20 August 2015

Based on the findings of the previous chapters, we assess in this chapter the types of debt (by creditors) with respect to the definitions of illegal, illegitimate and odious debts. Our assessment of unsustainability concerns the entire current Greek public debt as of June 2015.

A. ASSESSMENT OF THE UNSUSTAINABILITY OF THE CURRENT GREEK PUBLIC DEBT

From an economic standpoint, as it is shown in Chapter 5, the adjustment policies had detrimental impact on GDP, investment, labour productivity, output/capital ratio and employment. An ecologically and socially sustainable economic development presupposes, inter alia, a substantial increase of public spending (including public investment). It is incompatible with the existing austerity policies, because there is no room for any budget primary surplus.

Moreover, taking into account the definition given in this report, it is clear that Greece’s debt is unsustainable. Considering that a debt is unsustainable if it cannot be serviced without seriously impairing the ability or capacity of the Government of the borrower State to fulfill its basic human rights obligations, such as those relating to healthcare, education, water and sanitation and adequate housing, or to invest in public infrastructure and programmes necessary for economic and social development, or without harmful consequences for the population of the borrower State (including a deterioration in the living standards), the current Greek debt is indeed unsustainable, since:

Greece is currently unable to service its debt without seriously impairing its capacity to fulfill its basic human rights obligation. As it has been shown in Chapter 6, many basic human rights are currently violated in Greece due to a lack of public expenditures in social spending, thus preventing such violations would necessarily imply an increase of public spending. And yet, as highlighted in this report, the current financial situation does not enable Greece to increase public spending since the situation leads to no room for any budget primary surplus, while reimbursing its debt.

This situation has been well illustrated by many official statements stressing that without the final disbursement of the 2012 loan, Greece would be currently unable to reimburse its creditors and satisfy some social needs which are yet underfinanced. In this context, the Greek government is clearly in a position where it can either reimburse its loan while continuing to violate basic human rights, or suspend the reimbursement and dedicate the money that would have been used to such reimbursement to fulfill its human rights obligation.

B. ASSESSMENT OF THE DEBT TO THE IMF
1. Is the debt to the IMF legal?

Considering the debt which had conditions that contravened the law or public policy are illegal, debts to the IMF should be considered as illegal since the measures attached to the IMF loans to Greece breached fundamental laws as protected under the country’s Constitution, customary law and international treaties to which Greece is a party. Conditionality dramatically deteriorated Greece’s economic problems and forced the country to choose between repayment to the Fund and key social expenditures for maintaining adequate standard of living and safeguarding its people’s fundamental rights. Given the direct imposition and monitoring of the conditionalities by the IMF, [1] it bears responsibility for their attendant illegal consequences.

Considering the debts which involved clear misconduct are illegal, debts to the IMF should be considered as illegal since IMF acted in bad faith (which is illegal) :

 Warnings were issued by several EDs in May 2010 that “Greece might end up worse off after implementing this program” and that the attempted fiscal reduction is “a mammoth burden that the economy could hardly bear”. [2]

 The IMF Staff Appraisal in May 2010 recognised that: “the adjustment that lies ahead will be socially painful”, a point repeated in 2012. [3] The IMF did not take effectively into account the objections of one third of its board members in regard to the distribution of benefits and burdens resulting from the first Greek programme”. [4] Instead, the programme was presented to the public via the Executive Board Press release on the SBA by the MD DSK as a: “commitment to doing what it can to help Greece and its people”. [5]

 Large discrepancies between the confidential DSA of February 2012 in which “internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term”, concluding that the likelihood is “a much higher debt trajectory” of 160 percent of GDP in 2020” [6] and the March 9^th 2012 public version which replaces this assessment with a baseline scenario of 116.5% in 2020. [7]

Considering that debt which breach established legal procedures is illegal, the debt to IMF should be considered as illegal, since:

 The IMF breached its own Articles of Agreement. As we have shown in Chapter 5, the IMF operations in Greece clearly and intentionally breached the Fund’s objectives. Under its Articles of Agreement the Fund is bound to “respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members”. [8]

 The IMF’s own Guidelines necessitating national ownership of the programme [9] were grossly ignored in favor of a non-representative government which was effectively commanded by the Troika under conditions of fiscal occupation.

 The Fund’s system risk detection is inadequate, [10] its economic project for the sustainability of the Greek debt was ill-founded, [11] and if the Fund did not undertake a detailed systemic risk assessment, beyond the evidence of the large exposure of the European banks [12] then the Board’s decision was in breach of the Fund’s internal laws.

