Which Debt Strategies Should Europe Adopt?

by the Comittee for the Abolition of Third World Debt

February 3, 2015

On Tuesday, January 20, 2015, SYRIZA and Podemos, in collaboration with the CADTM and the Bloco de Esquerda, organized a session of debates and confrontation of ideas at the European Parliament to discuss different strategies for countering Europe’s debt trap. Moderated by Teresa Rodríguez, this two and half hour session provided an opportunity for various political groups including the CADTM to examine both divergent and convergent aspects of the strategy to deal with creditors.

The experience of debt restructuring shows that unilateral acts are necessary

Éric Toussaint, spokesperson for the Committee for the Abolition of Third World Debt with a Ph.D. in Political Science, delivered an introductory note on restructuring, audit, suspension and cancellation of debt in recent decades.

Without going into the nitty-gritty of these measures (compilation available in an interview published on the CADTM’s website), the discussion revolved around the examples of (1) restructuring carried out in debtor countries under favorable conditions merely for geopolitical reasons (West Germany in 1957, Lech Walesa’s Poland in 1991, Mubarak’s Egypt in 1991 and Iraq under American control in 2004); (2) an exception where restructuring inadvertently facilitated an alternative government (Bolivia in 2005); (3) unilateral suspensions of debt payment either followed by negotiations (Argentina) or not followed by negotiations (Ecuador). Most of the restructurings (600 cases between 1950 and 2010) have adversely affected the economies and peoples of the concerned countries.

A session on debt at the EU Parliament.

Toussaint showed that debt restructuring is a mechanism designed by creditors. The CADTM prefers not to consider restructuring as a demand and a solution as long as the creditors hold their ground. He rounded up his historical analysis with the particularly interesting case of the Greek debt restructuring in 2012. Conducted only in the interest of creditors, it’s a sharp reminder of the restructurings that took place in the third world countries. The newly-formed Greek government led by SYRIZA must learn from this recent event.

Currently, the public creditors–who are at present the main creditors in Greece, Portugal and other countries subject to memoranda–do not wish to act in a way that would in any way recall the post-war approach of meting out favors to West Germany. “Several radical left parties (including Podemos, SYRIZA, and the Bloco de Esquerda) are now offering restructuring and asserting their willingness to negotiate with the creditors. Whether such a negotiation could have a really positive outcome for the country and the people was the debate’s focal point, rather than the question of negotiation. Without suspension of payment, without audit, without other sovereign acts of debt resistance, it is very difficult to predict a substantial result from negotiations. In any case, we must be ready to take strong actions if negotiations do not materialize or have unfavorable results.”

As is also the case in the document of our Portuguese friends, Éric Toussaint stressed the importance of incorporating the issues of the banks, of control on capital movements and of a radical fiscal reform when developing a strategy to deal with public debt.

He concluded by underscoring the importance of the weapon of audit:

“The example of Ecuador’s audit in 2007-2008 shows that this is an important tool. It is a sovereign act of analyzing the debt, consequently understanding the process of indebtedness and identifying the illegal/illegitimate/unsustainable/odious parts. It is a tool for advocacy and demonstration. At the same time, it allows a nation to take a sovereign decision based on the domestic and international law or on general legal principles.”

A concrete proposal for a restructuring program

Francisco Louçã, former coordinator of the Bloco with a Ph.D. in Economics, presented the debt renegotiation plan which he and three other Portuguese economists had prepared. This document helps to initiate a political debate based on concrete proposals. In terms of restructuring, it recommends an extended time of up to 30 years for capital payment and a drastic reduction of the interest rates to 1%. It also recommends to discriminate in favor of small shareholders, other small investors as well as local authorities who could be affected by the restructuring. Finally, it calls for a radical reform of the banking sector (which would become entirely public once the shareholders are compelled to accept their losses).

“The strong and concrete nature of the proposals is very important for the sake of public debates. We are aware that there may be other, perhaps even better, standpoints, but none has been presented so far,” Louçã said. According to Francisco Louçã, the European Central Bank’s (ECB) debt bailout program will not suffice. It is essential to cancel part of the debt through a process of negotiation and restructuring. “Anything can happen. It will all depend on the vision of a left-wing government that can–and should–manifestly take unilateral actions.”

We have to think out how to proceed after unilateral acts

Ignacio Alvarez, a member of Podemos and Professor of Applied Economics, pointed out at the outset that unlike the other speakers Podemos was yet to have a strong stand on the debt. However, Podemos had passed a resolution that initiated the debate. This resolution has two tenets: Podemos’ economic program cannot be implemented without addressing the issue of debt (both public and private); and the institutional framework in which it operates (the European Union and its treaties) is to be treated with equal importance. “If the peripheral economies want to remain within this framework, they are expected to generate a higher primary surplus of 3 or 4 or even up to 7% in the coming years. This is unattainable and impossible.”

Ignacio Alvarez explained Podemos’ stand regarding citizens’ audit and debt: “These two approaches must be in line but not mutually exclusive; restructuring must take place even in the case of an incomplete or inconclusive audit. We consider audit to be a tool for awareness building and politicization. It is also, as Éric said, an instrument that should help define illegitimacy.” He then laid out the ideal course for restructuring: “it must be conducive to an effective reduction: interest rates, repayment schedules, debt service in the first few years as proposed by our Portuguese friends, and of course the principal of the debt.”

He believes that the use of the term “restructuring” can appeal to a much wider section of the population. “It’s not the terminology, but the implication that matters. I fully agree with the necessity for sovereign acts. The debate on debt will not evolve without the participation of the indebted countries, who must try to achieve collective solutions. But we cannot find financial resources overnight, we do not have a central bank. Therefore, this must be taken into consideration as well. We have to think out how to proceed after unilateral acts.”

Creditors use their power to impose conditions on restructuring

Georgios Katrougalos.

Georgios Katrougalos, MEP from SYRIZA and professor of Constitutional Law, reminded us that international law does not tell us how to address the issue of debt restructuring. For the time being, there are two informal groups: the Paris Club (public creditors) and the London Club (private creditors). They use their power to impose special conditions for restructuring so that their own interests, not those of the indebted peoples, are served.

“After the 2012 restructuring 90% of our debt was no longer in the hands of private creditors (mainly, German and French banks) but in those of institutions such as the ECB and the IMF, or of individual States. This is another example of socializing banking losses. Therefore, negotiations must take place”. We must not forget either that the Greek debt is now under the British, and not the Greek law.

Katrougalos stated that SYRIZA deems it impossible to pay the debt. However, the main reason behind debt resistance is political, not technical. Debt as a tool of domination is not just a problem for Greece or the peripheral countries; it is now the EU’s problem. “We must find a solution through an international conference, as was the case with Germany. Our proposal includes the need for a moratorium and a clause for a level of growth under which debt service would be suspended.”

What if SYRIZA took the EU at its word?

Éric Toussaint rounded up by explaining that Paragraph 9, Article 7 of an EU regulation dated May 21, 2013, recommends that countries subject to a macroeconomic adjustment should carry out a comprehensive debt audit. What if SYRIZA took the EU at its word and grabbed the opportunity to identify the liabilities in the Greek indebtedness and the part of the debt that its people must not pay?

This report was produced by the Committee for the Abolition of Third World Debt and translated by Suchandra De Sarkar in collaboration with Christine Pagnoulle.