Tag Archives: Debt

Syriza and Ireland

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syrizaimagesThis Sunday the Greek people will go to the polls in an election that could see the beginning of the end of austerity in Europe.  That anyway is the view of some on the left across Europe.

The potential election of a Coalition of the Radical Left (Syriza) Government, promising a radical reduction in the debt burden, has the potential to galvanise and set an example to the rest of the PIIGS.  It could incite a combined movement in Portugal, Ireland, Italy, Greece and Spain that would reduce the debt of these countries which has been a prime driver of austerity.  Through radically reducing the requirement to service and pay down enormous debts such a step could launch a definitive movement away from neoliberalism towards a radically different Keynesian social democratic alternative.

The elections in Greece will be followed this year by elections in Spain, in which a like-minded Podemos movement has grown, and in Portugal, and may also be joined by an election in Ireland despite the claims of the current Government that it will run in office until 2016.  Of the five PIIGS therefore at least three and possibly four may see elections this year.  Even elections in Britain could see the ousting of the Tory devotees of austerity and neoliberalism.  In fact the policy that might inspire the PIIGS is not confined to them but might apply right across Europe.  And Syriza is in the vanguard of this movement.

Is such a scenario a real possibility?

Let us notice what makes such a claim plausible.

Firstly the proposals of Syriza are not solely on behalf of the Greek people although as a Government it will be able to negotiate only on their behalf.  Syriza proposes a European Debt Conference modelled, with delicious irony, on effective debt forgiveness of (West) Germany in 1952.  This was carried out explicitly in order, or so it was claimed, to normalise relations between Germany and its creditors and to promote economic development.   That deal wrote off half of the debt, stretched repayment of the rest and for the first few years provided only for payment of interest, which was also limited.

Syriza proposals are more limited. Their policy could be based on an academic paper which proposes that half of the debt would be bought up by the European Central Bank (ECB) with either an interest holiday or interest charged on the remaining debt at a low rate.  The debt taken on by the ECB would not be written off but would be paid back only when the remaining debt left to the country had been reduced to 20 per cent of Gross Domestic Product (GDP).  In effect economic growth and inflation will have eroded the real value and real impact of debt repayment.

However in one very important sense the proposals are much more radical than the German precedent, because the Syriza proposal is that this plan applies to every country in the Eurozone with debt over 50 per cent of GDP (all but three countries).  The Irish state for example would see its debt reduced from 108 per cent of GDP to 50 per cent, saving €3.7 billion each year in interest payments, so reducing the need for cuts or tax rises and facilitating greater state spending and investment.[i]

It has been estimated that this would reduce sovereign debt in the Eurozone area by about €4.5 trillion.  It is asserted that this would not risk inflation because the ECB debt purchases would be funded by massive borrowing from private banks.  There would be no money printing since the money is borrowed.  And sure why worry about inflation when deflation is so clearly the enemy?  And who pays the interest on these loans?

Well, it is recognised that there will be losses in paying back the private banks, between €50bn – €60bn in each of the first 5 years, and €1trilion over 40 years, but it is argued that the borrowing costs of the ECB would be low and that renewed economic growth would compensate.  It would be cheaper than the current policy of austerity and expansion of the ECB balance sheet required to bail out the banks.

It is recognised that this may not be enough in the short term for some countries so that, for example, in order to prevent continued austerity in Greece the ECB would have to take over the debt that would be required to be issued in the next five years.  This would also be required because over 50% of outstanding debt has to be paid back within the next 5 years in Italy, Spain, France, Holland and Belgium and to cover this new debts would have to be taken on.

For Marxists the point is not that some monetary scheme has been devised that will solve capitalisms’ problems.  Nor is it the point that Syriza will go into negotiations and cannot expect, as in all negotiations, to get its original plan agreed, even discounting some conscious intention to betray the hopes of its supporters in order to accept the logic of capitalism.

The significance of the proposals is that it provides a concrete platform around which workers across Europe can organise and struggle together, and a series of elections that can be a focus for such struggle.  This is not to invest illusions in either elections or Syriza, who are condemned by some for having shifted from a policy of debt repudiation to one of simply extending repayment under more favourable terms.   If a practice of simply condemning the limitations of reformist politics were the answer we would no longer have the problem.

The Syriza programme is one that workers and socialists can support because it reduces the burdens they face and would deal a big political and ideological blow to austerity and the parties who have peddled it.  It would deal a real blow to reactionary political parties seeking nationalist or fascist solutions.  Through a successful campaign workers could gain strength and confidence to build up their organisations, their own social and political power and their own confidence and class consciousness.  The latter is the role that Marxists can play by advancing a programme that does all these things.

The victory of Syriza would allow an opportunity to directly organise workers on an international programme on an international basis.  It is remarkable that this significance has been somewhat missed.  So, for example, the call promoted by the Fourth International correctly argues that “their victory will be ours, but their defeat too” but appears to fail to appreciate that this can be so because other European workers will not just be in solidarity with Greek workers but can actually be part of the same struggle, demanding the same deal for their country, so that “our victory will be ours and our defeat will be ours too.”

This is made tactically easier by Syriza not proposing either to leave the Euro or leave the EU.  There can be no pretext that the demands of Syriza can be dismissed because they no longer want to belong to the club.

These policies have been condemned as examples of betrayal of earlier more radical promise but they are not just tactically recommended.  As argued before in the various posts on ‘The Left Against Europe’, the growing unity of capitalism provides the material basis for the international unity of the working class.  This is why a united international struggle against austerity is more immediately and concretely possible in the Eurozone than one against similar policies pursued more or less independently by separate capitalist states each with their own currency.

So to return to our question – is such a scenario possible?

It is possible to argue that it is, for the simple reason that the Greek debt is too big to be paid back anyway.  Some means of addressing it is required and the Syriza route is eminently preferable for workers than the slow death march of austerity and repeated minor debt ‘haircut’ so far embarked upon.

