Debt, a weapon of mass destruction aimed at the people

20 December 2014 by Pascal Franchet

Sarajevo Peace Event, June 3, 2014

This statement is on behalf of the CADTM (Committee for the Abolition of Third World Debt ).
CADTM was founded in 1990. It has since become a global network present in forty countries in Africa, South East Asia , Central and South America and Europe. Focused since its beginning on the debt of the South, since 2008, its attention has also been turned to the debt of the North. In Europe, committees exist in Belgium, France , Greece and Spain. More are being set up in several other European countries (Poland, Luxembourg).
Our experience of debt and structural adjustment programs in the South allows us to analyze and fight against the austerity plans and illegitimate and odious debt of the northern countries of the world.

To begin I will start with a statement by Warren Buffet, who, according to Forbes magazine, is one of the richest men in the world: "There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning (New York Times 26/11/2006).”

This cynical statement has the merit of clarity. We are talking here of war, economic war that is not constrained by borders and does not bother about nationalities, only about the interests of one social class. This type of war is responsible for millions of deaths each year, it is comparable with armed conflict. As the capitalist economy has become global so, along with it, has economic warfare.

This remark is intentionally general. I want to present a wide framework in which many different situations may exist. My presentation is not cover all situations and will not be giving lessons to anyone or talking in the place of anyone. Each country or group of countries has its own experience in terms of public debt and I come here, just as much, to learn about them; from you.

My intention is to show that within this global economic war, which, because of the crisis, has attained an exceptional scale, debt plays a crucial and central role. From this point of view, the class conflict between us and the bourgeoisie, the struggle against the illegitimate and odious public debt, can not be separated from the global struggle against this capitalist society. I will conclude with some proposals for concrete actions that we can discuss together.

Although our world has never produced so much wealth, material goods and sustenance, there is devastating poverty. Nearly a billion people suffer from hunger and the gap between the richest and the poorest continues to grow. The richest 10% now possess between 80% and 90% of the World’s wealth. This ruthless economic war maintains the people of the South in underdevelopment, famine and disease while their natural resources are plundered by industrial corporations with the complicity of the governments.

The economic and financial crisis that exploded in the United States in 2008 caused unemployment and poverty for millions of Americans. Four million foreign workers were sent home (Mexico, El Salvador, etc.), deteriorating the situation in their countries, in which more than 15% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
came from the remittances these workers sent to their families. More than one in 7 US residents are now pursued by a debt collection agency and more than 13 million households have been evicted from their homes because they could no longer repay the mortgages. Thousands of businesses have closed and cities, like Detroit (ex cradle of the automobile industry), are bankrupt .

This crisis was quickly exported to Europe, the weak link in global capitalism, with its share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of social disintegration, mass unemployment and destruction of industrial employment. The situation and the policies currently observed to be at work in the South and East of Europe seems to be, for many economists, transforming them into a new third world.

States and governments rushed to the rescue of the banks that became short of money, and to make the population pay for the crisis. €1.2 trillion were made freely available, hive-off vehicles for toxic assets Toxic assets An asset that becomes illiquid when its secondary market disappears. Toxic assets cannot be sold, as they are often guaranteed to lose money. The term “toxic asset” was coined in the financial crisis of 2008/09, in regards to mortgage-backed securities, collateralized debt obligations and credit default swaps, all of which could not be sold after they exposed their holders to massive losses. were created, €3 trillion of 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). have been provided to allow banks to borrow from 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.

. In total, in 2009, the European Commission authorized Member States to intervene to up to €4.5 trillion.

A concrete illustration of neoliberalism can be observed in the financial structure of multinational corporations and of big national companies. Capital’s offensive against labour in all industrialized countries since the mid-1970s has allowed it to increase its share in the distribution of the value produced to the detriment of the workers. In 15 years, labour’s share has decreased between 8 and 13 % depending on the country.

