“Suspending” the debt means paying the debt! (Newspaper Prin, October 2014)

9 December 2014 by Leonidas Vatikiotis

Τhere is a plethora of proposals for the public debt issue made by many executives of SYRIZA. However, the common denominator of all the suggestions made by the frontline executives (Dragasakis, Stathakis) -who tomorrow will take over the responsible and critical ministries and today express the majority view of SYRIZA-, is the understatement of the official position of SYRIZA, which was voted in their founding congress, about the cancelation of the greatest part of the public debt.

In this direction, Mr. George Stathakis (MP of the party), ruled out any possibilities for unilateral actions during negotiations. A statement that equals to an advance, voluntary and unilateral resignation even from the right of blackmail -a tool widely used by the creditors-, while at the same time paves the way to the acceptance of the terms of the lenders, that will be manifest as a joint decision. However, the interview of Mr. Yiannis Dragasakis in the new Real News newspaper, on Sunday 28 October, brought new facts on the debate. Y. Dragasakis the Deputy Minister of national economy in the «ecumenical» Government of X. Zolota (1989-1990), which paved the way for the government of abhorrent Mr. Mitsotakis, (the prime minister who launched Thatcher and Reagan’s policy in Greece), proposed as an alternative the proposal made in January 2014 by the economists Pierre Paris and Charles Wyplosz, with the title “Politically Acceptable Debt Restructuring in the Eurozone”, widely known with the acronym PADRE. To dispel any false expectations that this is a radical position, all we need to mention is that it was originally proposed as a solution to the Greek debt issue, in Philip Sahinidis speech, Deputy Minister, Alternate Minister and Minister of Finance and Government Minister for Finance in Papandreou and Papademos governements. In other words, he is the man who bears personal responsibility for the bankruptcy of the Greek social security funds, who lost 14 billion euros because of the restructuring of February 2012, as well as for the destruction of thousands of bondholders who saw their life savings evaporate overnight. Ιn fact, the speech of the Minister who managed the catastrophic PSI, took place in a conference last July, organized by the most failed Minister of Education since the establishment of the Greek State, Anna Diamantopoulou, who amid the neoliberal estrus of the time, experimented even with the abolition of free textbooks, leaving the students without books.

This proposal is reintroduced by John Dragasakis, who stated word by word that “instead of a haircut there could be a “withdrawal” of most part of the debt, that is, to withdraw a part of the debt from the markets or the institutions that currently hold it and keep it “frozen” within 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.

. This proposal has been articulated by many European economists and scientific institutions, with most recent example the position formulated by the prominent economists, Pierre Paris and Charles Wyplosz”. However, that this proposal does not amount to a haircut, but with the definitive burial of the target of debt cancellation, and, ultimately, with payment of the debt.

The proposal of the economists Pierre Paris and Charles Wyplosz for «freezing» the debt means postponing the payment in the next generation and not cancellation. But most importantly, strict conditions for its application mean even greater austerity. More specifically, the authors ask for more tightening of the Fiscal Pact!

The proposal of Paris-Wyplosz is a solution to the sovereign debt Sovereign debt Government debts or debts guaranteed by the government. crisis that the Eurozone faces. The PADRE project starts from the observation that several Eurozone countries are faced with unsustainable debt. The content that is given to “unsustainable” is not related to bankruptcy, but with the following strict restrictions that debt generates: First, it is an obstacle to development. In fact, the authors invoke a research of Reinhart and Rogoff (2010) that concludes that a debt of over 90% causes a decrease in growth rates by 1% annually. According to their research, this rule applies to Japan and Italy, but in no way, is it confirmed by the growth rates of the Greek economy, during the decades of 90’s and 2000’s… The second reason why we must reduce the debt is related with the need to develop a margin for interventions so that the governments can intervene anti-cyclically during recessions. The third reason why the soaring public debt is undesirable, is associated with the high cost of its service. Their reference to the «diabolic loop» between the public debt and the banking system is of great significance. The reason behind its creation lies in the absence of “lender of last resort”, such as the central banks around the world… but not in the Eurozone. The absence of such function from the Eurozone’s statute, led the states to turn to commercial banks for borrowing and the bankrupted -from over-borrowing- commercial banks to the states for rescue, causing a prolonged economic crisis and the impoverishment of the people.

A development that of course would have been prevented if the member – states reserved their right to print money and in particular national currency. That is, if they had not waived this right, by assigning it to 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. markets which turned the states into pariahs. Thus, the Eurozone became an autonomous factor of aggravation and complication of fiscal crisis. A conclusion that shows how problematic is any solution within the Eurozone.

The debt will be paid, simply, by …next generations!

