of the financial markets;

–to finance citizens’ and public authorities’ projects;

–to dedicate the activity of banking to the common good, with among its missions that of facilitating the transition from a capitalist, production intensive economy to a social and environmental economy.

Because savings, credit, security of deposits and the preservation of the integrity of payment systems are matters of general interest, we recommend that a public banking service be created by socializing the totality of the firms in the banking and insurance sectors.

Because banks are today an essential tool of the capitalist system and of a mode of production that is devastating our planet and grabbing its resources, creating wars and impoverishment, eroding, little by little, social rights and attacking democratic institutions and practices, it is essential to take control of them so that they become tools placed at the service of the greater number of people.

Socializing the banking sector cannot be conceived of as a mere slogan or demand, sufficient unto itself and which decision makers would put into practice because they understand why it makes sense. It must be seen as a political goal to be reached through a process driven by a movement of citizens. Not only is it necessary for existing organized social movements (including trade unions) to make it a priority of their agenda and for the different sectors (local governmental bodies, small and medium companies, consumer associations, etc.) to adopt the position, but also–and above all–for bank employees to be brought to an awareness of the role played by their profession and the fact that it would be in their interest for banks to be socialized; and for bank users to be informed at the point of use (for example, through occupations of bank branches everywhere on the same day) so that they can participate directly in defining exactly what a bank should be.

Only large-scale mobilization can guarantee that socialization of the banking sector can actually be achieved in practice, because it is a measure that strikes at the very heart of the capitalist system. If a government of the Left does not take such a measure, its action will not be able to truly bring about the radical change needed to break with the logic of the system and bring about a new process of emancipation.

Socializing the banking and insurance sector must be part of a much broader program of further measures which would trigger the adoption of a transition to a new, post-capitalist and post-productive model. Such a program, which needs to be European-wide but which may first be put into practice in one or several countries, would include abandonment of austerity policies, cancellation of illegitimate debt, implementation of an overall tax reform with heavy taxation of capital, an overall reduction in working hours with compensatory hiring and maintaining of wage levels, socialization of the energy sector, measures for ensuring gender parity, development of public services and social benefits and the implementation of a strongly determined environmental transition policy.

At this point in history, socialization of the entirety of the banking system is an urgent economic, social, political and democratic necessity.

– – – – – – – – – – – – – – – –

Authors

Gilbert Achcar, Professor of Development Studies, SOAS, University of London
Alan Freemaneconomist with the Greater London Authority from 2000 to 2011, ‎co-director, Geopolitical Economy Research Group, University of Manitoba, Canada
Giorgos Galanis, Lecturer, Goldsmiths, University of London.
Pete Green, co-convener of the Left Unity Economics Policy Commission.
David Harvey, Distinguished Professor at the Graduate Center of the City University of New York (CUNY)
Michael Hudson, Distinguished Research Professor University of Missouri-Kansas City and Professor, Peking University
Michel Husson, Economist, author of Le capitalisme en 10 leçons, La Découverte, Paris, 2012, France
Andy Kilmister, Senior Lecturer in Economics at Oxford Brookes University, and editor Journal of Contemporary Central and Eastern Europe.
Stathis Kouvelakis, Reader King’s College University of London, member of Popular Unity (Greece)
Costas Lapavitsas, Professor of Economics, SOAS, University of London
Francisco Louçã, Professor of Economics in Lisbon’s Instituto Superior de Economia e Gestão(“Higher Institute of Economics and Management”)
Philippe Marlière, Professor of Politics, University College London
Thomas Marois, Senior Lecturer, Development Studies, SOAS, University of London
Ozlem Onaran, Professor of Economics, director of Greenwich Political Economy Research Centre, University of Greenwich
Sabri Öncü, Economist, SoS Economics, Istanbul, Turkey
Susan Pashkoff, Economist, Left Unity, Economic Policy Commission, UK
Alfredo Saad Filho, Professor of Political Economy, SOAS, University of London
Patrick Saurin, Spokesperson for the bank employees’ labour federation Sud Solidaires de la Banque Populaire–Caisse d’Epargne (BPCE) -France.
Benjamin Selwyn, Senior Lecturer in International Development, University of Sussex, UK
Pritam Singh, Professor of Economics, Faculty of Business, Oxford Brookes University
Stavros Tombazos, Professor of political economy at the University of Cyprus.
Eric Toussaint, Spokesperson of the CADTM, author of Bancocracy, Resistance Books/IIRE/CADTM, 2015
John Weeks, Professor Emeritus, SOAS, University of London

