This is a longer and more detailed Guest post by Maria Lucia Fattorelli in which she disects the lies that have rebranded a bank crisis and bank debts into a public spending crisis and public debts.
Lies and Truths on Greek Public Debt
Maria Lucia Fattorelli[i]
The pressure against Greece is getting stronger every week. Everybody talks a lot about the debt crisis; but it´s important to remark that before being a debt crisis it was a bank crisis. Since 2008, there was a big problem located in the largest banks sector, originating from issuing derivatives and other assets without any support – called toxic assets – putting some of the largest banks of the planet in risk of default. Under secret documents[ii], atmosphere of fear and emergency summits, European Union took the countries to a series of “bank bail-out” operations. How European countries saved the banks? By issuing large amounts of sovereign bonds, transforming the bank crisis into a sovereign debt crisis.
The news in all kinds of media follows the “market feelings” and too much is published about the debt crisis, specially Greece´s, but almost nothing about its origin. It´s urgent to audit this public debt, in order to prove the origin of Greek public debt and uncover many lies which have been built against Greece´s situation, that are costing a very high price to its population.
The experience of debt audit in Ecuador showed that when a country owns a strong audit report with all the proofs of illegality and illegitimacy of the “Debt System”, the bond-holders accept any negotiation. When President Rafael Correa announced, on TV and radio, in October/2008, the main findings of the audit commission (CAIC), and suspended the coupon payment due in November/2008, the Ecuadorian bonds in secondary market went down to 30% of their nominal value. In 2009 the President made the sovereign proposal to pay 30% of the nominal value of the bonds – Global 2012 and 2030, that had interest rates of 12% and 10% at the time – putting an end to this debt. Almost 95% of the bond-holders presented their bonds and no legal action was initiated against Ecuador. This experience proved that a country can suspend payments and take sovereign acts anytime, and a safe result can be guaranteed by a deep audit report properly documented.
One of the most cruel lies that has been published is that the only way out for Greece´s debt crisis is submitting to impositions of IMF and EU, making new expensive debt to pay previous debt and privatize all national wealth, including the historical monuments! That´s not true. First, it is important for Greece and other European countries to look back to Latin American history, because what is happening in Europe now is very much like what happened here in the 80´s, with an aggravating circumstance: we were still under dictatorship and had no right to protest and absolutely no access to documents and information. Second, it is important to remember that if in theory nobody can obligate a country to make new loans to pay the previous debt, in reality, the creditors do pressure and coerce nations to get into the “Debt System”. That happens when the creditors organize themselves as a cartel composed by largest banks oligopoly, international financial authorities (IMF, EU, ECB), and other creditors[iii]. This situation can be considered illegal, for the evidence of the asymmetry between parts. Besides, the manipulation of the “country-risk” by the risk agencies – lowering the classification of the Greek debt exactly in refinancing days – is also a clear manipulation with the participation of the same banks oligopoly that contributed to push Greece into IMF and EU agreements. The illegality of the circumstances can nullify the debt operations.
The truth is that the “Debt-System” is a very profitable business and has many privileges. One of their main privileges is the possibility to negotiate the sovereign bond in any market, globally, and many times without the knowledge of the country. This has been a real large difficulty since the 70´s, when the international banks used to sell parts of the debt-contracts in secondary market. The important argument for us is that anytime a country can make a call of holders of its public debt. Even if the contract doesn´t have this prevision, this is always a sovereign act of a country that is called to pay for all disasters done in its name in secondary markets that includes tax heavens and all deregulated international finances. Another thing that can be done is a call for all stock markets to show up the operations with Greek sovereign bonds. They´ll probably argue that the bank secrecy impedes them to give the information, what can´t be accepted as public debt. In reality, the country must have the control of its own creditors, otherwise, to whom the interest will be paid?
Another very common comment in media is that some bond-holders have sold Greek bonds in the secondary market for a low price, like 60% of their value for example, and have already suffered the consequences – a “haircut”. Then, the new holders talk like they have helped Greece.
Is that comment true?
