Posts tagged ‘debt’

November 7, 2011

mystery debt and political foreclosure

by Melissa

Okay, of course, there’s more to the current crisis than US housing markets.  The European Debt Crisis (Greece of course being the current flavour) is a sovereign debt crisis like the debt crisis of the 80’s. Debt activists are pointing to some important continuities between then and now, including the mystery of debt burden and the related narrowing of what is politically viable.

This CADTM’s statement of solidarity aptly captures the (deliberate?) amnesia regarding the source of sovereign debt among European nations like Greece, Ireland, Italy and Iceland.  Like the US bank bailout, European countries too rescued big financial institutions in the wake of the toxic debt crisis that swept the financial sector following the housing crisis in the US.  For 30 years, debt activists have called for Debt Audits in order to democratically determine the source and legitimacy of the debt burden facing debtor nations.  This has yet to be done in the Philippines, for example, and the political space around national debt was foreclosed in the wake of Cory Aquino’s pledge to honour all debts incurred under Marcos (with the help of loan pushers, see my Nov 5 post).  And thus the Philippines kept the Martial Law period law ( Automatic Appropriation Act) that puts all debt service as priority in national expenditure.  Odious debt has many definitions, but importantly, all of them underscore the negotiability of debt.  Graeber has noted that debt can create conditions of servitude precisely because of a moral narrative of debt repayment.  Challenging this debt narrative is crucial.  Mainstream news coverage of the political crisis in the European Union (and Greece itself) has effectively forgotten about the debt owed by bankers to the public who bailed them out.  Challenging the debt narrative (through debt audit) can raise the important question:  Who owes who?  What does the investor class owe the public in light of the crisis they created?  Would a debt audit bring to light odious sovereign debts-  debts unrelated to government spending on social welfare and legitimate national investment-  debts that are in the form of toxic financial assets,  Credit Default Swaps or other strange and speculative intruments that create debt for investor profit….?

Similar to the creditor protection afforded by the IMF (through more loans with conditionalities) in the 80’s and 90’s, creditor protection in the European debt crisis has taken the form of loan extensions to Greece (notably by the EU) on conditions of austerity.  This effectively shifts the crisis burden from the investor class to the working class.  The narrative of austerity measures functions on the myth (real or imagined?) that national debt is the result of “overspending” given the national revenue stream.  Austerity measures (as the only solution to crisis) foreclose the possibility that debt was incurred through large-scale (unregulated and “legal”) fraud in the first place:  corporate tax breaks, new forms of sovereign lending (derivatives and creative accounting),  investments in crock-pot paper with high-grade ratings, and other anti-people practices.  Like in Argentina, Brazil and Ecuador, Greek people are right to challenge the mainstream debt narrative through street-level tactics.  Worldwide debt audits (and other ways of opening political spaces within economic narratives) should be on the table- for new and old debtor countries.

Moreover, the current Eurozone crisis ought to underscore the extent that sovereign nations are tied to odious terms of agreement.  The whole reason Greece needs bailouts from Europe and the IMF is due to perceived investor risk of sovereign default (and the consequent exhorbitant cost of further borrowing).  Is this risk in fact a product of  financial sector profit instruments in the Sovereign Derivatives Market rather than simply “Greece living beyond its means”?  Maybe the blueprint from the 80’s debt crisis still serves us well:

I  Frontier markets in  sovereign lending      (SO KEY!)

II Widespread inability to pay (or the perception of such due to risk ratings since payment is reliant on further borrowing)

III  Creditor protection like the backdoor bailout (so Greek won’t default on its loans to private investors) that is currently being negotiated.

What remains to be seen is whether the Greek people submit to debtor management at the cost of  national sovereignty and working class solidarity or effectively push back against the mainstream debt narrative.

The sovereign debt crisis is perhaps more a crisis of sovereignty than of debt proper.

November 5, 2011

debt mirror 80&08

by Melissa
There are four main parallels between the Debt Crisis of the 1980’s and the Housing Crisis of 2008:

I      Frontier markets

II    Widespread inability to pay

III  Creditor protection

IV   Ongoing debt management OR  Push back  

photo by a Filipina domestic worker (in honkonginterventions)


Debt crisis in the US:

Big banks in the US made predatory loans-  loans to low-income households which were likely to default (especially as interest rates rise and housing prices drop).  They then leveraged homeowner’s debts for profit in the shadow banking sector.  When the housing loans did indeed default, the banks had effectively spread the toxic debt far and wide-  thus there was a debt crisis that impacted not only the homeowners but also the banks themselves (both a creditor on main street and a debtor in the shadow banking sector (including the securities market).  To “solve” the debt crisis, the big banks were bailed out (given money by the government to pay off their debts).  They were not however regulated or otherwise punished as a creditor.  Homeowner debt has been addressed in the form of the “privilege” to re-finance their mortgages if the market price no longer reflects the terms on their original loan.  In other words, the solution to debt crisis has been creditor protection and debt management on bankers’ terms.

