Lies and truths on greek public debt lead to the urgency of audit

17 July 2011 by Maria Lucia Fattorelli

The pressure against Greece is getting stronger every week. Everybody talks a lot about the debt crisis; but it´s important to remark that before being a debt crisis it was a bank crisis. Since 2008, there was a big problem located on the largest banks sector, originated from issuing derivatives and other assets without any support – called toxic assets - and some of the largest banks of the planet were in risk to default. Under secret documentsii, atmosphere of fear and emergency summits, European Union took the countries to a series of “bank bail-out” operations. How European countries saved the banks? By issuing large amounts of sovereign bonds, transforming the bank crisis into a sovereign debt crisis.

The news in all kinds of media follows the “market feelings” and too much is published about the debt crisis, specially Greek´s, and almost nothing about its origin. It´s urgent to audit this public debt, in order to prove the origin of Greek public debt and put down many lies which have been built against Greek´s situation, that are costing a very high price for its population.

The experience of debt audit in Ecuador showed that when a country owns a strong audit report with all the proves of illegality and illegitimacy of the “Debt System”, the 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. -holders accept any negotiation. When the President Rafael Correa announced, on TV and radio, in October/2008, the main findings of the audit commission (CAIC), and suspended the coupon payment due in November/2008, the Ecuadorian bonds in 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. went down to 30% of its nominal value. In 2009 the President made the sovereign proposal to pay 30% of the nominal value of the bonds - Global 2012 and 2030, that had 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 12% and 10% at the time – putting an end on this debt. Almost 95% of the bond-holders presented their bonds and no legal action was initiated against Ecuador. This experience proved that a country can suspend payments and take sovereign acts anytime, and a safe result can be guaranteed by a deep audit report properly documented.

One of the most cruel lies that has been published is that the only way out to Greek´s debt crisis is submitting to impositions of 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.
and UE, making new expensive debt to pay previous debt and privatize all national wealth, including the historical monuments! That´s not true. First, it is important to Greece and other European countries to look back to Latin American history, because what is happening in Europe now is very much like what happened here in the 80´s, with an aggravating circumstance: we were still under dictatorship and had no right to protest and absolutely no access to documents and information. Second, it is important to remember that if in theory nobody can obligate a country to make new loans to pay the previous debt, in reality, the creditors do pressure and coerce nations to get into the “Debt System”. That happens when the creditors organize themselves as a cartel composed by largest banks oligopoly, international financial authorities (IMF, EU, 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 other creditorsiii. This situation can be considered illegal, for the evidence of the asymmetry between parts. Besides, the manipulation of the “country-risk” by the risk agencies - lowering the classification of the Greek debt exactly in refinancing days - is also a clear manipulation with the participation of the same banks oligopoly that contributed to push Greece into IMF and EU agreements. The illegality of the circumstances can nullify the debt operations.

The true is that the “Debt-System” is a very profitable business and has many privileges. One of their main privileges is the possibility to negotiate the sovereign bond in any market, globally, and many times without the knowledge of the country. This has been a real large difficulty since the 70´s, when the international banks used to sell parts of the debt-contracts in secondary market. The important argument for us is that anytime a country can make a call of holders of its public debt. Even if the contract doesn´t have this prevision, this is always a sovereign act of a country that is called to pay for all disasters done in its name in secondary markets that includes tax heavens and all deregulated international finances. Another thing that can be done is a call for all stock markets to show up the operations with Greek sovereign bonds. They´ll probably argue that the bank secrecy impede them to give the information, what can´t be accepted for public debt. In reality, the country must have the control of its own creditors, otherwise, to whom 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. will be paid?

Another very common comment in media is that some bond-holders have sold Greek bonds in the secondary market for a low price, like 60% of their value for example, and have already suffered the consequences – a “haircut”. Then, the new holders talk like they have helped Greece.

Is that comment true?

First of all, to evaluate how much someone lost or gained on a bond operation, we must know some information that a debt audit will answer:

- How much the bond-holder paid when he bought these bonds in the first place? Most of the times, the market-price is different from the bond nominal-value. But always the interest rates are calculated over the nominal-value. Combining these two factors, when someone buys an amount of bonds for a price under its nominal-value, this bond-holder is surely making a lot of money. That is, the 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. – the real income of the bond, calculated by dividing the interest coupon by the market-price – can be enormous. For example: If someone buys bonds for 60% of its value, instead of an interest rate of 7%, this person will have an income (yield) of 11,67%!


Bond-Nominal Value Market Price Interest-rate Interest coupon Yield
Example €1.000 60% = €600 7% €70 11,67%

In this case, the country register a debt of €1.000, but in fact received less than €600, because of all costs involved on the emission of the bond. For this reason, it’s very important to investigate the real value the country received when the bonds were issued, in order to calculate the yield and reveal the true damage caused by the speculators, which also influence on the continuous increases of the interest rates, submitting the nation under the market’s humor.