The second is that by the very fact that the Syriza plan is reformist there is no necessity for a life and death struggle by the forces of capitalism to defeat it.  The Syriza plans do not call the system into question, which both sets limits to what it can achieve but also provides scope for negotiations between a Syriza Government (and other PIIIGS Governments should they be elected or so inclined) and the IMF/ECB /EU/German State alliance.

The rallying of the Greek workers behind Syriza is one of many proofs that a revolutionary overthrow of Greek capitalism is not currently on the cards and is not therefore a realistic immediate alternative.  The revolutionary alternative today consists of preparing for such an eventuality tomorrow.

Not by either passively or even ‘aggressively’ preparing for socialist revolution but by the cumulative development of the power of the working class suggested above, with the certain knowledge that a revolutionary break with the capitalist state and system will be required.

To condemn Syriza for negotiating with capitalism when it cannot be overthrown is a bit like condemning trade unions for negotiating a pay award when they should be overthrowing the wages system.

The third has been pointed out here – Syriza will be damned if it does not get some sort of result and the executor of that judgement may be the fascists of New Dawn.  It is not only Syriza who has an interest in ensuring this doesn’t happen.

‘Ireland is not Greece’ we have been told repeatedly over the past five years or so.  If Syriza is anyway half successful Ireland will look pretty stupid if it isn’t.

[i] It is interesting that the authors go beyond the argument that this is some sort of socialism saying that “The left ought to be strategically against privatizations, having at the same time as an ultimate target the gradual historical replacement of “state control” by democratic forms of social control (unfortunately this type of discussion has not been adequately developed within the left).”

The new bank deal and the working class

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debt maturityThe most important aspect of the deal that has replaced the promissory notes is not what it entails but what it does not entail. It does not involve a write off of any of the debt so that less would have to be repaid and interest burden on the debt lowered. It does not involve the European Stability Mechanism, in effect the EU, directly funding the banks which appeared to be the deal offered last June and it does not affect all the bank debt.

The deal on the promissory notes affects €28 billion of a total debt at the end of last year of €192 billion and relates to less than half that incurred in bailing out the banks. The Government has not changed its austerity targets. The editorial in the Financial Times stated that ‘restructuring the promissory note does not make the public liability for bank losses lower, just easier to bear.’ Easier to get workers to pay is more accurate. All the questions regarding how the deal will work have not been answered, which also demonstrates continuity with the promissory note arrangements that were understood fully by very few despite the enormous impact on people’s lives.

Never mind, the Taoiseach proudly told us that the “stains on our international reputations and dents to our national pride, have now been removed from the financial and political landscape”. This is a statement so revealing of the shallow moral argument for the deal, so instructive of the concerns of the elite as distinct from the majority and illuminating of the poisonous demands of national identity that despite its odious character it would be good to see it repeated again and again and again. The Irish people have decades to ponder how satisfying it is to pay for so long to erase such an embarrassment.

As for the new deal itself, it involved the liquidation of IBRC, which was the combination of Anglo-Irish bank and the Irish Nationwide building society. The Government will still pay €1bn to the bondholders of Anglo, as part of the 2008 guarantee, so no bondholder is left behind, and more rotten loans in Anglo will transfer to NAMA, which promises further losses down the road. Loans left in Anglo totalled €15bn.

It involves tearing up the promissory notes that provided the means for the State to get money from the Irish Central Bank (ICB), the local branch of the European Central Bank (ECB), to be replaced by ordinary government bonds, which are really just a more regular IOU used by states. This allows the state to keep the money loaned to it on the back of the promissory notes instead of having to pay it back when the notes were torn up. The state will still have to pay the money back and pay interest but will have much longer to pay and with what appears a lower rate of interest. Both of these are good things – having longer to repay and being charged less for the loan, but both are not as good as they appear.

The longer you have to pay the more you have to pay back, just like any mortgage. The lower interest rate is not such a change for the reason explained in the last article. This is because the high rate of interest paid by IBRC (8.2 per cent) to the Irish Central Bank, which the taxpayer ultimately funded, was used by the ICB to pay the ECB which charged a much lower rate of interest. The difference was returned to the Irish State so the effective rate of interest was not they headline rate of the promissory note. The reduced interest cost between the promissory notes and the government bonds is therefore not what it might appear.

But this is not the only reason the savings might not be so great. The ICB will have an asset, the bonds, the ownership of which entitles it to receive interest every year and receive repayment of the principal. Part of the deal is that the bonds are sold to private capitalists, €6.5 must be sold by 2022. How quickly they must be sold is not at all clear and thus neither is the cost of the deal, although this has not prevented the Government, media and commentators continuing to welcome the deal and proclaim its savings as if they were hard fact.

In selling the bonds the Government will in effect be raising new loans. If for example it attempts to sell €1bn worth of these bonds and investors don’t think the interest they would get on them is high enough they may be willing only to pay €980m, €950m or €930m instead of the €1bn. In other words the bonds would be sold at a loss and the tax payer would foot the bill. To replace the loss would require more loans costing more.

The rate of interest charged on the bonds over their lifetime is not known so calculations of how much the new deal will cost must make more or less educated guesses of how much the deal will actually cost over the long term. The longer the term the more the ‘educated’ guess becomes ‘pure’ guesswork.

Nevertheless within a couple of days estimates of savings on an NPV basis were quoted and savings of €8bn announced. Net Present Value (NPV) analysis allows one to calculate and compare amounts over different time periods recognising that someone would rather pay €1 in 10 years’ time than pay €1 today. It allows one to say whether it would be better to pay €1 for each of the next 9 years and €11 the following year or pay €2 for the next 10 years. In both you pay €20.

The money paid in the future is discounted so that €1 paid in ten years’ time is less than €1 paid in 5 years’ time which is calculated as less than €1 paid in 3 years’ time. How much you reduce the amount depends on the discount rate and this rate can have a big effect on the result. The rate chosen is another variable that is a guess, first educated and then pure.