The architects of the PADRE project, from the very beginning of their paper, clarify that in post-war Europe there may not be any previous debt restructuring (until 2012), however, in the international economy it is the norm rather than the exception. More specifically, they mention that from 1820 to 2012 there were 251 defaults of states, while since the Second World War there have been 425 debt renegotiations within the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

, which usually included some short of debt reduction. In fact, by standardizing the implications in the states, based on empirical data, the exclusion from the markets lasts between 4-8 years and the rise of 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.
range from 2.5% to 4%. A tolerable cost, we conclude …

Paris and Wyplosz declare that their proposal, contrary to what happens in such cases, does not cause any cost to taxpayers or other Eurozone member-states, governments and institutions such as 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
and the European Stability Mechanism ESM
European Stability Mechanism
The European Stability Mechanism is a European entity for managing the financial crisis in the Eurozone. In 2012, it replaced the European Financial Stability Facility and the European Financial Stabilisation Mechanism, which had been implemented in response to the public-debt crisis in the Eurozone. It concerns only EU member States that are part of the Eurozone. If there is a threat to the stability of the Eurozone, this European financial institution is supposed to grant financial ‘assistance’ (loans) to a country or countries in difficulty. There are strict conditions to this assistance.

(ESM ), nor to the banks. That is, there is no redistribution or shifting weights whatsoever. «The only remaining solution is to impose the unavoidable losses on future taxpayers, which does not redistribute income at all. Indeed, in the absence of a default, future taxpayers will pay current debts. The common practice of rolling over maturing bonds means that the debt climb-down can be spread over a very long horizon” (page 12). In fact, in order to ensure the absence of redistribution or shifting weights, the solution will cover all Eurozone Member States, and not just some of them.

Their proposal is better understood with the help of an example that the authors themselves have processed. At the end of 2013, the total public debt of the Eurozone states amounted to € 9.18 trillion or 95.5% of the 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.
of Eurozone, with the lowest debt as a percentage of GDP to belong in Estonia (10%) and the largest in Greece (176.2%). A debt restructuring of half of the debt (4.59 bn. Euros) would be allocated to each of the 18 Eurozone member states according to their participation in the ECB’s capital. That is, their 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. (totaling 1) is multiplied by 4.59 trillion euro. For instance, Germany (participating in the ECB’s capital with a share of 26.86%) will see its debt reduced by € 1.23 trillion or by 45.1% of GDP, i.e. after the restructuring it will become € 944 bn. or 34.5% of GDP. Greece (participating in the ECB’s capital by 2.79%) will see its debt reduced by € 128 bn or 70.1% of GDP, meaning that after the restructuring it will reach 194 bn. or 106.2% of GDP. Following this process, Greece is brought out once again as the champion of debt, while on the other end of the spectrum we see countries with negative public debt, both in size and in percentage. E.g. Estonia’s debt will now be -10 bn. or -53.3% of GDP …

The withdrawal of the public debt is proposed to be implemented with the help of the ECB, which will issue bonds that will expire in the distant future and will be considered risk-free as they are issued by the Central Bank. Their issue, however, will have a cost which based on a rate of 3.5% is estimated at €161 billion per year or 1.7% of Eurozone’s GDP. Compared to any indicator, the amount is objectively enormous: To the average profits distributed by the ECB to its shareholders and amounted to 1.1 billion euro (on average) per year between 2008-2012, with the funds of the Eurosystem (ECB and National Central Banks), which in December 2013 amounted to 90 billion euro, even with the profits of the U.S 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 : http://www.federalreserve.gov/
(which is much more profitable than the ECB) that in 2012 totaled 88.4 billion USD. The authors of the study estimate that under certain strict conditions the cost of “parking” the debt for the future generations to pay, could be covered in the future by the profits of the ECB.

According to the authors, the European Stability Mechanism or any other successor scheme could be in place of the ECB, as the total subscribed capital is only €700 billion, with effective lending capacity of €500 billion, and paid-in capital €80 billion, or nearly 10% of the necessary funds (4.6 trillion. euro). At the end of their study, they present other alternatives such as: the restructuring of a smaller part of the Eurozone debt (25% rather than 50%) which however leaves Greece with a debt of € 258 bn. or 141.2% of GDP and two other countries with public debt of over 100% of GDP: Italy with 106.7% and Ireland with 102.3% of GDP. Another alternative given the uneven restructuring between the member states, but this is thought politically impossible as it would be considered as transfer, etc.

Austerity is a strict condition!