First of all, to evaluate how much someone lost or gained on a bond operation, we must know some information that a debt audit will answer:
· How much the bond-holder paid when he bought these bonds in the first place? Most of the times, the market-price is different from the bond nominal-value. But always the interest rates are calculated over the nominal-value. Combining these two factors, when someone buys an amount of bonds for a price under its nominal-value, this bond-holder is surely making a lot of money. That is, the yield – the real income of the bond, calculated by dividing the interest coupon by the market-price – can be enormous. For example: If someone buys bonds for 60% of its value, instead of an interest rate of 7%, this person will have an income (yield) of 11,67%!
|
Bond-Nominal Value
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Market Price
|
Interest-rate
|
Interest coupon
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Yield
|
|
|
Example
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€1.000
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60% = €600
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7%
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€70
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11,67%
|
In this case, the country registered a debt of €1.000, but in fact received less than €600, because of all costs involved on the emission of the bond. For this reason, it’s very important to investigate the real value the country received when the bonds were issued, in order to calculate the yield and reveal the true damage caused by the speculators, which also influence the continuous increases of the interest rates, submitting the nation under the market’s humor.
· To give an idea of how a comment that is sold like true can be a big lie, let´s put it in numbers. We read that on April 14th[iv] the interest rate required by the “financial market” to buy Greek bonds was 18.3% per year! We don´t know the market-price that Greek bonds have been sold then – the audit would answer. If it was 100% of the nominal value, and the interest rates were 18.3% per year, the coupon the bond-holder will gain is €183 for each thousand! That can be considered an abuse against any Nation, and that´s why an audit is so urgent in Greece.
In case this holder had bought his bonds for 60% of its value, he is still making a lot of money, gaining with Greek bonds almost 100 times he would gain with US-Treasure bonds, for example.
If the bond was bought for 90% of its face-value, the yield goes up to 20.33%! In case of 80% of face-value, the yield goes up to 22,88%!
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Bond-Nominal Value
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Market Price
|
Interest-rate
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Interest coupon
|
Yield
|
|
|
April,14,2011
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€1.000
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100%
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18,3%
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€183
|
18,3%
|
|
April,14,2011
|
€1.000
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90%
|
18,3%
|
€183
|
20,33%
|
|
April,14,2011
|
€1.000
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80%
|
18,3%
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€183
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22,88%
|
This simple example shows that it´s not true that the new bond-holders who bought the bonds with a “haircut” would have “helped Greece” and have the “right” to force the country to implement policies to guarantee their payments, selling out and privatizing the national wealth, or shifting bond-loans to burdensome mortgaged debts. They are already taking extreme advantage.
Looking at the examples above, we can figure out that when a bond-holder sells its bonds with the so called “haircut”, the one who buys these bonds makes a lot of money. As the market-price goes down, the higher goes the yield, which is a complete attraction for speculation. So, if someone “suffers” a haircut by selling bellow the nominal-value, the one who is buying will have an extra-gain over the enlarged yield of the bonds. Considering the two parts of this operation in secondary market can easily do their attached business, these actions can be characterized as “market manipulation” and “abuse” against Greece. While Greek workers are desperate, losing their jobs and even their lives, many people are making a lot of money against Greece.
This situation leads to the urgency of an audit that should be integral, which means that the audit must take care not only of the numbers of each bond issue, the accountability, but also look at all aspects and circumstances that took Greece to this point, like:
1. How much sovereign Greek debt was issued to bail-out failed banks?
2. What is the responsibility of European Central Bank and European Commission on Greece indebtedness process evolution?
3. What is the responsibility of the rating agencies for downgrading the Greek bonds, causing the elevation of interest rates?
4. What is the responsibility of IMF and EU on their impositions to Greek government to implement reforms against the people, benefiting the Banks?
5. What is the responsibility of the Banks for:
a. not telling the truth about the amount of Greek Debt in order to impulse more and more new loans, turning it exaggerated?
b. speculating with Greek bonds, in order to make the interest rates go up continuously to force an intervention from IMF?
c. playing with derivatives, “Credit Default Swaps” and other “toxic” papers?