The higher the discount rate the less costly future costs become which offsets the fact you are paying longer and on the face of it more. So one could be paying €21bn equally over 20 years instead of €19bn equally over 12 years but because the first means the money is paid off later it is worth less and the total cost on an NPV basis is less. In the example above an NPV calculation at a discount rate of 6 per cent shows that the first payment schedule costs €11.2 in NPV terms, where €11 is paid in the last year, and €14.7 in the second where equal yearly payments of €2 are made.

In the new deal the first repayment of principal is not until 2038 and the last in 2053. The NPV savings in the new deal were worked out by one economist as €8bn and then by a couple of others as €4bn, a whopping difference of 50 per cent of the first estimate. Another economist has stated that almost all of the calculated savings disappear if the timing of the sale of the government bonds to the private sector is accelerated. Factor in the loss on sale to the capitalists plus increased interest costs and the deal might very well cost more.

A final argument has been much quoted, and certainly more often than the lack of robustness of the savings estimates. This is that inflation will erode the real value of debt repayable by our children, who will be middle aged when they might finally pay it off. This means that, if say the interest rate is 5 per cent and inflation is 3 per cent the effective rate of interest is only 2 per cent. Also the real value of the money repaid in thirty years’ time will be less because of the cumulative reduction in the real value of the debt by this inflationary process.

It might otherwise be amusing to listen to these experts, who gave us a property ‘soft landing’ and now the wonderful benefits of inflation, except that we can state with absolute certainty that they will also be lecturing us in the future on the evils and futility of seeking pay rises to compensate for inflation because these will only increase it. Not only will interest rates rise in response to higher inflation thus limiting the effect above, which will also put up the cost of mortgages, car loans and credit card debt etc. but higher inflation will also erode living standards. What workers might gain from erosion of the real value of the debt they will surely lose by the reduction in living standards caused by an increased cost of living.

By now it should be apparent that the deal’s main benefit is putting off repayment of the loan principal thus making it less likely the state will have to default. In other words the main beneficiaries are the State and the ECB, which is sanctioning the lending of the money and protecting the European banking system. What is good for the state, that it continues to pay and does not default, is bad for workers who will really do the paying.

The second benefit is that the low interest rate charged for the money the state gets in exchange for the bonds will be around longer. However as we have seen, how much longer we don’t know. It won’t be our decision when it goes up (through selling the bonds to the capitalists) because this is a decision of the European Central Bank. Such a decision will cost us billions but we have absolutely no say in the matter. Yes, we live in a democracy.

Once again it is necessary to educate workers that they must distrust the state as much as they would distrust an email from Nigeria asking for their bank details. (The power of the state means it doesn’t need them.) We need to remind them that the state is able to foist the debt of Anglo and Nationwide on them because it nationalised these institutions. We need to inform them that both the Irish Central Bank and European Central Bank are institutions of the state deliberately designed to be protected against any kind of democratic pressure.

This brings us to a couple of questions a reader asked me about the promissory note deal. He asks how the government borrows from the central bank as if it is separate institution. “To me it looks like the government is borrowing from itself, but if that is the case why doesn’t it borrow some more?”

The first answer is that with so much debt the Irish State cannot borrow more from the markets (private capitalist funds) which is why the EU and IMF stepped in to loan the money. It can’t borrow more from these institutions because they want the state to reduce its indebtedness and pay them back their existing loans.

The second answer is that the Irish Central Bank is a branch of the state and a normal central bank can both provide loans and ‘print money.’ There are limits to the former if, as we have just noted, the state won’t be able to pay the loan back. In this case it is if it makes a loan that isn’t repaid just printing money. Printing money will at some point lead to a devaluation of the currency meaning that the Euro will be worth less and buy less making everyone across the Eurozone worse off when it has to buy goods from countries that don’t sell in Euros.

To protect against this the ECB has a firm grip on money printing and the deal on the promissory notes and the new one involving the issuing of bonds required its approval. The Irish state is part of the Euro so doesn’t control its own currency or it could try to get away with printing some money, although in reality it is too weak to be able to do so even if it went back to the Punt.

The ECB is taking control of the timing of selling the bonds because printing money in exchange for bonds that don’t have to be repaid for years is so close to money printing it really is printing money.

The rules of the ECB prevent it funding states and public institutions directly for this reason. It has however ended up with Irish government bonds in exchange for funding the IBRC. Because it ended up in this position indirectly by funding a bank (public banks must be treated just like private ones)rather than a government and through the receipt at first of promissory notes rather than regular government bonds this has to a very little degree been hidden.

This is why they’re not very happy with the deal and might also be why they will quickly ensure the bonds are sold to private capitalists; thereby entailing an interest cost more reflective of the market. As I have said, this will cost the Irish people a lot of money.

In the next post I will look at whether the new deal has solved the debt problem.

The promissory notes and the working class

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The response of the mass media to the deal on the promissory notes was one of considerable praise to a Government that had won a deal that “appears as good as could have been hoped for”.

The world of finance is notoriously complex so in simplifying the deal for a mass audience the media felt free to simply lie.  Thus the headline in the Irish Times said that the ‘Bank debt deal to cut borrowing by €20bn and ease next budget’.  The small print revealed it would only reduce the amount paid in the next decade and the debate after the deal has revealed that there is no certainty that the next two budgets will be any less severe than planned.  The Troika and others are demanding the original targets are adhered to and being a poster boy of austerity might demand it.  The uncertainty surrounding important aspects of the deal leaves open to doubt many of the claimed benefits.

But one thing is very clear: the bank debt was unsupportable despite the responsibility of all the parties for placing it on the shoulders of the Irish people and something had to be done to prevent a disorderly bankruptcy.  This would have been caused by inability to raise the financing required to run the State at remotely affordable interest rates.  The average maturity of the main sovereign debt of about €80bn is around six and a half years, which has to be renewed by borrowing this amount again to pay it off – ‘rolling over’ the debt.  Combined with a possible promissory note repayment of over €28bn averaging five years and continued deficits this looked close to impossible.