«There is no doubt that a debt restructuring involves a serious 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.
, especially if it is carried out by a multinational institution, such as the ECB or ESM. Indeed, why not let the public debt rise again after the restructuring if one can reasonably expects that a new restructuring will be forthcoming”, the two economists (Paris and Wyplosz) wonder. They give two answers. First, “a covenant that allows the ECB – or another agency – to swap back the perpetuities that it holds into bonds that would be disposed of and sold back to the financial markets, in gradually increasing installments. The intention is to turn market pressure on governments that do not abide by strict fiscal discipline principles”. But they don’t suggest just that…

«If rapid market sanctions cannot be fully relied upon to eliminate the moral hazard, we need to turn to an institutional approach. Unfortunately the Treaty on Stability Coordination and Governance (TSCG) is vague in many respects. Both the debt brake arrangement and the constitutional requirements are “if possible” obligations. In many countries, its translation into national legislation has led to much softer rules, often under the cover of excessive complexity and few countries have made it a constitutional requirement. Fiscal discipline has not yet effectively renationalized. One possibility is to make debt restructuring conditional on the adoption of the complete debt brake solution and its inscription in the national Constitution. This would make any fiscal indiscipline illegal”!

Based on the above, it is clear that the restructuring of the public debt does not come on its own. An integral to part of the PADRE solution is the application of even more strict austerity policies than the ones imposed today. The fact that Paris and Wyplosz find the Fiscal Pact of 2012 insufficient is very indicative.

Therefore, even if the solution of the two economists was beneficial, it should be rejected just for this premise, since the problem of the Eurozone today is not the public debt. Public debt (like the 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. in the 1980s) is only the excuse. The problem today, speaking from the perspective of the social majority, lies in the increase of salaries, wages, pensions and social benefits in health, education and social security. The importance of the cancellation of a large part of the debt (e.g. 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
’s debt which amounts to 68.4% of total debt), if not all, is related to the development of the conditions that will enable the exercise of redistributive policy. As long as the debt is serviced and the amounts shown in the table are paid every year, there is no room for improving the living conditions of the workers. The restructuring and the cancellation is not an end in itself. Thus, even the best solution for the public debt that would however have as a prerequisite the austerity policy, ought to be rejected by the Left. Most importantly: such a solution is not a left solution.


The «Greek problem» remains


The proposal of Paris-Wyplosz is full of contradictions because of their effort to respect the political balances. As a result, it is a proposal that does not resolve the problem of public debt, but it simply shifts it to the next generation or even to future generations, thereby turning the over-indebtedness in a stable condition. The only hope that creates is that in the meantime it will generate those growth conditions that will allow easier repayments in the future. However, there is no indication that growth is just around the corner and all it waits is for the debt to disappear. Instead, everything suggests that the impending growth is not only unstable, but also reactive, with soaring unemployment and wages on 481 Euros.

However, there are many other reasons that make the proposal of Paris and Wyplosz impractical, if not reactionary, which leads to the conclusion that the only way to reduce the debt is by cancelling it with unilateral actions.

First, by seeking a balanced solution, they underestimate the asymmetries and contradictions of the Eurozone, who are responsible for the fiscal crisis in the periphery and not in the whole Eurozone. Behind the paradox of the negative debt in certain countries after the restructuring, lies the fact that a balanced solution does not relate to the whole Eurozone. Germany has no 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. to accept it. Much more because they know that public debt is an ideal tool for pressuring other member states of the Eurozone for anti-labor reforms. Why lose this privilege? The ineffective nature of this solution is evident in the fact that although it reduces debt to countries that have no such concern, in the case of Greece not only leaves debt at very high level, but does not even eliminate the need of cancelling part of the debt. This is clearly stated in their main scenario, of the restructuring of 50% of the debt: «With a ratio of 106.2%, Greece remains in the danger zone, which may justify the special treatment (official section involvement, or OSI) likely to be decided upon in 2014”. That is, they preconceive the cancellation of part of the official debt – that is owed to 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.

, EFSF, ESM and member – states of Eurozone – but those who invoke it pretend not to see the reference…

Also, they underestimate the cost of the proposal. The solutions that the two economists suggest, through the profits of the ECB from seigniorage, is wishful thinking, as in order to eliminate the cost, strict conditions should be applied.

Moreover, although it is a solution that fits in bond debt, it is totally inapplicable in “official” debts, like those of the four countries that have been borrowed from the Troika (Greece, Ireland, Portugal, Cyprus). For instance, the IMF which demands to be repaid in absolute priority, it is impossible to accept to be paid off with perpetuities.

Finally, it is a socially unjust solution to the extent that the perpetrators of the debt continue to shift the cost of servicing to the backs of the people. Thus, Germany, for instance, who rushed into nationalizing the debt, in order to shield the German banks that were exposed to the Greek debt, turned the German taxpayers into human shield and will never pay for the economic crime that committed against people of Europe!

October, 2014.

Source: https://leonidasvatikiotis.wordpress.com/2014/12/03/suspending-the-debt-means-paying-the-debt-newspaper-prin-october-2014/



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