Facing the debt crisis in Europe

15 July 2011 by Eric Toussaint , Damien Millet

One of the avatars of the financial sector crisis that began in 2007 in the United States and spread like wildfire to Europe, is the enthusiasm shown by Western European banks (especially German and French banks |1|, but also Belgian, Dutch, British, Luxembourgish and Irish ones) in using funds lent or donated massively by the Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
and the 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.

to increase their loans to several Eurozone countries between 2007 and 2009 (Greece, Ireland, Portugal, Spain) racking up juicy profits due the higher 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.
there. For example: between June 2007 (beginning of the subprime crisis) and September 2008 (Lehman Brothers bankruptcy) loans by private Western European banks to Greece rose by 30%, from 120 to 160 billion Euros. Western European bankers jostled to loan money to the European Union periphery to anyone prepared to incur debt. Not satisfied with taking extravagant risks across the Atlantic in the subprime market with the money of savers who made the error of trusting in them, they repeated the same operation in Greece, Portugal and Spain… Indeed, the fact that some peripheral countries were in the Eurozone convinced Western European bankers that the governments, 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
(ECB) and the European Commission would come to their aid in the event of problems. They were not mistaken.

By the time heavy turbulence shook the Eurozone from Spring 2010, the ECB was lending to private banks at the advantageous rate of 1%, and these banks in turn demanded a far higher return from countries such as Greece: from 4 to 5% for three-month loans, approximately 12% for 10 year securities. The banks and other institutional investors Institutional investors Entities which pool large sums of money and invest those sums in securities, real property and other investment assets. They are principally banks, insurance companies, pension funds and by extension all organizations that invest collectively in transferable securities. justified such requirements by the “default risk” among the so-called “risky” countries. As a consequence the rates increased considerably: 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.

and European Union loan to Ireland reached 6.7%, compared with 5.2% to Greece six months earlier. In May 2011, the ten-year Greek rates exceeded 16.5%, meaning Greece could only borrow for three or six months, or resort to the IMF and to other European governments. Heretofore, the ECB had to guarantee debts held by private banks by buying State securities from them … despite its stated policy against lending directly to the States.

Seeking to reduce risks, French banks diminished their exposure in Greece in 2010. It melted by 44%, falling from 27 to 15 billion dollars. German banks made a similar move: their direct exposure fell by 60% from May 2010 to February 2011, from 16 to 10 million Euros. The IMF, ECB and European governments gradually replaced bankers and other private financiers. The ECB holds an amount of 66 billion Euros in Greek securities (20% of the Greek public debt), which it acquired 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. from banks. The IMF and the European governments lent 33.3 billion Euros up to May 2011. Their loans will increase further in future. But that is not all; ECB accepted the equivalent of 120 billion Greek debt securities as guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). (collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. ) for the loans it had granted to them at a 1.25% rate. The same process has been undertaken with Ireland and Portugal.

There we find all the ingredients of Third World debt crisis management with the implementation of the Brady Plan |2|. At the beginning of the crisis that broke out in 1982, the IMF and governments of major powers, above all the United States and Great Britain, came to the rescue of Northern private bankers who had taken huge risks by lending to countries of the South, especially Latin American ones. When countries such as Mexico found themselves at the brink of payment default due to the combined impact of the rise in 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. rates and the fall in their export revenues, the IMF and the countries belonging to the “Club de Paris” lent them capital on condition that they continued to make repayments and implement austerity plans (the notorious structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
plans). Then, as the South’s debt load was ballooning due to the snowball effect (as we now see happening in Greece, in Ireland, in Portugal and elsewhere in the EU), they implemented the Brady Plan (named for the US Secretary of the Treasury at the time) which involved restructuring the debt of the main debtor nations with an exchange of securities. The debt volume was cut by 30% in some cases and the new securities (Brady bonds) guaranteed a set interest rate of approximately 6%, which was very much in the bankers’ favour. This also ensured continuation of the austerity policies under IMF and World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 180 members in 1997), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

control. In the long term, the total sum of the debt rose none the less and the sums repaid were huge. If we only take into account the net balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. between amounts lent and the amounts repaid since the Brady Plan was implemented, developing countries offered creditors the equivalent of six Marshall plans, or approximately 600 billion dollars. Mustn’t we avoid repeating such a scenario? Why should we accept that peoples’ economic and social rights are once again sacrificed on the altar of bankers and other financial market Financial market The market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. operators?