Not that anyone dared point out that the deal exposed the lie of the Government parties, of the previous administration, and of the current Governor of the Irish Central Bank that the deb was ‘manageable’.

Ignoring this also allowed the media to largely stay clear of why this deal was necessary in the first place.  The Irish State had decided it would protect the investors in two thoroughly rotten institutions, run recklessly by their owners, by promising them that the Irish working class would pay off their gambling bets.

The Irish State never asked workers whether they wanted to, or whether they thought it was a good idea, but conceived the original bank guarantee in the middle of the night, as a scheme concocted without even the presence of cabinet ministers who were supposed to make up the Government.  In effect it decided to pledge money it didn’t have to people we still did not know and get everyone else to pay for it, including generations not yet born.

As ever we are bombarded with propaganda that cuts must be made in wages and services; increases must be applied to taxes, charges and working hours and all because we need to be competitive.  Yet billions that could not possibly be afforded were pledged and paid that bankrupted the State.  This in turn necessitated a ‘bail-out’ by the EU and IMF, which is akin to a blood transfusion to a dying patient so that she can work to earn money to pay the vampire.

As the Croke Park deal is ripped up and more draconian conditions inserted – not ‘extended’ as claimed – on the back of demands for austerity, no austerity is to be inflicted on the capitalist gamblers.  While money can be wasted on dead banks money must be cut out of wages and services because ‘we’ can’t afford it.

This is the logic of the capitalist system but it is hidden not just by the mass media and politicians but by the opaque workings of the capitalist system itself, made more complicated by the complexity of the financial system.  This complexity is useful because when it is more difficult to understand and appreciate what is going on it is more difficult to fight against it.  Only vague ideas that you are being screwed do not help give you confidence to say stop!

That is the importance of understanding as much as possible what the promissory note deal involves.

When the State guaranteed the liabilities of the banks in September 2008 it claimed the problem was one of liquidity, that is the banks were basically sound but were in danger because they would not lend to each other.  There might also be a withdrawal of money by depositors.  This was the purest rubbish and the gamblers who had put their money into Anglo-Irish Bank and Irish Nationwide didn’t buy it.  They took their money and ran.  Deposits in these institutions, packaged together as the Irish Bank Resolution Corporation (IBRC), fell from €65.8bn at the end of 2007 to €1bn at the end of 2011 while the value of debt securities funding the IBRC fell from €30.85bn to €6.3bn during the same period.

So if the IBRC was bust where did the money come from to give to the depositors and holders of the IBRC debt?  The answer is that it came in the form of Exceptional Liquidity Assistance (ELA) from  the Central Bank of Ireland (CBI).   This ELA funding to the IBRC was zero in 2007 and €40.1bn at the end of 2011. ELA is money so the question is where did it come from, how did the CBI get it?

In many ways the CBI may be thought of as the Irish branch of the European Central Bank (ECB).  The ECB has strict rules about money creation (money printing) so the local branch in Ireland could not just print Euros (metaphorically speaking) although this is one of the things Central Banks can do.

Nevertheless the CBI was able to give money in the form of ELA to IBRC which then paid off its depositors and holders of debt securities.  Since this bank and building society were broke the state nationalised them making all their reckless speculation our reckless speculation and making their debts everyone else’s debts.  Because the State didn’t have the money either to pay back the speculators they issued IOUs to the Central Bank of Ireland in return for their money’ the ELA.

The result was that the CBI gave money to the State in the form of IBRC and the State gave the CBI promises to pay this money back with interest.  Although the two institutions that became the IBRC had issued loans which were due to be repaid many of these were worthless so only through the state intervening could the capitalist investors in these institutions get their money back.

The promissory note IOUs were the promise by the State that through tax increases, wage cuts and public service cuts the working class would ensure they got their money.  This is what prevented the ELA being simply money printing and thus prevent the CBI holding worthless pieces of paper.

So the cuts to wages and public services that are justified by the claims that we need to be competitive are partly in order to pay the debts of a very uncompetitive bank.  So uncompetitive it is now dead, having been in a zombie-like state for the last few years.  When the State pays part of the promissory note IOU to the CBI the Irish Central Bank has ‘taken the money out of circulation’, again to ensure the problem is not solved by printing money.  In other words the money workers paid through austerity is simply burnt (again metaphorically speaking).

What could be more uncompetitive than maintaining dead banks on life support through burning money by putting real people on the dole and cutting services such as education?  The promissory note episode is one object lesson in the irrationality of the capitalist system.

This course of action could not have been taken by the Irish Central Bank and the Irish State without the approval of the European Central Bank and the European Union and its Commission.  For them the over-riding concern has been the protection of the European banking system just as the main objective of the Irish State has been the protection of the Irish banks.  Nationalist complaints that the Irish have made sacrifices for everyone else, much trumpeted by trade union leaders, has to ignore this.

If Irish workers have paid more so far it is because the Irish banks have been weaker and more rotten and Ireland remains a subordinated country which is dependent on foreign money for its speculative bubbles.

If the Irish State’s attempt to save the banking system required the ultimate liquidation of the IBRC this is because there was, in the end, little left to save after all the depositors and holders of its debt securities had been paid.  Again only the workers, in this case of the two institutions, are threatened with picking up the bill through redundancy.

For the Irish State this promissory note device to ensure that it did its best for European banks (and its own) had some advantages and disadvantages.  Of course inability to actually afford it is one big disadvantage but if it can get workers to accept austerity then this is not such an insurmountable obstacle.

The ECB does not want to lend money to institutions that cannot pay it back and since IBRC was bust its actions in approving the lending by its local branch raised some controversy.  If for example it lent to a bank that went bust and which didn’t pay back the money lent this money would then have entered the economy (through those people the bank did pay back, its employees or new loans) and this would amount to money creation/printing.  This can create inflation and low inflation is the primary objective of the ECB.  A strong currency allows a state, or in this case the Eurozone, to command greater resources on the world stage and is thus integral to the project of a strong EU imperialism.