– – – – – – – – – – – – – – – –

Notes

1. Philippe Lamberts, the Green MEP, proposes a maximum of $100 billion in assets. “By way of comparison, the total assets* of BNP Paribas and Deutsche Bank, respectively, in 2011 were 2,164 billion euros and 1,965 billion euros.” http://www.philippelamberts.eu/les-7-peches-capitaux-des-banques/ We feel that the maximum size should be significantly smaller, in particular in smaller countries. 100 billion euros is a multiple of Cyprus’s GDP, and it’s more than a quarter of Belgium’s.
2. http://blog.mondediplo.net/2013-02-18-La-regulation-bancaire-au-pistolet-a-bouchon (in French)
3. Paul Jorion in Financité, November 2013 (in French).
4. For example, limit off-balance-sheet items to guarantees and signed commitments. Discussion is needed.
5. See Eric Toussaint, “Comment les grandes banques manipulent le marché des devises” (“How the major banks manipulate the currency market”), published on LeMonde.fr on 13 March 2014 and available in English as Chapter 18 of Bankocracy (available in .pdf form; also available in paper from CADTM)
6. Eric Toussaint, “Banks Speculate on Raw Materials and Food,” 10 February 2014
7. This would mean abandoning the system of weighting assets for risk, which is particularly unreliable since the weighting is left up to the banks themselves. Here’s an explanation of the system of asset weighting based on risk.
8. Eric Toussaint, “Il faut imposer une véritable taxe Tobin au lobby bancaire” (“A real Tobin Tax must be levied on the banking lobby”), an op-ed published by the daily L’Humanité on 25 February 2014 and also at http://cadtm.org/Il-faut-imposer-une-veritable-taxe (in French)
9. Interview with Eva Joly by Renaud Vivien, “Iceland refuses its accused bankers ‘Out of Court’ settlements.”
10. See their site (in French). The public banking entity promoted by the collective would include public financial institutions (the Banque de France, the Caisse des Dépôts and its financial subsidiaries, OSEO, the Société des participations de l’État, the Banque Postale, UbiFrance, the Agence française de développement, the Institut d’émission des départements d’Outre-Mer, CNP Assurance) or ones whose activities constitute a public service (the Crédit foncier, Coface). Any bank or insurance firm in which the State acquires a majority share or which may be assigned public-service missions would be part of it. In Belgium, a site created by the PTB is dedicated to promoting the need for a public bank (in French or Flemish).
11. Frédéric Lordon, “L’effarante passivité de la ‘re-régulation financière’” (“The frightening passivity of ‘financial re-regulation'”), in Changer d’économie, les économistes atterrés, Les liens qui libèrent, 2011, p. 242 (in French).
12. See in particular these links (in French): http://www.sudbpce.com/files/2013/01/2012-projet-bancaire-alternatif-definitif.pdfhttp://cadtm.org/IMG/pdf/PLAQUETTE_BANQUES_SUD_BPCE.pdf;http://cadtm.org/Socialiser-le-systeme-bancaire

Translated by Snake Arbusto and Mike Krolikowski. First published at the web site of the Committee for the Abolition of Third World Debt.

Sep 152015
 

By Eric Toussaint, CADTM, 99GetSmart

Eric Toussaint, CADTM

Eric Toussaint, CADTM

Another way is possible …

Chapter titles:

  • The Citizen Audit Commission of 2011
  • The position of SYRIZA’s leadership regarding the citizen audit committee of 2011
  • SYRIZA’s program in the legislative elections of May-June 2012
  • Late 2012: SYRIZA’s leadership moderates its positions
  • October 2013: Alexis Tsipras calls for a European conference on public debt
  • SYRIZA becomes the leading party in Greece with the May 2014 European elections
  • The January 2015 victory5.
  • The fatal agreement of 20 February 2015 with the institutional creditors
  • A different policy was desirable and possible
  • The Truth Committee on the Greek Public Debt is launched
  • The Greek government refrains from making use of the audit
  • From the referendum on 5 July to the agreement of 13 July 2015
  • The lessons of the capitulation of 13 July 2015
  • A parallel currency as part of “Plan B”

Subtitles in the video by snakearbusto

 

Jul 192015
 

By Éric Toussaint, Rosa Moussaoui, CADTM, 99GetSmart

Éric Toussaint before the Greek Parliament on 17 June 2015, in the presence of Zoe Konstantopoulou, president of the Greek Parliament and several ministers

Éric Toussaint before the Greek Parliament on 17 June 2015, in the presence of Zoe Konstantopoulou, president of the Greek Parliament and several ministers

Éric Toussaint interviewed by Rosa Moussaoui, Special envoy in Athens for  L’Humanité

Has Athens really been subjected to a financial coup d’état over recent weeks as claimed by many Greek and foreign observers?