6. What is the origin of Greek Debt? Did Greece receive this amount of money? Where did it go? Who got the benefit of these loans? For which purpose?
7. Which private debts were transformed into public debts? What is the impact of these private debts to the budget?
When we have this information all clear, we can tell what part of Greece´s debt is illegal, supported in many legal aspects, like:
• Co-responsibility of creditors and international financial institutions
• Asymmetry between parts
• Violation of general principles: Reasonability, Rebus sic Stantibus
• Right to Development
• Right of Sovereignty
• Violation to Human Rights
Other legal studies are necessary to match, in the country’s legal structure, the prohibition for procedures like “market manipulation” and “abuse”, because it´s evident that Greece is assuming abusive interest rates, as shown with the above examples.
Every legal system includes the notion of the Abuse of Rights. In general, the main characteristics that define an abusive act are connected to the case when the act produces damage, harm or injury; when there´s excessive prejudice to a part; when there´s evidence of the intention to produce prejudice or to obtain excessive benefits; when the act is against the social and economic rights; when the act doesn´t obey the reasonability cast in terms of social interests, among others.
During the Ecuadorian Debt Audit, besides applying the country legislation, the audit commission – CAIC – also searched for principles of International Public Right, International Pacts, like the International Pact of Civil and Political Rights and the International Pact of Economic, Social and Cultural Rights. We found out that most of the negotiations of Ecuadorian external debt had violated those treats.
The CAIC also utilized some General Principles of Law that can also be useful for Greece, like:
· Enrichment without cause
· Principle “contractus qui habent tractum successivium et dependientium de futuro rebus sic stantibus”, which determines that an obligation can be revised and become not eligible if the circumstances have substantially changed (interest rates, for example);
· Usury, known as the illegal practice of charging excessive, unreasonably high, and often illegal interest rates on loans.
· Anatocism
· Vicious in origin
· Good Faith (like in the United nations Convention)
· Equity (The laws do not deal with other forms of abuse such as financial abuse)
· Solidarity and Cooperation (also part of UN Convention)
· Public Policy
Besides that, the CAIC deepened the studies about the doctrines of Odious Debt and Illegitimate Debt that can also be applied to Greece, because there are many subjects to be investigated, as Eric Toussaint[v] resumed:
The Greek public debt made the headlines when the country’s leaders accepted the austerity measures demanded by the IMF and the European Union, sparking very significant social struggles throughout 2010. But where does this Greek debt come from? As regards the debt incurred by the private sector, the increase has been recent: the first surge came about with the integration of Greece into the eurozone in 2001. A second debt explosion was triggered in 2007 when financial aid granted to banks by the US Federal Reserve, European governments and the European Central Bank was recycled by bankers towards Greece and other countries like Spain and Portugal. As regards public debt, the increase stretches over a longer period. In addition to the debt inherited from the dictatorship of the colonels, borrowing since the 1990s has served to fill the void created in public finances by lower taxation on companies and high incomes. Furthermore, for decades, many loans have financed the purchasing of military equipment, mainly from France, Germany and the United States. And one must not forget the colossal debt incurred by the public authorities for the organization of the Olympic Games in 2004. The spiraling of public debt was further fueled by bribes from major transnationals to obtain contracts, Siemens being an emblematic example.
This is why the legitimacy and legality of Greece’s debts should be the subject of rigorous scrutiny, following the example of Ecuador’s comprehensive audit commission of public debts in 2007-2008. Debts defined as illegitimate, odious or illegal would be declared null and void and Greece could refuse to repay, while demanding that those who contracted these debts be brought to justice. Some encouraging signs from Greece indicate that the re-challenging of debt has become a central issue and the demand for an audit commission is gaining ground.