The ECB thus regularly monitors (every few weeks) its ELA so their approval or otherwise was always hanging over the Irish State, although even without this it remains under close and regular scrutiny.

An advantage of the promissory note arrangement that will be lost at some stage with the new deal is that because the State owes the money to the Irish Central Bank profits by the ICB on the loans can be returned to the Irish State.  Given the high interest rate of over 8 per cent this is important.

Because a lot of the ELA created by the Irish Central Bank has ultimately been paid by IBRC to banks and institutions in other EU states the ECB has had to lend money to the ICB so that the reserves of the Irish Central Bank do not decline dramatically.  The ECB charges the ICB for this money but at a low interest rate so that the difference between this low interest rate charged to the ICB and the higher interest rate charged by the ICB to IBRC is a profit which can go to the Irish State.

What this means in terms of the current benefits of the new deal is that the move to a lower interest rate on the Government bonds that replace the promissory notes is not a gain since the effective rate of interest actually paid on the notes is the rate charged by the ECB to the Irish Central Bank and not that charged on the promissory notes.  As explained the profit generated by the latter is taken by the Irish Central Bank and returned to the State.

In the next post I will look at the new deal to replace the promissory notes.

Default on the debt – part 3

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How would a policy of default be implemented?  There might appear to be two ways for this to be achieved.  The left could demand it as part of a manifesto to win a majority in the Dail whereupon this majority would implement the policy.  This is however neither immediately realistic, practical nor will the Irish State allow workers to use the machinery of the State to challenge the capitalist system, which is what a left default would represent.

The second is that we think pressure can be put on the existing State to repudiate at least part of the debt and lessen the demands for austerity.  The Irish State already wishes to get concessions from the EU and ECB but on a very limited scale and with all the strength of a beggar asking for change.  However no amount of pressure will get the Irish State to break with the EU, IMF or the US.  If any significant concessions are ever offered it will only be in response to either recognition that the interests of European capitalism as a whole, or the Euro project, is threatened (which is why we now have the latest deal)or if a socialist movement threatens to do more than repudiate the debt. We are nowhere near the latter situation and it is not the current perspective of the left, which is the subject of these posts.

From a Marxist perspective repudiation should not be sought in order that the existing capitalist economy should grow, although that is a better capitalist alternative for workers than the existing policy – if it could work.  It should be part of a strategy of assisting the creation of a working class alternative that will ultimately overthrow this economic system and the state that defends it.  We should not seek salvation from a Keynesian alternative that seeks to grow the capitalist economy because Keynesianism seeks only to postpone austerity and to effect wage reductions through inflation.

The role and place of the demand for repudiation must therefore be dependent on the stage of development of the creation of this workers alternative.  We are neither at a point where the majority of the population actively seeks repudiation of the debt or even believes it a necessity and nor are we at a stage where a large movement is building up support for such a demand.  Most importantly we are not at the point where the working class in in a position to reject the necessary laws of capitalism and present itself to society with a new alternative.  By alternative I mean not absence of debt through repudiation but an alternative to the capitalist system, of which debt is a symptom.  And by ‘present itself’ I mean not promises that things will be better under socialism, but be in a position to show actual examples of workers power in the economy and society. The demand to repudiate the debt is therefore currently limited to an educational role, a propaganda role.

This does not mean that it is unimportant. The argument on debt is important in supporting opposition to austerity, which is the only way at present that workers can actually counter the effects of the debt and in effect seek their own means of repudiating it.  It plays a role in persuading workers that ending austerity is not only desirable but possible.  The wider and deeper the opposition to austerity the more convincing this argument will have to be.  The wider and more successful opposition becomes the more other elements of the programme become important, but we will take these up one by one as we proceed.

In relation to debt repudiation socialists are regularly challenged on the effects their proposals would have on the workings of the capitalist economy.  It has already been claimed that repudiation of the debt would lead to a flight of capital and virtual collapse of the banking and credit system and that, absent outside help from those just told to take their losses, it would lead to severe economic dislocation.  The crisis would intensify across Europe and beyond and lengthen and deepen the recession.  The reputation of the Irish State as a haven for multinational business and as a site for financial speculation would be in tatters.  The loss of capitalist confidence on its own would increase unemployment.  This of course does not affect in the least the purpose of our demand for debt repudiation, which is to win workers away from acceptance of payment for the crisis and for the debts of the State.  As we have seen above, we do not actually currently control any mechanism to repudiate the debt.

Nevertheless the arguments against repudiation of the debt and the effects such repudiation would cause are not false, they are not a lie, or a simple blackmail because in large measure they are true.  Repudiation of debt by a Russian or Argentinian government determined to get back into the markets by assaulting working class living standards do not provide the model for a working class default beyond countering arguments that it is in itself simply impossible.  While for socialists they do not outweigh the necessity to persuade workers to take no responsibility for the crisis they do expose the need not just for a socialist opposition but for a socialist alternative.

For Marxists, as we have said, the achievement of socialism is based not on sound and logical argument but on necessity.  If the socialist alternative is not practical then it will not succeed and will certainly not win the working class to take it up as its own programme.  This is the underlying reason we pointed to for the defeat in the referendum – that we are as yet far from having a real alternative – practical ,immediate, in place right now, contesting for hegemony because it is widely if not yet universally recognised as a real, potential, living alternative.

Sine this alternative is the working class taking ownership and control of the economy, the state and society as a whole we have to answer a very simple question today, right now: is the working class poised to take ownership and control of the economy to counter the sabotage of the capitalist class as we repudiate the debts to its big cousins in the European Banks?

That is the working class as it presently exists in reality; not an idealised one that resides in books or in abstract slogans, but the working people in your street, your neighbourhood and your workplace?  Have they been readying themselves to take over the running of the economy and the state; have they already taken over, or are in control of some workplaces?  Are they perfecting their organisation?  Have they been debating the necessity to do so, the requirements of doing so, the burning necessity to do so – to carry out a veritable revolution?  If not then we currently have no answer, or no practical answer, to the capitalist charge that what we propose, if implemented right now, would simply cause chaos.