Éric Toussaint: Yes and no. What was decisive was the result of political decisions made by political institutions, though obviously complicit with financial interests. The coup d’état was not directly led by financial powers, but by institutions, the European Commission and the heads of State and Government of the Eurozone. Germany was not the only country involved. Mariano Rajoy in Spain, or Pedro Passos Coelho in Portugal, not to mention the Finnish, Latvian and other decidedly neoliberal governments clearly wanted to demonstrate to their respective populations that the options presented to the European peoples by the Syriza government were unworkable. So the primary motivation was political. Clearly though the private banking sector and the multinational corporations also wanted to show that it is impossible to turn away from austerity policies. However, it must be remembered that Greece’s principal creditors are public institutions; since 2012 when they managed to unload their Greek debt, private banks are not the most interested party. The debt restructuring that took place permitted them to comfortably withdraw. Today, despite the failure of the economic policies that have been imposed on Greece, the European Commission, the ECB and the Eurozone countries are adamant that Greece continues on the path of neoliberalism. Remember that the IMF is also a political institution.
Alexis Tsipras expected assurances for debt relief in return for his capitulation to the austerity policies. The creditors have merely acquiesced to a discussion scheduled for this year on a possible debt restructuring starting from 2022. Why this obstinacy, while the IMF itself now considers the debt as unsustainable?
Éric Toussaint: I think that a Debt Restructuring is feasible before 2022. The creditors will say “not before 2022” because they know that this plan will not work and that the debt payment will be unsustainable. They will restructure this debt provided the neoliberal reforms are pursued. Debt is a means of blackmail, an instrument of domination. Basically, in the Greek case, the creditors are not so much motivated by profit, pertinent as it is, as by teaching a lesson to their own people and the peoples of other peripheral countries that there is no question of deviating from the model. For Hollande to say, “Look, even Tsipras and the radical left cannot escape the economic stranglehold!” is a way of vindicating his own abdication in 2012 on the promise to renegotiate the European treaty on fiscal stability.

Did Tsipras have any other choice vis- à-vis the violent attacks from the creditors? Does the alternative boil down to an exit from the Euro?

Éric Toussaint: I don’t think so. The choice was not necessarily between Grexit and remaining in the Euro Zone equipped with a new austerity plan and continuing to pay the debt. It was possible to stay in the Euro Zone by disobeying the creditors through legal means. Human rights violations are at stake here. The Greek authorities should have suspended the debt payment; retrieved control over the Bank of Greece (Antonis Samaras appointed its CEO, who has not served the interests of the country); and created a complementary electronic currency that could have helped to cope with the liquidity crisis, whilst remaining within the Euro Zone.

The State should also have taken the following steps:
1. Organize an orderly liquidation of banks and transfer the assets to the public sector (guaranteeing deposits up to € 100,000) whilst ensuring the protection of small shareholders and recovering the cost of cleansing the banks from the wealth of major international shareholders.
2. Reduce VAT on goods and basic utility services; reduce direct taxes on low income and assets; and levy heavy taxes on the income and wealth of the richest 10% (particularly the richest 1%).
3. Stop privatization and reinforce public services.

After the Greek Parliament adopted the disastrous agreement of 13 July, the prospect of a voluntary exit from the Euro is obvious. That there is no favourable solution for the peoples within the Euro Zone is now evident to more and more Greek and other European people. In case of a voluntary exit from the Euro Zone, the above propositions remain fully valid and a redistributive monetary reform must accompany them (see Greece: Alternatives to the Capitulation).

The ECB, one of the masterminds of the coup, is flooding the financial markets with liquidity and boosting speculation. Can capital generation serve the real economy, social needs and human development?

Eric Toussaint: Of course but this not what the ECB has been doing! Mario Draghi is not “independent”. He is the interface between major private banks and the governments of the Euro Zone. The ECB has deliberately destabilized the Greek economy to suit its own as well as other creditors’ purpose.

Translation : Suchandra de Sarkar, Mike Krolikowski and Christine Pagnoulle

 

Eric Toussaint, Author

Eric Toussaint, Author

Eric Toussaint is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège. He is the President of CADTM Belgium, and sits on the Scientific Council of ATTAC France. He is the co-author, with Damien Millet of Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He is the author of many essays including one on Jacques de Groote entitled Procès d’un homme exemplaire (The Trial of an Exemplary Man), Al Dante, Marseille, 2013, and wrote with Damien Millet, AAA. Audit Annulation Autre politique (Audit, Abolition, Alternative Politics), Le Seuil, Paris, 2012. See his Series “Banks versus   the People: the Underside of a Rigged Game!” Next publication : Bankocracy Merlin Press, Londres, May 2015 (English version).

Since the 4th April 2015 he is coordinator of the Truth Commission on Public Debt.

 

Jul 172015
 

By Eric Toussaint, CADTM, 99GetSmart

arton11971-e8690

On 5 July 2015, by a referendum initiated by the government of Alexis Tsipras and the Hellenic Parliament, the Greek people overwhelmingly rejected the austerity measures imposed by the institutions that were known as the Troika. It was a splendid victory for democracy.

However the agreement reached on Monday, 13 July will lead to fresh austerity measures over several years. This completely contradicts the will of the Greek people expressed in the referendum. During the night of 15th to 16th July, it was adopted thanks to the support of four right-wing parties (PASOK, Potami, New Democracy, Independent Greeks) that brought their votes to Tsipras while 32 Syriza MPs voted against and 7 abstained.

