Thomas Piketty’s Capital in the 21st Century: an ABC

Thomas Piketty, the CADTM and Public Debt

Part 4

20 April by CADTM

 Piketty and public debt

Piketty devotes a dozen very interesting pages to the question of public debt over the last two centuries, focusing his analysis mainly on France and the United Kingdom. He rightly states that in discussing public debt, studying the past is worthwhile for understanding and dealing with the challenges of the current crisis: “The complex question of government debt Government debt The total outstanding debt of the State, local authorities, publicly owned companies and organs of social security. and the nature of the wealth associated with it is no less important today than it was in 1800, and by studying the past we can learn a lot about an issue of great contemporary concern. Although today’s public debt is nowhere near the astronomical levels attained at the beginning of the nineteenth century, at least in Britain, it is at or near a historical record in France and many other countries and is probably the source of as much confusion today as in the Napoleonic era.” [1]

The issue of the indebtedness of States is at least as much a concern today as it was in 1800

Between the end of the 18th century and the beginning of the 19th century, France and the United Kingdom adopted policies that were quite different regarding public debt. Whereas in the years 1760-1770, public debt stood at nearly 100 percent of national income in both countries, forty or fifty years later the situation had changed completely. France’s public debt was only 20 percent of its national income in 1815, whereas Britain’s debt had skyrocketed to 200 percent of national income.

How did that happen? In France, the burden of paying off public debt and the people’s refusal to bear that burden alone played a central role in the revolutionary explosion of 1789. Measures taken during the Revolution radically reduced the burden of public debt.

In France, public debt and the people’s refusal to bear its burden alone played a central part in the revolutionary explosion of 1789

Piketty sums up the sequence of events as follows: “The French monarchy’s inability to modernize the tax system and eliminate the fiscal privileges of the nobility is well known, as is the ultimate revolutionary resolution, initiated by the convocation of the Estates-General in 1789, that led eventually to the introduction of a new tax system in 1790-1791. A land tax was imposed on all land owners and an estate tax on all inherited wealth. In 1797 came what was called ‘la banqueroute des deux-tiers,’ or ‘two-thirds bankruptcy,’ which was in fact a massive default on two-thirds of the outstanding public debt, compounded by the high 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. resulting from the issuance of assignats (paper money backed by nationalized land). [2]This was how the debts of the Ancien Régime were ultimately dealt with. The French public debt was thus quickly reduced to a very low level in the first decades of the 19th century (less than 20 percent of national income in 1815).” [3]

Thanks to the Revolution France radically reduced its public debt

Britain took a completely different path. In order to finance its war to oppose the Declaration of Independence signed by the 13 British colonies in North America “as well as its many wars with France during the Revolutionary and Napoleonic eras, the British monarchy chose to borrow without limit. The public debt consequently rose from approximately 100 percent of national income in the early 1770s to nearly 200 percent in the 1810s – ten times France’s debt in the same period.” [4]

Piketty explains that it took the United Kingdom a century of austerity and budget surpluses to reduce its indebtedness gradually to less than 30 percent of national income at the beginning of the second decade of the 20th century.

It took the United Kingdom a century of austerity to reduce its indebtedness to less than 30 percent of its national income in the early 1920s

What lessons can be drawn from Britain’s experience? First, there is no doubt, according to Piketty, that the heavy public debt increased the extent of private wealth in British society. Wealthy Englishmen readily lent money to the State.

Piketty goes on: “This very high level of public debt served the interests of the lenders and their descendants quite well, at least when compared with what would have happened if the British monarchy had financed its expenditures by making them pay taxes. From the standpoint of people with the means to lend to the government, it is obviously much more advantageous to lend to the State and receive 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. on the loan for decades than to pay taxes without compensation.” [5] He adds that the massive recourse to public debt by the State enabled the bankers to raise 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.
, which was beneficial to the wealthy lenders such as entrepreneurs, the independently wealthy, and bankers.

