Who Owes Whom?

I spent my Easter weekend this year in an exciting meeting of social movements focused on rejecting the debt at source: on conducting a series of Citizens' Audits to ascertain exactly how we came to be in this disastrous position and to ask the question, Who really owes to whom? And why should the tiny percentage of the super-wealthy continue to extract such a vast share of the common wealth of nations? This is empowerment as an alternative to austerity.

In the room were around 60 activists from across Europe and the newly liberated countries of the Middle East. Countries represented included France, Egypt, Poland, Tunisia, Italy, Greece, Portugal, the UK, Ireland, Germany, Belgium, and Spain. In each country, popular movements have grown up to resist the disfiguring of societies that austerity brings, some with more technical approach to debt audit, some with more direct campaigning responses.

In Spain the campaign against the debt was launched in October 2011 under the rubric 'We don't owe; We won't pay'. A coalition of social and ecological movements, trade unions and political parties. Their objective is a general one: to raise the issue of the debt nationally and regionally and to challenge the perceived inevitability of austerity policies. This campaign is less focused on the specific technical aspects of debt audit, rather the campaign for an audit is used as a vehicle to demand a real democratic debate about the national debate and its social and political consequences. The aim of the campaign is to change the political model, taking power from the financiers and giving it back to the people. A special conference on the process of debt audit specifically will be held in Catalonia in October 2012.

In Greece the campaign against an unquestioning policy of austerity and in favour of a open discussion about policy alternatives forms an umbrella within which a number of groups operate including three who were represented in Brussels: Comite grec contre la d'être, No debt no euro, and the Greek Debt Audit Campaign. Specific investigation of the debt itself has been undertaken mainly by the third of these, and has consisted of research into single-issue examples of illegitimate debt. Overall the campaign is working at the level of popular education to share and explain the idea of debt audit and debt cancellation. The defining characteristic of the Greek crisis is a failure of trust elites and particularly where money is concerned. For this reason the Audit campaigners do not feel able to consult experts or to seek funding to pay economists or accountants to study the government accounts. In the current context they feel that this would only lead them to lose credibility in the eyes of the public. For this reason they undertake to forensically analysis the debt using the data they can gain access to, and in a voluntary capacity.

In Portugal the campaign against the debt was launched officially in a big public meeting on 17 December 2011. The focus is on working towards a full-scale public debt audit although, as we were told at the conference, 'All initiatives of resistance and a new social paradigm are unequivocally indispensable at this moment'. The aim of the campaign is to produce technically reliable results from a thorough analysis of government accounts. In the mean time, however, the campaign process itself is providing the opportunity for considerable public education. The common sense view in Portugal, as in many European democracies, is that the debt must be paid: that there is no alternative. The campaign has achieved widespread media coverage and is organising a roadshow to take its message around the country. One particular campaign is the launch of a legal action against accountants Ernst and Young, who have been found to be auditing companies they themselves work for in a way that may raised questions about the ability to provide independent audit.

From Egypt we heard from Noha el Shoki, of the Campagne populaire pour l'audit. A trained economists she told us of her campaign's goals to suspend payment of the foreign debts inherited from the Mubarak era and to enter into negotiations with debt holders. They have a rather dubious history of such 'rescheduling', such as the 40% downgrade in foreign debts that Mubarak was allowed in exchange for his support for the Iraq War. The campaign is undertaking a technical exercise to audit their country's national debt from this point. They are meeting with the new parliament's public accounts committee and are being well supported with information. Less encouragingly, Noha told us that during the period between the overthrow of Mubarak and the election of the parliament, Egypt was allowed to borrow at 8 times its previous annual rate, acquiring illegitimate loans that the new democracy will now be forced to pay back. These loans were agreed in documents that were not even translated into Arabic.

A similar situation arose in Tunisia, which will host the World Social Forum in April 2013. Fathi Aloui told us how the national debt is preventing the fledging democracy from succeeding. As in Egupt, during the interim between old and new regimes, Western countries massively increased their loans for questionable projects, tying Tunisia into future debt bondage. On 17 January 2011, three days after Ben Ali was ousted, the World Bank took control of the Tunisian Central Bank. The campaign is seeking to make these facts known to the Tunisian people: without economic democracy political democracy is worthless.

