Why Europe Needs A Debt Conference

30 June 2015 by Ozlem Onaran

After yet another summit on the Greek debt on 22 June, there are signs of an “extend and pretend” deal until winter. There is vague talk of a “debt relief” in the future, although it is unclear how much of the debt the Eurozone governments are willing to write off. Most importantly what are the conditions they impose in return?

According to the current proposals of the Greek government, even if there are elements of a left austerity with redistributive concerns, the primary budget surpluses imposed on them are too high to secure economic and social recovery; further privatizations are expected; the demands regarding minimum wages and collective bargaining are postponed, and the type of cuts in the pension system continues to be the sticking point.

But even if a deal is reached, there are other inconvenient facts about the increase in the public debt in Greece since 2010. The Truth Committee on Public Debt – an independent committee of experts from 11 countries set up by the President of the Hellenic Parliament, Zoe Konstantopoulou – has published its preliminary reporton 18 June 2015. The report provides evidence that the Greek debt is largely illegal, illegitimate, and odious.

The programmes were based on clearly wrong assumptions; however this was not a mistake, their unsustainability was predictable and the main goal was the rescue of banks and private creditors. Particularly revealing is the testimony of Panagiotis Roumeliotis, the former representative of Greece at the 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.

, on 15 June 2015 at a public hearing answering the questions of the Truth Committee. The IMF knew that the Greek debt was unsustainable and according to its own rules should not have agreed to a loan agreement without a debt restructuring in 2010, but the European governments and banks influenced the decision. Papandreou’s government helped to present the elements of a banking crisis as a sovereign debt Sovereign debt Government debts or debts guaranteed by the government. crisis in 2009. In 2013 theIMFadmits that “a delayed debt restructuring also provided a window for private creditors to reduce exposures and shift debt into official hands”.

Since the first Memorandum in 2010, private creditors managed to offload their risky bonds issued by the Greek state. In 2015, 80% of Greece’s public debt is held by public creditors: fourteen Member States of the Eurozone, the EFSF, the IMF, and 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.

. Only less than 10% of the funds have been destined to the government’s current expenditure. The conditionalities imposed further neoliberal reforms, which was not only an aim in itself, but also helped to create the illusion that they were designed to secure the future debt repayment.

However, the wage and pension cuts and fiscal consolidation led to lower 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.
, tax losses, and higher public debt. Our estimatesshow that the fall in the wage 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. alone has led to a loss in GDP by 4.5%, and a 7.80% point increasein the public debt/GDP ratio. The fall in wages alone explains more than a quarter (27%) of the rise in the public debt/GDP ratio in this period. The conditionalities of the memoranda have not only been counterproductive in terms of its aims regarding debt sustainability, but also engineered a humanitarian crisis.

Philippe Legrain, advisor to the President of the European Commission Barroso in 2010, who spoke at a public hearing at the Greek Parliament on 11 June 2015, writes

Why would Eurozone authorities be so cruel and foolish? Because they don’t really care about the welfare of ordinary Greeks. They aren’t even that bothered about whether the Greek government pays back the money that they forced European taxpayers to lend to it, ostensibly out of solidarity, but actually to bail out French and German banks and investors. German Chancellor Angela Merkel and other Eurozone policymakers just don’t want to admit that they made a terrible mistake in 2010 and have lied about it since.

The report of the Truth Committee demonstrates that the debt claimed today from Greece can be considered illegitimate, in the sense that it has not benefited the population but a small minority of private creditors, especially the large Greek, German and French banks. This debt is unsustainable not only from an economic, but also a human rights perspective, as Greece is currently unable to service its debt without seriously impairing its capacity to fulfill its basic human rights obligations regarding the right to work, a life with dignity, social security, health, education, and housing. Loans have been contracted in violation of the Greek Constitution and the EU law, and can therefore be classified as illegal. The debt may also be classified as odious, since lenders knew that the conditionalities attached to their loans violated fundamental human rights.

The report also confronts the myth of excessive public spending before the crisis. The increase in debt since the 1980s was not due to excessive public spending, which in fact remained lower than the public spending of other Eurozone countries, apart from excessive and unjustified military spending, marked by widespread fraud with contracts benefiting the armament industry of the creditor countries. The other reasons of the rise in public debt were the extremely high 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.
, loss of tax revenues due to tax evasion and illicit capital outflows, and finally the recapitalization Recapitalization Reconstituting or increasing a company’s share capital to reinforce its equity after losses. When the banks were bailed out by the European States, they were most often recapitalized with no conditions attached and without the States having the decision-making power their participation in the banks’ capital should have given them. of private banks.

On 21 June 49 SYRIZA MPs requested a plenary of the Parliament to discuss the report of the Truth Committee on Public Debt. Whether there is a deal or not, there will be people in Greece who will not forget these inconvenient facts and seek justice. Who owes whom after years of destruction? This concerns not just the people of Greece but also Europe. Europe needs a debt conference. In 1953, as a result of the London Debt Agreement, half of German debt was written-off. The winners of the financial crisis do not have 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. in a debt conference, but the people of Europe have the right to learn that their taxes were used to bail out banks. The people in Ireland, Portugal, Spain, and Latvia need to see the truth that their governments imposed on them the similarly wrong austerity measures.

The bill must eventually be sent to the private banks. Until then the people of Greece have the right to refuse to pay the debt. It is time that the Greek people have a clear discussion about what the debt means, and what are the options outside this straightjacket. Greece needs policies to achieve decent jobs with decent wages for both women and men, structural change, sustainable development and a caring society for both the young and the elderly. Solutions to these problems are incompatible with payment of the debt and austerity policies likely to be attached to further agreements.

A unilateral debt default surely requires capital controls, but despite the scaremongering, the Greek people need to be reminded that most countries had capital controls until the massive financial deregulation of the late 1970s and 1980s. To counterbalance the blackmail of the ECB, the Greek government can introduce IOUs for internal payments. Will this lead to an exit from the Eurozone? Staying in or exiting the Euro cannot be a taboo, and exit is a possible outcome of confrontation, but it is not the only outcome.

After default, the ECB would cut the supply of liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. , since the government bonds held by the Greek banks would cease to serve as collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. , but according to Willem Buiter of Citi, European authorities could recapitalize the Greek banks, and the ECB could continue funding the banks until a political decision is reached to avoid being the institution to pull the plug. But this approach sees the transition period from the perspective of the bankers; from the perspective of the Greek government, the more important issue is to take control of their banks rather than leaving it to the ECB.

The degree of financial contagion to the rest of Europe after a Greek default is yet to be seen, as the calm in the government 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 seem to be more fragile than the ECB and the European governments hope for. But the political contagion of a Greek default, as people choose dignity over blackmail, is what the people of Europe can hope and prepare for. The political and financial contagion will mutually reinforce each other in the medium run as more questions are asked by the people of Europe about the legitimacy of the so called bail out programmes.

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Ozlem Onaran

Professor of Economics, director of Greenwich Political Economy Research Centre, University of Greenwich

Other articles in English by Ozlem Onaran (5)



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