According to Piketty, the essential difference with the 20th century (see below) is that public debt was reimbursed at a premium in the 19th century: “Inflation was virtually zero from 1815 to1914, and the interest rate on government bonds was generally around 4-5 percent;in particular, it was significantly higher than the growth rate. Under such conditions, investing in public debt can be very good business for wealthy people and their heirs.” [6]

Piketty offers a hypothetical case: “imagine a government that runs deficits in the order of 5 percent of 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.
for twenty years... after twenty years an additional public debt of 100 percent of GDP will have accumulated. Suppose that the government does not seek to repay the principal and simply pays the annual interest due on the debt. If the interest rate is 5 percent, it will have to pay 5 percent of GDP every year to the owners of this additional public debt, and must continue to do so to the end of time. In borad outline, this is what Britain did in the 19th century.”
 [7] Now, let us travel in time and space: today in Greece, public debt is in excess of 160 percent of GDP. If we entertain the hypothesis that the State will reimburse that debt to 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.

and its other creditors at a rate of around 5 percent [8] on average, and if we also take into consideration that growth is non-existent [9] and that the rate of inflation is also nil, Greece will have to pay its creditors, indefinitely, the equivalent of 8 percent of its GDP without reducing the debt, since only the interest on it is being paid off. [10]

Piketty was right about the debt claimed from Greece in this first fifth of the 21st century

Now let us return to the 19th century: total public debt in France, which was very limited in 1815, increased rapidly over the next decades, in particular during the period of the censitary monarchies (1815-1848). After the defeat at Waterloo in 1815, the French State went deeply into debt to finance the compensation paid to the armies of occupation, then again in 1825, to finance the famous “émigrés’ billion” [11] paid to the aristocrats who went into exile during the Revolution (to compensate them for the consequences of the Revolution, and in particular the confiscation of part of their land holdings). In all, public debt increased to the equivalent of over 30 percent of the national income. Under the Second Empire, debts were paid “cash on the nail.”

According to Piketty the public indebtedness policy pursued during the 19th century in France and the United Kingdom explains why “19th-century socialists, beginning with Marx, were so wary of public debt

Piketty mentions the short work The Class Struggles in France, written in 1849-1850, in which Karl Marx denounces Louis-Napoléon Bonaparte’s Minister of Finance, Achille Fould – a worthy representative of the bankers and high finance –, who decided to increase taxes on beverages in order to pay off wealthy holders of government bonds. Twenty years later, following the defeat at the hands of Prussia in 1870-1871, the French State further increased public debt to pay a war tribute equivalent to some 30 percent of national income. Finally, the indebtedness policy conducted between 1880 and 1914, which was favourable to creditors, brought public debt to a higher level in France than in the United Kingdom – around 70-80 percent of national income, compared to less than 50 percent previously.

Piketty adds, “French sovereign debt Sovereign debt Government debts or debts guaranteed by the government. was a good investment throughout the nineteenth century, and private investors prospered on the proceeds, just as in Britain.” He concludes that the policy of public indebtedness pursued during the 19th century in France and Britain explains why “nineteenth-century socialists, beginning with Marx, were so wary of public debt, which they saw – not without a certain perspicacity – as a tool of private capital.” [12]

He goes on to say, very accurately, “the bulk of the public debt (…) is in practice owned by a minority of the population... , so that the debt is the vehicle of important internal redistribution... In view of the high degree of concentration that has always been characteristic of the wealth distribution, to study these questions without asking about inequalities between social groups is in fact to say nothing about significant aspects of the subject and what is really at stake.” [13]

Piketty: the bulk of the public debt is in practice owned by a minority of the population, so that the debt is the vehicle of important internal redistribution of wealth in favor of the richest

Piketty explains that over the course of the 20th century, France underwent a major change in the way public debt was managed. Government agencies benefited from inflation, and then made use of it to reduce the real value of the debt. “Despite a large initial public debt (nearly 80 percent of national income in 1913) and very high deficits during the period 1913-1950, especially during the war years, by 1950 French public debt once again stood at a relatively low level (about 30 percent of national income), as in 1815. In particular, the enormous deficits of the Liberation were almost immediately cancelled out by inflation above 50 percent per year in the four years 1945-1948, in a highly charged political climate. In a sense, this was the equivalent of the ‘two-thirds bankruptcy’ of 1797: past loans were wiped off the books in order to rebuild the country with a low level of public debt.” [14]

Based on this experience in the second half of the 20th century, a very different vision from that of Marx and the socialists during the 19th century was developed, founded on the conviction that indebtedness can be an instrument in the interest of a policy of public spending and redistribution of wealth in favour of the poorest citizens.