When we start to investigate the public debt of any country, the first step to take is to know the origin of this debt. In Ecuadorian debt audit (CAIC) and also during the parliamentarian investigations in Brazil (CPI), only when we went deep on documents and data we could prove, for example the explicit practice of anatocism, for its evidence on the transformation of interest into capital. That happened during the Brady Plan – the same plan was adopted for many countries in Latin America. This plan transformed the previous debt in new sovereign bonds. The previous debt had a part of capital and a large part of interests that had been accumulated because they got just so high that our countries couldn´t pay them. Some of the new bonds issued under the Brady plan were the unequivocal transformation of the accumulated interests into capital and were called Interest-bond!
The Brady plan took place in the early 90´s and all kinds of media and even some people from academia believed that the Brady plan was a good step, because it was widely presented as a plan that would bring our countries back from insolvency to the market operations. Besides that, it was said that the transformation was “giving” our countries a discount. In fact, one of the new bonds issued under the Brady plan was called “Discount Bond”. Only when we did the audit in Ecuador and the investigations in Brazilian parliament and had access to the contracts we could see the reality was totally different from the propaganda.
The documents proved that there was a “Debt System” under a continuous refinancing of previous debt; a mechanism of creating new debt to pay previous debt in a way that the new debt was always much bigger than the previous one, besides the huge payments of capital, interests, commissions, fees, taxes, costs, and all kind of extra bills. The audit also proved that the negotiations were made abroad and in many occasions – like in the Brady plan – the money registered as debt on the contracts and bond issues never arrived into our countries, because the exchange of the previous debt into the new bonds was made by the creditors themselves, in the Luxemburg stock market, with no registration in the SEC – Securities and Exchange Commission in United States of America – besides the law and jurisdiction were the North American ones. The interest rates, costs and clauses of the contracts were completely illegal and abusive. Resuming, the audit uncovered the complete misinformation about the real meaning of the Brady plan for our countries. And this was possible by reaching the documents of the negotiations: contracts, records of meetings, writings, proceedings and all registers of each operation, besides the statistics and data available.
This is only one of the examples of how we proved the anatocism and the illegality of the process. The main conclusion of the 30 years audited in Ecuador and 39 years investigated in Brazil is that the “Debt System” benefited only the large international banks, and did not serve as a mechanism to finance our countries, as the economic theory defines public debt. The instrument of public debt has been usurped by the “market”. Our job is to reveal the truth, by reaching the documents and proofs that can unmask the many lies that have being told about our countries public debt. We can not keep paying illegal debt with our jobs and our lives. Feel encouraged to start Greece´s debt audit urgently, and count on our help.
[i] Maria Lucia Fattorelli is Coordinator of Citizen Debt Audit-Brazil since 2001; Member of the Commission of Debt Audit of Ecuador (2007-2008) and Assessor of Brazilian Parliamentarian Investigation of Public Debt (2009-2010): CPI da Dívida da Câmara dos Deputados em Brasília. www.divida-auditoriacidada.org.br Citizen Debt Audit-Brazil is part of CADTM international network and Latindadd.
[iii] In Ecuadorian Debt Audit we proved by documents (clauses in contracts, letters and telex) the coordination between all creditors – international private banks organized in Committee, IMF and Paris Club – in 1982/1983, forcing the country to get into a new deal that transferred private and public debts into the responsibility of Central Bank of Ecuador.
"before being a debt crisis it was a bank crisis"
and before that? A Property bubble
and before that? a money creation problem
and before that? a trade imbalance problem
trade-imbalances-lead-to-debt-imbalances
Here is the real problem, how do you get mr wong in bejing to pop down to sharons nail bar on the high street and spend some cash on a regular basis?
Last time i checked bankers were not responsible for trade policy.
sorry here is the link….
link
http://www.minisikerdoskopon.gr/en/index.html
These are the Greek lawyers that Max Keiser had contact with, possibly people who it might be useful for Maria to talk to ?
from stopspeculators.gr
Is it possible that banking people are buying bonds at full price in order to dump them to produce the high-yielding instruments?
