Debt: which strategies should Europe adopt?

The Bloco de Esquerda, the CADTM, Podemos and SYRIZA discussed strategies to deal with the European debt crisis at the European Parliament on January 20, 2015.

2 February 2015 by CADTM Europe

On Tuesday, January 20, 2015, SYRIZA and Podemos, in collaboration with the CADTM and the Bloco de Esquerda, organized a session of debates and confrontation of ideas at the European Parliament to discuss different strategies for countering Europe’s debt trap. Moderated by Teresa Rodríguez, this two and half hour session provided an opportunity for various political groups including the CADTM to examine both divergent and convergent aspects of the strategy to deal with creditors.

The experience of debt restructuring shows that unilateral acts are necessary

Éric Toussaint, spokesperson for the Committee for the Abolition of Third World Debt with a Ph.D. in Political Science, delivered an introductory note on restructuring, audit, suspension and cancellation of debt in recent decades.

Without going into the nitty-gritty of these measures (compilation available in an interview published on the CADTM’s website), the discussion revolved around the examples of (1) restructuring carried out in debtor countries under favorable conditions merely for geopolitical reasons (West Germany in 1957, Lech Walesa’s Poland in 1991, Mubarak’s Egypt in 1991 and Iraq under American control in 2004); (2) an exception where restructuring inadvertently facilitated an alternative government (Bolivia in 2005); (3) unilateral suspensions of debt payment either followed by negotiations (Argentina) or not followed by negotiations (Ecuador). Most of the restructurings (600 cases between 1950 and 2010) have adversely affected the economies and peoples of the concerned countries. Eric Toussaint showed that debt restructuring is a mechanism designed by creditors. The CADTM prefers not to consider restructuring as a demand and a solution as long as the creditors hold their ground. Éric Toussaint rounded up his historical analysis with the particularly interesting case of the Greek debt restructuring in 2012. Conducted only in the interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. of creditors, it’s a sharp reminder of the restructurings that took place in the third world countries. The newly-formed Greek government led by SYRIZA must learn from this recent event.

Currently, the public creditors - who are at present the main creditors in Greece, Portugal and other countries subject to memoranda – do not wish to act in a way that would in any way recall the post-war approach of meting out favors to West Germany. “Several radical left parties (including Podemos, SYRIZA and the Bloco de Esquerda) are now offering restructuring and asserting their willingness to negotiate with the creditors. Whether such a negotiation could have a really positive outcome for the country and the people was the debate’s focal point, rather than the question of negotiation. Without suspension of payment, without audit, without other sovereign acts of debt resistance, it is very difficult to predict a substantial result from negotiations. In any case, we must be ready to take strong actions if negotiations do not materialize or have unfavorable results”.

As is also the case in the document of our Portuguese friends, Éric Toussaint stressed the importance of incorporating the issues of the banks, of control on capital movements and of a radical fiscal reform when developing a strategy to deal with public debt. The audit is a sovereign act of analyzing the debt, consequently understanding the process of indebtedness He concluded by underscoring the importance of the weapon of audit: "the example of Ecuador’s audit in 2007-2008 shows that this is an important tool. It is a sovereign act of analyzing the debt, consequently understanding the process of indebtedness and identifying the illegal / illegitimate / unsustainable / odious parts.
It is a tool for advocacy and demonstration. At the same time, it allows a nation to take a sovereign decision based on the domestic and international law or on general legal principles”.

A concrete proposal for a restructuring program

Francisco Louçã, former coordinator of the Bloco with a Ph.D. in Economics, presented the debt renegotiation plan which he and three other Portuguese economists had prepared.

This document helps to initiate a political debate based on concrete proposals. In terms of restructuring, it recommends an extended time of up to 30 years for capital payment and a drastic reduction of the interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
to 1%. It also recommends to discriminate in favor of small shareholders, other small investors as well as local authorities who could be affected by the restructuring. Finally, it calls for a radical reform of the banking sector (which would become entirely public once the shareholders are compelled to accept their losses).

"The strong and concrete nature of the proposals is very important for the sake of public debates. We are aware that there may be other, perhaps even better, standpoints, but none has been presented so far.”

According to Francisco Louçã, the European Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
’s (ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html
) debt bailout program will not suffice. The European Central Bank’s (ECB) debt bailout program will not sufficeIt is essential to cancel part of the debt through a process of negotiation and restructuring. "Anything can happen. It will all depend on the vision of a left-wing government that can - and should – manifestly take unilateral actions.”

We have to think out how to proceed after unilateral acts

Ignacio Alvarez, a member of Podemos and Professor of Applied Economics, pointed out at the outset that unlike the other speakers Podemos was yet to have a strong stand on the debt. However, Podemos had passed a resolution that initiated the debate.
This resolution has two tenets: Podemos’ economic program cannot be implemented without addressing the issue of debt (both public and private); and the institutional framework in which it operates (the European Union and its treaties) is to be treated with equal importance. “If the peripheral economies want to remain within this framework, they are expected to generate a higher primary surplus of 3 or 4 or even up to 7% in the coming years. This is unattainable and impossible”.