Piketty is right to insist on the dangers of a unilaterally positive vision of public debt

“The difference between these two views is fairly simple: in the nineteenth century, lenders were handsomely reimbursed, thereby increasing private health; in the twentieth century, debt was drowned by inflation and repaid with money of decreasing value. In practice, this allowed deficits to be financed by those who had lent money to the state and taxes did not have to be raised by an equivalent amount. This “progressive” view of public debt retains its hold on many minds today, even though inflation has long since declined to a rate not much above the nineteenth century, and the distributional effects are relatively obscure.” [15] Thomas Piketty is quite right to stress the dangers of a unilaterally positive vision of public debt.

 Piketty’s proposals on public debt

Let us now analyse what Piketty proposes. From the outset, he makes it clear that he does not defend public debt in anyway: “debt often becomes a backhanded form of redistribution of wealth from the poor to the rich, from people with modest savings to those with the means to lend to the government (who as a general rule ought to be paying taxes instead of lending).” [16] We can only agree with this statement. He adds that “national wealth is very unequally distributed. Private wealth rests on public poverty, and one particularly unfortunate consequence is that we currently spend far more on interest on the debt than we invest in higher education. This has been true, moreover, for a very long time: because growth has been fairly slow since 1970, we are in a period of history in which debt weighs very heavily on public finances. This is the main reason why the debt must be reduced as quickly as possible (…)” [17]

For Piketty, debt often becomes a backhanded form of redistribution of wealth from the poor to the rich (while it would be much better in all respects to have the latter pay their fair share of taxes)

Clearly, since the policy of quantitative easing has been developed, the cost of the debt has decreased but Piketty’s view is still valid in historical terms for the amounts of debt that has to be permanently refinanced are steadily increasing. A change of policy in the major central banks is possible and as a consequence pressure on public finances may result in a return to brutal austerity policies both at a structural level with the continuation of neoliberal counter- reforms and at the level of deep cuts in social spending. Moreover some governments still pay much more than others to refinance their debts and in the Global South several countries are again defaulting. See the series “The North’s new debt trap for the South”:

  1. Evolution of the external debt of developing countries between 2000 and 2019:
  2. The external debt of Developing Countries: a Timebomb:
  3. DCs caught in the stranglehold of debt (Les pays en développement pris dans l’étau de la dette)
  4. Latin America and the Caribbean are faced with a severe debt crisis (L’Amérique latine et la Caraïbe sont confrontées à une grave crise de la dette)
  5. An unbearable debt burden for peoples in Subsaharan Africa (Le fardeau insupportable de la dette pour les peuples d’Afrique subsaharienne)

Thomas Piketty cosigned a call for the cancellation of public debts held by the European Central Bank

Piketty considers (but rejects) two solutions for reducing public debt, before proposing a third one. The first rejected solution is to privatize public assets to repay the debt. The second consists in cancelling the debt. The third one, which he supports, is to levy an exceptional progressive tax that would “spare the more modest fortunes and require more of the largest ones.” [18] I will not spend much time on the first solution, because it is obvious to me that it must be rejected. This is the solution currently being rolled out by governments that are merely extending the wave of privatizations undertaken in the 1980s-1990s.

As for the second solution, which Piketty also rejects, it is obvious that he does not fully explore all possible scenarios for debt cancellation. The only model he mentions explicitly is the one applied to Greek debt in March 2012, a so-called haircut operation, while there are other possibilities.

He is right to reject this kind of partial debt cancellation devised by the Troika (the European Commission, 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 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.
) for Greece. In this case, debt cancellation was based on measures that run against the civic, political, social, and economic rights of the Greek people, and it contributed to dragging Greece even further into a downward spiral. The operation aimed at making it possible for foreign private banks (mainly French and German ones) to pull out while limiting their losses, for private Greek banks to get fresh capital from the public treasury, and for the Troika to tighten its long-term grip on Greece. While Greek public debt amounted to 130 percent of GDP in 2009, and 157 percent in 2012 after partial debt cancellation, it reached 175 percent in 2013! The unemployment rate, which was 12.6 percent in 2010, was 27 percent in 2013 (50 percent among youths under 25). Piketty is thus completely right when he rejects such haircuts, which merely aim to keep the victim alive in order to bleed it longer. After his book was published, when the disastrous impact of the policies led by the Troika in Greece became obvious, Piketty supported the cancellation of a large portion of the Greek debt.