This agreement forces Syriza to abandon essential commitments made during the 25 January 2015 election campaign, which led to its historically significant victory. Syriza has binding responsibilities towards the Greek people and it is tragic that they were not respected, especially since the people very clearly showed their support both on 25 January and 5 July 2015. |1|

The Greek government’s concessions to the creditors include pension cuts (Syriza had promised to restore a 13th month to people who receive pensions of less than 700 euros per month) and an extension of the retirement age; wages will remain restrained; labor relations will become more precarious; there will be an increase in indirect taxes, including those paid by lower income earners; the continuation and acceleration of privatization; the accumulation of new illegitimate debts to repay previous debts; the transfer of valuable Greek assets to an independent fund; further relinquishing of key elements of sovereignty, giving an upper hand to the creditors in matters of legislative power, etc.

Contrary to claims that in return for these detrimental concessions Greece will get three years of respite and will significantly boost its economic activity, it will in fact be impossible to create the primary fiscal surplus announced in the plan considering the continued check on household purchasing power and public expenditure.

Harmful consequences are inevitable: in a few months or early next year at the latest, creditors will attack the Greek authorities for failing to comply with their commitments in terms of primary fiscal surplus and will introduce new demands. Neither the Greek people nor their government will have any respite. The creditors will threaten to bring the promised disbursements to a halt if new austerity measures are not implemented. The Greek authorities will be caught up in a spiral of concessions.

The Truth Committee on Public Debt established by the President of the Greek Parliament has documented in its preliminary report made public on 17 and 18 June 2015 that the debt claimed by the present creditors must be considered illegitimate, illegal and odious. |2| The Committee has also shown that its repayment is unsustainable. On the basis of arguments derived from international and domestic law, the Greek government should have taken a sovereign decision to suspend debt repayment for the time that the debt audit takes to run its full course. Such a suspension of debt payment is quite possible. Since February 2015, Greece has paid €7 billion to creditors without receiving the €7.2 billion previously agreed upon in the bailout program that ended 30 June 2015. Other amounts that should have been paid to Greece have not been transferred: the interest earned by the ECB on Greek securities, the projected balance for the recapitalization of banks, etc. If Greece suspends debt payment to its international creditors, it will save nearly €12 billion by the end of 2015 and the creditors would be compelled to make concessions. |3| A radical reduction in the amount of debt could lead the way either to negotiation or to repudiation.

Contrary to the widespread claim that suspending payment would result in exiting the euro, it would have been possible to stay in the Euro if a series of sovereign measures of self-defense and economic recovery such as a strict control on banks, currency, and taxation (see below) had been implemented. It would have been perfectly possible to eschew the ECB’s, the Eurogroup’s and the EC’s unacceptable and illegitimate injunctions. The Tsipras government decided otherwise, and this has led to a tragic subordination to EU supervision, to more austerity and to the selling off of the Greek national heritage.

It is now clear that negotiations cannot convince the European Commission, the IMF, the ECB and the neoliberal governments in other European countries to take measures that respect the rights of Greek citizens as well those of the people in general. The referendum of 5 July, to which those institutions were fiercely opposed, did not convince them. Instead, in contradiction with basic democratic rights, they have radicalized their demands. Without taking strong and sovereign measures of self-defense, the Greek authorities and the Greek people will not be able to put a stop to the human rights violations perpetrated by the creditors. A host of measures should be taken at EU level to restore social justice and true democracy. Technically, it is not difficult but it must be noted that with the balance of power prevailing in the European Union, the countries with progressive governments can hope neither to be heard nor supported by the European Commission, the ECB, or the European Stability Mechanism. On the contrary, these institutions as well as the IMF and the neoliberal governments are actively opposing the current Greek experiment to demonstrate to all the people of Europe that there is no alternative to the neoliberal model. However, if the Greek authorities adopt strong measures they can gain genuine concessions or simply force the institutions to recognize the decisions taken. It is also vital to find an alternative strategy by initiating massive popular mobilizations in Greece and other European countries. The Greek authorities could draw on that to thwart the attempts to isolate them — attempts that the forces opposed to change in favor of social justice will waste no time in making. In turn, such a stand from the Greek government would empower popular mobilizations and encourage the mobilized people to have confidence in their own strength.

On top of the suspension of the payment of illegitimate, illegal, odious and unsustainable debt, here are a number of alternatives to the conditions in the agreement between Tsipras and the creditors, to be urgently submitted to democratic debate, that are likely to help Greece recover:

1. The Greek state is by far the main shareholder of the major Greek banks (representing more than 80% of the Greek banking sector) and it should therefore take full control of the banks in order to protect citizens’ savings and boost domestic loans to support consumption. First, the State should have assumed its majority stake in the banks and turned them into public-sector companies. Then, the State would have organized the orderly liquidation of these banks whilst ensuring the protection of small shareholders and savers (guaranteeing deposits up to 100,000 €). The State would have recovered the cost of cleansing the banks from major private shareholders who have caused the crisis and then abused public support. To do this it would have had to seize part of their assets which reach far beyond the banking sector. A ’bad bank’ should have been created to isolate and hold toxic assets with a view to their liquidation. Those responsible for the banking crisis should have been sued to pay once and for all. The financial sector must be thoroughly cleaned up and made to serve the people and the real economy.