That we, the working class, are not yet ready to take over society is obvious because we can see this every day if we live within working class communities and work alongside other workers.

A fatal answer to this current weakness is to seek salvation through a non-working class solution which at first glance might look more ‘practical’ or ‘realistic’: calling on the State to do what can only be done by workers.  Calling for nationalisation when what we stand for is ownership and control by the workers, not the capitalist state.

Instead of such ‘short cuts’ to a different destination Marxists recognise that we need to put forward a comprehensive programme that addresses the needs and interests of the working class and that repudiation of the debt, which is not even a specifically socialist measure, is only one element of this.  It is necessary to place any specific demand within an overall programme that represents a real alternative.  This does not mean that we need always to proclaim a veritable shopping list of demands or that specific and often very limited struggles and demands are not where we really are at.  It is to understand and be able to explain how any particular struggle fits within a global alternative.  As we have said, this alternative must assume a living corporeal reality to count as a real alternative and not simply a logically coherent programme.  The beginning of a living alternative based on a coherent programme is defending the working class by supporting its resistance to austerity and renouncing its responsibility for the causes of the austerity.  Only on such resistance can an alternative be built.

In addressing the austerity inflicted to pay off the State’s debt the left has recognised the necessity for a wider alternative by calling for the continuing budget deficit to be made whole by progressive taxation of the rich.  In our next post we will look at this part of the left alternative.

One more issue merits being addressed in the context of the Marxist approach to the state’s debt.  This is the call for an audit of the debt.  The burden of the bank debt was placed on the workers’ shoulders in order to pay bondholders, but who are or were these bondholders?  Who got paid in full or is awaiting payment that is a hedge fund used by the fabulously wealthy who bought the bonds at a huge discount or who already had insurance for default?  Who is the recipient of this huge transfer of wealth from working people? This is an elementary demand and is not an alternative to repudiation.

For example, what if we found that it was a workers pension fund that held the debt?  Then we could say to them – let’s talk about what effect it would have on your pensions of us not paying this debt.  What arrangements could we come to which would recognise the legitimate claims of both sides?  What if this pension fund was privately managed and subject to the normal charges by its managers which excluded the control of its members or even knowledge of what mangers were doing? Then we might say – ok, we recognise that we should not deprive you of your pensions but we have no obligation to fund the huge charges that allow the financial services industry to pay its managers and bosses salaries and bonuses that are counted in the millions.  We will take ownership of our debt if you, the workers of this pension fund, take ownership of this fund and do not use it to speculate against the living standards of other workers.

Such a debt audit is thus not a call for justification of the debt but becomes a call to action – a workers’ enquiry to determine its ownership and its beneficiaries now and in the past.  A call to action to repudiate what is not legitimate in our eyes and accept what we believe is legitimate by demanding the actions that make it so.

The argument will come back that this debt is subject to rules of confidentiality that are imposed by market exchanges in foreign countries.  Ok then, the debt we still owe should not be paid until we know who we are paying, that it is the appropriate amount and does not involve an unfair redistribution of wealth from workers to international spivs.  If the bondholders have already been repaid we still want to know who walked off with our money since we are still paying for it and we weren’t asked for permission in the first place.

The demand for an audit is a demand for the books to be opened on international finance and is the first step to taking it over.  The very first step in this would be bank workers doing a ‘Wikileaks’ and releasing all the emails and documents relating to the debt guarantee and repayment.  What an education that would be, especially the howls of condemnation from the powers that be – despite this being our money that is being paid over, our banks that we are supposed to own and our Government and State which are supposed to be defending our interests.

The demand for an audit is entirely legitimate; it is the first step to control and to demonstrating the legitimacy of repudiation.

Default on the debt – part 2

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This post was largely written before the latest initiative of the EU, which has been hailed by Government parties as a major breakthrough for Ireland although we can be confident there will be no slacking in the austerity programme.

The devil in these deals is always in the detail, or so the cliché goes, but this is only partially correct.  The deal will also do little to reverse the austerity agenda in Europe, which is the big picture, and without this the crisis in the Eurozone will not be resolved.

The plan appears to involve the funds in the European Stability Mechanism going straight to the banks instead of the National State beforehand, thus avoiding the immediate burden on the State through increased sovereign debt and pressure on interest rates.  This was demanded by Spain and Italy and Germany has backed down.

The Irish now hope to piggy-back on this to get similar treatment, except this approach would have to be applied retrospectively as the EU demanded exactly the opposite in the Irish deal.  Since the Irish State owns the banks the debts of the banks are the debts of the State, which workers are expected to pay.  Michael Noonan has claimed that when the EU takes over lending to the Irish banks it will take over the asset side of the banks as well, in other words it will own them.  Whether this would involve the EU owning the shipwreck that is Anglo-Irish and Irish Nationwide is an open question and the deal may mean no more than extending the repayments and a little lower interest rate.

In any case socialists must exploit any concession to demand more, as the post below argues, and should draw attention to the concern in the EU statement about the sustainability of the Irish debt to demand that it be repudiated.  The post below is mostly about the tactical way this may be put forward and is therefore timely.

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So what should socialists demand now?  Should we demand repudiation of all the debt even that incurred before the economic crash?  What would be the rationale for this?  Should this include the debt currently being piled up to pay for day to day expenditure on public services?  Should we limit our call to repudiation of that part of the debt that is a result of the bank bailout, or add to this the pension savings wasted on buying the banks?  Who do we take this latter money from since it involves an arbitrary decision on who the state would otherwise have borrowed from instead of using the pension reserve?  In other words default on a sum of money that wasn’t actually borrowed!

It might be that some socialists believe that it is a betrayal of the working class if we do not always demand repudiation of all the debt, although these socialists would still be ignoring costs of bailing out the banks that didn’t result in debt creation while including repudiation of debt that had nothing to do with the banks.