2. Is the debt to the IMF legitimate?

Considering that a debt is illegitimate when the conditions attached to the loan included policy prescriptions that violate national laws or human rights standards, IMF loans are illegitimate for the same reasons that they are illegal since the conditions included policy prescriptions that infringed human rights obligations (see above).

The debt is also illegitimate because it was converted from private (commercial) to public debt under pressure of the creditors.

 The prepared statement to the IMF Board for the May 9 2010 meeting stated that: “The risks of the programme are immense… As it stands, the programme risks substituting private for official financing. In other and starker words, it may be seen not as a rescue of Greece, which will have to undergo a wrenching adjustment, but as a bailout of Greece’s private debt holders, mainly European financial institutions.” [13]

 The risk that the programme would undermine the ability of Greece to repay the Fund is stressed and repeated in the Programme Reviews. [14] The IMF unduly delayed a restructuring that was acknowledged as inevitable from the outset and several EDs strongly warned that restructuring should have been on the table in 2010. [15] Its exclusion was deemed a political motive of pandering to powerful European interests in the IMF and to safeguard the European financial sector. This is confirmed by the statement made by the IMF Managing Director on 28^th April 2010: “… the situation is serious, not only for Greece but for all the Euro-zone now. And the stability of the Euro-zone is really the point which is at stake”. [16] This clearly demonstrates that the IMF intervention was solely aimed at protecting the interests of private creditors.

3. Is the debt to the IMF odious?

Considering that debt is odious if the lender knew or ought to have known that the loan is unconscionable and whose effect is to deny people their fundamental civil, political, economic, social and cultural rights, debts to the IMF is odious, since the IMF knew that measures were ineffective and lead to serious violations of socio-economic rights. Indeed:

 The IMF was aware that its loans and the conditionalies were unconscionable as we have shown above.

 Furthemore, as decades of structural adjustment led by the IMF and the World Bank in the developing world has amply demonstrated, it was more than foreseeable that the measures imposed by the Troika on Greece will have had some substantial impact on human rights. It was thus unreasonable for the creditors to impose such conditionalities on Greece, hence the economic and social crisis could be seen as the direct result of unreasonable conditionalities.

C. ASSESSMENT OF THE DEBT TO THE ECB
1. Is the debt to the ECB legal?

Considering that debt, which breach established legal procedures are illegal, the debt to the ECB should be considered as illegal, since:

 The ECB over-stepped its mandate by imposing, via its participation to the Troika, the application of macroeconomic adjustment programs (i.g. the deregulation of the labour market).

 According to Article 130 TFEU: “(...) neither the European Central Bank, nor a national central bank,nor any member of their decision-making bodies shall seek or take instructions from Union institutions, (...) from any government of a Member State or from any other body. (…) The Union institutions, bodies, offices or agencies and the governments of the member states undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks.” ECB has established a conditionality that links its SMP purchases to the policies of the members states, in particular the rigorous application of fiscal measures (see chapter 3), which is illegal regarding the requirement of central bank independence. Nonetheless, the ECB announced in 2012 that it would undertake outright transactions in secondary sovereign bond markets, namely, Outright Monetary Transactions (OMT), adding that “a necessary condition for OMTs is strict and effective conditionality attached to an appropriate EFSF/ESM programme.”

Considering that debt involving clear misconduct by the lender, or debt whose attendant conditions contravene the law or public policy should be considered as illegal, debt to the ECB are illegal, because:

 The measures laid down in the MoUs, which are de facto conditions attached to the SMP Program, breach the rights protected by the Greek Constitution and international human rights treaties. The ECB, as part of the Troika, is co-responsible for violation of human rights.

 The ECB acted in bad faith (which is illegal) within the SMP programme because it bought Greek bonds on the secondary market but demanded the full reimbursement of both capital (nominal value) and accrued interest.

 The ECB decided to return the profit made on capital and interest to Greece but only under the condition that Greece agrees to implement the reforms imposed within the programme period. The decision to withhold the interest which accrued to Greek bonds and thus refuse to give it to its legal recipient (namely Greece) constitutes a clear case of coercion by which to force the government to accept the conditions imposed by its creditors.