According to the business banks Morgan Stanley and J.P. Morgan, in May 2011, the markets estimated that there was a 70% probability that Greece would default on its debt, up from 50% two months earlier. On 7 July 2001, Moody’s put Portugal in the high-risk debt category. That is a further reason to opt for cancellation: debts must be audited with citizen participation to cancel the illegitimate portion. If this option is not taken, the victims of the crisis will serve a life sentence of double jeopardy, to the benefit of the guilty bankers. We can see this clearly with Greece: austerity therapies follow one another with no improvement in the public accounts situation. The same will happen in Portugal, Ireland and Spain. A large portion of the debt is illegitimate because it is the result of a policy favouring a tiny minority of the population at the expense of the overwhelming majority of citizens.

In countries that made agreements with the Troika Troika Troika: IMF, European Commission and European Central Bank, which together impose austerity measures through the conditions tied to loans to countries in difficulty.

IMF : https://www.ecb.europa.eu/home/html/index.en.html
(IMF, EC and ECB), the new debts are not only illegitimate, but also odious, for three reasons:
- 1. The loans are on conditions that violate the economic and social rights of a large portion of the population;
- 2. the lenders are blackmailing these countries (there is no real autonomy on the borrowers’ side);
- 3. Lenders are making an abusive profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. by skimming off prohibitive interest rates (for example, France and Germany borrowing at 2% on financial markets and lending at more than 5% to Greece and Ireland; private banks borrowing at 1.25% from the ECB and lending to Greece, Ireland and Portugal at over 4% per three months). For countries such as Greece, Ireland, Portugal or Eastern European countries (and outside the EU, countries such as Iceland), i.e. countries subjected to speculator blackmail, it is appropriate to resort to a unilateral moratorium on public debt repayment. It is an unavoidable means of resetting the balance of power in their favour. This proposal is becoming popular in the countries most heavily impacted by the crisis.

Public debt also has to be audited under citizen control. The aim of the audit is to conclude with a cancellation/disavowal of the illegitimate or odious portion of the public debt and to cut the balance of the debt.

A radical reduction in public debt is a necessary but not sufficient condition to get European Union countries out of the crisis. This must be rounded out by a whole series of large-scale measures in different arenas (taxation, transfer of the banking sector to the public domain, resocialisation of other key economic sectors, reducing working hours while preserving incomes and ensuring compensatory hiring, etc. |br /|).

The flagrant injustice of the regressive policies underway in Europe is feeding the powerful mobilization of the “outraged” (“indignés”) in Spain, Greece and elsewhere. Thanks to these movements that got underway in the wake of people’s uprisings in North Africa and the Middle East, we are seeing an acceleration of history. The public debt issue calls for a radical response.

Translated by Maria Lagatta in collaboration with Christine Pagnoulle.

Damien Millet is CADTM France spokesperson (www.cadtm.org), Eric Toussaint is the chair of CADTM Belgium. They edited : La Dette ou la Vie, Aden-CADTM, Brussels-Liège, summer 2011, 379 pages, 20€.


|1| At the end of 2009, German and French bankers alone held 48% of Spanish foreign debt bonds (French banks held 24% of these debts) ; 46% of Portuguese bank bonds (French banks held 30%) and 41% of Greek debt bonds (French banks led with 26%).

|2| Éric Toussaint, The World Bank: A Critical Primer, Pluto Press, London, 2008, chapter 15.

|br /| See Eight key proposals for another Europe


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.


Damien Millet

professeur de mathématiques en classes préparatoires scientifiques à Orléans, porte-parole du CADTM France (Comité pour l’Annulation de la Dette du Tiers Monde), auteur de L’Afrique sans dette (CADTM-Syllepse, 2005), co-auteur avec Frédéric Chauvreau des bandes dessinées Dette odieuse (CADTM-Syllepse, 2006) et Le système Dette (CADTM-Syllepse, 2009), co-auteur avec Eric Toussaint du livre Les tsunamis de la dette (CADTM-Syllepse, 2005), co-auteur avec François Mauger de La Jamaïque dans l’étau du FMI (L’esprit frappeur, 2004).

Other articles in English by Damien Millet (45)

0 | 10 | 20 | 30 | 40



35 rue Fabry
4000 - Liège- Belgique

00324 226 62 85