History shows that it is legitimate to repudiate “odious debt”

16 February 2018 by Eric Toussaint , Vittorio De Filippis

Eric Toussaint interviewed by Vittorio De Filippis
Published in the French daily Libération on 19 December 2017.

Eric Toussaint is the international spokesperson for the CADTM ( Committee for the Abolition of Illegitimate Debt). In his latest book Le systeme dette. Histoire des dettes souveraines et de leur répudiation (The Debt System: a History of Sovereign Debts and their Repudiation), he provides an explanation of how indebting sovereign States has always been used as a weapon of domination and spoliation. Page by page, the little-known, often barely credible history of debt is sketched before the reader’s eyes. The Debt System is supplemented with archive documents and official reports of exchanges between political actors from all sides and all countries. It delves deep into history to show that the struggle against odious, illegitimate, illegal and unsustainable debt is by no means a newly-emerging fight.

Why do you claim that the debt crises of countries of the South are always linked to the crises erupting in capitalist countries ?

From the 19th Century, recourse to external debt and the adoption of free trade played a fundamental role in subjecting entire economies to the supervision of the main capitalist powers where the biggest banks were established.

Each debt crisis was preceded by a period of overheating in the highly industrialized economies. This brought on a surplus of capital, part of which was recycled towards the economies of the Periphery. The crises would usually be caused by factors external to the indebted Periphery countries, such as a recession or a financial crash hitting the principal industrialized economy or economies, or again, a change of policy concerning 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.
decided by the central banks of the major powers of the time.

Is it not going too far, to transpose that past into the present ?

The debt system that we see today reproduces many of the mechanisms of domination that powerful States currently use against weaker ones. One might add that the ruling classes of indebted countries also 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. from the indebtedness. They encourage their governments to borrow internally and from abroad because the loans contribute to lowering the taxes paid by the bourgeoisie. They buy their own countries’ debt bonds knowing that the returns are guaranteed by the State and that yields will be high. These mechanisms that have been developed over the last two centuries are widely used today.

Using external debt as a weapon of domination has been a fundamental element of the foreign policy of the major powers throughout the 19th Century and into the 21st Century in newly invented forms. Greece, since it was founded in the 1820s to 30s, was completely subjected to the dictates of the creditor powers (especially Great Britain and France). Haiti, which gained its liberation from France during the Revolution and proclaimed its independence in 1804, was once again enslaved by debt in 1805. Indebted Tunisia was invaded by France in 1881 and transformed into a protectorate. The same fate awaited Egypt in1882 at the hands of British Imperialism.

What has happened to Greece, Cyprus, Portugal and Ireland over the last ten years confirms this. Of course, the methods used have evolved; new forms of coercion have been introduced. Since 2010 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
(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.

, 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.

and the European Commission) and the Eurogroup have been dictating to the Greek government what their social and economic policies must be.

But Greece is partly responsible itself. What has it to do with the debt system? Is Greece not a special case ?

In the early 2000s, the creation of the Eurozone generated significant volatile, often speculative, financial flows from the economies of the Centre (such as Germany, France, Benelux and Austria) towards countries of the Periphery (Greece, Ireland, Portugal, Spain, Slovenia, etc.). The big private banks and other financial institutions of the Central economies lent money to the private and public sectors of the Peripheral economies because it was more profitable to invest in those countries than in their own national markets. The existence of a single currency, the euro, encouraged these flows as there was no risk of devaluation Devaluation A lowering of the exchange rate of one currency as regards others. . All this led to a private credit bubble mainly in the property sector but also affecting consumption. The private banks of Western Europe used money that 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
lent to them in large quantities at very low cost to increase their loans to countries like Greece without checking the borrowers’ capacity to repay Bankers sought profits without consideration of the risks.hat happened to Greece in 2010 when Western bankers shut-off liquidities Liquidities The capital an economy or company has available at a given point in time. A lack of liquidities can force a company into liquidation and an economy into recession. was to happen to Ireland, Portugal, Cyprus and to a certain extent Spain, shortly afterwards

Periphery, Centre… these are words you rarely hear nowadays.