 The ECB placed illegal pressure upon the Greek government. On February 4, 2015 the European Central Bank announced that from February 11 it would cease to accept Greek Government bonds as collateral, stating that “it is currently not possible to assume a successful conclusion of the programme review.” By pressuring the Greek Government which was then engaged in negotiations with its creditors, the ECB contravened Article 130 TFEU. [17] Consequently, the ECB aggravated the crisis and increased the financial instability of the euro and the Eurozone, which is grossly contradictory of its mandate.

2. Is the debt to the ECB legitimate?

Considering that a debt is illegitimate if its attendant conditions were grossly unfair, unreasonable, unconscionable or otherwise objectionable, or because the conditions attached to the loan, security or guarantee included policy prescriptions that violate national laws or human rights standards, the debt to the ECB are illegitimate for the same reasons that they are illegal (see above: debt to the ECB involving a clear misconduct by the ECB and the conditions laid down in the MoUs contravene the law and public policy).

Considering that a debt is illegitimate if the loan, security or guarantee was not used for the benefit of the population, debt to the ECB are illegitimate, since the principal reason of the SMP programme was to serve the interests of the private financial sector, allowing the major European private banks to dispose their Greek bonds.

3. Is the debts to the ECB odious?

Considering that debts are odious if the lender knew or ought to have known that those debts are unconscionable and whose effect is to deny people their fundamental civil, political, economic, social and cultural rights, the debts to the ECB are odious, given its decision to connect its buyback of the bonds with the SMP, which required Greece’s implementation of the MoU.

The ECB knew or ought to have known (as a European Institution it has failed to meet the most basic of requirements to prevent human rights violations in the policies they purse) that the conditions encompassed in the MoU are illegal and evidently against the interests of the Greek people and the Greek State, chiefly because of the abusive clauses in the agreements between Greece and its creditors. The effect of those clauses was to deny the Greek people their fundamental civil, political, economic, social and cultural rights, as well as restrict or even dissolve the sovereignty of the Greek state.

D. ASSESSMENT OF THE DEBT TO THE EFSF
1. Is the debt to the EFSF legal?

Considering that debt which do not respect the proper legal procedures are illegal, it follows that the debt to the EFSF should be considered as illegal, because:

 Article 122(2) TFEU was violated. The Commission and the Council’s legal justification for the EU loan to Greece was predicated on Article 122(2) which allows the financing of another member state when these are: “severe difficulties caused by natural disasters or exceptional occurrences beyond its control”. However it was not the case for Greece, since its situation was comparable to other EU states, only deteriorating after the implementation of the conditionalities stipulated in the pertinent MoU. Furthermore, the manipulations of statistics were used to increase dramatically the fiscal deficit (see chapter 2) so as to justify the bailout programme (MoU).

Considering that debts, which involve clear misconduct by the lender or which suffer from conditions that contravene the law or public policy, should be considered as illegal, debt to the EFSF is illegal, because:

 The measures laid down in the MoU, which in turn constitute conditions imposed by the EFSF, breach several socio-economic rights and civil liberties protected by the Greek Constitution, as well as the European and international human rights treaties.

 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). For example, it is stipulated that the agreement has to be implemented even if it is found to be illegal. If pertinent clauses were applied, it it implies that states participating in the EFSF pursue illegal activities.

2. Is the debt to the EFSF legitimate?

Considering that a debt is illegitimate if the terms and conditions attached to the loan, security or guarantee (from which it originates) infringed the law (both national and international) or public policy, or if such terms or conditions were grossly unfair, unreasonable, unconscionable or otherwise objectionable, or because the conditions attached to the loan, security or guarantee included policy prescriptions that violate national laws or human rights standards, it follows that the debt to the EFSF are illegitimate for the same reasons that they are illegal (see above: the EFSF Framework Agreement 2010 and the Master Financial Assistance Agreement of 2012 contain several abusive clauses and the MoU breach the Greek Constitution and several human rights Covenants). Furthermore, the EFSF bailout was channeled through an escrow account. This account is controlled by an external “commissioner” of the Troika. [18] The majority of the second bailout funds have not gone through the government’s budget. The EFSF did not respect the sovereign rights of the Hellenic Republic to manage its own money.

Considering that a debt is illegitimate if the loan, security or guarantee was not intended, or indeed used, for the benefit of the population, it follows that the debts to EFSF are illegitimate because:

 As it is shown in the Chapter 4: the 2012 agreement objective of the EFSF is explicitly the “recapitalization of financial institutions”; [19] the PSI programme recycles “other” unspecific obligations into debt towards the EFSF without any benefit for Greece; the EFSF impose Greece abusive costs, even if the disbursement does not take place.