But this brings us back to our point about socialists more or less ignoring the private debts bearing down on workers while not demanding that they be defaulted on. Is this a betrayal of the working class also?  One possible answer to such a charge is that to seek this as well would be to conflate two questions, that of the burden of debt generally and of the specific austerity drive resulting from the explosion of State debt in particular.  This would seem to me to be a valid argument.   It has to be recognised however that in making this argument we are making a political judgement.  It is not primarily about the absolute effect of debt on workers.  It is not a moral argument.

It should therefore be accepted that it may also be permissible to demand repudiation of the bankers’ debt while not believing that it is politically best at all times and in all places to call for rejection of all the debt.  This might be because doing so might no longer allow particular emphasis to be placed on the argument about acceptance of the bankers’ debt.  While it may be claimed that the huge deficits incurred, and to be incurred over the next number of years, are more or less a direct result of the bankers and developers crash we would be obliged, if we accepted this logic, to still accept payment of the debt that was not the result of the financial crisis.

In the end however the left must accept that whatever the advantages of propaganda in opposition to the debt of the bankers, or specifically on the promissory notes, this can really only be a matter of presentation for propaganda or educational purposes.  It cannot represent a deeper policy or strategy.  If successful this approach would anyway have to recede and give way to stronger arguments if it proved successful in winning workers to reject paying the debt.

To agree that the debt created by the budget deficits are simply an indirect result of the banking crash, if not the direct result of assuming banks’ gambling debts, means not explaining what has just happened.  This crisis is not ultimately the result of gambling debts but an abnormally large crisis of overproduction which is a form of crisis that is anything but abnormal in capitalism.  In other words the deficits are the result of a capitalist crisis and socialists should not be diverting workers from this fundamental truth by claiming it is the result of individual bankers or individual banks.

This is also true of the direct debts of the banks themselves that the left has prioritised.  In the last analysis the irrationality of the behaviour of Anglo-Irish and Nationwide banks etc is simply an expression of the irrationality of the system as a whole and it is this we want workers to learn.  The obvious greed, recklessness and stupidity of the individuals and banks involved must be held up as typical examples of the whole rotten and bankrupt system not particularly egregious exceptions.

So if we highlight the direct debt of the banks as the centre of a campaign to repudiate the debt this in no way means acceptance that workers have a duty to pay any of it, any more than we think workers should take responsibility for any other result of a capitalist economic crisis.  It is a matter of what we think are the political demands that will allow workers to come to an understanding of the causes of the crisis and mobilise in their own defence.  This is the decisive criteria for determining the demands that socialist should raise in respect of the debt. It is a tactical decision how we raise the question of debt repudiation, although it’s only a question of tactics if we reject responsibility for any of it.  It is rather like prioritising resistance against some particular item of austerity while not thereby accepting any of it.

We are not at the point where we can realistically hope to build a movement on the basis that workers do not accept any responsibility for the actions of the Irish State.  Identification with this state is derived in no small way from nationalist and bourgeois illusions in its legitimacy.  So the point is to break these illusions, not engage in political projects that assume they have already been erased.

If we believe that the debt is still so large after repudiation or amelioration of the bankers’ debts that the austerity demanded to repay it, or to narrow the State’s budget deficit, will still cripple workers then it would be wrong to accept this debt.  In this case it might be necessary to use the fight over the bankers’ debt as only one step to challenging payment of any of the debt.  (This might be the opportunity provided by the latest putative deal)  We would then be making clear that workers face a choice – acceptance of the legitimacy of the state’s demands or the legitimacy of their own needs.

Arguments around the origin of some of the debt arising from the banks would then play a subsidiary role to the contention that we simply can’t afford to pay these debts and will not pay them.  These arguments however might greatly assist this larger purpose.

This is the situation we are now in.  The level of debt is simply not supportable and the word restructuring will be applied where the word default would be more accurate.  When this happens it should be exploited to discredit the whole exercise, especially the bank bailout, and to push forward the demand for further debt repudiation.

This brings us to what the status of this demand is: why do we demand it and what role does it play in our socialist alternative?  After all, repudiation of the debt is not in itself a socialist demand.  Two of the most recent defaults have been by Argentina and Russia and neither of these were part of a socialist project but rather part of a policy that inflicted deep suffering on millions of workers.

We demand repudiation because of the suffering it inflicts and because if it is accepted workers cannot be in a position to create their own alternative.  We demand it because it puts the needs of workers before the demands of the capitalist system.  We demand it to give workers the opportunity to break with their illusions in ‘their’ State, whether derived from nationalist beliefs in the legitimacy of the nation state or illusions that the state is democratic and legitimate.  If this can best be approached today by putting to the fore the debts being paid on behalf of the banks then this is legitimate and appropriate.

Default on the Debt – part 1

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The key argument of the Yes side in the Austerity referendum was that if there wasn’t a yes vote the state would lose access to the European Stability Mechanism (ESM) needed for a potential second bail out and the ATMs would run dry.  Much of the No campaign responded by saying that we could get access to the ESM, especially if the Government made this a condition of supporting the Treaty changes necessary to allow it to come into force; that the EU had promised to continue to support the Irish State; that anyway it could get money from the existing European Financial Stability Facility until June 2013 or it could access funding from the IMF.

You should know you’re in trouble when you’re putting forward the IMF as a solution.  Just what would the IMF or the EU, or anyone else in a position to do so, ask for in return for a new loan but more austerity?  As an alternative to austerity a new loan made about as much sense as another pub crawl for an alcoholic.

The alternative put forward by the left, which did not feature enough in the campaign, was defaulting on the debt so that the necessity for getting a new loan and suffering austerity to repay the existing ones was reduced.  The argument put forward for this was clear, logical and appealing.  We, the workers, should not pay these debts because these debts were not ours to repay.  We didn’t take out the loans so why should we pay them back?  The gambling debts of the bankers and property developers are theirs to repay.  If European banks were stupid enough to lend money to stupid and reckless Irish banks that lent to stupid and reckless developers then the rules of capitalism say that you take the downside of the risk which you claim justifies your reward.