On the basis of a debt audit decided by the government and carried out with active citizen participation in 2007-2008 Ecuador unilaterally suspended the payment of part of its external debt

More recently in early 2021, Thomas Piketty cosigned an international call at the European level for the cancellation of public debt held by the European Central Bank.

The cosignatories write, “in full compliance with the law and contrary to what some heads of institutions – including the ECB – claim, cancellation is not explicitly prohibited by European treaties. On the one hand, any financial institution in the world can write off its debts, and the ECB is no exception to that rule.” They conclude, “We too must think about using the money-making power of the ECB to finance ecological and social reconstruction, under democratic control. The cancellation of the public debts it holds, in exchange for investments by the states, would constitute the first strong signal of the European Union’s willingness to take back control of its destiny.”

From the end of 2008, Iceland unilaterally refused to pay for the debts of private banks that owed money to foreign creditors

We think he was wrong not to seriously consider the idea of debt cancellation or the suspension of debt payment as decided by debtor countries, on their own terms and under citizens’ control. This is what Ecuador in 2008-9 and Iceland from 2008 onward did in two different sets of circumstances. On the basis of an audit decided on by the government and carried out with the active participation of citizens in 2007-2008, Ecuador unilaterally suspended payment on the portion of its public debt owed as securities maturing in 2012 and 2030, which were mainly held by foreign banks. [19] The outcome was positive: Ecuador bought back 91 percent of these securities at less than 35 percent of their market value (i.e. a haircut of 65 percent). Thanks to what the country had saved in debt repayment, it could greatly increase social spending, particularly in the fields of education and healthcare (see Appendix 2 for a more detailed presentation of Ecuador’s experience). In the case of Ecuador, we should not simply take the current process as a model: it is essential to continue analysing the situation there. However, it does demonstrate that a State can take a unilateral sovereign decision in terms of debt auditing and suspension of payment, and consequently increase public spending in fields such as education and health.

Ecuador and Iceland are two examples showing that debt cancellation is possible

From the end of 2008, Iceland unilaterally refused to pay for the debts of private banks that owed money to foreign creditors. This occurred in the context of strong citizen mobilization that put pressure on Iceland’s government to refuse the claims of foreign creditors, especially the UK and the Netherlands.

What happened in Iceland? Because of the collapse of the banking system in 2008, Iceland refused to pay compensations to people in the UK and in the Netherlands, who had deposited a total of €3.9 billion in subsidiaries of private Icelandic banks that had just collapsed. The British and Dutch authorities compensated their own citizens, and demanded that Iceland pay them back. Under popular pressure (demonstrations, sit-ins, referenda), the Icelandic government refused. As a result, Iceland was listed as a terrorist organization, Icelandic assets were frozen in the UK, and the Icelandic government was sued by London and The Hague in the Court of Justice of the European Free Trade Association States (EFTA). [20] In addition, Iceland completely blocked the outflow of capital. Ultimately, it fared much better than many other European countries that had met their creditors’ demands. Of course, we should not simply take Iceland as a model to be emulated, but we should draw lessons from its experience.

Ecuador and Iceland are two recent examples that should be examined carefully for they show that there are solutions for debt cancellation other than the Greek haircut. [21] Those two examples offer proof that if you do not comply with creditors’ demands your country does not simply collapse, quite the opposite.

If you do not comply with creditors’ demands your country does not collapse, quite the opposite

Let us return to Piketty’s position. He is convinced that cancellation will hardly affect the richer creditors, because they will manage to “restructure their investments in time” and consequently he claims that “there is no guarantee that the people who would be penalized are those who ought to be.” [22] However, he produces no evidence that is based on concrete examples or statistical data to support this, while history shows that when a country hints that it might stop repaying its debt or when it actually does, the market value of its debt securities plummets, and it is very difficult for stockholders to unload them at a good price. [23] This is what occurred between 2007 and 2009 in Ecuador, and all those who follow what is happening on the debt market know that it is virtually impossible to get rid of a large amount of securities without significant losses in the case of unilateral debt cancellation or suspension. Moreover, it is easy for a country taking such measures to provide compensation and protection to those with limited income, assets, and savings. It is quite possible to make sure that those who should pay do while protecting those who deserve to be protected.