 The EFSF financial regulatory status benefits banks. International regulatory frameworks Basel II and III and the European regulation frameworks categorize the EFSF assets as 0% risk weighting assets, which by no means corresponds to its credit ratings. Banks benefit from public guarantees and favourable regulations to increase profits, while maintaining capital ratios untouched. [20]

3. Is the debt to the EFSF odious?

Considering that debt is odious if the lender knew or ought to have known that those debts were incurred in violation of democratic principles (including consent, participation, transparency and accountability), and used against the best interests of the population of the borrower State, or are otherwise unconscionable, the effect of which is to deny people their fundamental civil, political, economic, social and cultural rights, it follows that the debt to the EFSF is odious, because:

 The EFSF knew or should have known that the conditionalities incorporated in the MoU were breaching human rights. As we have shown in Chapter 7, each Euro Area (Lender) Member State is required to ensure that non-state actors (such as the EFSF), whose conduct the state is in a position to influence, are prohibited from impairing the enjoyment of such rights.

 The EFSF knew that the abusive clauses in the agreements were against the interest of the Greek people and the Greek State. The effect of those clauses is to deny Greek people their fundamental civil, political, economic, social and cultural rights but also to deny the Greek State its sovereignty.

Furthermore, we must keep in mind that the EFSF suffers from a serious democratic legitimacy deficit. The EFSF, managing the EU public funds, was constituted as a private firm outside the ambit of the EU law, in the form of a Special Purpose Vehicle (SPV) similar to a hedge fund and incorporated in Luxembourg, one of the world’s major tax havens. Therefore, it is not an institution predicated on democratic principles, particularly openness and accountability, representative of and committed to the protection of fundamental rights.

E. ASSESSMENT OF THE BILATERAL LOANS
1. Are bilateral loans legal?

Considering that debt which do not respect the proper legal procedures provided for by the domestic law of the parties are illegal, the bilateral loans should be considered as illegal, since:

 As it has been seen, the procedure provided for by the Greek constitution has not been respected.

 The Commission (composed by States) was meant to verify Greece’s obedience to the MoU before each disbursement. The Commission had also powers such as to coordinate and manage; negotiate; open the account in the ECB to process all payments. And yet, neither the EU commission nor any other State has taken or implemented either any impact assessment or applied any other mechanism that could have assessed the impact of the conditionalities on the exercise of human rights by the people in Greece.

Considering that debts, which involved clear misconduct by the lender or had conditions that contravened the law or public policy are illegal, the bilateral loans should be considered as illegal since there was a breach of both EU law and of international law to sideline human rights in the design of the macroeconomic programmes:

 The conditions attached to these loans breached human rights obligations provided for by the Greek constitution and several European and International human rights instruments to which the lenders states are parties and from which stemmed some extraterritorial obligations.

 As it is underlined in Chapter 7, the European Lenders (States and Institutions) have also breached several articles of the TEU (articles 2 and 3) and the TFUE (article 9).

 The Loan Facility Agreement contains abusive clauses (revealing a clear misconduct of the lender) such as stating that provisions of the agreement have to be implemented even if they were found illegal and those stating that Greece hereby irrevocably and unconditionally waives all immunity.

2. Are bilateral loans legitimate?

Considering that a debt is illegitimate if the conditions attached to the loan included policy prescriptions that violate national laws or human rights standards, bilateral loans are illegitimate for the same reasons that they are illegal, since the conditions included policy prescriptions that infringed human rights obligations (see above).

Considering that a debt is illegitimate if the loan was not used for the benefit of the population, bilateral loans are illegitimate since:

 They have not been used for the benefit of the population of Greece, they have merely enabled the private creditors of Greece to be bailed out.

 The interest rates were too high compared to the interest rates lender countries were paying the market, so much so that they were reduced later.

3. Are bilateral loans odious?

Considering that debt is odious if the lender knew or ought to have known that this debt was incurred in violation of democratic principles (including consent, participation, transparency, and accountability), and used against the best interests of the population of the borrower State, or is unconsciable and its effect is to deny people their fundamental civil, political, economic, social and cultural rights, bilateral debts are odious since:

 The lender states could not argue that they were not aware of such potential violations. We must remind that neither in 2010, nor in 2012, was there any attempt to assess the human rights impacts of the macroeconomic adjustment and fiscal consolidation that were the conditions for the loans. In the case of the 2012 MoU, the harms were widely known by then.