2. The Greek authorities should retrieve control over the central bank. Yannis Stournaras, the current CEO (appointed by the government of Antonis Samaras), invests all his energy in preventing the changes that the people call for. He is a Trojan Horse that serves the interests of large private banks and neoliberal European authorities. The central bank of Greece should be made to serve the interests of the Greek population.

3. The Greek authorities also had the opportunity to create an electronic currency (denominated in euros) for internal use in the country. The public authorities could raise pensions and salaries in the public services and grant humanitarian aid to people by opening credit accounts for them in electronic currency that could be used for several kinds of payment: electricity and water bills, payment for transport and taxes, purchases of food and basic goods, etc. Contrary to a baseless prejudice, even private businesses would do well to voluntarily accept the electronic method of payment as it will allow them to sell their goods and settle payments to the government (payment of taxes and for the various public services they use). The creation of this additional electronic currency would reduce the country’s needs in euros. Transactions in this electronic currency could be made by mobile phones as is the case today in Ecuador.

4. The restrictions on capital flows must be maintained while the price of consumer goods must be controlled.

5. The privatization agency must be dissolved and replaced by a national
asset management agency (with an immediate halt to privatizations) which will be responsible for protecting the public assets while generating revenue.

6. New measures should be adopted to achieve more tax justice, reinforcing those already taken, notably by levying heavy taxes on the richest 10% of the population (particularly the richest 1%), both on their income and on their assets. Similarly, it would be beneficial to significantly increase the tax on big companies’ profits and to withdraw the tax exemptions for ship-owners. Heavier taxes should be imposed on the Orthodox Church, which only paid a few million euros in taxes in 2014.

7. Taxes on small incomes and wealth and on essential goods and services should be significantly reduced. This would benefit the majority of the population. A whole series of basic utility services should be free (public transport, electricity, and water to a certain limited level of consumption, etc.) These social-justice measures would revive consumption.

8. The fight against tax evasion should be intensified by establishing substantial deterrents. Considerable amounts can thus be recovered.

9. An extensive public plan for job creation should be implemented to rebuild the public services destroyed by years of austerity (for example, health and education) and to pave the way for the necessary ecological transition.

10. This support to the public sector should be accompanied by measures which provide active support to small private ventures that are key elements in the Greek economy.

11. Public domestic borrowing measures may be adopted by issuing public debt securities within national borders. In fact, the State must be able to borrow to improve the living conditions of the population, for example by carrying out public utility works. Some of this work can be financed by the current budget through assertive policy choices, but government borrowing could enable other projects, broader in scope — for example the massive development of public transport to replace private cars; developing the use of renewable energy; creating or reopening local railway services throughout the urban and semi-urban sectors of the country; renovating, rehabilitating or constructing public buildings and social housing while reducing energy consumption and providing quality amenities. Such measures can also finance the ambitious plan for job creation outlined above.

It is urgent that a transparent policy of public borrowing be defined. Our proposal is:

1 Public borrowing should aim at guaranteeing an improvement in living conditions, discarding the logic of environmental destruction.

2. Public borrowing must contribute to a redistribution of wealth and to reducing inequalities. That is why we propose that the financial institutions, large private corporations and wealthy households be legally bound to purchase – commensurate with their wealth and income – non-indexed government bonds at 0% interest. The remaining population can voluntarily acquire government bonds at an interest rate that will ensure a genuine and positive return (e.g. 3%), above inflation. So if the annual inflation is 2%, the interest rate actually paid by the State for the corresponding year will be 5%. Such a policy of positive discrimination (similar to those adopted against racial oppression in the US, the caste system in India, or gender inequalities) will result in tax justice and less inequality of wealth distribution.

Finally, the Greek authorities should ensure that the Audit Committee as well as other committees working on the memoranda and on war damages can continue their task.

Other additional measures that can be democratically debated and implemented on an urgent basis might complement these first emergency measures based on the following five pillars:

- Socializing banks and a part of currency creation.
- Preventing tax evasion and establishing a fair tax reform to provide the State with the necessary resources for implementing its policies.
- Protecting public property, including the national heritage, and placing it at the service of the entire community.
- Rehabilitating and developing public services.
- Supporting local private enterprises.

It is also important to launch Greece into a process of structural democratic change with active citizen participation. To achieve this constituent process, Greece must convene an election of a Constituent Assembly to draft a new democratically chosen Constitution. Once the Constituent Assembly – which should operate on the basis of grievances and proposals received from the people – adopts the draft, it will be submitted to popular vote.