A country that decrees a unilateral debt cancellation can provide compensation for small holders and protect the savings of the popular classes

Let us now examine Piketty’s proposal on finding the means necessary to reduce the burden of public debt. After considering the possibility of “a flat tax [24] of 15 percent on private wealth,” [25] he rejects this idea, because as he writes “it would not make much sense to levy an exceptional tax on all private wealth in Europe.” He claims that “it would be better to apply a progressive tax designed to spare the most modest fortunes, and require more of the largest ones.” [26]

Piketty is favourable to a partial reduction of the debt, amounting to 20 percent of GDP. In order to reach this objective, he suggests that a progressive exceptional tax be levied: “0 percent on fortunes up to 1 million, 10 percent between 1 and 5 million, and 20 percent above 5 million,” [27] while recognizing that other rates could be used.

Piketty never questions the legitimacy of public debt

It must also be mentioned, and deplored, that Piketty never considers the issue of the legitimacy of public debt. It is actually astonishing, because throughout the book he shows that a regressive tax policy results in an increase in public debt, and that, as he states repeatedly, those who pay back the debt are for the most part lower-income people, given the 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. of taxes they pay, while those in the higher income brackets lend to the State, since this is a safe investment. He does not suggest either that citizens should organise and audit the debt, while he must know that in France (and elsewhere in Europe), since 2011 citizen debt audit initiatives have been developing with a certain amount of success. [28]

 The CADTM’s proposal on public debt

To contribute to the debate needed to find solutions to the public debt crisis, the CADTM argues that the portion of public debt identified as being illegitimate (or illegal) should be repudiated instead of being repaid.

The CADTM adds that the following measures should be instituted:

  1. Those who own small quantities of government bonds will be completely reimbursed;
  2. The following rule of thumb should be applied in line with point 1: “When public debts are cancelled, small savers who have invested in government bonds, and wage earners and old-age pensioners who have part of their social security contributions (pension, unemployment, health-care, and family benefits) invested in institutions or bodies that mange the same kind of bonds must be protected.” [29];
  3. The portion of public debt that has not been identified as illegitimate should be decreased by making those who gained from it contribute to paying it back. One possible option to do this would be to levy an exceptional progressive tax on the richest 10 percent. The revenues from this tax could be used to prepay a portion of the debt that is not considered to be illegitimate. There are other possible solutions, and the CADTM remains open to discussion.

The procedure used to identify the illegitimate part of public debt that must be cancelled will be based on a far-reaching citizen debt audit, which must mobilize people and ultimately lead public authorities to formally repudiate this debt. The CADTM is making concrete propositions while participating actively in different citizen debt audit initiatives. It is through a democratic debate linked to the debt audit process that we will be able to more precisely define propositions leading to a popular consensus, and thanks to the mobilization of as many people as possible that these ideas will be put into practice by our government leaders.

The different forms of responsibility in the debt process must also be determined during the citizen debt audit, and those responsible for running up debt nationally and internationally must be held legally accountable. If the audit demonstrates that there are offences linked to the illegitimate part of the debt, the perpetrators (natural or legal person(s)) must be severely sanctioned and forced to pay reparations. They should not be allowed to work in any credit or banking sector jobs (any banks found to be guilty could have their banking license revoked), and should be given jail sentences if their actions deserve such punishment. Furthermore, the public authorities who committed to any illegitimate loans must be held legally accountable.

The CADTM proposes that the portion of public debt identified as illegitimate (or even illegal) not be paid

A legal framework must also be established to avoid crises like the one that started in 2007-2008, and should include the following five measures.

  1. It must be illegal to socialise private debt;
  2. An obligation to conduct continuous auditing of the public debt with citizen participation;
  3. The non-applicability of statutory limitations to offences linked to illegitimate debt;
  4. Illegitimate debt must be considered null and void; [30]
  5. A golden rule must be adopted according to which it is illegal to cut any public spending needed to guarantee fundamental human rights, which take precedence over spending to repay debts.

A State must be able to borrow so that it can improve the living conditions of its people, by improving public infrastructure and investing in renewable energies. Some of these projects can be funded by its current budget thanks to determined political choices, but government borrowing can make other more far-reaching projects possible. For instance, such money would be needed to make a transition from the “car culture” to the large-scale development of public transport, to definitively close nuclear power plants and replace them by renewable energy sources, to build or re-open local railways throughout the country, starting in urban and peri-urban areas, or even to renovate, rehabilitate, and construct high-quality low-energy public buildings and social housing.