This extra 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. has not been invested in new machines or the maintenance and renovation of the old, nor in research and development (R&D). The much greater part is distributed in dividends and financial investments. In the early 1980s the shareholders of these industrial corporates chose to move towards a more financial structure of their activities, preferring speculation and casino-style operations rather than industrial investment .

This pursuit of maximum profit with an immediate rate of return on investment of around 15-18 % per year led (and still leads today) to the massive relocation of industrial jobs away from the rich countries to countries with lower wages and lower or non-existent social cover( see Bangladesh textile factory that collapsed on workers killing a thousand people).

But it would be wrong to believe that European relocations are only in one direction, away from the rich countries towards the South and East of Europe. In fact, if Hungary has benefited from the creation of 60,000 new jobs in 20 years (1990 to 2010) due to relocation, at the same time it has suffered a net loss of 1,5 million jobs in industry, agriculture and services.

So that this financial structure could spread its wings; as from the beginning of the 1980s banking and finance has been released from the regulations established by public authorities after the end of the second world war (since the New Deal for USA). Bank deposits activities and commercial activities have merged, complex derivatives Derivatives A family of financial products that includes mainly options, futures, swaps and their combinations, all related to other assets (shares, bonds, raw materials and commodities, interest rates, indices, etc.) from which they are by nature inseparable—options on shares, futures contracts on an index, etc. Their value depends on and is derived from (thus the name) that of these other assets. There are derivatives involving a firm commitment (currency futures, interest-rate or exchange swaps) and derivatives involving a conditional commitment (options, warrants, etc.). products appeared and proliferated, such as CDSs (Credit Defaults Swaps ) better known as “subprimes”, and financial speculation has spread to raw materials and foodstuffs.

“This happened seven years ago and and four years ago. Agricultural prices soared. Mid-2008, they were three times higher than at the beginning of the millennium. Shortly after, they fell again to quickly rise to new records again. These Price fluctuations had dramatic consequences. Millions of people lost their lives. There were riots, violence and unrest. The United Nations Food and Agriculture Organization (FAO ) estimates that the 2007-2008 crisis caused the deaths of approximately 80 million people. In Pakistan, for example, poverty has increased by 35 %. In Ethiopia , people have had to reduce their calorie intake by a quarter“. “While in 2003 only $13 billion had been invested in the markets for derivatives of raw material, ten years later, in spring 2013, it was 33 times more - $430 billion. Up until the year 2000, the share of contracts traded for speculative purposes did not exceed 20 percent. This has changed dramatically. Today, speculative contracts are responsible for 80 percent or more of this activity”.
Source = Alliance Sud.
La spéculation sur les denrées alimentaires March 2014

Complicity of the States and of the European Union

The liberalization of finance and of the real economy would not have happened without the active complicity of the governments. Another essential aspect of the financialization of the society was that the ruling class, the bourgeoisie, used it to ensure the submission of governments and states. The conversion of social democracy to neoliberalism, over several decades (the conservative parties had already come over) was not sufficient, it was necessary to ring-fence the autonomy of the States.

This was done with the creation of the European Union and the adoption of its undemocratic treaties that have the power of constitutions. The creation of the European Central Bank 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.
and the adoption of its Statute which prohibits states from borrowing from their own central banks and from public companies. But if the ECB is independent from the states, in fact, it promotes private banks (financial institutions and subsidiaries of multinational corporations) which can borrow at very low or even negative (below inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. ) rates and then lend to states and households at much higher rates. The ECB is clearly a tool for the financial markets rather than being at the service of the States. The use of (and addiction to) financial markets is now obligatory.

At the same time, the bourgeoisie has put pressure on governments (oh, very light pressure!) to reduce of tax rates on corporate profits and on the richest households. Government resources have declined. Public expenditure is restrained and an accumulation of large fiscal and budget deficits has resulted, that can only be balanced by borrowing from those who have benefited from these tax cuts. The financial markets are fixing, unilaterally, 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.
of government bonds.