Debt crisis in the Philippines:

As the standard debt story goes, a corrupt dictator and his cronies literally robbed the future.  This is of course true- Marcos’ regime borrowed money from abroad for  “development” projects like the infamous Bataan Nuclear Plant that in addition to the outrageous price paid (padding corrupt pockets) it was also built on a fault line and therefore unsafe for use.

However, this story leaves out a crucial component-  banks in the First World (flooded with cash from the oil boom of the 1970’s) were at the time literally pushing loans across the Third World.  Big banks in the US made predatory loans– loans to companies in the Philippines which were likely to default  (especially as exchange rates fluctuate thus impacting the price of exports and imports).  Philippine national debt jumped from under $1 billion in 1966 to over $28 billion in 1988 as the nation (through its government financial institutions) absorbed the toxic debt of both public and private failures.

As one insider remarked in a 1983 expose about selling money in the Philippines: “American banks, through the agency of loan officers like me, have made a number of questionable loans in countries whose balance of payments is so far arrears that according to Citicorp’s Walter Wriston, ‘ability to repay’ is no longer the main consideration.  All that matters now is ‘access to the marketplace’…”   As US companies expanded their markets abroad, banks followed suit in affect to finance the import of American goods and services.

Moreover, these loans were “unsecure” except through the full faith and credit of the Philippine government.  Despite the chronic balance of payments problem in the Philippines, the young writer goes on to narrate: “American banks persist in the decade-old notion that ‘banks and governments won’t default’… I set about securing a partial guarantee from the Philippines largest bank [likely PNB] which has already put its name on more guarantees than it can possibly pay off.”

The fact is that beginning with Mexico in 1982 countries did default-  but again, US capitalists negotiated the debt to their advantage.  The IMF and World Bank effectively stepped in to protect the creditor.  Debts were “rescheduled” and more loans with neoliberal conditionalities proffered.  Thus, the Philippines has since been on the path of debt management-  a negotiated debt program that has necessitated massive anti-people economic restructuring in addition to starving the nation of necessary public goods like education, health, infrastructure, and technology.

(more on debt[or] management to come)

November 5, 2011

recognizing Wall St in the debt crisis of the 80’s

by Melissa

Perhaps from the outset it seems that the Philippines is unconnected to Collateralized Debt Obligations, mortgage crisis, bank (and European Union) bail outs, austerity measures and other distinctly Western experiences of the last 5 years.  However, this is far from the truth.  In fact, what the West is currently experiencing is a debt crisis spurred by systemic predatory lending.

Analyses of  the US recession and the European debt crisis have been largely silent about the specific parallels between what’s happening now and the Third World’s experience of finance capitalism in the 80’s (that continues today)…  although a recent article in the Nation has captured the political  fallout of the  debt crisis well:

“When the dictates of foreign debt or trade treaties put core economic decisions beyond the control of elected representatives, “democracy” becomes a cruel joke or, worse, a spectacle designed to absorb popular frustration while the real deals go down elsewhere…  The OWS moment seems to reflect a recognition that we have joined our neighbors to the south in being ruled by a system that, whatever its other virtues may be, is powerless to solve the most important problems plaguing the country.”

This blog wants to bring this conversation along-  I want to highlight that Wall St was behind many defaulted loans that created the debt crisis in the 80’s-  and moreover that Wall St. has benefited from this same crisis through debtor management.

There’s an incredible story from a 1983 Harper’s article (Numbers – Adventures in the Loan Trade 11 01 83) that tracks the experience of one American banker engaged in making risky loans in the Philippines and beyond.  This article (and a book called the Loan Pushers (check out this short article by the same author), have re-oriented my understanding of the Third World debt crisis.  I was a baby in the 80’s (and barely that) and my impression of that crisis always includes the history of Martial Law and widespread fraud and corruption under Marcos.  But these articles point to the crisis of finance capitalism:  frontier markets, orchestrated mass debt peonage, and the ongoing crisis of democracy (as we  know it) due to money power.

In the the 5000 years of debt history (thanks Dr. Graeber) a central tension has always been who benefits from debt negotiations: the creditor or the debtor?

Those affected by the current crisis (everyone, no? ) can learn about Wall St. debtor management tactics from the Third World experience.   And more importantly imagine what a worldwide debtor movement might look like?