Posts Tagged ‘EU’

Loansharking Greece and odious debt.

datePosted on 10:57, July 7th, 2015 by Pablo

I do not purport to be an economist nor would I ever want to be. Theirs is a world of implicit assumptions and pseudoscience that only a brave few have challenged from within. However, theirs is also a discipline that in theory and practice can shape the fate of millions, which is why I pay more than casual attention to them. Thus it is that I came to ponder the financial situation in Greece, a place that I lived in in 2010 at the start of its downward slope towards the current moment (my wife has researched and written on matters of Greek political economy and I have an interest in Greek civil-military relations, so our stay was mutually beneficial). Here is my non-expert view of things.

When lenders charge interest on principal loaned, they prefer to have the interest paid rather than the principal. This loan repayment rationale, which is true for states, firms and individuals, keeps the debtor beholden to the lender so long as the principal remains unpaid. Over time, the interest accrued can well exceed the amount lent, which is perfectly fine from the lenders point of view but keeps the debtor permanently saddled in a cycle of interest payment unless the debtor earns additional income (revenue) that can be directed towards paying down the principal. Short of a lottery win, a pay raise or new sources of revenue, debtors on relatively fixed incomes are locked into the cycle of debt.

Greece is in that situation. Until 2008 it was servicing the interest payments on its debt to international lenders (mostly the European Central Bank, various national banks and private investors). Then the international financial crisis of 2008-09 hit, which had nothing to do with Greece per se but which drove up interest rates. With a stagnant economy and flat tax revenues, Greece quickly found itself unable to make interest payments and, in a dramatic revelation, announced in 2010 that it had been systematically underestimating its fiscal deficit in order to maintain interest payments on its debt at a sustainable rate. At that point many private investors dumped their Greek debt holdings and the IMF assumed a significant portion of them as well as some of that accrued by European public banks.

The Greeks were subsequently offered two “bailout” loans that allowed them to continue to pay the interest on their debt, which together with the principal now amounts to nearly 250 billion Euros. With interest set at approximately 4 percent annually, the figure is set to reach the half trillion euro mark in a few years. Even if interest rates were capped at zero, it is estimated that it would take Greece 81 years to repay the amount currently owed.

There are several questions arising from the Greek debt. Why, since the interest paid is now more than the principal borrowed, does not the ECB and IMF put a cap on the debt? Why did investors continue to offer loans to Greece when it turned out that the Greeks were fiddling the books, and that neither the principal or the repayment loans ever trickled down to the general public in terms of public goods and services? Why does it expect the Greek population to pay via austerity for the risky borrowing of Greek elites and the even riskier lending of European banks?

Asking the Greek people to shoulder the burden of austerity–in a country with 30 percent general unemployment and 50 percent unemployment for those under 30, with a massive brain drain of educated professionals, porous borders and deep cuts to public sector salaries, pensions and basic services–is akin to forcing the children of crack addicts to starve and swab floors in order to pay for the rehab treatment of their parents. And the outcome is just as uncertain.

Let’s look at it this way. Capitalism is about assuming risk for higher reward. In the financial world, the riskier the investment the higher the interest paid on it. And just like quick finance and pawn shops are located in poor rather than rich neighbourhoods, high interest bonds are issued on “risky” countries with poor credit ratings and histories of financial instability. For “courageous” investors riding the line between high interest and junk bonds, the rewards for so-called bailouts are great. But the downside of a default is that they will have to wear losses, just as many ill-advised investors have to.

Greece is one such high risk place and those who lent to it knew this from the beginning.

With that in mind is is easy to see that the behaviour of the “troika” (the European Commission, European Central Bank and IMF) can be (and has been) likened to loansharking and needs to be treated as such. When people seek debt relief from loansharks, banks or credit card providers, they arrange to repay a capped sum and a payment schedule is established. The alternative is bankruptcy, which leaves the creditor with nothing. Although suboptimal from the lender’s point of view, the capped payment alternative is better than nothing.

