FacebookTwitterGoogle+RedditEmail

The European Bill of Fare

In May 2010 the European Commission created the European Financial Stability Facility (EFSF), financed with several hundred billion euros.(Originally the amount was to be EUR 440 billion but with the continuing crisis and the speculative attacks it keeps increasing.) Aid was intended for three years, but it is already clear that this limit will be overstepped. It is conditional on the concerned countries implementing austerity policies that are supposed to restore them to solvability. The EFSF is part of a broader aid programme, which also includes IMF financing for several hundreds billion euros under the same conditions, in keeping with the IMF Structural Adjustment Policies that have been imposed to developing countries and to countries that used to belong to the Soviet bloc since the 1980s.

On the other hand the ECB decided to buy debt securities issued by countries that are meeting hard times but, and this is crucial, it does so with private banks on the secondary market. Instead of directly lending to Eurozone member states, the ECB thus lends capital at a 1.25% rate to private banks which then, with this money, buy securities from States in difficulty at two or three times the rate for short term borrowing (if they are 10-year bonds the rates can reach 10 to 13% in the cases of Greece, Ireland or Portugal).

Next the ECB buys the securities issued by States it had refused to grant direct loans to, from the same private banks! It seems entirely logical to think the ECB should lend the needed amounts directly at 1,25% interest instead of lending it to banks that make juicy profits and take unconscionable risks in their lending policies, which States will eventually have to cover up in case of bankruptcy. But we shouldn’t just demand that the ECB lend directly to States, we must first and foremost have the illegitimate part of the public debt cancelled and the remainder significantly reduced. If we do not give priority to this demand, the noose of the debt will hardly be loosened and these countries’ people will have to pay for the crisis for decades.

Several provisions in the treaties governing the EU, the Eurozone and the ECB must be repealed, for instance, articles 63 and 125 of the Lisbon Treaty that prohibit all restrictions on movements of capital and any help to member states meeting difficult times. We must also move out of the Stability and Growth Pact. Moreover, the current treaties must be replaced by new ones in a truly democratic constituent process, concluding with a solidarity pact among peoples to promote employment and protect the environment. We must thoroughly revise the current monetary policy as well as the status and practice of the European Central Bank.

Issuing Eurobonds

Faced with the depth of the crisis, European leaders decided to create and issue European bonds (Eurobonds) to partly finance the Fund established to provide loans to the most indebted countries. This new mechanism makes it possible for countries with AAA rating (as was the case for France and Germany in 2010) to borrow on the capital markets in the most favourable conditions. Again the process involves borrowing on the markets, i.e. with private banks or other investment bodies instead of directly financing the needs of public bodies with money from the ECB or the member states’ central banks.

Prospect of a Brady plan for the most indebted European countries

During 2010 European leaders realized that Greece, Ireland, Portugal and probably other countries as well would have to face even more difficult times in the coming years since a snowball effect has been triggered. While these governments repay their debts, their amounts steadily increase because of interest costs and weak economic growth. The debt repayment burden will soon become unbearable for some of them. This is why at the end of 2010 European leaders announced that from 2013 onward, new rules would be applied for issuing debt securities so as to make it possible to restructure the debt and reduce its amount. From June 2013 all securities issued by European member states will include a “collective action clause” mentioning that if a defaulting country cannot repay its debt, all investors will have to come together and indicate how debts can be restructured and possibly reduced. This kind of mechanism had already been discussed within the IMF in the early 2000s, in the wake of Russia and Argentina suspending their repayments in 1998 and 2001.

In short, in the years following 2013 private creditors must expect a restructuring of the debts of debtor countries, which means a reduction of their amounts after imposed negotiations. But we are not too concerned about the dividends of major shareholders in creditor private institutions: meanwhile, creditors will have received considerable amounts while reducing their exposure to countries at risk, because the IMF, the ECB and the European Commission are taking over. Patrick Artus, chief economist at Natixis, has the same analysis: At the beginning of the coming decade virtually all the debt owed to private creditors will have been repaid while virtually all the public debt owed by countries at risk will be to public creditors (European Financial Stability Facility (EFSF), European Union, IMF.) (Flash Economie, 24 March 2011, http://gesd.free.fr/flas1218.pdf, our translation).

This actually recalls the management of the debt crisis in developing countries in the 1980s with the Brady Plan. Indeed at the beginning of the 1982 crisis the IMF and the governments of the United States, the UK, and other major powers bailed out private bankers in the North that had taken huge risks when lending without restraint to countries of the South, particularly in Latin America (in a somewhat similar way to what happened with subprime mortgages or with countries such as Greece, Eastern European countries, Ireland, Portugal, Spain). When developing countries, starting with Mexico, were on the brink of defaulting, the IMF and member countries of the Paris Club granted them loans on condition that they carry out repaying private banks and that they implement austerity plans (the notorious Structural Adjustment Policies).