But there is a problem.  Actually there are two problems.  The first we dealt with in our post on the referendum result.  Most Irish workers knew these arguments and enough of them either discounted them for what they thought were stronger ones or didn’t think they could challenge the forces gaining from paying off the debt – the bankers, developers, Irish State, EU, IMF, US etc.  In our article we stated that in an important way they are correct.

Marxists believe that it is not ideas that fundamentally shape the world but the economic and social forces that shape peoples’ lives and also shape their world view.  No matter how good a Marxist argument or idea is, if the capitalist reality is not challenged by a stronger reality the Marxist argument or idea will not prevail.  This is what the referendum result taught us.  The lesson is that we must create a new reality, one based on working class economic, social and political power if we are to hope to win battles like the austerity referendum and ultimately overcome capitalism.

But this also has implications for the Marxist argument itself.  For if political ideas and arguments are   ultimately only as good as their correspondence to reality and this reality does not currently allow victory for the working class then in what way is the argument presented above deficient?  We should want to know this so that we can clarify our arguments and our programme the better to fight for our ideas inside the working class and help create this new reality.

This does not mean we abandon our ideas but rather understand that to the extent that they do not engage the working class they lack power and to the extent that they do not represent the interests of the working class they will never represent their power.

When we call for repudiation of the debt, what do we mean?  In 2011 total debt equalled 494 per cent of national income, which at the end of the 2010 was roughly €129 billion, so that the debt was roughly €637 billion.  Paying off all this debt, even over 25 years, would lead to a depression which would make the 1930s look like the Celtic Tiger.  No one is seriously suggesting it.  In fact no one would even think of it.  This obvious inconsistency of treatment between public and private debt is a question not just for the ideological advocates of austerity but also for us.

I recently attended a meeting at which I asked why Marxists saw public debt as so very different from other debt, as do the ideologues of the right.  The best answer I got was that there was an assault on working people and their social wage as a result of the government’s austerity agenda which focussed the fight to defend working class interests.   And all this is true.  But it is also true that the financial crisis is not just one of the insolvency of the State but also of the banks which have lent to workers and to businesses.  It is a generalised economic crisis in which the debts of the state are smaller than private debt held by households and businesses.  The share of debt belonging to the State last year was roughly 28 per cent of the total, that of households 30 per cent and of businesses 42 per cent.

Such is the level of indebtedness of the Irish economy that ‘deleveraging’, or paying down these debts, is a necessary part of the system returning to some sort of normality (whatever that is).  There has therefore been a credit crunch and businesses have complained of difficulty in getting loans and those wishing to buy houses, even in seemingly sound financial circumstances, have also found it extremely difficult.  The austerity imposed on households and businesses, just like that imposed to solve the State’s debt crisis, has led to unemployment, reduced incomes and the very real threat of repossession of homes.  These are consequences every bit as severe as many of the measures required to reduce the public debt.  Yet are there calls to repudiate the debt of households, the self-employed and small businesses?  Why not?  The consequences for working people, as I have said, can be equally dramatic.

This may seem an abstruse, pedantic or simply irrelevant point in the context of a political campaign against austerity imposed by the government but I want to make a point which is relevant to it, even ignoring for the moment the issues raised by the exploitation of working people by their entanglement in private debt.

The argument that has been employed by the left has been that workers should not pay for the debts of the gambling banks.  This is a powerful argument that has robbed many of illusions in the current arrangements, albeit they do not see it as being the result of a fundamental flaw of the capitalist system and as yet see no alternative, certainly not one that rests in their own hands.

When the crisis exploded in September 2008 the left denounced the proposed bail out of the banks with workers’ money given with the blanket guarantee.  Even capitalist commentators were simply astounded at its generosity to the banks.  But it went ahead.  So what part of the existing debt is now a direct result of bailing out the banks?

There are different figures for the debt quoted by different authorities at different points in time and having very accurate figures depends on the assumptions made, for example whether to include potential losses in NAMA or whether there are further losses coming down the track from the banks.  All this is very important but not for our purposes where tolerably accurate amounts are only required to make the point.  Before the crisis the debt was €47 billion.  Annual budget deficits between 2008 and 2015 will have generated around €99 billion of borrowings and further borrowings of €13 billion were held in cash at the end of the year.  On top of this the bank bailout will have cost €47billion, making a total debt of €206 billion. (Figures from Seamus Coffey in ‘What if Ireland Defaults?’, Orpen Press 2012)

On the other hand the economist Karl Whelan on his blog has stated that the total outlay and commitments to the bank bailout will be €63 billion.  It is not necessary to try to reconcile the two amounts since they are not measuring the same thing.  For example Whelan’s total includes €20.7 billion invested in acquiring ownership of the banks using money from the National Pension Reserve Fund.  It is a cost of the bank bailout but it did not in itself result in creation of debt.  The state spent €28.1 billion buying shares that Whelan believes are scarcely worth €9 billion now, which will be a loss to the taxpayer but also not a debt.  This underscores the reality that while socialists opposed the bank bailout of September 2008, its implementation  has resulted in losses which have already been paid by workers but do not sit as debt on the State’s balance sheet.

Some of the cost is still in the process of being foisted on the working class taxpayer, such as the €31 billion of promissory notes to ‘save’ a dead bank, Anglo-Irish, now renamed the Irish Bank Resolution Corporation.  In reality the only people saved have been its bondholders.  We now have to pay the money back through tax increases and expenditure cuts which will generate the money to fund payment of the promissory notes to the local branch of the European Central Bank, the Central Bank of Ireland (CBI).  The CBI lent the money to the State to save these bondholders in the first place and will, when it is paid back to them, ‘retire’ the money, or burn it (figuratively speaking).  So much for the rationality of capitalism.

So when socialists say repudiate the debt of the bankers this neither includes all the debt nor all the cost of the bailout.  When it is demanded that the bondholders be ‘burned’ the boat has really been missed on this one.  The bondholders have been saved and the working class of Ireland has had its pension savings robbed and been saddled with enormous debt.