The citizen debt audit must determine responsibilities in the debt process and make sure that those responsible for running up debt nationally and internationally be held legally accountable

The CADTM argues that a transparent public borrowing policy must be established, and would like to make the following propositions: 1. All public borrowing must be used in a way that 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). improved living conditions, and breaks with the logic of environmental destruction; 2. All public borrowing must contribute to a wealth redistribution process aimed at reducing wealth inequalities. This is why the CADTM argues that all financial institutions, major private corporations, and wealthy households should be legally bound to purchase government bonds in amounts proportional to their wealth and income, which earn 0 percent interest and are not indexed on inflation. The remainder of the population could purchase these bonds on a volunteer basis, and would be guaranteed a real positive 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. (for example 3 percent) that is greater than inflation. In this case, if the annual inflation rate were 3 percent, the interest rate paid by the government would be 6 percent for that same year.

Such affirmative financial action (comparable to the policies adopted to fight racial discrimination in the United States, the cast system in India, and gender-based inequalities) would help us to move toward more tax justice and a more egalitarian distribution of wealth.

The CADTM also argues that national banks and the ECB (for eurozone countries) must offer countries 0 percent loans to fund their national budgets.

 Appendix: The example of Ecuador in the struggle against illegitimate debt

Towards the end of the 1990s, a series of popular movements, particularly Jubilee 2000 Guayaquil (Ecuador’s biggest city and port) began a campaign against the unjust debt demanded from the country. At first, the positions of this social movement were moderate and confused. In 1998, they went to the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

hoping to present a case for restructuring Ecuador’s debt along with obtaining a significant reduction. After waiting patiently for two years, they realised that the Paris Club did not have the slightest intention of renegotiating, and that it had only agreed to discuss the issue for public relations.

In 2001-2002, CADTM International and the Centre for Economic and Social Rights (CDES) began a campaign against Ecuadorian debt specifically centred on the sale of fishing boats to Ecuador by Norway. The two groups mounted a case demonstrating that the debt owed to Norway for this purchase was illegitimate because the sale had been a measure in the interest of Norway’s ship building industry, at the time in crisis in need of export orders, and not in the interest of the Ecuadorian people.

The denunciation of the debt towards Norway illustrates how a campaign against debt can be led: by targeting one specific debt and introducing the notion of illegitimate debt

These boats had hardly been used for their original purpose of fishing, instead they were made available to one of the countries wealthy banana producers to transport bananas. This concrete example illustrates how a campaign against debt can be started: by drawing attention to a specific debt, and linking to it the notion of illegitimate debt. We managed to work with the Norwegian organization SLUG, and to introduce the idea of debt auditing to clarify what, if anything, Ecuador really owed.
This campaign was managed against a background of social unrest between the end of the 1990s and beginning of the 2000s. In 2000 and 2005, several important popular movements succeeded in bringing down two neoliberal Presidents. In 2000, the President was removed and new Presidential elections were won by Lucio Guttierez on a left wing, anti-IMF, and anti-US platform. Once in office, he changed his policies completely announcing, “I am the best friend of the USA, Chavez is our enemy.” This caused discontent, frustration, and another popular uprising in 2005 that forced the President to abandon the Presidential palace by helicopter. There followed a transitional government with Rafael Correa in the office of Finance Minister in a period when oil prices were quite high. The question of the debt was important because the social movements had been conducting this campaign for 7 or 8 years. As Finance Minister, Rafael Correa allocated all the extra oil revenues to health and education spending, with no question of dilapidating them on foreign debt payments. The debt was considered to be illegitimate, and the people must benefit from the export revenues and the taxes earned on them. The World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and IMF reacted violently and refused to allow Ecuador to use the oil revenues on social spending. The World Bank threatened to suspend its lending to the country if such measures were taken. However, Correa refused to be pushed around by the World Bank, and maintained this attitude before the rest of the Ecuadorian government. Ultimately, he preferred to resign and enter into opposition rather than withdraw a decree that was in his country’s interest. The interim President who replaced Correa decided to launch a debt audit commission, but with very limited powers. Nevertheless, the results of the study on Ecuadorian debt were interesting and contributed to raising awareness on the question of debt.