- To give an idea of how a comment that is sold like true can be a big lie, let´s put it in numbers. We read that on April 14thiv the interest rate required by the “financial market Financial market The market for long-term capital. It comprises a primary market, where new issues are sold, and a secondary market, where existing securities are traded. Aside from the regulated markets, there are over-the-counter markets which are not required to meet minimum conditions. ” to buy Greek bonds was 18.3% per year! We don´t know the market-price that Greek bonds have been sold then – the audit would answer. If it was 100% of the nominal value, and the interest rates were 18.3% per year, the coupon the bond-holder will gain is €183 for each thousand! That can be considered an abuse against any Nation, and that´s why an audit is so urgent in Greece.
In case this holder had bought his bonds for 60% of its value, he is still making a lot of money, gaining with Greek bonds almost 100 times he would gain with US-Treasure bonds, for example.
If the bond was bought for 90% of its face-value, the yield goes up to 20.33%! In case of 80% of face-value, the yield goes up to 22,88%!


Bond-Nominal Value Market Price Interest-rate Interest coupon Yield
April,14,2011 €1.000 100% 18,3% €183 18,3%
April,14,2011 €1.000 90% 18,3% €183 20,33%
April,14,2011 €1.000 80% 18,3% €183 22,88%

This simple example shows that it´s not true that the new bond-holders who bought the bonds with a “haircut” would have “helped Greece” and have the “right” to force the country to implement policies to guarantee their payments, selling out and privatizing the national wealth, or shifting bond-loans to burdensome mortgaged debts. They are already taking extreme advantage.

Looking at the examples above, we can figure out that when a bond-holder sells its bonds with the so called “haircut”, the one who buys these bonds makes a lot of money. As the market-price goes down, the highest goes the yield, which is a complete attraction for speculation. So, if someone “suffers” a haircut by selling bellow the nominal-value, the one who is buying will have an extra-gain over the enlarged yield of the bonds. Considering the two parts of this operation in secondary market can easily do their attached business, these actions can be characterized as “market manipulation” and “abuse” against Greece. While Greek workers are desperate, losing their jobs and even their lives, many people is making a lot of money against Greece.

This situation leads to the urgency of an audit that should be integral, what means that the audit must take care not only of the numbers of each bond issue, the accountability, but also look at all aspects and circumstances that took Greece to this point, like:

1.How much sovereign Greek debt was issued to bail-out failed banks?
2.What is the responsibility of 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.

and European Commission on Greece indebtness process evolution?
3.What is the responsibility of the 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 :
for downgrading the Greek bonds, causing the elevation of interest rates?
4.What is the responsibility of IMF and EU on their impositions to Greek government to implement reforms against the people, benefiting the Banks?
5.What is the responsibility of the Banks for:
a. not telling the true about the amount of Greek Debt in order to impulse more and more new loans, turning it exaggerated?
b. speculating with Greek bonds, in order to make the interest rates go up continuously to force an intervention from IMF?
c. playing with 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.). , “Credit Default Swaps CDS
Credit Default Swaps
Credit Default Swaps are an insurance that a financial company may purchase to protect itself against non payments.
” and other “toxic” papers?
6.What is the origin of Greek Debt? Did Greece receive this amount of money? Where did it go to? Who got the benefit of these loans? For which purpose?
7.Which private debts were transformed into public debts? What is the impact of these private debts to the budget?

When we have this information all clear, we can tell what part of Greek´s debt is illegal, supported in many legal aspects, like:

- Co-responsibility of creditors and international financial institutions
- Asymmetry between parts
- Violation of general principles: Reasonability, Rebus sic Stantibus
- Right to Development
- Right of Sovereignty
- Violation to Human Rights

Other legal studies are necessary to match, in the country legal structure, the prohibition for procedures like “market manipulation” and “abuse”, because it´s evident that Greece is assuming abusive interest rates, as shown on the examples above.

Every legal system includes the notion of the Abuse of Rights. In general, the main characteristics that define an abusive act are connected to the case when the act produces damage, harm or injury; when there´s excessive prejudice to a part; when there´s evidence of the intention to produce prejudice or to obtain excessive benefits; when the act is against the social and economic rights; when the act doesn´t obey the reasonability cast in terms of social interests, among others.

During the Ecuadorian Debt Audit, besides applying the country legislation, the audit commission – CAIC - also searched for principles of International Public Right, International Pacts, like the International Pact of Civil and Political Rights and the International Pact of Economic, Social and Cultural Rights. We found out that most of the negotiations of Ecuadorian external debt had violated those treats.