Exiting the Euro Zone. After the Greek Parliament adopted the disastrous agreement of 13thJuly on the 16th, an alternative must include the possibility of voluntarily exiting the Euro Zone if the Greek people support this prospect. This option is comforted by the Greek Parliament’s capitulation on July 16th and by the very content of the agreement. Moreover the Greek people will soon understand that if they want a future that includes justice and emancipation, Greece must get out of the euro zone. In this case, the above propositions remain valid, especially the socialization of banks similar to the nationalization of France’s banking system after the Liberation. These measures should be combined with a significant monetary reform, inspired by the system implemented by the Belgian government after World War II. This reform will specifically aim at deflating the incomes of those who got rich at the expense of others. The principle is simple: during the changeover to another currency, there should be no automatic parity between the old and the new currency (the existing euro against a new drachma, for example) beyond a certain limit.

The amount exceeding the limit must be blocked in an escrow account and its origin must be justified and authenticated. In principle, any amount exceeding the specified ceiling will be exchanged at a less favourable rate (for example, two former euros against one new drachma). When a criminal origin can be proved, the sum may even be forfeited. Such monetary reform would distribute part of the wealth in a more socially just manner. Another objective of the reform is to reduce the money in circulation in order to fight inflationary trends. To be effective, strict control over capital movements and foreign exchange must be established.

Here’s an example (of course the rates are indicative and may be modified after analyzing the distribution of liquid household savings and the adoption of stringent criteria) :

€1 would be exchanged against 1 new drachma (n.D.) up to 200,000 euros
€1 = 0.7 n. D. between 200,000 and 500,000 euros
€1 = 0.4 n. D. between 500,000 and 1 million euros
€1 = 0.2 n. D. above 1 million euros

If a household owns € 200,000 in cash, it gets 200,000 n.D in exchange.
If it has € 400,000, it gets 200,000 + 140,000 = 340,000 n.D
If it has € 800,000, it gets 200,000 + 210,000 + 120,000 = 530,000 n.D
If it has € 2 million, it gets 200,000 + 210,000 + 200,000 + 200,000 = 810,000 n.D

A genuine alternative logic can be triggered and Greece can finally liberate itself from its creditors’ control. The peoples of Europe could again believe in a change that favors justice.

Translation by Suchandra de Sarkar in collaboration with Christine Pagnoulle, Mike Krolikowski and Snake Arbusto.

Footnotes

|1| The author thanks Stavros Tombazos, Daniel Munevar, Patrick Saurin, Michel Husson and Damien Millet for their advice when he was drafting this document. However, the author takes full responsibility for the content of this text.

|2| See: http://cadtm.org/Executive-Summary-of-the-report

|3| €6.64 billion and €5.25 billion respectively, will be paid to the ECB and the IMF by 31 December 2015. Source: Wall Street Journal, http://graphics.wsj.com/greece-debt-timeline/ consulted on 12 July 2015.

————————————————————-

Eric Toussaint, Author

Eric Toussaint, Author

Eric Toussaint is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège. He is the President of CADTM Belgium, and sits on the Scientific Council of ATTAC France. He is the co-author, with Damien Millet of Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He is the author of many essays including one on Jacques de Groote entitled Procès d’un homme exemplaire (The Trial of an Exemplary Man), Al Dante, Marseille, 2013, and wrote with Damien Millet, AAA. Audit Annulation Autre politique (Audit, Abolition, Alternative Politics), Le Seuil, Paris, 2012. See his Series “Banks versus the People: the Underside of a Rigged Game!” Next publication : Bankocracy Merlin Press, Londres, May 2015 (English version). Since the 4th April 2015 he is coordinator of the Truth Commission on Public Debt.

Jun 252015
 

By Truth Committee on the Greek Public Debt, CADTM, 99GetSmart

arton11754-a5949

In June 2015 Greece stands at a crossroad of choosing between furthering the failed macroeconomic adjustment programmes imposed by the creditors or making a real change to break the chains of debt. Five years since the economic adjustment programmes began, the country remains deeply cemented in an economic, social, democratic and ecological crisis. The black box of debt has remained closed, and until now no authority, Greek or international, has sought to bring to light the truth about how and why Greece was subjected to the Troika regime. The debt, in whose name nothing has been spared, remains the rule through which neoliberal adjustment is imposed, and the deepest and longest recession experienced in Europe during peacetime.

There is an immediate need and social responsibility to address a range of legal, social and economic issues that demand proper consideration. In response, the Hellenic Parliament established the Truth Committee on Public Debt in April 2015, mandating the investigation into the creation and growth of public debt, the way and reasons for which debt was contracted, and the impact that the conditionalities attached to the loans have had on the economy and the population. The Truth Committee has a mandate to raise awareness of issues pertaining to the Greek debt, both domestically and internationally, and to formulate arguments and options concerning the cancellation of the debt.

The research of the Committee presented in this preliminary report sheds light on the fact that the entire adjustment programme, to which Greece has been subjugated, was and remains a politically orientated programme. The technical exercise surrounding macroeconomic variables and debt projections, figures directly relating to people’s lives and livelihoods, has enabled discussions around the debt to remain at a technical level mainly revolving around the argument that the policies imposed on Greece will improve its capacity to pay the debt back. The facts presented in this report challenge this argument.