Yet there does indeed exist a hierarchy between the countries of the wealthy Centre and the peripheral countries, whether within the European Union or on a global scale.

What is the 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.
you talk about so much in your book ?

In 1927, working from a whole series of cases in jurisprudence, the Russian jurist Alexander Sack, exiled in Paris after the Bolshevik revolution, elaborated la Doctrine of Odious Debt. According to this doctrine, if the debt had been contracted against the interests of the population and the creditors were aware of this, or could have been, that debt is odious and can be cancelled.

The doctrine emanates from a conservative professor who meant to defend the interests of creditors while warning them to be careful to check the use that borrowers made of the loans they were granted.

During the 19th Century there were a series of debt repudiations, for example in the United States. In 1830, social unrest in four States of the US resulted in the overthrow of their corrupt governments and repudiation of the debt that those governments had contracted from dishonest bankers. The infrastructure projects the loans were supposedly to have financed never saw the light of day, due to corruption.

In 1865, when the North had won the war against the South, the victors decreed that the Southern states should repudiate the debts they had contracted with banks to finance the war. This was laid down in the 14th Amendment to the United States Constitution. The debt was considered « odious » because it had been contracted to defend slavery.

Do you have any further examples ?

Nearly a century ago, in February 1918, the Soviets decreed the repudiation of Tsarist debt.

In 1919, Costa Rica repudiated debt contracted by the former dictator, Tinoco, to profit none but his family. It was a former US president who arbitrated and endorsed the repudiation, on the grounds that the money borrowed had served personal interests.

More recently, ten days after the invasion of Iraq in 2003, the US Treasury Secretary summoned his G7 colleagues to cancel the debt contracted by Saddam Hussein, using the argument of odious debt. In October 2004, 80 % of Iraq’s debt was cancelled. This demonstrates the validity of the argument in international law.

How can these observations be applied to Greece ?

The debt that the Troika is claiming from Greece represents 90% of Greek public debt. There is no doubt at all that the Troika’s loans were granted against the 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. of the Greeks themselves. The measures imposed on them have deteriorated the exercise of their basic rights and their living conditions without improving the economic situation. The Troika lent Greece money to reimburse private Western banks. The Truth Committee on Greek Public Debt that I coordinated in 2015 at the request of the Speaker of the Hellenic Parliament was able to prove that the members of the Troika were well aware of the nefarious effects of their demands.

And does the same go for Venezuela ?

Before being able to answer, we would need to carry out an audit of the Venezuelan debt that was contracted under the regime of Hugo Chavez and his successor Nicolas Maduro. An audit would have to answer the following questions: was the money borrowed used to serve the interests of the population, or to finance the interests of a privileged minority? There needs to be a thorough and rigorous examination of the process whereby debt was incurred. It is very interesting to note that the right-wing opposition facing Maduro has never called for suspension or cancellation of the debt. The local wealthy classes invested in the debts issued by the previous regime and are counting on the resumption of debt repayments after the fall of Maduro.

By repudiating debt, are you not cutting yourself off from external finance ?

Well, the history of capitalism demonstrates that the reverse is true. In 1837, Portugal repudiated its debt towards French banks, yet Portugal was then able to issue 14 successive loans in France and elsewhere. The same happened to the United States. And despite the fact that the Soviets had repudiated their debt in 1918, by 1924 the Western countries were all falling over one another to lend money to the Soviet Union.

There is no shortage of later examples.

Finally, let me add that cancellation of illegitimate debt is not enough! Cancelling debt without taking far-reaching measures to deal with banks, currency, taxation, investment priorities and democracy would merely drag the country into yet another cycle of indebtedness. Repudiation needs to be part of a broader overall plan.

Translation by Vicki Briault and Mike Krolikowski (CADTM)

Original source : Libération

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 Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), 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, 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. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.




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