The CAIC also utilized some General Principles of Law that can also be useful for Greece, like:
- Enrichment without cause
- Principle “contractus qui habent tractum successivium et dependientium de futuro rebus sic stantibus”, which determines that an obligation can be revised and become not eligible if the circumstances have substantially changed (interest rates, for example);
- Usury, known as the illegal practice of charging excessive, unreasonably high, and often illegal interest rates on loans.
- Anatocism
- Vicious in origin
- Good Faith (like in the United nations Convention)
- Equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. (The laws do not deal with other forms of abuse such as financial abuse)
- Solidarity and Cooperation (also part of UN Convention)
- Public Policy

Besides that, the CAIC deepened the studies about the doctrines of 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.
and Illegitimate Debt
that can also be applied to Greece, because there are many subjects to be investigated, as Eric Toussaintv resumed:

The Greek public debt made the headlines when the country’s leaders accepted the austerity measures demanded by the IMF and the European Union, sparking very significant social struggles throughout 2010. But where does this Greek debt come from? As regards the debt incurred by the private sector, the increase has been recent: the first surge came about with the integration of Greece into the eurozone in 2001. A second debt explosion was triggered in 2007 when financial aid granted to banks by the US Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
, European governments and the European Central Bank was recycled by bankers towards Greece and other countries like Spain and Portugal. As regards public debt, the increase stretches over a longer period. In addition to the debt inherited from the dictatorship of the colonels, borrowing since the 1990s has served to fill the void created in public finances by lower taxation on companies and high incomes. Furthermore, for decades, many loans have financed the purchasing of military equipment, mainly from France, Germany and the United States. And one must not forget the colossal debt incurred by the public authorities for the organization of the Olympic Games in 2004. The spiraling of public debt was further fueled by bribes from major transnationals to obtain contracts, Siemens being an emblematic example.
This is why the legitimacy and legality of Greece’s debts should be the subject of rigorous scrutiny, following the example of Ecuador’s comprehensive audit commission of public debts in 2007-2008. Debts defined as illegitimate, odious or illegal would be declared null and void and Greece could refuse to repay, while demanding that those who contracted these debts be brought to justice. Some encouraging signs from Greece indicate that the re-challenging of debt has become a central issue and the demand for an audit commission is gaining ground.

When we start to investigate the public debt of any country, the first step to take is to know the origin of this debt. In Ecuadorian debt audit (CAIC) and also during the parliamentarian investigations in Brazil (CPI), only when we went deep on documents and datas we could prove, for example the explicit practice of anatocism, for its evidence on the transformation of interest into capital. That happened during the Brady Plan – the same plan was adopted for many countries in Latin America. This plan transformed the previous debt in new sovereign bonds. The previous debt had a part of capital and a large part of interests that had been accumulated because they got just so high that our countries couldn´t pay them. Some of the new bonds issued under the Brady plan were the unequivocal transformation of the accumulated interests into capital and were called Interest-bond!

The Brady plan took place in the early 90´s and all kinds of media and even some people from academy believed that the Brady plan was a good step, because it was widely presented as a plan that would bring our countries back from insolvency to the market operations. Besides that, it was said that the transformation was “giving” our countries a discount. In fact, one of the new bonds issued under the Brady plan was called “Discount Bond”. Only when we did the audit in Ecuador and the investigations in Brazilian parliament and had access to the contracts we could see the reality was totally different from the propaganda.

The documents proved that there was a “Debt System” under a continuous refinancing of previous debt; a mechanism of creating new debt to pay previous debt in a way that the new debt was always much bigger than the previous one, besides the huge payments of capital, interests, commissions, fees, taxes, costs, and all kind of extra bills. The audit also proved that the negotiations were made abroad and in many occasions – like in the Brady plan - the money registered as debt on the contracts and bond issues never arrived into our countries, because the exchange of the previous debt into the new bonds was made by the creditors themselves, in the Luxemburg stock market, with no registration in the SEC - Securities and Exchange Commission in United States of America – besides the law and jurisdiction were the North American. The interest rates, costs and clauses of the contracts were completely illegal and abusive. Resuming, the audit proved a complete misinformation about the real mean of the Brady plan for our countries. And this was possible by reaching the documents of the negotiations: contracts, records of meetings, writings, proceedings and all registers of each operation, besides the statistics and datas available.

This is only one of the examples of how we proved the anatocism and the illegality of the process. The main conclusion of the 30 years audited in Ecuador and 39 years investigated in Brazil is that the “Debt System” benefited only the large international banks, and did not serve as a mechanism to finance our countries, as the economic theory defines public debt. The instrument of public debt has been usurped by the “market”. Our job is to reveal the true, by reaching the documents and proves that can unmask the many lies that have being told about our countries public debt. We can not keep paying illegal debt with our jobs and our lives. Feel encouraged to start Greek´s debt audit urgently, and count with our help.

Maria Lucia Fattorelli

member of the Committee and coordinator of the Brazilian Citizens’ Debt Audit Commission. Since the 4th April 2015 she is member of the Truth Committee on Public Debt.

Other articles in English by Maria Lucia Fattorelli (12)

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