Excellent post, thanks to David & Maria
The problem across the US, Europe, UK & other jurisdictions has been the massive creation of a debt bubbble by the banks. Banks have the privilege gifted to them of creating all the money as debt, and they have completely abused this system to enrich themselves & wealthy elites. Indeed, Professor William Black has accused, on numerous occasions, publicly, the major US banks of systematic, illegal, fraud. (Prof Black was a US financial regulator at the time of the US 'Savings & Loan' scandal, & was instrumental in many bank executives being sent to jail.)
Much of what the banks have done, if not legally fraud, should be made so.
It is important to understand that much of the debt (money creation) was for unproductive purposes in the 'real' economy & socially useless. It was for speculative bubble creation (property) & gambling on financial 'markets'. The real economy has had little benefit from this & has hence has not been able to keep pace sufficiently to continue to service such debt (pay interest), let alone make repayments. This is the core reason that such debt was not sustainable, & would inevitably crash the economy. Economist Steve Keen developed the accounting methods in the 90s to predict a crash, & did so some years in advance. But he was studiously ignored.
It is hard to imagine that such immense irresponsibility was not at the higher levels, in fact, deliberate. The banks' executives & much of the financial sector stand to make as much profit when the bubble burst as they did in creating it in the first place. They are endeavouring to do this regardless of costs and suffering to ordinary citizens &, incredibly, over many years, have 'captured' most politicians, their advisers, media & the mainstream economics profession & academe. The near complete capture of the latter is extraordinary. The very basic assumptions of the neo-liberal, neo-classical economics taught in universities over decades are demonstrably false. (For proof read Prof Steve Keen's work, & others.)
Not only that, but the analytical methods that would have signalled in advance the growth of a 'bubble' have been asiduously, likely deliberately ignored. And remain so today, 4 yrs after the crash, by mainstream economics. This is intellectual bankruptcy & incompetence of the highest order. But, of course, banks & the financial sector are the dominant employers of economists, either directly or thru' consultancy.
Another, even more important free 'gift' to banks is to give them the monopoly to create government funds, when tax income falls short, as interest bearing debt also. Any government of a sovereign currency can create its own money entirely free of debt. It's solely an ideological (or bank influenced) decision not to do this. The euro central bank authority could also create its own money, but, perhaps again deliberately, has no mechanisms or procedures for eurozone governments to co-ordinate this in a proper fashion.
On top of all this, the banks also ensured that the entire system of bank debt is so interlinked with debt derivatives & insurance, that none of the larger banks can suffer primary debt losses without risking complete collapse. The real economy of ordinary citizens & production of real goods & services has in this way been held to ransom. Forced to pay the losses of the banks' gambling. And forced to borrow to do this from the same banking system! It's hard to see this as an 'accident' either.
There are solutions which sovereign currency countries could readily adopt, that would curb the banks domination permanently & sustainably return economies to prosperity.
In my opinion, the best options are coming from a school of economic thinking (broadly post-Keynesian) known as MMT (Modern Monetary Theory). A good resource list a academics blogs & others is here:
http://dollarmonopoly.blogspot.com/p/resources_10.html
Whilst not specifically mentioning MMT, this well worked proposal, incorporates MMT principles with a full reserve banking system.
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
Obviously, the eurozone could also adopt such a system, but would involve far more complexity in co-ordinating fiscal policy across widely divergent economies. Not impossible, but difficult.
But if the eurozone shows no sign of dealing with a rogue banking system & introducing real reform (& soon, before our economies are decimated further), regardless of the difficulties in transition, any peripheral state in the situation of the 'PIGS' would be massively better off, medium & long term, in adopting reforms like those of positivemoney.org (and collaborators).
allcoppedout 17.06
pretty nonsense post there, if I understood you correctly .
No dealer knowingly buys above the market price.
However the ECB has been taking as surety many dubious pieces of Paper
Some pretty BIG news coming this evening boys and girls! Hang on to your Irish hats. And check back here later this evening.
Just looks like more can kicking to me David?
This post is gold. It explains a lot in particular the secondary markets.
Solid post and advice -it would seem Homo sapiens haven't been totally lobotomised – yet!
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