Ireland is, in some ways, the most inspiring example, since three academics from the University of Limerick have already completed and published an audit. The Audit drew some interesting conclusions about the relationship between the Irish state and financial speculators:

'The profile of investors in Irish sovereign debt has changed significantly since the Irish banking guarantee was put in place in 2008. Prior to the crisis, Irish debt was viewed by the market as a low yielding, low risk asset and it usually found a home on European banking books, insurance companies and pension funds. The crisis has changed the nature of Irish sovereign debt and has led to the creation of a number of credit instruments that affect the credit risk of the Irish sovereign. Over the past three years the trading activity in Irish sovereign debt and related instruments has been unprecedented both in terms of volume and trade-type.'

Once the state was guaranteeing returns, the market was open for profiteering and extortion, spiking in 2011 when returns were at their maximum. The academics also question the democratic acceptability of having secret bond-holders owning government debt.

In Britain we are still at the early stages of building a coalition to call for a Debt Audit. A technical exercise is useful, but if nobody notices its findings then it does not take you very far. Instead we need to build an ideological movement to reject the austerity vs. growth dichotomy and find a third way of trascending debts and moving towards a stable and sustainable economy.
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Can't Pay Won't Pay

It was three years ago that I first used this title in an article I wrote for the Welsh left magazine Celyn (it means holly). Back then I argued that:

‘The implications of the public-spending cuts caused by bailing out the banks on such a massive scale are devastating. Borrowing announced in the budget amounted to £175bn. in 2009/10 and a huge £701bn. over the next five years. If you add in our liabilities for bad debts we have ‘insured’ (since they are already bad debts it seems certain that we are going to have to pay these liabilities) then the total we are in hock for is more than twice the value of all the activity in our economy for a whole year. Just the interest on this borrowing is more than £40bn., about a third of total NHS spending in any one year. Following this year’s budget public spending will fall from 48% of national income to just 39% by 2017-18.’

My conclusion was:

‘So this can be our political demand: an international debt jubilee to relieve the working people from the slavery of repaying mountainous debts for which they are not responsible.’

Although in Britain the majority have accepted the Big Lie about the public debt being our fault and our responsibility to repay, across Europe a movement for debt relief is spreading like wildfire, and expressing itself in the form of citizens' debt audits. In Ireland the process was rather academic and not political, but resulted in a popular call to abandon expensive attempts to support 'zombie banks'. In Greece the audit committee has become the focus of a nationwide campaign for an alternative economic policy. A civil society movement is building in France where it was launched at a meeting of 700 people in Paris in January.

This is the opportunity offered by the debt crisis: the old route of passivity and Danegeld has broken down in the face of the excessive greed of the owners of capital. What stands before us is the prospect of an economy based on equality and participation. The rest is up to us.
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Ten-Point Stabilisation Plan

Spurred on by my recent realisation that I am better qualified for the job than Christine Lagarde, I have put together a modest proposal to resolve the turmoil in the global financial markets. Please send it around, discuss it with your friends, and most importantly: improve upon it.

The most obvious feature of the current crisis in the Eurozone, and the longer-term crisis over the rebalancing of power in the global economy between east and west, is the way that it is happening in a political vacuum. The sense of failure of politicians to manage these historic developments risks exposing us all to an extended period of chaotic change during which the vulnerable suffer.

This short statement is a summary of what it would mean for politicians to act in the interests of their electors to protect them against financial instability. It begins by listing the assumptions that are framing, and limiting in an unhelpful way, the present debate. It then moves on to propose 10 specific actions which need to be taken; further explanation for these actions and greater detail is provided in the following notes.

Failed Assumptions

The most striking feature of the present crisis is the limited range of policy options that are included in the discussion. The most constructive actions are being ruled as ‘impossible’ because of a number of mistaken assumptions which should now be abandoned. These include:

• That markets are efficient while politicians are not;
• That the problem of finance is essentially technical rather than political;
• That politicians should not have a role in managing the flow of money and credit within and between national economies.

Our proposal rests on the understanding that we need politicians to take strong and wide-ranging action to support the interests of their citizens rather than responding to the increasingly incoherent and inconsistent demands of a range of financial interests.

