Capitalism and Government Debt at Odds in Greece (1/2)

Michael Hudson says unlike personal and corporate debt, there is no legal framework for writing off government debt, so there is deliberate anarchy in place

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Story Transcript

Part 1

SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to the Real News Network. I’m Sharmini Peries coming to you from Baltimore.

Greece is in the situation they’re in, burdened with a huge debt that they cannot pay, because there’s no legal framework for writing down debt owed to the IMF, ECB, and intergovernmental bodies, writes Michael Hudson in an article he penned in Counterpunch. So where do we go from here?

To answer this question, I’m joined by Michael Hudson. He’s a former Wall Street economist and a distinguished research professor at the University of Missouri Kansas City. He’s the author of Bubble and Beyond: Finance Capitalism and its Discontents.

Michael, as usual, we love having you here.

MICHAEL HUDSON, UMKC: Good to be here, Sharmini.

PERIES: So Michael, give us a take on what you’re writing here in Counterpunch in terms of that there’s no mechanism in place to write down debt, which Greece has been asking for for five and a half months, now.

HUDSON: Well, the United States and Europe have a long body of law going back hundreds of years to deal with public bankruptcy–with private sector bankruptcy. Individuals have bankruptcy laws to free themselves from debt. Corporations go broke all the time, and they go to court, and debts are written down.

But the government debts are something different. There is a deliberate anarchy that’s been imposed, especially since World War II, to prevent any discussion of governments writing down debt. And the idea is that if the world’s bondholders, and basically we’re talking about the 1 percent, if the 1 percent can stop any court form writing down this then there’s only anarchy if any government says we can’t pay. And it’s obvious that a lot of governments can’t pay, above all right now Greece.

And normally, governments have been able to renegotiate debts with bondholders. There’s a market in government bonds. The marketplace has moved down Greek government bonds to about 30 cents on the dollar. And that means that the markets believe that maybe Greece can pay a third of the debt that it has, but not more. But the central banks have something else in mind. And it’s not really economic, and it’s not really financial. It’s political.

And if you look at how Europe has been organized, Europe doesn’t have any common organization. There’s no real parliament able to set European-wide tax rules, or regulatory rules, or anything else. There’s only one European organization that can set policy, and that’s the European Central Bank. And the European Central Bank, like central banks everywhere, are run by the commercial banks. And in Europe they’re run by the ultra-right wing. So we’re talking about a right-wing extremist policy, and they believe essentially in [inaud.] privatization.

And what’s at issue isn’t really whether or not Greece can pay the debts or not. Everybody knows that it can’t. Yesterday U.S. Treasury Secretary Lew came out and said, Greece needs a writedown, it can’t pay the debt. A week ago the International Monetary Fund said we will not make any more loans with the European Central Bank to Greece, because it can’t pay. Everybody realizes it can’t pay.

But the European Central Bank has taken what is very nearly a fascist position. It says what we’re after isn’t the collective debts. We know Greece can’t pay, out of the–it can’t earn the money to pay that debt. What it can do is sell off its islands, it can sell the Parthenon. It can sell its land. It can sell its gas rights in the Aegean. It can sell its radio stations and television stations. It can sell its roads to people that we appoint.

Now, just imagine that all of a sudden there was a financial crisis in America, and Governor Chris Christie of New Jersey, or Mayor Rahm of Chicago were put in charge of selling off the public domain. They’d sell to their cronies. They’d sell to their insiders, and that’s what the European Central Bank has told Greece. So like last year, the right-wing parties that ran Greece had agreed to privatize their gas rights. Half of the privatization that was scheduled was supposed to be the gas pipeline. The largest bidder was Gazprom of Russia. And the ECB said no, no. We’re going to operate on behalf of the [cold war]. You have to sell to our appointees at a fraction of the price the Russians paid, because they’re the people who we’re backing.

And Greece said, wait a minute. You’re telling us to sell to the–not only to sell off the public domain and privatize to people who are now going to charge for the roads, charge for public health, charge for the islands, and drain us, but you want us to sell to the crooks that the Greek people have just thrown out?

They’ve accused the ECB of backing the most anti-democratic–quite frankly, they’re gangsters. And from the very beginning, the problem, looking backwards, that Syriza and Varoufakis and Tsipras had was they believed that the European Central Bank was going to operate in its self-interest, and believed what the IMF said. You have to write down the debt. But instead, the intention of the European Central Bank was saying, we’re in control. And if you don’t do exactly what the previous parties did, the parties that were voted out of power. If you don’t sell off your land and privatize, and you have to–you have to basically wipe out the pensions. You need 30 percent of your population to emigrate within two years. You have to create a permanent crisis. If you don’t do this and agree to it, we’re going to wreck your banks.

PERIES: Michael, the no vote, clearly the Greek people indicated that they don’t want to accept these terms. So as your article is titled, where do we go from here?

