Debt bomb

Dumping the Debt

In his infinite wisdom UK Chancellor George Osborne warned us that the huge Greek vote for Syriza was
‘Not a defeat of austerity. It is a defeat of economic plans that don’t work...’
On the other hand the Syriza leader Alexis Tsipras said,
‘The verdict of the Greek people ends, beyond any doubt, the vicious circle of austerity in our country...’
It is perhaps easy to decide who has really grasped the moment here.

Osborne is not an idiot however. He was not warning the Greeks. Gunboats are long gone and his dire warnings, he suspects rightly, would mean little in Greece. The Greek people are no doubt now consigned in Osborne’s head to that collection of peoples and nations that the great Tory patrician, Douglas Heard, once described as ‘Basket Cases.’ In the meantime we will get a picture in a few weeks of what UK voters think about austerity – albeit limited through the painfully distorting prism of a party system without proportional representation and without a formation like Syriza. No. Osborne was speaking to the UK population and to the EU – especially the Germans. He has a deep interest that the German leadership does not retreat in the face of the anti-austerity tide in Europe unleashed by the Greeks. He is aware of how politically fragile things are at home.

It would be an arrogant stupidity here to outline Syriza’s economic policy. Syriza spokespeople are today the most cogent politicians in Europe and present their own case more convincingly than anyone else ever could. It is useful however at this point to look at one issue more closely. That is the question of debt. And here we find a potential fault line in the camp of big capital and among those politicians and thinkers who defend its social system, which may prove useful in the wider battle against austerity.

A critical part of Syriza’s policy is the substantial reduction of ‘Greece’s debt’ to the IMF, the EU and the European Bank (the Troika.) Syriza points out that barely 10% of the Troika’s loans went anywhere near the Greek people. The loans were used to shore up individuals and institutions that faced a catastrophe because of the collapse of their previous highly profitable investments. This money has not been used subsequently in any productive way whatsoever. In fact the Greek economy is 25% smaller than its size in 2008. Today, Greece ‘owes’ 317 billion euros. Production is stagnant and in 2016, Greece must pay out 22.3 billion euros, mainly in interest payments, on those wretched loans. (That is more than total Greek expenditure on all of its state employees in 2014.) In fact the Greek debt, as leading economists across the globe agree, is not really sustainable.

What then was big capital’s plan for Greece and its people, before the Greek electorate intervened in its own history? It was spelled out, among others, by various US banks and London based investment funds. The Greek debt would be rescheduled forever, accepting more rescheduling around 2024, 2030, 2050 and beyond, and reinforcing permanent austerity applied by a succession of rightwing capitalist governments, under the whip of the endless debt. This was the prospects outlined in Greece (not to say Spain, Portugal, Ireland and now the UK) for long term US and other western investors.

Debt has a long history in the capitalist system. Syriza quotes the 1953 London Conference that annulled more than half of Germany’s  debts, including pre-war debts, as part of the planning to stimulate West German growth (under the shadow of East Germany and the USSR). The US and the UK were deeply aware that debt had stifled growth in the past and led to catastrophe after 1918. We can all smile when we are reminded that there are still outstanding debts held by the UK government for money that financed the war against Napoleon. Perhaps not so amusing for the US at least (and one key reason why there was such intense US opposition to supporting the UK at the beginning of WW2) was the 1934 ‘decision’ by British rulers to stop paying their WW1 debt to the US. This amounted to £40 billion today if adjusted by RPI (£225 billion if estimated as a proportion of GDP.) France, Greece and Italy stopped paying their war debts at about the same time. Those debts were 36%, 43% and 52% of their nations’ various GDPs respectively. Revolutionary regimes, as in the case of Soviet Russia, repudiated all previous debts.

But is it only in cases of post war settlements and revolutions that capitalist countries annul debts?  By December 1983, 27 countries, mainly in Latin America, publicly stated that they could no longer finance their debt charges from debts of over $239 billion. In 1989 the Brady Plan (under President Bush senior) annulled 32% of all outstanding loans in the 18 countries that applied. $61 billion was wiped out. This was money lost to Western major shareholders in US banks. Why? Capitalism was threatened across Latin America and they were not going to get the money anyway. The US billionaires and Corporations got tax relief.

Debt annulment is often agreed secretly for obvious reasons, but still emerges publicly from time to time, as in the case of Ecuador when in December 2008 the President of the Republic declared Ecuador's national debt ‘illegitimate odious debt,’ based on the argument that it was contracted by corrupt and despotic prior regimes. He has succeeded legally so far in reducing the price of the debt.

As a result of this reality in the history of the capitalist system there is a sustained argument among economists and leading politicians about debt relief and annulment in general. And Syriza’s policy will open out that argument again. In a recent example, on the 24th December 2014 Rogof, the ex lead economist for the IMF, produced an IMF paper that re-charged the debt bomb row. Carmen Reinhart and Kenneth Rogof pointed out that debt overload in developed Western countries had always required major (albeit sometimes masked) debt annulment in the past – just like developing economies. They also pointed out that western debt has now reached a 200-year high. From 1970 to 2011 western debt, both government and private, rose from 25% of GDP to 260% of GDP. So, they demonstrated, austerity and ‘labour flexibility’ (lower wages; longer shifts) won’t do it. And not just in Greece.
Syriza’s policy on the debt will change the economic landscape on the western crisis. It is no longer (and has never been as Rogof’s paper shows) simply an argument about the rich West and the poor South; it is also and indeed primarily an argument about the rich in general and the global poor who are now paying and who have always been asked or been forced to pay for the rich’s systemic crises. Syriza’s policy on the euro debt could have the effect of further dividing the current political and economic leadership in Europe and the West - as well as the hope it has also created for the 99%.

Note: Apologies to any readers for the delay in blogs, which was caused by family health matters.