From Socialist Voice, January 2011

Illegitimate, odious, and perpetual!


Ireland’s “sovereign debt crisis” is not a sovereign debt crisis according to any rational understanding of sovereign debt.
     Sovereign debt is the debt incurred by a state to finance the needs of its citizens, for example running or improving health and education services. In a healthy, productive economy a state should be able to meet its expenditure through its own revenue and income and thereby never enter into debt, let alone face a sovereign debt crisis. However, symptomatic of contemporary capitalism’s inherent instability and long-standing stagnation in productive forces, debt has become an important vehicle for investment and a necessary tool for fundamentally weak economies, such as Ireland’s.
     The shocking state of both personal and state debt in this country is no surprise, even leaving aside recent developments. However, this of itself is not the cause of today’s so-called sovereign debt crisis. While debt has been used both by individuals and by the state to finance expenditure that their own income cannot meet, it is the huge cost of the financial bail-out that has created what is described as Ireland’s sovereign debt problem.
     The state bank guarantee, NAMA and the recapitalisation of financial institutions have caused Irish state debt to soar to levels previously unseen and almost unheard of. This has blacklisted Ireland for international lenders and resulted in the EU-IMF bail-out, which was designed to protect German lenders and the future of the euro.
     This debt, caused and created by banks and developers and now taken on by the state, is socialised private debt. It is not sovereign debt.
     To give just one example of how the state guarantee has worked we can take the continuing funding problems of the Irish Nationwide Building Society, a building society that acted like a private fund for its then chief executive, Michael Fingleton, and enabled him to walk away with a pension of €17 million.
     Earlier this year, with the full approval of the Department of Finance, the Irish Nationwide issued a €4 billion loan (money it did not possess) to a holding company and subsidiary of the society. The building society, legally, then called in the state guarantee and, through the European Central Bank, transformed that €4 billion debt into €4 billion cash.
     As if like magic, it created €4 billion that immediately went out of the Irish Nationwide to pay off international lenders. The state, however, was an additional €4 billion in debt.
     This debt, and all the debt created by the state guarantee, NAMA, and the recapitalisation of the banks, is not legitimate debt.
     In addition to this debt, and as a consequence of it, there is now also the bail-out imposed by the European Union and the International Monetary Fund. The €85 billion imposed by them has an exorbitant average interest rate of 5.82 per cent (5.7 from the IMF and 6.05 from the EU), with an average maturity of 7½ years.
     To put this in perspective, Greece is expected to pay 5.2 per cent. Indeed some analysts are saying that the true cost is not reflected in the 5.82 per cent interest, as this does not include other fees and costs attached to the loan. In addition, the rates will vary according to “market conditions,” and the state’s debt situation will worsen if the economy doesn’t grow by about 3 per cent each year of the four-year plan.
     How the state hopes this increasing debt will inspire confidence from international lenders and so decrease the private sector’s reliance on state bail-outs is lost on many commentators. This doubt was reflected in the initial reaction by the market to the bail-out, which showed an increased fear of a state default.
     But leaving aside other lenders and debt that will be incurred, this debt and the interest attached to it are unpayable by an economy our size with such fundamental weaknesses. What happens on maturity when we inevitably haven’t paid off, and cannot pay off, the loans?
     This raises the question: is this debt perpetual, designed never to be paid off but always to be paid? Perpetual debts were first created in the thirteenth century by lenders to loan to warring Italian city-states to force those states to finance their wars through perpetual interest on a loan that was unpayable. This provided a constant source of income for the lender, and forced the city-states to continually expand to finance the debt.
     Has Ireland been subjected to one of these? But how can we expand? There is an established legal concept in international law known as “odious debt.” This is described as national debt incurred by a regime for purposes that do not serve the best interests of the country—usually, but not exclusively, wars of aggression or the suppression of internal opposition. Odious debt is considered the private debt of the regime and not of the nation.
     This theory was most comprehensively examined by Alexander Sack in the 1920s. He described it as debt amassed “not for the needs or in the interest of the state, but rather to strengthen itself . . . This debt is odious for the people and of the entire state . . . The reason why these odious debts cannot attach to the territory of the state is that they do not fulfil one of the conditions determining the lawfulness of State debts, namely that the State debts must be incurred . . . for the needs and in the interests of the State . . . They cannot expect a nation which has freed itself of a despotic regime to assume these odious debts.”
     The debts recently incurred by the Fianna Fáil Government were entered into to protect the people who frequented the Fianna Fáil tent at the Galway Races and who supported their regime over the previous twenty years. They have been incurred by a Government with no mandate from the people.
     Consequently, these debts are the regime’s debts and not the state’s or the people’s and so need not be honoured by any Government elected with a mandate from the people—despite what the EU memorandum of understanding says.
     Any new Government must repudiate these illegitimate, odious and perpetual debts.
[NL]

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