Committee for the Abolition of Illegitimate Debt

Government aid is made up 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). , and injections of capital in order to recapitalize the banks. In the period from October 2008 to December 2011, €1,174 trillion (9.3% of EU 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.  [1] ) worth of guarantees were underwritten by European Governments as a contingency measure. To these guarantees must be added €442 billion (3.5% of EU GDP) of public capital support to banks. During 2012 and 2013 the recapitalizations continued: about €40 billion in Spain in 2012 alone, more than €50 billion in Greece, about €20 billion in Cyprus, €4 billion more for Dexia bank in Belgium, €3.9 billion for Monte dei Paschi in Italy, €3.7 billion for the Dutch bank SNS, €4.2 billion in Portugal on top of the Portuguese bail-out of the Banco Esperito Santo in July 2014., not forgetting Ireland, Slovenia, Croatia This assistance was granted without any government supervision of the use made of the funds. [2]

A quick calculation can give an idea of the importance of capital injections if we compare their volumes to the banks’ hard capital Hard capital The capital provided by shareholders plus the undistributed profits (retained earnings). . The 20 largest European banks in 2012 have assets of about €23 trillion, considering that on average their hard capital represents 3% of assets, the total hard capital is roughly €700 billion. If we consider that in recent years, European governments have advanced €200 billion of capital into these banks (a precise calculation would take into account the injections into banks such as Fortis, which were acquired by BNP Paribas), we realize that the contribution is quite impressive.

Some authors refer to State guarantees granted to “Too big to fail” banks as implicit subventions and expose their perverse consequences.

Other forms of government aid to banks are:

• Borrowing on the financial markets by issuing sovereign debt Sovereign debt Government debts or debts guaranteed by the government. bonds. They entrust the sale of these bonds to a group of big private banks called primary dealers (generally chosen among the group of the thirty biggest international banks [4]) for whom this activity is a source of income. Then, through their Central Banks the governments repurchase, 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. , a part of the bonds they have themselves issued through the primary dealers. In January 2014 the US central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.
  
  ECB : http://www.bankofengland.co.uk/Pages/home.aspx ’s 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. sheet included $2,228 trillion worth of treasury bonds that it had purchased from different banks. The Bank of England had £371 billion of gilts on its books on 13 March 2014 [5], that is, British Government bonds that were also purchased on the secondary market; on the 31 December 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 held €185 billion of Greek, Irish, Italian, Spanish and Portuguese sovereign bonds that had all equally been purchased on the secondary market. [6]

• Reductions in taxes effectively paid on banks’ profits. They have declared losses in 2008-2009 (and sometimes for other exercises too) that have permitted tax avoidances over several years. In fact losses are carried forward to following years, thus permitting substantial tax savings. Care must be taken that BNP Paribas does not write down as a commercial loss the $9 billion fine imposed by the US and save the equivalent in tax payments. The French government may cover the fine as it is in close relationship with the banking sector.

• The refusal by Governments to prosecute the banks that are considered “Too big to Fail”. [7]
  Since 2007-2008 not one bank in the EU, North America or Japan has had its banking licence (its right to exercise banking activities) revoked. Out of court settlements have permitted the banks to carry on business as usual, avoiding condemnation in due form. [8] Not one bank director has been imprisoned (except in Iceland which is not a EU member) or has been prohibited from banking activities. The only judgements have been against bank employees mostly condemned for having damaged their bank’s image. This refusal to prosecute the banks themselves is visible through the attitudes taken against traders such as Jerome Kerviel, who have served as scapegoats. In taking this lax attitude towards banks, States encourage moral hazard Moral hazard The effect on a creditor’s or an economic actor’s behaviour when they are covered against a given risk. They will be more likely to take risks. Thus, for example, rescuing banks without placing any conditions enhances their moral hazard.
  
  An argument often used by opponents of debt-cancellation. It is based on the liberal theory which considers a situation where there is a borrower and a lender as a case of asymmetrical information. Only the borrower knows whether he really intends to repay the lender. By cancelling the debt today, there would be a risk that the same facility might be extended to other debtors in future, which would increase the reticence of creditors to commit capital. They would have no other solution than to demand a higher interest rate including a risk premium. Clearly the term “moral”, here, is applied only to the creditors and the debtors are automatically suspected of “amorality”. Yet it is easily demonstrated that this “moral hazard” is a direct result of the total liberty of capital flows. It is proportionate to the opening of financial markets, as this is what multiplies the potentiality of the market contracts that are supposed to increase the welfare of humankind but actually bring an increase in risky contracts. So financiers would like to multiply the opportunities to make money without risk in a society which, we are unceasingly told, is and has to be a high-risk society… A fine contradiction. .

• *The refusal to take strict measures against financial institutions, that would avoid repeated banking crises. [9]

• *The refusal to take measures forcing the banks that receive ECB loans to use them in their turn to grant loans to households and small businesses (which are the principal private employers) to stimulate the economy. The banks freely use this money as they see fit without bringing any benefits to the real economy. Since 2012 and 2013 loans to business, especially small business, have decreased. The ECB says that for its next series of loans to banks it will condition them to business and household credits. Wait and see!

Translation : CADTM