printer printer Click on the green icon on the right
“Suspending” the debt means paying the debt! (Newspaper Prin, October 2014)
by Leonidas Vatikiotis
9 December 2014

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. 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 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 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, 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 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 and the European Stability Mechanism (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 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 (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 (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, 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 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’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 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, 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.


Leonidas Vatikiotis