Why are Philippine funds being used to bail out irresponsible European banks?

2 July 2012 by Walden Bello

The Philippine government’s decision to extend a $1 billion loan to the International Monetary Fund 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.

(IMF) to supplement the Fund’s war chest of $456 billion to contain the economic crisis in Europe has been justified as assistance to countries in dire need of financial help.

It will do no such thing.

The IMF funds may be nominally earmarked for Greece, Spain, or Ireland, but they will actually flow to the big banks that made loans to these countries.

A supply-driven crisis

As in the United States, the financial crisis in Europe is a supply-driven-crisis, as the big European banks sought high-profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. , quick return substitutes like real estate lending and speculation in financial 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.). for industrial and agricultural investment. German and French private banks hold some 70 per cent of Greece’s $400 billion debt. German banks were great buyers of the toxic subprime assets from US financial institutions, and they applied the same lack of discrimination to buying Greek government bonds. For their part, even as the financial crisis unfolded, French banks, according to the Bank of International Settlements, increased their lending to Greece by 23 per cent, to Spain by 11 per cent, and to Portugal by 26 per cent.

Indeed, in their drive to raise more and more profits from lending to governments, local banks, and real estate developers, Europe’s banks poured $2.5 trillion into Ireland, Greece, Portugal, and Spain. It is said that these countries’ membership in the euro deceived the banks into thinking that their loans were safe since they were implicitly backed with the economic power of the Eurozone’s most powerful economies, meaning Germany and France. Not only was this a lame excuse for not looking into a debtor’s financial health, which every bank is obligated to do. More likely, a country’s membership in the euro provided the much-needed justification for unleashing the tremendous surplus funds the banks possessed that would create no profits by simply lying in the banks’ vaults.

Rescuing the banks

The so-called rescue funds are pretty much like the $700 billion Troubled Assets Relief Program (TARP) that injected money into the United States’ top financial institutions to keep them from crashing into bankruptcy in 2008. Like TARP, the European bailout funds are public monies being used to bail out private banks that made bad bets in the global casino. TARP, however, was clearly a bailout of the banks, whereas the European rescue funds are disguising a bailout of the banks as a bailout of countries.

The European rescue program is, in this sense, also very similar to the funds assembled by the IMF during the Asian Financial Crisis in 1997. Practically all of these funds went to pay off foreign creditors and hardly anything went to ease the sufferings of people whose economies collapsed when the investors deserted them. Many creditors got a large part of their money back, but nothing was allocated to assist the estimated 20 million Indonesians and one million Thais who dropped below the poverty line as a result of the harsh stabilization programs the IMF demanded in exchange for the bailout funds.

The European bailout funds are also like the structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
loans extended to the Philippines in the 1980’s during the depths of the country’s foreign debt crisis. They went to rescuing Citibank and other foreign creditors while Filipinos were left not only with the task of paying off 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 the IMF but also undertaking the painful measures of budgetary cutbacks, trade liberalization, deregulation, and privatization that dislocated the country’s economy irreversibly. One of the IMF conditions for the rescue loans for international private banks was Automatic Appropriations Law, which mandated that servicing the debt to these creditors would have priority allocation in budgetary expenditures. In the last few years, we have allocated 20-25 per cent of the national budget to debt servicing.

Banks escape, people pay

While the big banks will be able to get a significant part of their irresponsible investments back, as a result of the generosity of countries like the Philippines, it will be the people of Spain, Greece, Ireland, and other bankrupt European countries that will be left with the bag, just as Asians and Filipinos were the ones who had to clean up the mess that their foreign creditors and domestic economic elites left behind after the Asian financial crisis.

From our bitter experience, we can relate to the frustration of the Spanish economist who, upon hearing of the $125 billion “rescue” deal that would put the enormous burdens of repayment on Spanish taxpayers in the dreary years to come, told the New York Times, “Ultimately, those who lent to our financial system were the banks and insurance companies of Northern Europe, which should bear the consequences of these decisions.” Great principle, but it won’t be followed.

In order to repay the EU-IMF bailout loan, the Greek government agreed to a draconian program that increased the value-added tax to 23 percent, raised the retirement age to 65 for both men and women, made deep cuts in pensions and public sector wages, and eliminated practices promoting job security. Years of pain and stagnation are the only future Greeks can look forward to.

As for Ireland, in return for an 85 million euro loan to repay European banks, it accepted what the New York Times characterized as the “toughest austerity program in Europe,” involving “the loss of about 25,000 public-sector jobs, equivalent to 10 percent of the government work force, as well as a four-year, $20 billion program of tax increases and spending cuts like sharp reductions in state pensions and minimum wage.” The program, being essentially, as in Greece and Spain, a draconian effort to rip off resources to pay off the banks, will end up choking growth for years to come, with the IMF itself warning the program would risk a “pernicious cycle of rising unemployment, higher arrears and loan losses.”

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.

There is a term for the consequences of bank bailout programs: “moral hazard.” By generating the expectation that they will be rescued whenever their debtors run into trouble serving their debts, bailout programs encourage irresponsible lending. The Eurozone governments-IMF rescue operations can only encourage more irresponsible lending in the future.

There are a number of other reasons others have cited why the $1 billion credit to the IMF is a bad idea. It could be better used being lent to the national government to pay off our $62.9 billion foreign debt or plugging the budgetary shortfalls for education, health, and infrastructure. It should be given only if the IMF agreed to changes in its governance structure to give countries like the Philippines larger quotas and greater voting power and a larger say in policy. But the main reason is plain, simple, and commonsensical: our government should not be in the business of bailing out irresponsible European banks.

*Inquirer.net columnist Walden Bello is also the representative of Akbayan in the House of Representatives.

Walden Bello

is senior analyst at the Bangkok-based Focus on the Global South and the International Adjunct Professor of Sociology at the State University of New York at Binghamton.



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