Correa ran for President in the 2006 elections and put forward the following proposals:

  1. the need for a radical change of the country’s constitution for a fundamental political democratization,
  2. the need to put an end to illegitimate debt.

“Elect me as President and I promise to take measures so that the country can stop paying for illegitimate debt.” He also promised to close the US naval base on Ecuadorian territory and to abandon the negotiations that were leading to a free trade treaty with the US. His objective was to regain Ecuadorian independence with a project for a democratic political system, constitutional change, abolition of illegitimate debt, national sovereignty and independence, and the closing of the foreign military base.

The 2007 – 2008 debt audit and its positive consequences

Correa was elected in December 2006, and immediately started a referendum campaign in February 2007 in favour of a new Constitution. He was victorious in spite of the opposition of all the big media.

The next step, as from May 2007, was to settle the debt question. The first thing the new President did was to expel the World Bank’s permanent representative to Ecuador. The message was clear: The WB had not respected Ecuadorian sovereignty in 2005, driving Correa to resignation, it had interfered in Ecuador’s internal affairs, Go home! World Bank clear off (to put it nicely)! In July 2007, by Presidential decree, Rafael Correa created a commission to audit the national debt. The Ecuadorian participants were drawn from “grass roots” civil society movements, and from four state institutions: the General Accounting Office, the Anti-corruption Commission, Ministry of Finance, and the Ministry of Justice.

In the commission auditing the Ecuadorian debt, only grass-root civil society was represented, which was quite positive

In addition, six foreign experts on debt were called upon. It was in this context that I took part in this commission mandated to analyse the internal and external public debt contracted from 1976 to 2006. We had access to all the information needed to carry out our work as auditors. After fourteen months, a report was established on the debts that were illegitimate and submitted to the government with our conclusions and recommendations. During these fourteen months, we had three meetings with the President and the Government, which then studied our conclusions and recommendations for one and a half months.

In November 2008, Correa announced a unilateral suspension of the reimbursement of two thirds of the commercial debt concerning bonds on the financial markets coming to maturity in 2012 and 2030. For six months, Ecuador remained silent, letting the financial markets stew in incertitude. During this time, the international investment bank “Lazard” was asked to discretely purchase these Ecuadorian bonds on the secondary debt market for the Ecuadorian State. This operation enabled Ecuador to buy back a large share of the bonds and then make an offer to those who still owned bonds that had not yet been sold to Lazard Bank. A large portion of the bonds were bought back in this way at 20 percent of their nominal value. In April 2009, there followed an offer to buy back the remainder at 35 percent of nominal value. By the end of the offer period in June 2009, 91 percent of the concerned bonds had been bought back officially. The remaining 9 percent were never repurchased. 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 had had long enough to sell them back to the State.

In this way, it cost Ecuador only $900 million buy back $3.2 billion of its own bonds. The total amount saved including the interest that would have been paid until the maturity of the 2030 bonds is $7 billion, which became available for social spending for items such as health care, education, and infrastructure development.

If we consider Ecuador’s budget, we see that from 2009 – 2010, the cost of servicing the debt diminished radically and socially useful spending increased considerably, enabling the living conditions of people to be improved.

In Ecuador in 2009-2010, expenditure on debt repayment went down and public spending increased

This is why Rafael Correa was re-elected for another term, under the new constitution in 2009. This term finished in 2013, when he was again re-elected with 57 percent of the votes, a higher score than in either of his previous presidential campaigns!

What lessons can we draw from this experience? Rafael Correa won the 2006 elections on an illegitimate debt and anti-World Bank platform, and at the same time, he created an important base of popular support. This shows that an organization, a candidate or a collective of organizations such as a Popular Front, which is in the opposition, can gain the support and the votes of a large portion of the general public, so that illegitimate debt can be repudiated. This is possible if there is long-term action and awareness raising by the popular movements. The discourse on debt is extremely important for raising public awareness and demonstrating that alternatives to current government policies do exist.