When it comes to states, the decision to cap debt is a political decision, not a financial one. That is because the stability of states is more important than the returns on risky investment, especially when ample returns have already been received, many creditors are no longer at risk and demands for future returns put state stability at peril. In the case of Greece there is a twist, in that the referendum on whether to accept austerity was the first political iteration in a multi-step process. Now that the Greeks have refused more austerity, it is the turn of the EC to make a political decision of its own.

Let’s be clear: this is not a Greek crisis; it is a crisis of European finance capital. The demand for more Greek austerity is not about servicing the debt but about humiliation, punishment and deterrence of others who might dare to do the same.

The people who should seek answers are those who invested in the agencies that undertook the high risk lending strategies that have brought us to this moment. The people who are responsible for the crisis are not average Greeks but suits sitting in fancy offices in Athens, Brussels, Frankfurt and London. They are the ones who took the risk on Greece and they are the ones who need to be held to account.

This does not absolve Greeks from their own mistakes. Certainly the culture of entitlement and the pervasive corruption in Greek society needs to be addressed. But here again, this was well known to foreign creditors at the time they lent money to Greece, and for all the everyday petty corruption in Greece involving phantom war veterans and people faking disabilities, it is the Greek political-economic elite who elevated institutional corruption to an art form. Syriza proposes to confront them as well as the lower-level scams but in order to do so it must show that it can negotiate a debt payment agreement that puts the interests of average Greeks first.

There is a way out of the imbroglio that can leave Greece in the EU without undergoing more austerity punishment. In international law there is a concept known as “odious debt.” Odious debts are those that are incurred by governments that do not go to their stated purposes or are ill-gotten from the onset. Under international law, odious debts are the responsibility of the incurring parties and are not the responsibility of their successors. As such, they do not have to be serviced by others if the responsible parties cannot be made to pay.

One can argue that the debt incurred by pre-Syriza governments from 1999-2008 fall into the odious debt category and should be forgiven as such. If anything the political parties in government during the time the debts were incurred can be sued for repayment (these being the Panhellenic Socialist Party (PASOK) and New Democracy (ND)). Whatever happens, it is clear that Greece has not seen the purported benefits of the loans incurred by previous governments (to include the now abandoned or derelict Olympic facilities) but it has paid more than its fair share of interest on them. By any reasonable measure the remaining debt is now odious.

In the end this is a cautionary tale with minor and major sub-plots. The minor plot is about sustainable debt and the limits of debt relief. The major plot is about the perils of political union. The EU needs to understand that how it addresses the minor plot will determine the conclusion of the major one.

Bonus read: Although I do not agree with some of his observations, Brian Easton has a nice short piece on the Greek situation here.

 

NATO toasts Putin.

datePosted on 12:18, March 27th, 2014 by Pablo

The end of the Cold War left NATO without its raison d’être. Its creation was predicated on the existence of an existential threat emanating from the USSR, one that would take the military shape of high intensity warfare: waves of armored columns crossing the central European plains backed by massive infantry formations covered by blanketing air cover and even tactical nuclear weapons. NATO was designed as a collective security arrangement whereby superior counter-force on the part of the US and its Northern Hemisphere allies served as a deterrent to Soviet aggression. That strategic orientation was at the heart of the Cold War.

With the Soviet Union gone, so was the need for that strategy. NATO first sought to incorporate, over Russian objections, former Warsaw Pact states into its embrace. Poland, Hungary and the Czech Republic joined first, followed by  Estonia, Latvia, Lithuania, Slovenia, Slovakia, Bulgaria, Romania and, most recently, Albania and Croatia. It shifted its focus towards multinational peace-keeping and peace-enforcement, irregular low-intensity conflict operations such as those in Kosovo in the late 1990s (the size, scope, pace, depth and range of weapons used in kinetic operations determine the relative intensity of combat). Later it cast its collective gaze further afield, involving itself in the International Security Assistance Force occupation of Afghanistan and the ouster of the Gaddafi regime in Libya.

