Committee for the Abolition of Illegitimate Debt

Summary

As the economy started to deteriorate in 2008, the Greek banking system was con-fronted with a solvency crisis. The main ob-jective of the first loan agreement of May 2010, amounting to €110 billion, was to rescue banks with exposure to Greek public debt. The loan allowed for European and Greek banks to reduce their exposure to Greek bonds, transferring the risk to multilateral and bilateral creditors. As the economy shrank as a conse-quence of austerity measures, imposed in an attempt to service debt, the fiscal situation continued to dete-riorate leading to an increase in the debt to 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. ratio.

The second agreement, which involved additional loans amounting to €130 billion and a haircut of 53.5% of the face value of Greek bonds, worsened the cri-sis. Among the losers of PSI were public entities which suffered losses of €16.2 billion. Most of these losses accrued to pension schemes, with losses of €14.5 billion. In stark contrast, Greek banks were fully compensated while private foreign creditors were partly compensat-ed on the losses induced by the haircut through the use of “sweeteners”.

The management of the crisis was a failure as a result of the fact that it was approached as a sovereign debt Sovereign debt Government debts or debts guaranteed by the government. crisis when reality it was a banking crisis.

1. From 2009 to May 2010

The snap elections on October 4 of 2009 signaled one of the biggest victories of PASOK during the last decades, gaining 43.92% of the votes. PASOK owed this victory to its pre-election promises. With the famous phrase “we have money”, proclaimed during a rally in rural Greece, the leader of PASOK won the elections. PASOK promised a new period of increased redistri-bution of wealth, tackling the social problems of the “generation of 700 euro” and protecting the most vul-nerable. Nonetheless, just a few weeks after the elec-tions, a series of substantial revisions of statistical data

[see box] took place. As a result, the political climate changed sharply.

The Greek crisis arose from the fragile position of the Greek banking system, demonstrated through the high degree of leverage Leverage This is the ratio between funds borrowed for investment and the personal funds or equity that backs them up. A company may have borrowed much more than its capitalized value, in which case it is said to be ’highly leveraged’. The more highly a company is leveraged, the higher the risk associated with lending to the company; but higher also are the possible profits that it may realise as compared with its own value. of the banking sector as a whole. The dependence on short term funding of the banking sector created significant liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. issues, as well as sol-vency concerns, which eventually led in October of 2008 for the government of K. Karamanlis to provide an aid package of aid to the banks amounting to €28 billion. From this amount, €5 billion were provided to ensure compliance with banking capital requirements. The rest of the resources were promised in the form 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). . As it can be observed in figure 2.1, the first increase in the sovereign risk spread took place in this moment, long before G. Papandreou officially declared the exclusion from the markets of the coun-try in the spring of 2010.

FIGURE 2.1
Greece Government Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. 10Y
Implied Yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. on 10 Year Bonds

Source : Trading economics.com | Public Debt management Agency (POMA)

Between the end of 2009 and the beginning of 2010, the continuous announcements of new austerity meas-ures (i.e. spending cuts) and downgrades of Greece by rating agencies Rating agency
Rating agencies Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/ marked the betrayal of the pre-election promises of the new government. This paved the way for the deterioration of the fiscal situation that allowed, under an “emergency situation”, to approve further in-jection of public resources to re-capitalize Greek banks. These measures quelled the expansion of the crisis to other European banks, effectively transferring the bur-den of the crisis to the Greek taxpayers.

The new austerity measures that the government of George Papandreou announced in February and March 2010 accelerated the deterioration of public finances.
As a result, the yields of Greek bonds increased. The Greek government declared the loss of market access and officially requested, on April 23^rd, the support of other Eurozone members 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 , following the decision of the European Summit on March 25. The situation was dramatized, although there were other alternatives to cover the financing gaps of the 2010 budget such as:

 Restructuring of the banking sector, in a similar vein to the measures taken in Scandinavian countries in the 90’s and Iceland in 2008.
Increase domestic borrowing.
 Bilateral loans from non-euro countries.
 Buy-back of Greek bonds from 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. .
 Accepting more of the €25 billion offered in the last auction of 2010 when the government sought to borrow.
 Other alternatives include the cessation of pay - ments and cancellation of debt.