Ignacio Alvarez explained Podemos’ stand regarding citizens’ audit and debt: "These two approaches must be in line but not mutually exclusive; restructuring must take place even in the case of an incomplete or inconclusive audit. We consider audit to be a tool for awareness building and politicization. It is also, as Éric said, an instrument that should help define illegitimacy.” He then laid out the ideal course for restructuring: “it must be conducive to an effective reduction: interest rates, repayment schedules, debt service Debt service The sum of the interests and the amortization of the capital borrowed. in the first few years as proposed by our Portuguese friends, and of course the principal of the debt.”

The restructuring must be conducive to an effective reduction: interest rates, repayment schedules, debt service in the first few years

He believes that the use of the term “restructuring” can appeal to a much wider section of the population. "It’s not the terminology, but the implication that matters. I fully agree with the necessity for sovereign acts. The debate on debt will not evolve without the participation of the indebted countries, who must try to achieve collective solutions. But we cannot find financial resources overnight, we do not have a central bank. Therefore, this must be taken into consideration as well. We have to think out how to proceed after unilateral acts”.

Creditors use their power to impose conditions on restructuring

Georgios Katrougalos, MEP from SYRIZA and professor of Constitutional Law, reminded us that international law does not tell us how to address the issue of debt restructuring. For the time being, there are two informal groups: the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

http://clubdeparis.org
(public creditors) and the London Club London Club The members are the private banks that lend to Third World states and companies.

During the 70s, deposit banks had become the main source of credit for countries in difficulty. By the end of the decade, these countries were receiving over 50 per cent of total credit allocated, from all lenders combined. At the time of the debt crisis in 1982, the London Club had an interest in working with the IMF to manage the crisis.

The groups of deposit banks meet to co-ordinate debt rescheduling for borrower countries. Such groups are known as advisory commissions. The meetings, unlike those of the Paris Club that always meets in Paris, are held in New York, London, Paris, Frankfurt or elsewhere at the convenience of the country concerned and the banks. The advisory commissions, which started in the 80s, have always advised debtor countries immediately to adopt a policy of stabilisation and to ask for IMF support before applying for rescheduling or fresh loans from the deposit banks. Only on rare occasions do commissions pass a project without IMF approval, if the banks are convinced that the country’s policies are adequate.
(private creditors). They use their power to impose special conditions for restructuring so that their own interests, not those of the indebted peoples, are served.

"After the 2012 restructuring 90% of our debt was no longer in the hands of private creditors (mainly, German and French banks) but in those of institutions such as the ECB and the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
, or of individual States. This is another example of socializing banking losses. Therefore, negotiations must take place”. We must not forget either that the Greek debt is now under the British, and not the Greek law. It impossible to pay the debt. However, the main reason behind debt resistance is political, not technical. He stated that SYRIZA deems it impossible to pay the debt. However, the main reason behind debt resistance is political, not technical. Debt as a tool of domination is not just a problem for Greece or the peripheral countries; it is now the EU’s problem. "We must find a solution through an international conference, as was the case with Germany. Our proposal includes the need for a moratorium and a clause for a level of growth under which debt service would be suspended.

What if SYRIZA took the EU at its word?

Éric Toussaint rounded up by explaining that Paragraph 9, Article 7 of an EU regulation dated May 21, 2013, recommends that countries subject to a macroeconomic adjustment should carry out a comprehensive debt audit. |1| What if SYRIZA took the EU at its word and grabbed the opportunity to identify the liabilities Liabilities The part of the balance-sheet that comprises the resources available to a company (equity provided by the partners, provisions for risks and charges, debts). in the Greek indebtedness and the part of the debt that its people must not pay?

Translated by Suchandra De Sarkar in collaboration with Christine Pagnoulle

A vidéo by Vasileios Katsardis


Footnotes

|1| “A Member State subject to a macroeconomic adjustment programme shall carry out a comprehensive audit of its public finances in order, inter alia, to assess the reasons that led to the building up of excessive levels of debt as well as to track any possible irregularity”. Regulation (EU) No. 472/2013 of the European Parliament and of the Council of 21 May 2013 on the strengthening of economic and budgetary surveillance of Member States in the euro area experiencing or threatened with serious difficulties with respect to their financial stability
http://eur-lex.europa.eu/legal-cont...

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CADTM Europe

Le CADTM Europe (Comité pour l’abolition des dettes illégitimes) est présent en Grèce, en France, en Belgique, en Espagne, en Suisse, en Italie, en Pologne. et au Luxembourg Au niveau mondial, le réseau CADTM est implanté dans plus d’une trentaine de pays.


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