The irony is that these strategic shifts did nothing to allay Russian concerns that NATO’s  primary focus remained on curtailing its ability to project force to its West and South, but in Western capitals the belief was that NATO needed to re-boot given the shifting geopolitical landscape and strategic priorities of the late 20th and early 21st centuries.

None of the new NATO missions substituted for those designed to counter the threat posed by the Soviet-led Warsaw Pact, and with the exception of the US, this was reflected in diminishing defense budgets, numbers of uniformed personnel and overall military significance within policy-making circles in member states. However it tried to redefine its core mission, NATO was increasingly seen by elites and public alike as a security organization without a purpose. Many felt that it should be disbanded and replaced by more flexible military agreements that would eliminate the costs of maintaining a permanent NATO infrastructure in Brussels and annually contributing, both militarily and financially, to its operations. It was believed in some quarters that this could be done without significantly impacting on any nation’s self-defense in what was seen as a largely benign European strategic environment where conflicts were more intra-rather than inter-state in nature.

It was for that reason that I penned this column as part of my late “Word from Afar” series as Scoop.

Now, thanks to the Russian invasion and annexation of Crimea, that has changed. In the eyes of its champions, NATO is once again confronted by hostile Russians on its Eastern flanks. Not surprisingly, US and European military-security officials, especially but not exclusively in places like Poland, have been quick to raise the specter of Russian imperialism in the former Eastern European bloc, calling for a revitalization of NATO’s original primary and core concern: containing the Bear.

The justification for NATO revitalization is based on the belief that Putin will not stop in Crimea or even the Eastern Ukraine, but has intentions to at the very least “Finlandize” a number of former Soviet Republics on Russia’s border that he feels have gotten too politically close to the EU and their Western neighbors. Given that the uprising in Ukraine was seen as a vote in favor of closer ties with the EU, the Russian response in Crimea is taken as indicative of its approach towards other “pro-EU” governments in its near abroad.

Just as Putin was able to capitalize on Russian nationalism as a generator of support for the invasion of Crimea, so too can conservative politicians in many European states use his actions as a catalyst for nationalistic appeals. Fear of the Bear is widespread and often visceral in many parts of Europe, especially those that suffered under Soviet occupation or at the hands of Soviet troops during the Great War. They and their descendants provide receptive audiences for anti-Russian appeals made on both politically opportunistic as well as principled grounds.

This is music to the ears of European defense bureaucrats, even if the US is not quite as capable of shouldering the burden of their collective defense in the measure that it once used to. For European security elites, the good ole days of robust defense spending, new weapons acquisitions, force expansion and significant military say in national policy making are now set to replace the politics of austerity and neglect that characterized the post Cold War period. Security decision-makers will make the argument that resurgent Russia is as much a threat today as it was back during the Cold War, even if its reach is now more regional than global in scope and its power is derived as much from its energy exports as it is from its military capabilities. Their argument will dove-tail nicely with those of anti-Russian nationalists, so the die is set for another re-casting of NATO’s mould.

Of course, while NATO went through contortions of re-defining itself after the Cold War, Russian strategists continued to focus primarily on defending their land borders and promoting Russian influence in neighboring states so as to provide a buffer to would-be aggressors, particularly from the West. For the Russians the “liberation” of Crimea is just a natural and justified reaction to the steady erosion of Russian influence in regions in which it has core historical, cultural and political interests. It is this “natural” reaction that has prompted the calls for NATO’s strategic re-orientation, which in turn means that the two strategic visions have once again been counterpoised.

This will be welcomed by Russian military and NATO officials because it marks the return to the common logics of collective defense that justify their positions and the arguments for counter-force deterrence that bound them together in opposition during the Cold War. However, for the citizens affected by a return to Cold War logics the prospects may not be so rosy.

Whatever the case, there are bound to be more than a  few NATO officials quietly hoisting a glass in honor of Vladimir Putin, for it is is he who has given them importance once again.