TABLE 2.1
Issuance of government bonds 2009 - 2010

Source : PDMA, Issuance Calender & Syndication and Auction results.

2. The Memorandum of Understanding of May 2010

The first loan agreement of €110 billion (€80 billion from the Eurozone countries and €30 billion from the IMF) was accompanied by what the President of 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.

https://www.ecb.europa.eu/ecb/html/index.en.html , Jean Claude Trichet, described as “strict conditionalities”. [6] The program focused, namely, on three “key challenges”: First, to restore confidence and fiscal sus-tainability through a front-loaded fiscal effort, second, to restore competitiveness through reforms like wage and benefit cuts, and third to safeguard financial sector stability. [7]
In reality, the aim of the first loan was to offer a safe emergency exit to private bondholders that wanted to reduce their exposure to Greek bonds, in a context in which the likelihood of nominal haircuts on the value of the bonds was significantly high.

FIGURE 2.2
Consolidated BIS Bank for International Settlements
BIS The BIS is an international organization founded in 1930 charged with fostering international monetary and financial cooperation. It also acts as a bank for central banks. At present, 60 national central banks and the ECB are members.

http://www.bis.org/about/ -reporting Bank Claims on Greece
end-2009, percent of total claims

Source: BIS consolidated Bank Statistics and IMF Staff estimates

The exposure of foreign banks to Greek public and private debt is recognized as the key reason behind the unwillingness of debtors to apply an early haircut on bonds: “The exposure of French banks to Greece was €60 billion, whereas Germany’s was €35 billion euro worth [8]]. ;billion euro worth8; if they were obliged to take steep losses on their Greek papers – and
on their other euro government bond holding as well – the financial system’s
viability would come under a huge cloud”. [9]
Hence, its possible to argue that the first loan agreement and the MoU were designed to rescue the private creditors of the country, specially banks, and not Greece.

3. From May 2010 to February 2012

As a result of the refusal of creditors to agree on a haircut of Greek bonds, sovereign debt since the end of 2009 until the end of 2011 increased from €299 billion to €355 billion. This is an increase of 18,78%. More
importantly, there was a dramatic change in the profile of the debt. Due to the massive sell off of Greek bonds by European and Greek banks, public debt privately held was transferred to other Eurozone member states and the IMF. The share of bonds in the total Greek debt de-creased from 91.1% in 2009 to 70.5% in 2011, while the share of loans increased from 5.2% in 2009 to 25.3% in 2011. [10]

In 2010 and 2011 the unprecedented recession (con-traction of GDP of 4.9% and 7.2% respectively) led to a failure in the achievement of nearly all the fiscal tar-gets (from tax revenues to the reduction of the budget deficit). In the meantime, the increasing popular anger against austerity led to a political crisis.

Starting from February 2011, 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 began to ask for additional spending cuts and measures. This was a clear indication that the first Memorandum was quickly becoming out-dated. On October 26, 2011 the Coun-cil of the European Union decided a new program for Greece, amounting to €130 billion of additional loans. This represented an increase in the value of a previous offer presented in July 2011, which amounted to €109 billion. In the framework of a European Summit, the voluntary participation of private bondholders to take a aproximately 50% haircut in the nominal value of the bonds was proposed. A modified version of this propos-al, called PSI+ (Private Sector Involvement), material-ized under the second loan agreement.