10-point Stabilisation Plan

1. The announcement by the finance ministers of the world’s leading economies of a six-month moratorium period during which all trade in their currencies and their bonds will be suspended.
2. During the period of moratorium, the negotiation of a global international agreement to create an agreed system of political control over finance.
3. The creation of a new reserve currency instrument, not linked to any single national economy.
4. The linkage of the new reserve instrument to carbon dioxide emissions.
5. The reintroduction of national democratic control over currencies, with a system of negotiated exchange between currencies.
6. The reintroduction by national governments of strict reserve requirements on their national banks and a parallel system of rationing of consumer credit.
7. The creation of public banks to provide a safe haven for citizens’ deposits and with lending designed to facilitate the transition to a sustainable economy.
8. The creation of an independent body to undertake the monitoring of country’s sovereign debts and the rating of their credit-worthiness. The majority of the membership of this Global Audit Committee should be comprised of academics and laypeople, rather than those who work in the finance sector.
9. The creation of national Audit Committees to evaluate the process by which current debt was acquired; where this debt was acquired by a process that was not in the interests of the citizens of the country it would be possible to repudiate that debt.
10. The elimination of secondary markets trading in the debt of nation-states and the establishment of a global body to register all derivative instruments on the basis of their ability to increase social and/or environmental welfare.

Notes on the Plan

1. At present politicians are finding it impossible to act because of fear of the immediate response from the financial markets. The moratorium would give them the space to consider a policy proposal.
2. Following the last period of international financial instability in the 1930s, which ultimately led to the Second World War, a global agreement to govern international finance was signed at Bretton Woods. It was gradually abandoned following the US’s unilateral decision to cut the link between its currency and gold in 1971, however, the role of the dollar as the global reserve currency, which depended on the link with gold, has continued. The story is told by Paul Davidson in ‘Reforming the World’s International Money’.
3. The role of the dollar as a national currency of the world’s largest economy, as well as the international numeraire, is a key cause of the instability in the global financial system. Such a call was made in UNCTAD’s Trade and Development Report 2009. Earlier this year the IMF proposed that its Special Drawing Rights might play such a role (Enhancing International Monetary Stability—A Role for the SDR?), however the lack of neutrality and representativeness of the IMF undermines its credibility in making such a proposal.
4. This linkage, first suggested by Richard Douthwaite in The Ecology of Money, would enable the new reserve currency to also introduce an ecological limit on the global economy, in contrast to the current emphasis on a return to rapid economic growth whatever the environmental consequences. A discussion of the proposal can be found in Molly Scott Cato’s paper ‘A New Financial Architecture based on a Global Carbon Standard’.
5. The fact that the Chinese currency the Renbinmi is under political management by the state has attracted attention in recent discussions, but less has been made of the fact that until the 1980s most western economies also managed their currencies. The history of exchange controls in the UK between 1939 and 1979 is described in an article by Brandon Hugget in the National Archives.
6. The financial crisis of 2007/8 was clear evidence of the failure of the Basel process for determining the capital requirements for banks, which is unsurprising given the domination of the financial interest in these negotiations. Simon Johnson, former Chief Economist at the IMF, has made this case in an article ‘Capital Failure’ published in the New York Times. Since as was made clear following the crisis, the citizens of nation-states are the ultimate guarantors, it should be the role of their democratic representatives to ensure that banks do not take on more liabilities than they are able to support.
7. Such a bank could operate in a way similar to the Banco do Brasil, which is state-controlled and uses credit to support the interests of the citizens of the country, while also providing a place for them to invest their savings.
8. Such a body would replace the increasingly discredited credit-rating agencies. It has long been apparent that these agencies have fundamental conflicts of interest, since they profit from the very system that they are established to monitor. They have also faced criticism for their failure to accurately assess the risk faced by banks as a result of the range of ‘exotic’ financial products before, during and since the financial crisis of 2008. Such a crucial role as assessing the costs national governments should pay for their borrowing should be undertaken in a democratic and transparent way. President of the EU Commission Jose Manuel Barroso is one leading European politician to have challenged the role of these US-based institutions; German Chancellor Angela Merkel another.
9. The prototype for such and Audit Committee is that established by President Correa following his election as President of Ecuador in 2005. In spite of the country’s oil wealth poverty was widespread because 50% of national income was being spent on servicing foreign debt. The Audit Committee was established to investigate who the creditors were and how they had persuaded governments to take on the debt. Eventually, it found that some 70% of the debt was illegitimate and the creditors were forced to sell at reductions of around 90%. Audit Committees have now been established in Greece and Ireland.
10. Such a proposal would help to democratise this centre of power in the global economy. During the process of registration, the onus will lie on the product’s originator to demonstrate that it is beneficial and there is no alternative way of achieving the same purpose. The root cause of the financial crisis was the deliberate obfuscation on the part of financiers of the riskiness of the activities. Under this proposal, only those derived investments which can be demonstrated to have a social value, say by spreading risks over a wider group of people, would be permitted.
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