Next, as the South was getting more and more into debt through a snowball effect, they set up the Brady Plan (Brady was the US Treasury Secretary at the time) that involved restructuring the debt of major indebted countries through an exchange of securities. In some cases the amount of the debt was reduced by 30% and the new securities (Brady bonds) guaranteed a fixed interest rate of about 6%, which was quite favourable to bankers. This also insured that the same austerity policies would be carried out under control of the IMF and the WB.

Today, under different latitudes, the same logic results in the same disasters.

Eric Toussaint, president of the Committee for the Cancellation of Third World Debt – Belgium www.cadtm.org , author of The World Bank: A Critical Primer, Pluto, London, 2008.

Translated by Christine Pagnoulle in collaboration with Marie Lagatta.

 

More articles by:
Weekend Edition
June 22, 2018
Friday - Sunday
Karl Grossman
Star Wars Redux: Trump’s Space Force
Andrew Levine
Strange Bedfellows
Jeffrey St. Clair
Intolerable Opinions in an Intolerant Time
Paul Street
None of Us are Free, One of Us is Chained
Edward Curtin
Slow Suicide and the Abandonment of the World
Celina Stien-della Croce
The ‘Soft Coup’ and the Attack on the Brazilian People 
James Bovard
Pro-War Media Deserve Slamming, Not Sainthood
Louisa Willcox
My Friend Margot Kidder: Sharing a Love of Dogs, the Wild, and Speaking Truth to Power
David Rosen
Trump’s War on Sex
Mir Alikhan
Trump, North Korea, and the Death of IR Theory
Christopher Jones
Neoliberalism, Pipelines, and Canadian Political Economy
Barbara Nimri Aziz
Why is Tariq Ramadan Imprisoned?
Robert Fantina
MAGA, Trump Style
Linn Washington Jr.
Justice System Abuses Mothers with No Apologies
Martha Rosenberg
Questions About a Popular Antibiotic Class
Ida Audeh
A Watershed Moment in Palestinian History: Interview with Jamal Juma’
Edward Hunt
The Afghan War is Killing More People Than Ever
Geoff Dutton
Electrocuting Oral Tradition
Don Fitz
When Cuban Polyclinics Were Born
Ramzy Baroud
End the Wars to Halt the Refugee Crisis
Ralph Nader
The Unsurpassed Power trip by an Insuperable Control Freak
Lara Merling
The Pain of Puerto Ricans is a Profit Source for Creditors
James Jordan
Struggle and Defiance at Colombia’s Feast of Pestilence
Tamara Pearson
Indifference to a Hellish World
Kathy Kelly
Hungering for Nuclear Disarmament
Jessicah Pierre
Celebrating the End of Slavery, With One Big Asterisk
Rohullah Naderi
The Ever-Shrinking Space for Hazara Ethnic Group
Binoy Kampmark
Leaving the UN Human Rights Council
Nomi Prins 
How Trump’s Trade Wars Could Lead to a Great Depression
Robert Fisk
Can Former Lebanese MP Mustafa Alloush Turn Even the Coldest of Middle Eastern Sceptics into an Optimist?
Franklin Lamb
Could “Tough Love” Salvage Lebanon?
George Ochenski
Why Wild Horse Island is Still Wild
Ann Garrison
Nikki Haley: Damn the UNHRC and the Rest of You Too
Jonah Raskin
What’s Hippie Food? A Culinary Quest for the Real Deal
Raouf Halaby
Give It Up, Ya Mahmoud
Brian Wakamo
We Subsidize the Wrong Kind of Agriculture
Patrick Higgins
Children in Cages Create Glimmers of the Moral Reserve
Patrick Bobilin
What Does Optimism Look Like Now?
Don Qaswa
A Reduction of Economic Warfare and Bombing Might Help 
Robin Carver
Why We Still Need Pride Parades
Jill Richardson
Immigrant Kids are Suffering From Trauma That Will Last for Years
Thomas Mountain
USA’s “Soft” Coup in Ethiopia?
Jim Hightower
Big Oil’s Man in Foreign Policy
Louis Proyect
Civilization and Its Absence
David Yearsley
Midsummer Music Even the Nazis Couldn’t Stamp Out
FacebookTwitterGoogle+RedditEmail