All the evidence we present in this report shows that Greece not only does not have the ability to pay this debt, but also should not pay this debt first and foremost because the debt emerging from the Troika’s arrangements is a direct infringement on the fundamental human rights of the residents of Greece. Hence, we came to the conclusion that Greece should not pay this debt because it is illegal, illegitimate, and odious.

It has also come to the understanding of the Committee that the unsustainability of the Greek public debt was evident from the outset to the international creditors, the Greek authorities, and the corporate media. Yet, the Greek authorities, together with some other governments in the EU, conspired against the restructuring of public debt in 2010 in order to protect financial institutions. The corporate media hid the truth from the public by depicting a situation in which the bailout was argued to benefit Greece, whilst spinning a narrative intended to portray the population as deservers of their own wrongdoings.

Bailout funds provided in both programmes of 2010 and 2012 have been externally managed through complicated schemes, preventing any fiscal autonomy. The use of the bailout money is strictly dictated by the creditors, and so, it is revealing that less than 10% of these funds have been destined to the government’s current expenditure.

This preliminary report presents a primary mapping out of the key problems and issues associated with the public debt, and notes key legal violations associated with the contracting of the debt; it also traces out the legal foundations, on which unilateral suspension of the debt payments can be based. The findings are presented in nine chapters structured as follows:

Chapter 1, Debt before the Troika, analyses the growth of the Greek public debt since the 1980s. It concludes that the increase in debt was not due to excessive public spending, which in fact remained lower than the public spending of other Eurozone countries, but rather due to the payment of extremely high rates of interest to creditors, excessive and unjustified military spending, loss of tax revenues due to illicit capital outflows, state recapitalization of private banks, and the international imbalances created via the flaws in the design of the Monetary Union itself.

Adopting the euro led to a drastic increase of private debt in Greece to which major European private banks as well as the Greek banks were exposed. A growing banking crisis contributed to the Greek sovereign debt crisis. George Papandreou’s government helped to present the elements of a banking crisis as a sovereign debt crisis in 2009 by emphasizing and boosting the public deficit and debt.

Chapter 2, Evolution of Greek public debt during 2010-2015
, concludes that the first loan agreement of 2010, aimed primarily to rescue the Greek and other European private banks, and to allow the banks to reduce their exposure to Greek government bonds.

Chapter 3, Greek public debt by creditor in 2015, presents the contentious nature of Greece’s current debt, delineating the loans’ key characteristics, which are further analysed in Chapter 8.

Chapter 4, Debt System Mechanism in Greece reveals the mechanisms devised by the agreements that were implemented since May 2010. They created a substantial amount of new debt to bilateral creditors and the European Financial Stability Fund (EFSF), whilst generating abusive costs thus deepening the crisis further. The mechanisms disclose how the majority of borrowed funds were transferred directly to financial institutions. Rather than benefitting Greece, they have accelerated the privatization process, through the use of financial instruments.

Chapter 5, Conditionalities against sustainability, presents how the creditors imposed intrusive conditionalities attached to the loan agreements, which led directly to the economic unviability and unsustainability of debt. These conditionalities, on which the creditors still insist, have not only contributed to lower GDP as well as higher public borrowing, hence a higher public debt/GDP making Greece’s debt more unsustainable, but also engineered dramatic changes in the society, and caused a humanitarian crisis. The Greek public debt can be considered as totally unsustainable at present.

Chapter 6, Impact of the “bailout programmes” on human rights, concludes that the measures implemented under the “bailout programmes” have directly affected living conditions of the people and violated human rights, which Greece and its partners are obliged to respect, protect and promote under domestic, regional and international law. The drastic adjustments, imposed on the Greek economy and society as a whole, have brought about a rapid deterioration of living standards, and remain incompatible with social justice, social cohesion, democracy and human rights.

Chapter 7, Legal issues surrounding the MOU and Loan Agreements, argues there has been a breach of human rights obligations on the part of Greece itself and the lenders, that is the Euro Area (Lender) Member States, the European Commission, the European Central Bank, and the International Monetary Fund, who imposed these measures on Greece. All these actors failed to assess the human rights violations as an outcome of the policies they obliged Greece to pursue, and also directly violated the Greek constitution by effectively stripping Greece of most of its sovereign rights. The agreements contain abusive clauses, effectively coercing Greece to surrender significant aspects of its sovereignty. This is imprinted in the choice of the English law as governing law for those agreements, which facilitated the circumvention of the Greek Constitution and international human rights obligations. Conflicts with human rights and customary obligations, several indications of contracting parties acting in bad faith, which together with the unconscionable character of the agreements, render these agreements invalid.

Chapter 8, Assessment of the Debts as regards illegtimacy, odiousness, illegality, and unsustainability, provides an assessment of the Greek public debt according to the definitions regarding illegitimate, odious, illegal, and unsustainable debt adopted by the Committee.