In the name of balanced budgets and debt repayments, austerity plans are applied more or less violently across the whole of Europe. The social protection systems are the main target (pensions, health care, unemployment benefits, etc.) but also wages, labour laws, public employment, bringing political support to business, privatization and industrial destruction. The result is a considerable social decomposition that provides a breeding ground for populists, nationalists and xenophobic parties on the extreme right.

Austerity policies in Europe threaten and attack a social edifice of human and labour rights that grew out of more than 60 years of social solidarity. The South and East of Europe have become the laboratories of these austerity policies as Pinochet’s Chile was the laboratory of neoliberalism, inspired by the Chicago School.

This social regression also promotes the return of patriarchy, sexism and the questioning of women’s rights such as the right to abortion. The ground is ready for an ideological regression. We are facing a real decline of civilization.

In this backward step of civilization, 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.
plays, with the ECB and the European Commission, the same role it played in the early 1980s in Africa and Central and South America. The European austerity plans are a true copy of the 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).

programs implemented in the South as from 1982. Austerity policies lead, throughout Europe, to unemployment and poverty, especially for women and youth, but also for the middle class, they increase debt instead of reducing it, and degrade the ecosystem.

The strategies are similar, public debt is used as a key issue to impose growing exploitation of peoples. It is in this name that the structural adjustment programs in the South were implemented. It is still in this name that the austerity plans in Europe are pleaded. This is a real war against the people and the debt plays the function of a weapon of mass destruction aimed at the people.

This economic war may, recent news is full of examples, lead to armed conflicts ( Mali, Central Africa) or to dictatorships (Thailand). Debt serves a very specific function: the enslavement of national and local economies to the dictatorship of finance.

Here I would like to make proposals

The dependence on the financial markets is neither absolute nor unavoidable. International law permits states to step away from binding treaties where necessary, to satisfy the basic needs of population. That international law also provides for the suspension of debt repayment and even cancellation in case of illegitimate, illegal or odious debt Odious Debt According to the doctrine, for a debt to be odious it must meet two conditions:
1) It must have been contracted against the interests of the Nation, or against the interests of the People, or against the interests of the State.
2) Creditors cannot prove they they were unaware of how the borrowed money would be used.

We must underline that according to the doctrine of odious debt, the nature of the borrowing regime or government does not signify, since what matters is what the debt is used for. If a democratic government gets into debt against the interests of its population, the contracted debt can be called odious if it also meets the second condition. Consequently, contrary to a misleading version of the doctrine, odious debt is not only about dictatorial regimes.

(See Éric Toussaint, The Doctrine of Odious Debt : from Alexander Sack to the CADTM).

The father of the odious debt doctrine, Alexander Nahum Sack, clearly says that odious debts can be contracted by any regular government. Sack considers that a debt that is regularly incurred by a regular government can be branded as odious if the two above-mentioned conditions are met.
He adds, “once these two points are established, the burden of proof that the funds were used for the general or special needs of the State and were not of an odious character, would be upon the creditors.”

Sack defines a regular government as follows: “By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.”

So clearly for Sack, all regular governments, whether despotic or democratic, in one guise or another, can incur odious debts.

But the law is nothing without the political will to impose it. This will cannot arise without social mobilization able to express the needs of the people.

These issues of public debt and financialization of society are voluntarily presented by the watchdogs of the media as too complex for ordinary people to understand . However, if certain financial mechanisms are actually extremely complex, it is not the same for the public debt. To see through the opacity, maintained by governments, Just ask the right questions. Why did we borrow? To who’s advantage? Should we really repay? What can we do?

We make three main proposals:

  • a moratorium on payment of the debt
  • a public audit
  • cancellation of illegitimate, illegal and odious debt

1. Declare a moratorium on debt payments.

A simple decree is sufficient. The advantage of a moratorium is to immediately relieve public finances and to identify the unknown creditors who crawl out of the woodwork and are revealed to parliament and the public.