HUDSON: Well, where do we go from here is, number one, we need some sort of a new international organization to adjudicate how much can a country pay? All of this was done in the 1920s, when Germany couldn’t pay reparations. And this is ironic that Germany was a beneficiary of this in the past. The world said, okay, we’re not–if we try to bankrupt Germany any more, we’re going to bring the Nazis into power. So they created the Bank for International Settlements under the Young Plan in 1929 to say how much can a government afford to pay? And they created this, and the Young Plan, and the Bank for International Settlements, scaled back German reparations to what the country could pay.

And the guiding philosophy of this was put forth by John Maynard Keynes. And he said if a creditor has a claim on a government, it’s the job of the creditors in Europe to say, to tell Germany, here are the exports we’re willing to take. The creditor has an obligation to tell the debtor how it can pay without simply sacrificing the land, and just selling off the assets. All of this, this theoretical background, is that the capacity to pay has been stripped away from the economics curriculum. I have a summary of all of this in my book Trade Development [in] Foreign Debt, which summarizes the 1920s debate.

At that time, you had a whole mechanism. After World War II, and today, you have such a movement to the right wing that it’s essentially left no alternative for a government to ask for an honest broker. Now, we know the IMF can’t be an honest broker, because it’s run by, traditionally by a Frenchman. And the French are, and have been major holders of Greek debt. So they’re taking an inherent conflict of interest in trying to settle the Greek debt. There has to be a brand new organization to set what are the rules for debts that are valid, and debts that are invalid?

The Greeks, three weeks ago, had a Debt Truth Commission. And they said, look, these debts are odious debts. The money that was ostensibly paid to Greece wasn’t paid to Greece at all. It was paid to the French banks and the German banks. And other European bondholders. Greece didn’t get any of this money. It’s as if, suppose that you have a house and a bank comes to you and–you think you own the house free and clear. And a bank comes to you and says, well, you have to pay us a mortgage, because somebody in the next block just took out a mortgage on your house, and so now you have to pay it.

And you can say, wait a minute, that, I didn’t take out that mortgage. There was no basis for that. I never signed anything. That’s what Greece is saying when Papandreou, the former prime minister, said he wanted a referendum four years ago about the loan to Greece, Angela Merkel and the French President Sarkozy said you can’t have a referendum, they’ll vote no. so they knew that what they were doing was anti-democratic.

So the Greeks now are, the only court they have to go to is the European Court of Human Rights, and they intend to go to the European court and to say this is an odious debt, we don’t owe them money. And of course it’ll take years and years for them to say that. They’re going to the European court of justice and saying that they’re not treated as a country should be treated. They’re singled out because basically the European Central Bank says, you have to follow the right-wing policy that our bank clients want, and basically the crooks behind us want. And essentially the European Union has been captured by a group of financial gangsters. That’s the story in a nutshell.

PERIES: Michael, let’s take up this issue you’re raising about odious debt, what it means, and then what Greece can actually do in our second segment. Thank you so much for joining us.

HUDSON: Okay. Thank you very much.

PERIES: And thank you for joining us on the Real News Network.

Part 2

PERIES: Welcome back to the Real News Network. I’m Sharmini Peries coming to you from Baltimore. And I’m in conversation with Michael Hudson about the Greek financial crisis and the debt that is owed to its lenders, ECB, the IMF, and other lenders that come under their auspices. And we’re talking about what Greece can do, what solutions and mechanisms should there be in order to address these kinds of situations that we are faced with, and Greece in particular.

Michael, thank you so much for joining us, again.

HUDSON: Good to be here.

PERIES: So Michael, earlier you were calling the debt that Greece has an odious debt. Describe what that is, and explain the mechanism that you have derived that could possibly deal with the debt crisis.

HUDSON: The term odious debt is a legal term. It was invented earlier in the century, almost 100 years ago, for debts that are basically wrong, that are taken over by a non-democratic government in the name of the people, and paid to themselves or to their clients. And then you try to shift this debt onto a country’s taxpayers. And international law, such debts don’t have to be paid.

Well, that’s exactly what happened in Greece. The loans that were made to Greece were not really made to Greece. Greece was only a vehicle for the European Central Bank and the International Monetary Fund to pay bondholders to make a killing. The bondholders that had bought Greek bonds for 30 cents on the dollar were all of a sudden paid at 100 cents on the dollar. This made hundreds of billions of dollars for speculators and insiders. And then the European Central Bank said, just like we made Ireland’s government pay for all of the crooked debts by the Irish banks to bondholders, and make the Irish taxpayers pay, so we’re going to make you, the Greek taxpayers pay.

