Why Greece’s Debt is Illegal

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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 –   July 10, 2015


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

But government debts are something different. There is a deliberate anarchy that’s been imposed, especially since World War II, to prevent a discussion of governments writing down debt. 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 anarchy if a government says it can’t pay.

It’s obvious that a lot of governments can’t pay, above all Greece. Normally, governments have been able to renegotiate debts with bondholders. There’s a market in government bonds. By 2010-12 the marketplace had priced down Greek government bonds to about 30 cents on the dollar. That means that the markets believed that maybe Greece could pay a third of its bonded debt, not more.

But central banks today have something else in mind besides writing down debts. It’s not really economic, and it’s not really financial. It’s political.

If you look at how the European Union has been organized, it doesn’t have any common governing organization. There’s no real parliament able to set European-wide tax rules, 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 privatization giveaways.

So 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 that Greece needs a writedown, it can’t pay the debt. A week ago the International Monetary Fund said that it 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 also knows that Greece 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 the EU approves.

For comparison, imagine that all of a sudden there was a financial crisis in America, and Governor Chris Christie of New Jersey or Mayor Rahm of Chicagowere put in charge of selling off the public domain. They’d sell to their cronies. They’d sell to their insiders. That’s basically what the European Central Bank has told Greece to do.  Two years ago, the right-wing parties that ran Greece 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. But the ECB said no. Operating on behalf of NATO and the New Cold War, they told Greece to sell to their appointees at a lower price.

Greece said, wait a minute. You’re telling us to sell off the public domain, to privatize to people who are going to charge more to use the roads, charge more for public health, charge for the islands, and drain us. You want us to sell to the crooks that the Greek people have just thrown out?

They knew Greek politicians have accused the ECB of backing the most anti-democratic individuals. Quite frankly, they’re gangsters. From the beginning, Syriza’s Varoufakis and Tsipras saw that the European Central Bank was operating with its own agenda. Even the IMF said that the ECB had to write down the debt that Greece owed it. But instead, the European Central Bank said, “We’re in control. We insist that you do exactly what the previous parties were going to do” –  the parties that were voted out of power in January. “You must sell off your land and privatize, and basically wipe out a big chunk of your pensions. You need 30 percent of your population to emigrate within two years. You have to create a permanent austerity crisis. If you don’t do this and agree to it, we’re going to wreck your banks and cause chaos.”

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 we go from here is, Number One, we need a new international organization to adjudicate how much can a country pay. This was done in the 1920s, when Germany couldn’t pay reparations without tearing itself and Europe apart. It is ironic that Germany was a beneficiary of this in the past. The world recognized that if it tried to bankrupt Germany any further, it would cause the kind of chaos that ended up bringing the Nazis to power. So they created the Bank for International Settlements under the Young Plan in 1929, to rule on how much the government could afford to pay. The Young Plan and Bank for International Settlements scaled back German reparations to what the country could pay.

The guiding principles of this measurement were put forth by John Maynard Keynes. He said if creditors have a claim on a government, it’s their job say, to tell Germany or other debtors, “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 selling off assets. But all this theoretical background dealing with the capacity to pay has been stripped away from the economics curriculum. I give a summary of all of this in my book of lectures for my course on international economics: Trade, Development and Foreign Debt, which summarizes the 1920s debate.

At that time you had a legal mechanism to adjudicate debts. But after World War II, and especially today, you have a right wing ideology and group of inter-governmental institutions that leave no alternative but for a government to ask for a new honest broker.

One problem is that the IMF can’t be an honest broker, because it’s traditionally run by a Frenchman. The French have been major holders of Greek debt. So there’s an inherent conflict of interest in trying to settle the Greek debt. There needs to be a brand new organization to set rules for what debts are valid, and what debts are invalid.

Three weeks ago the Greek Parliament issued a report by its Debt Truth Commission. They found that most of these official debts are legally odious debts. The money that was ostensibly paid to Greece wasn’t really paid to Greece at all. Most was paid to French and German banks, along with other European bondholders. Greece didn’t get this money. It’s as if, suppose, you have a house and own it free and clear. But 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.