The payment of 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. or repayment of capital (coupons) is made anonymously by compensation funds or through financial investment organisations.
Parliamentarians who vote the budgets do not know who profits from the service of the debt (public money)!
Suspending debt repayments would create the best conditions for a public audit.

2. How to do a public debt audit.

Citizens audits are under way in several countries (Spain, Portugal, Greece, France, Belgium, Brazil and elsewhere ). They clarify which public debts should not be repaid. They are an important support for mobilizations.

Adding “public” to audit means to us that this action should have the largest possible base. Using expert and technical collaborators should not mean delegating power but using their skills and sharing them. The goal is to simply and clearly take back the control of what is decided in our name, to enable a collective decision. The goal of an audit is to clarify and to make understandable what is behind public debt and to mobilize public opinion by providing evidence and arguments necessary for the repudiation of the debt identified as illegitimate, illegal and/or odious.

The purpose of a public audit is first to see through the opacity that has become commonplace concerning debt, and to answer several questions:

1) Where does the debt come from?
2) The public debt, how does it work?
3) Was it subscribed in the public interest?
4) Who profits?

Then determine the share of public debt which should be cancelled or repudiated.

Without being exhaustive, we can propose the following definitions:

  • Illegitimate Debt: a debt taken on by a government that is not in the general interest, or to the detriment of the general interest. We distinguish between what is legal (eg. a budget voted in a democratic context) and what is legitimate. A debt incurred to cover tax breaks for the rich and for big corporates can legally be considered not be legitimate.
  • Illegal debt: debt taken-on in violation of applicable legal or constitutional order. (Parliament not consulted, Constitution not respected)
  • Odious debt: debt resulting from loans to authoritarian regimes or that are imposed under conditions that violate the social, economic, cultural, civil or political rights of the populations affected by the repayment.
    (“If a despotic power incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime, to repress the population that fights against it, etc., this debt is odious for the population of all the State.
    This debt is not an obligation for the nation; it is a regime’s debt, a personal debt of the power that has incurred it, consequently it falls with the fall of this power.”(Sack’s definition))
  • Unsustainable debt: debt whose repayment condemns the population of a country to impoverishment, degradation of health and public education, rising unemployment and even malnutrition. This is the case, for example, of Greece, Cyprus and Ireland.

3) Decide collectively to cancel illegitimate, illegal or odious debt

These cancellations depend on the specific situation and circumstances of each country’s debt. There are many examples in history, of total or partial suspension and cancellation of debt .

It must be also be emphasised that total or partial cancellation of the debt is not an end in itself and alone will not transform society, it is only a step in the right direction, a means to an end.

Other measures are to be taken: an end to austerity plans, reforms to the tax and banking systems, creation of legitimate public funding mechanisms, development and expansion of public services, strengthen the pension system, reduce working hours and introduce a new incomes policy, bring on another Europe of the peoples by promoting a constitutional process that will replace the existing treaties, promote relations of solidarity between countries and peoples, etc.

But! illegitimate, odious, illegal and/or unsustainable debt is an important barrier to break down in order to finally achieve the peace and economic development which we reclaim.

Thank you.

PS: for much more information on all these issues visit the CADTM web site.

Citizen’s public debt audit groups have been formed in several European countries. They are grouped together as the ICAN network. CADTM is involved in groups in Portugal, Greece, Spain, Belgium, France. These include trade unions, political parties, associations and individuals. They work together for the audit of public debt, to explain its mechanisms, to break down the dominant discourse and to propose alternatives and mobilizations.

I said in the introduction, that what I explain reflects a general framework. To progress further, CADTM may take part in all actions. Your public debt creditors and ours are often the same. The role that 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.

(ECB , European Commission and IMF) plays is called to spread to all countries. We have common enemies! Let’s fight them together!

Translation Mike Krolikowski

Pascal Franchet

Président du CADTM France

Other articles in English by Pascal Franchet (3)



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