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Illegitimate international debt

March 10, 2015

How do you declare international debt illegitimate?

When is debt so odious that the taxpayers of a government have no obligation to pay it back?

This is a huge, important question. It’s a question currently plaguing Argentina and Greece, for example. Individuals in both countries have explained to me that the debt was taken on by previous regimes that stuffed their own pockets, and then amplified by terrible deals with predatory investment banks. The average individual citizen feels very little personal responsibility to pay that debt back, consisting as it does of interest payments to the banking system.

The movie we showed at Alt Banking last week, Who’s Saving Whom, also made the case that Spain could declare its taxpayer debt illegitimate, considering that the banking system got bailed out on the taxpayer dime.

Well, now the Center for Global Development has come up with an idea in this direction, called Preemptive Contract Sanctions (hat tip Philip Sterne). They’re aiming it at Syrian debt for Russian arms, and claiming that this debt is odious and illegitimate from the outset. The idea is, if the international community can get together and agree that such debt is odious, and that they will not lift a finger in the future to help the borrower get their money back, then it would be harder to borrow the money, and maybe even impossible, and it wouldn’t saddle future citizens of Syria with that burden.

It’s an interesting idea – see the video here:

It wouldn’t necessarily help solve the current debt crises of Argentina and Greece, which built up over many years, but I like the idea of all debt living on a spectrum of morality. Too often when contracts enter the financial system, they are utterly sanitized and legitimized in the eyes of the international community.

Categories: economics
  1. March 10, 2015 at 8:24 am

    As far as I know Greece held democratic elections, and the people elected both the current and previous governments or regimes. Same with Argentina.

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    • March 10, 2015 at 10:18 am

      That argument might carry some weight if “We will take out huge debts in your name at ruinous rates of interest” was in the relevant manifestos.

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    • ScentOfViolets
      March 10, 2015 at 11:38 am

      I’m not connecting the dots. Why don’t you explain what you mean. In detail.

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    • Bobito
      March 11, 2015 at 3:14 am

      Holding democratic elections and functioning democratically are completely different things as is evident from a cursory glance at the state of affairs in almost any developed country. When the only candidates&parties are toadies of the banking, energy, and military system, what good does it do to have democratic elections? It’s better than simply appointing a Putin, but it’s a long way from guaranteeing democracy. Democracy consists in far more than voting once every four or five years.

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  2. cat
    March 10, 2015 at 12:39 pm

    I am guessing that abekohen is saying if your fellow countryman elect someone to public office the office holder now can loot the gov’t coffers and the taxpayers will have to foot the bill because its not illegal to sign a bad deal and then lie about it to the voters.

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  3. Arthur Wilke
    March 10, 2015 at 4:37 pm

    The Center for Global Development looks to use Max Keiser’s tag
    a variant of the “financial wars of mass destruction” though it
    targets not financial interests roaming the globe, but in the
    example particular “suspect” countries such as the US-NATO
    nemesis, Russia. In such cases as Russia as a lending country,
    the borrowing country (Syria) would not be held liable should
    the Assad regime fall..

    For background, Greek debt rose to 100 percent of GDP around
    1994 and hovered about this ratio from 1994-2005:
    http://www.tradingeconomics.com/greece/government-debt-to-gdp.
    Since 2005 and especially beginning in 2009 the Greek Debt/GDP
    ratio has dramatically increased.

    What are the contributors to the spectacular increases in the Greek
    debt/GDP ratios. Some questions (and likely others) look worth
    further investigation such as:

    1. Has Greece’s economy nose-dived so badly to reduce the denominator
    (GDP) by such a precipitous amount?

    2. Has Greece incurred more debt through a suppression of GDP growth
    due to a decline in the global economy and imposed austerity measures
    thus contributing to the numerator in the debt/GDP ratio?

    3. Has Greece incurred more debt to roll-over old debt but a higher
    cost (higher interest rates)?

    4. Is there a significant portion of Greek sovereign debt denominated
    in non-EU currencies that have appreciated in exchange value
    in recent years thus inflating the interest payments and
    payment on principal?

    The Debt/GDP ratio beginning around 2002 (a stable time in the
    2000-2008 period) looks in need of review given the financial
    activities private banks undertook to “assist” the Greek government
    to get membership into the European Union.

    Before embarking morality narratives (the German public has been
    sold on the notion of the “lazy Greeks” as “the problem”) that might
    duel with other ones, some more illumination of the world of
    international finance looks in order as well as economic discourse
    which economist critics such as Steve Keen note is notorious in
    ignoring three components in macro economics: banks, debt and
    money. The exclusion is exhibited by many who use kitchen table
    analogies about things like debt and obligations.

    If the Center for Global Development’s policies were in force after
    World War I, U.S. financial interests would have simply had to gobble
    up their reparations losses liked to Germany and financially strapped
    European countries to which credit was extended. Some of these
    have been renegotiated. And Germany which was in dire straights
    after World War II had portions of its loans “forgiven” (lenders took a
    haircut).

    In the recent case of Argentina, the bankruptcy led to a restructuring
    of the loans with lenders taking a “hair cut,” agreed to by about 92
    percent of the lenders while at least one vulture fund has survived in
    U.S. federal court in its claim that the full face value of bonds it
    purchased at a deep discount are to be paid the agreed upon interest
    and are to be redeemed at full-face value.

    It looks, at least to me, to be a tangled state of affairs.

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  4. Alina
    March 10, 2015 at 8:30 pm

    Reblogged this on Alina's Blog.

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  5. Danon
    March 10, 2015 at 9:55 pm

    The Greek debt doesn’t surprise me. This had happened in many African countries since the 80s eloquently described by William Easterly in his 2001 book “The Elusive Quest for Growth”, Chapters “The Loans that Were, the Growth that Wasn’t” and “Forgive Us our Debts”
    summary: http://abridge.me.uk/doku.php?id=the_elusive_quest_for_growth
    http://www.slideshare.net/beezual/the-elusive-quest-for-growth-book-presentation (slides 35–55).
    I was born and lived for more than twenty years in one of the African countries Easterly mentioned in his book.

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  6. Bobito
    March 11, 2015 at 3:12 am

    The average citizen *(or non citizen who pays taxes) has no obligation to pay back debt assumed, in general, without her constent or knowledge. It’s not just the governments of Greece and Argentina that were conniving thieves. It’s also the banks that connived with them, knowing full well what they were doing with the money loaned, and the governments of the USA, UK, Germany, etc. that supported and continue to support the lying, cheating, thieving, no tax paying, usurious banks that made the loans. Knowingly making a loan to a corrupt government is itself corrupt.

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  7. March 11, 2015 at 2:30 pm

    I don’t think ethics is a good way to understand or judge sovereign states. The government of Greece is beholden to the citizens of Greece, and is supposed to act in their interests. It should refuse to pay the debt if it is in the interests of Greece not to pay it (knowing that this would create problems in contracting debts in the future), and pay it otherwise. The past cannot be changed; what matters is the situation today, and how today’s actions will affect the future. I haven’t thought about things enough to have a solid opinion on this; Varoufakis has and is qualified to make this decision.

    Accepting the bailout seems to me to have been a mistake (it was mostly done to save the banks that had previously loaned to Greece from their bad investments), but Syriza today can’t change that. The original loans are even less relevant today. Also, the effect on Greece in the future is largely independent of the reason the debt was contracted. It may be that by painting the debt as illegitimate, Syriza could convince the markets that while this debt won’t be paid, future debt will be, but as far as I can tell this is the most mileage you can get out of this notion.

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