You can say, “Wait a minute, 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. That means it was odious, politically speaking.

So the Greeks now are going to the only courts they have, the European Court of Justice, and claim that this is an odious debt, so they don’t owe the ECB and IMF money. Of course, the case will take years and years to settle. Greece will say that it’s not treated as a country normally is treated, but is being singled out. The European Central Bank insists on a regime change, telling Syriza to follow the right-wing policy that its clients want, and the crooked insiders behind them. You could say that the European Union’s financial institutions have been captured by a group of financial gangsters.


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, or ones that are taken on by a non-democratic government in the name of the people, but paid to themselves and their backers. Then they try to shift this debt onto a country’s taxpayers. Under international law such debts don’t have to be paid.

That’s what happened in Greece. The loans made to Greece by the International Monetary Fund and European Central Bank were not really made to Greece. Greece was only a vehicle for them to pay bondholders, who made a killing. Many bondholders had bought Greek bonds for 30 cents on the dollar, and ended up getting paid 100 cents on the dollar. This made tens of billions of dollars for speculators and insiders. Then the European Central Bank said, “Just like we made Ireland’s government and Irish taxpayers pay for the crooked debts by the Irish banks to bondholders, we’re going to make you, the Greek taxpayers pay.”

One of the principles of odious debt is 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) but knows that the company can’t pay, it’s a fraudulent loan. Suppose that you see somebody who owns a home – a widow who has inherited a house, but doesn’t have much money. Suppose 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, before she gets her next welfare check to pay it back, you demand payment. She can’t pay. So then you try to grab the house.

That’s considered a fraudulent debt, because the lender had no idea 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 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.

This is much what has been done to Greece. The European Central Bank says, “We will lend you 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 you don’t do as we say, we’re going to smash all your banks. We’re going to stop the bank internet payment. We’re going to stop supplying you with currency, and we’re going to drive you bankrupt if you don’t agree to sell off your public domain.” That’s what we’ve just discussed in the previous segment.

This is illegal under the odious debt law. So finally the Greek ruling party, Syriza, is preparing a legal case to go to the European court of justice and claim that this is an odious debt. 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 how much a country has to pay. If it can’t pay, they come in and smash and grab.

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

HUDSON:. The closest precedent was in the 1920s for German reparations debt, and for Inter-Allied arms debts stemming from World War I. The Young Plan created an international forum that decided the Versailles Treaty debts couldn’t be paid as scheduled. There was a moratorium in 1931 and then again in 1934. So in practice, people have followed the principle without ever creating a formal court, a legal body to rule on what an odious debt is and where to draw the line to say if Greece can only earn so much, how much does it have to pay. There’s no vehicle to do that.

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 they want, or try to bankrupt Greece and drive it out of the Eurozone, and create a disaster.

There should be a principle that if a country is a sovereign country, it has the right to say “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 definition of a state came into being. A state is defined as having the ability to issue its own money, levy its own taxes, and set its own laws, as well as the ability to go to war.

Greece has that right, but the Eurozone is saying, “Wait a minute, you’re part of the Eurozone now. Even though the Eurozone doesn’t have a parliament, even though in the absence of the Eurozone being 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.”

It’s basically as if the mafia has taken over Europe. Greece is trying 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 outline the principles of an international organization that we insist be 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, and it’s not going to be a bank where the U.S. or Wall Street has veto power. They’ve talked to the BRICS bank, they’ve talked to Russia and China, talked to other countries. It may very well be that they will work with the BRICS bank to help create and sponsor an international agencythat 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, but by lawyers. Christine Lagarde, the head of the IMF, was an anti-labor lawyer. She worked for firms to smash up labor. That’s the job of the IMF. It’s not there to help countries to balance their payments deficit. It’s job is 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 downright evil. That’s what finally the Greeks are coming out and saying. The way the financial system is structured now is anti-human, against human rights, against national sovereignty. 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.