4. The PSI

The progressive change in the composition of the debt paved the way for a restructuring process with the participation of private bondholders. The restructuring of Greek debt was completed on March 9 through the exchange of bonds with new ones bearing a haircut. The total amount of debt prior to the exchange was reduced in February 2012 by €106 billion. This decrease failed to reduce the debt burden of the country as a new loan agreement totalling €130 billion was settled. This amount included an initial allocation of €48 billion to be destined for bank recapitalization Recapitalization Reconstituting or increasing a company’s share capital to reinforce its equity after losses. When the banks were bailed out by the European States, they were most often recapitalized with no conditions attached and without the States having the decision-making power their participation in the banks’ capital should have given them. . It is clear then that this loan agreement was also designed to protect and minimize the losses of the financial sector. It is not a coincidence that the negotiations that took place during the winter of 2012, which led to a “happy end” for the creditors, were headed by officials of the Institute of International Finance and its then managing director and ex-banker Charles Dallara.
Among the biggest losers of PSI+ were public enti-ties and small bondholders. With the adoption of two laws, the deposits of hundreds of public entities suf-fered losses of a total value of €16.2 billion. Most of the losses were imposed on pension schemes, total-ling €14.5 billion (from a total of capital reserves of €21 billion). These losses had no impact on the total amount of outstanding debt because of their intergov-ernmental nature of this debt. Another group, which registered significant losses, were the small bondhold-ers. It is estimated that more than 15.000 families lost their life savings. This was a result of the fact that for many years sovereign bonds were promoted and sold as a zero-risk form of saving. The unequal distribution of losses opened a social wound, as highlighted by the 17 suicides that have been recorded to date among those who lost their savings. [11] The injustice is made evident if we compare the refusal of the PSI+ scheme to compensate this small group of bondholders, while at the time providing full compensation to Greek banks and the provision of “sweeteners” to foreign banks. The social impact of the PSI+ was augmented as a result of the draconian and punitive terms that accom-panied it (cuts in salaries, privatizations, dismantling of the collective bargaining system, mass redundan-cies of public employees, etc). In addition, the issue of the new bonds under British and law (which makes its restructuring with a sovereign decision much more difficult) undermines sovereign rights to the benefit of creditors.

The neutral impact on Greek debt of the 2012 re-structuring on debt sustainability became evident very soon. In the summer 2013 the same promoters of PSI+, who initially advocated for it as a permanent solution of the sovereign debt crisis, where issuing calls for a new restructuring.

5. From 2012 to 2015

The restructuring of the Greek debt was completed in December 2012 when the ECB implemented a buy back of Greek bonds. This reduced the debt further. Nevertheless, this buy back at a price of 34 cents per euro allowed some hedge funds Hedge funds Unlisted investment funds that exist for purposes of speculation and that seek high returns, make liberal use of derivatives, especially options, and frequently make use of leverage. The main hedge funds are independent of banks, although banks frequently have their own hedge funds. Hedge funds come under the category of shadow banking. , like Third Point of Dan

Loeb, to generate hefty profits in a short space of time making $500 million. [12]

During the period of the “Greek rescue” (2010-2014) sovereign debt experienced its biggest increase and got out of control, increasing from €299.690 billion, 129.7% of GDP, to €317.94 billion, 177.1% of GDP. In the mean-time the share of bonds decreased from 91.12% in 2011 to 20.69% in 2014 and the share of loans increased from 5.21% in 2009 to 73.06% in 2014. In particular, the EFSF’s loans constituted 68.4% of the overall Greek debt. The totally ineffective character, in an economic sense, of the two loan agreements was proved in 2015 during the discussions for a new restructuring of the debt. The need for restructuring is a result of the fact that “the two support programmes for Greece were a colossal bail-out of private creditors”. [13]

Setting aside the specific causes of the unsustaina-bility of Greek debt, it is notable that a substantial in-crease in sovereign debt took place all over the world in the aftermath of the 2007 crisis. According to the IMF, general government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. between 2008 and 2014 in-creased from 65% of GDP to 79.8% globaly, from 78.8% to 105.3% in advanced economies and from 68.6% to 94% of GDP in the Euro area. [14] Sovereign debt was a way for the private financial sector to pass the costs of the crisis of 2007 onto the public sectors across the world.

Chapters :
Chapter 1 : Debt before the Troika
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 8 : Assessment of the debt as regards illegitimacy, odiousness, illegality and unsustainability
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