More information on Ecuador:

  1. Ecuador’s poisoned loans from the World Bank and the IMF:
  2. Ecuador: Resistance against the policies imposed by the World Bank, the IMF and other creditors between 2007 and 2011 :
  3. Ecuador: From Rafael Correa to Guillermo Lasso via Lenin Moreno:


[1Chapter 3, p. 84

[2“Assignats were a type of monetary value used in 1789 -1796 during the French Revolution. These delicate notes were backed, not by gold or food, but by property. Interestingly these assignats were backed by properties formerly held by the Catholic Church – and therefore assignats became immediately controversial. Proponents argued that land was of more stable value than gold or silver, where the opponents saw the backed land as illegitimate seized property.” Selling those former Church lands was slow, whereas “the printing presses were increased to run at full capacity turning out as many new assignats as possible. Once the increase printing took place the ‘assigned’ assignats concept that were originally intended for one particular parcel of land by 1791, had become obsolete.” Eventually counterfeiting and overprinting “led to a failed system.” (

[3Chapter 3, p. 94.

[4Chapter 3, p. 95.

[5Chapter 3, p. 95.

[6Chapter 3, p. 95.

[7Chapter 3, p. 95.

[8In reality, the rate is higher, but this is only a theoretical hypothesis.

[9The hypothesis of zero growth is theoretical and used to facilitate calculations. In reality, the GDP decreased by 20 percent between 2009 and 2013, and it is difficult to predict exactly what will happen in the years ahead.

[10Let us use the same reasoning with Portugal, whose public debt represents 130 percent of GDP in 2014, and where the rate of growth is zero (it also decreased between 2011 and 2013) and the rate of inflation is very low. Portugal reimburses its debt at a rate of about 6.5 percent, and so for many years will have to pay the equivalent of 8.5 percent of its GDP. Italy reimburses at a rate of 5 percent, and its public debt is 133 percent of its GDP. Thus, Italy will have to pay the equivalent of 6.5 percent of its GDP for many years. Let me again point out that the figures cited above are part of a theoretical hypothesis. They are nonetheless close to reality. The examples given are mine not Piketty’s.

[11See percentC3 percentA9migr percentC3 percentA9s (in French)

[12Chapter 3, p. 96.

[13Chapter 3, p. 98.

[14Chapter 3, p. 97.

[15Chapter 3, pp. 96-7.

[16Chapter 16, p. 394.

[17Chapter 16, p. 395.

[18Chapter 16, p. 379.

[19I participated in the auditing process as a representative of CADTM for 14 months in 2007-2008.

[20The Court of Justice of the European Free Trade Association States, though anything but an anti-globalization association, judged that Iceland was right. See CADTM, “EFTA court dismisses ‘Icesave’ claims against Iceland and its people,”, 29 January 2013.

[21Commentators often reply that the situations in these two countries are completely different from countries in the EU. While there are obvious differences, it would be a mistake to disdain such experiences. Those who do, show how ignorant they are of the complex situations the governments had to face and partly overcame.

[22Chapter 16, p. 379.

[23The function of haircuts advocated by the IMF and the governments of creditor countries is precisely to limit the losses of large private creditors through organized restructuring. In my Ph.D. dissertation, I showed how the Brady plan is a model in these matters. See Enjeux politiques de l’action de la Banque mondiale et du Fonds monétaire international envers le tiers-monde (Political Aspects of World Bank and International Monetary Fund Actions toward the Third World), Ph.D. dissertation in political science completed at the universities of Liège and Paris VIII in 2004, . See also The World Bank: a never-ending coup d’état. The hidden agenda of the Washington Consensus, 2008

[24“The Flat Tax system is a mechanism in which the same rate of tax is applied to every individual irrespective of their income levels. Also, no deductions or exemptions are allowed in this tax system. In this tax system, the person earning higher wages does not fall into a higher tax bracket, so this system gives incentives to people with higher wages. However, the person earning a lower income is also taxed at the same rate due to which critics argue that this system imposes a burden on the lower-income group.”

[25Chapter 16, p. 378.

[26Chapter 16, p. 379.

[27Chapter 16, p. 379.

[28See the International Citizen debt Audit Network - ICAN),,750

[29Thomas Coutrot, Patrick Saurin, and Éric Toussaint, “Canceling debt or taxing capital: why should we choose?”,

[30See Eric Toussaint, « La Constitution équatorienne : un modèle en matière d’endettement public » (“The Ecuadorian Constitution: a model to follow in terms of public debt,” — in French), 27 December 2010.

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