Well, one of the principles of odious debt is a principle of–similar to what’s called fraudulent conveyance in the United States. Under U.S. law if somebody makes a loan to another person, or a company especially, when you know that the company can’t pay, suppose that you see somebody who owns–a widow who has inherited a house, a home, and she doesn’t have much money. But the home is worth, say, a few hundred thousand dollars. Suppose you lend her maybe $1000 to help her buy groceries. And then all of a sudden you say, well, it’s collateralized by the house. And then you say, well, all of a sudden, before she gets her next welfare check to pay it back you say, well, now repay us. Oh, you can’t pay? We’re going to grab the house.

That’s considered an odious debt. That’s considered a fraudulent debt, because the purpose, the lender had no idea at all how the creditor could repay in the normal course of business. During the 1980s, a lot of corporations in America were taken over by high-interest junk bonds. People would borrow a lot of money, take over the company, and then they’d empty out the pension funds. They’d sell off the parts and break them up. And the companies tried to protect themselves by suing under the law of fraudulent conveyance.

Well, this is very much what is done to Greece. The European Central Bank says, we will lend you even more money. We know that you can’t pay, and we’re not even going to discuss whether you pay or not. We’re going to lend you money, and if we don’t lend you money we’re going to smash all of your banks. We’re going to stop the bank internet payment. We’re going to stop supplying you with money, and we’re going to drive you bankrupt if you don’t agree to sell off your public domain, as we’ve discussed in the previous issue.

Now, all of this is illegal under the odious debt law. And so finally the Greek ruling party now, the Syriza, is preparing a legal case to say, to go to the European court of justice, and say this is an odious debt. What we need is–we’re not going to go to the IMF, because that’s a kangaroo court. The IMF people are tunnel-visioned doctrinaire people who are trained simply to calculate, what do you have to repay? We’re coming in and we’re smashing and grabbing. [Inaud.]

PERIES: Michael, is there a precedent set for an odious debt case involving a nation?

HUDSON: Not really. The closest precedent was in the 1920s for German reparations debt, and for inter-Allied debt. And the Young Plan created an international forum that decided these debts shouldn’t be paid. And there was a moratorium in 1931 and then again in 1934. So in practice, people have followed them without ever creating a court, without ever creating a legal body to say, what is an odious debt, and where do we draw the line to say if Greece can only earn so much, how does it have to pay? There’s no vehicle at all to do that.

And so what Greece has to do in effect is reinvent the wheel. It has to say, look, there has to say some body of law as an alternative to anarchy. Because under anarchy, the central bankers can come in and grab whatever we want, or try to bankrupt us and drive us out of the Eurozone, and create just a disaster here. And it’s–there should be a principle that if a country is a sovereign country, it has the right to say we can, [here] are the terms on which we can repay the debt. That’s part of international law since 1648. That was the year when the 30 Years’ War ended and the whole definition of a state came into being. And the definition of a state is the ability to issue its own money, the ability to set its own taxes, and the ability to set its own laws, as well as the ability to go to war.

And Greece has that right, and the Eurozone is saying, wait a minute, you’re part of the Eurozone now. And even though the Eurozone doesn’t have a parliament, even though in the absence of the Eurozone having a political entity, you have to do what the bankers say. And we bankers work for a bunch of very, very wealthy Europeans and foreign investors. We want your land. And it’s basically as if the mafia have taken over Europe. And suddenly Greece is saying, my God, we have to save Europe from these crooks.

PERIES: Michael, you have a specific proposal how to address these kinds of odious debts, and how to provide a, as they say, a haircut or a debt reduction plan. Describe what that looks like.

HUDSON: Well, for the last few weeks I was in Greece, and also in Brussels, talking to politicians mainly on the left to say, here are the principles of an international organization that we insist being created. We don’t have a name for it yet, but it’s not going to be the IMF, it’s not going to be the European Central Bank, it’s not going to be a bank where the U.S., where Wall Street has veto power under U.S. power. They’ve talked to the BRICS bank, they’ve talked to Russia and China, talked to other countries. And it may very well be that they work with the BRICS bank to help us create and sponsor an international agency that will do what almost all the economists from the left to the right agree that has to be done, write down the debts.

The European Central Bank and the IMF are not run by economists. They’re run by lawyers. Christine Lagarde, the head of the IMF, was an anti-labor lawyer. They worked for firms to smash up labor. That’s the job of the IMF. It’s not to help countries how to balance a payments deficit. It’s to strip away their pensions, cut their wages, and make them more competitive under the pretense that any country can pay its debt if it only will reduce its wages and living standards by enough.

That’s an odious concept. That’s the right-wing concept, and it’s effect is it’s downright evil. And that’s what finally the Greeks are coming out and saying, that the way in which the financial system is structured now is anti-human, against human rights, against national sovereignty, and it’s pretty much what in the vernacular is called evil.

PERIES: Michael Hudson, thank you so much for joining us today.

HUDSON: It’s really good to be here. Thank you, Sharmini.

PERIES: And thank you for joining us on the Real News Network.

End

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