Chapter 8 concludes that the Greek public debt as of June 2015 is unsustainable, since Greece is currently unable to service its debt without seriously impairing its capacity to fulfill its basic human rights obligations. Furthermore, for each creditor, the report provides evidence of indicative cases of illegal, illegitimate and odious debts.

Debt to the IMF should be considered illegal since its concession breached the IMF’s own statutes, and its conditions breached the Greek Constitution, international customary law, and treaties to which Greece is a party. It is also illegitimate, since conditions included policy prescriptions that infringed human rights obligations. Finally, it is odious since the IMF knew that the imposed measures were undemocratic, ineffective, and would lead to serious violations of socio-economic rights.

DetteGrecque-4dc79

Debts to the ECB should be considered illegal since the ECB over-stepped its mandate by imposing the application of macroeconomic adjustment programs (e.g. labour market deregulation) via its participation in the Troïka. Debts to the ECB are also illegitimate and odious, since the principal raison d’etre of the Securities Market Programme (SMP) was to serve the interests of the financial institutions, allowing the major European and Greek private banks to dispose of their Greek bonds.

The EFSF engages in cash-less loans which should be considered illegal because Article 122(2) of the Treaty on the Functioning of the European Union (TFEU) was violated, and further they breach several socio-economic rights and civil liberties. Moreover, the EFSF Framework Agreement 2010 and the Master Financial Assistance Agreement of 2012 contain several abusive clauses revealing clear misconduct on the part of the lender. The EFSF also acts against democratic principles, rendering these particular debts illegitimate and odious.

The bilateral loans should be considered illegal since they violate the procedure provided by the Greek constitution. The loans involved clear misconduct by the lenders, and had conditions that contravened law or public policy. Both EU law and international law were breached in order to sideline human rights in the design of the macroeconomic programmes. The bilateral loans are furthermore illegitimate, since they were not used for the benefit of the population, but merely enabled the private creditors of Greece to be bailed out. Finally, the bilateral loans are odious since the lender states and the European Commission knew of potential violations, but in 2010 and 2012 avoided to assess the human rights impacts of the macroeconomic adjustment and fiscal consolidation that were the conditions for the loans.

The debt to private creditors should be considered illegal because private banks conducted themselves irresponsibly before the Troika came into being, failing to observe due diligence, while some private creditors such as hedge funds also acted in bad faith. Parts of the debts to private banks and hedge funds are illegitimate for the same reasons that they are illegal; furthermore, Greek banks were illegitimately recapitalized by tax-payers. Debts to private banks and hedge funds are odious, since major private creditors were aware that these debts were not incurred in the best interests of the population but rather for their own benefit.

The report comes to a close with some practical considerations.

Chapter 9, Legal foundations for repudiation and suspension of the Greek sovereign debt, presents the options concerning the cancellation of debt, and especially the conditions under which a sovereign state can exercise the right to unilateral act of repudiation or suspension of the payment of debt under international law.

Several legal arguments permit a State to unilaterally repudiate its illegal, odious, and illegitimate debt. In the Greek case, such a unilateral act may be based on the following arguments: the bad faith of the creditors that pushed Greece to violate national law and international obligations related to human rights; preeminence of human rights over agreements such as those signed by previous governments with creditors or the Troika; coercion; unfair terms flagrantly violating Greek sovereignty and violating the Constitution; and finally, the right recognized in international law for a State to take countermeasures against illegal acts by its creditors , which purposefully damage its fiscal sovereignty, oblige it to assume odious, illegal and illegitimate debt, violate economic self-determination and fundamental human rights. As far as unsustainable debt is concerned, every state is legally entitled to invoke necessity in exceptional situations in order to safeguard those essential interests threatened by a grave and imminent peril. In such a situation, the State may be dispensed from the fulfilment of those international obligations that augment the peril, as is the case with outstanding loan contracts. Finally, states have the right to declare themselves unilaterally insolvent where the servicing of their debt is unsustainable, in which case they commit no wrongful act and hence bear no liability.

People’s dignity is worth more than illegal, illegitimate, odious and unsustainable debt

Having concluded a preliminary investigation, the Committee considers that Greece has been and still is the victim of an attack premeditated and organized by the International Monetary Fund, the European Central Bank, and the European Commission. This violent, illegal, and immoral mission aimed exclusively at shifting private debt onto the public sector.

Making this preliminary report available to the Greek authorities and the Greek people, the Committee considers to have fulfilled the first part of its mission as defined in the decision of the President of Parliament of 4 April 2015. The Committee hopes that the report will be a useful tool for those who want to exit the destructive logic of austerity and stand up for what is endangered today: human rights, democracy, peoples’ dignity, and the future of generations to come.

In response to those who impose unjust measures, the Greek people might invoke what Thucydides mentioned about the constitution of the Athenian people: “As for the name, it is called a democracy, for the administration is run with a view to the interests of the many, not of the few” (Pericles’ Funeral Oration, in the speech from Thucydides’ History of the Peloponnesian War).

Here the German translation: http://www.attac.de/uploads/media/W…