 They also knew that conditions attached to the loans have clearly been imposed on Greece, and that participation, transparency, and accountability principles have not been respected in this respect.

 Furthermore, European States (which are also members of the IMF) knew since 2010 that the loans will serve merely some private interest and the austerity measures lead to serious violations of socio-economic rights. See the above, “Assessment of the debts to the IMF”.

F. ASSESSMENT OF THE DEBT TO THE PRIVATE CREDITORS

Private creditors fall into three main groups: banks, hedge funds, and small holders. Auditing the public debt should make it possible to find a way to compensate small holders and treat them differently as compared to others. Less informed than banks and hedge funds, small holders are victims of the banks’ actions. One should remember that the Greek government encouraged its citizens to buy bonds that were presented as secure and profitable investments at a time when the same government paid laid-off workers in sovereign bonds. [21] One should also keep in mind that some private creditors whose loans were not contracted under Greek law could decline the credit- wapping operation, or “hold out” which demonstrates that creditors were not, in fact, treated equally.

1. Is debt to the private creditors legal?

Considering that debts which involved a clear misconduct by the lender should be considered as illegal, it follows that part of the debt to private creditors is equally illegal because:

 Private banks conducted themselves irresponsibly before the Troika came into being. For example, in the report they submitted after their inquiry into the role of the Troika concerning the Eurozone countries involved in bailout programmes, [22] MEPs Othmar Karas and Liem Hoang Ngoc emphasized the dual responsibility of banks and States. They regretted “that the burden has not been shared among all who acted irresponsibly and that the protection of bondholders was seen as an EU necessity in the interests of financial stability”. [23] Private banks failed to observe their due diligence obligations and yet still received significant profits from the Greek State. In its 2013 report, the Bank of Greece identified several elements explaining changes in Greece’s debt-to-GDP ratio and measuring their respective contributions to these changes. For the years 2009, 2010, 2011 and 2012, the portion that can be attributed to the snowball effect was respectively 6.2%, 11.2%, 16.9% and 18%. [24]

 Some private creditors such as hedge funds acted in bad faith. Bad faith may be found in the speculation on public debts by private investors, particularly hedge funds, through financial instruments such as credit default swaps.

Considering that debts contracted in violation of domestic law are illegal, some local debts to private creditors should be considered as illegal. For instance, the municipality of Zografou was granted a €25 million loan by the Austrian bank KommunalKredit, a subsidiary of Dexia, for a project which did not get approval from state auditors as required by law. [25]

2. Is debt to the private creditors legitimate?

Considering that a debt is illegitimate if the terms and conditions attached to that loan, security or guarantee infringed the law, or if such terms or conditions were grossly unfair, unreasonable, unconsciable or otherwise objectionable (such as bearing excessively high interest rate), some parts of the debts to private banks and hedge funds are illegitimate for the same reasons that they are illegal (see above).

Furthermore, Greek banks have been abundantly recapitalized by tax-payers since the second programme, adopted by the Eurogroup on 21 February 2012, commited €48 billion for recapitalization. Such assistance, which mainly benefits bank shareholders, may rightly be considered illegitimate.

3. Is debt to the private creditors odious?

Considering that a debt is odious if the lender knew or ought to have known that it was incurred in violation of democratic principles and used against the best interests of the population of the borrower State, debts to private banks and hedge funds are odious.

Indeed, the private sector was insulated from a great part of Greek debt because of pressure exerted by the Troika, which suffers from a serious democratic legitimacy deficit. Since major private creditors (banks, hedge funds) were aware that these debts were not incurred in the best interests of the population but rather for their own benefit, it is beyond doubt that a large part of this debt is of an odious nature.

Chapters :
Chapter 1 : Debt before the Troika
Chapter 2 : Evolution of the Greek public debt during 2010-2015
Chapter 3 : Greek public debt by creditors in 2015
Chapter 4 : Debt mechanism in Greece
Chapter 5 : The conditionnalities against sustainability
Chapter 6 : The impact of the “bailout” programme on human rights
Chapter 7 : Legal issues surrounding the MoU and Loan Agreements
Chapter 9 : Legal foundations for repudiation and suspension of Greek sovereign debt
Preliminary Report of the Truth Committee on Public Debt in PDF

Additional :
Eric Toussaint’s speech at the presentation of the preliminary report of the Truth Committee

Footnotes :