by Ellen Brown
December 22, 2009
Ellen Brown is a California
attorney and the author of eleven books, including “Web of Debt: The
Shocking Truth About Our Money System and How We Can Break Free,”
available in English, Swedish and German. Her websites are
Europe’s small, debt-strapped countries could
follow the lead of Argentina and simply walk away from their debts. That
would shift the burden to the creditor countries, which could solve the
problem merely by a change in accounting rules.
Total financial collapse, once a problem only for developing countries, has
now come to Europe.
International Monetary Fund is imposing its
“austerity measures” on the outer circle of the European Union, with Greece,
Iceland and Latvia the hardest hit. But these are not your ordinary third
world debtor supplicants.
the Vikings of Iceland successfully
Latvian tribes repulsed the Vikings
the Greeks conquered the whole Persian
If anyone can stand up to the IMF, these
stalwart European warriors can.
Dozens of countries have defaulted on their debts in recent decades, the
most recent being Dubai, which declared a debt moratorium on November 26,
If the once lavishly-rich Arab emirate can
default, more desperate countries can; and when the alternative is to
destroy the local economy, it is hard to argue that they shouldn’t. That
is particularly true when the creditors are largely responsible for the
debtor’s troubles, and there are good grounds for arguing the debts are not
Greece’s troubles originated when low interest
rates that were inappropriate for Greece were maintained to rescue Germany
from an economic slump. And Iceland and Latvia have been saddled with
responsibility for private obligations to which they were not parties.
Michael Hudson writes:
“The European Union and International
Monetary Fund have told them to replace private debts with public
obligations, and to pay by raising taxes, slashing public spending and
obliging citizens to deplete their savings.
Resentment is growing not only toward those
who ran up these debts... but also toward the neoliberal foreign
advisors and creditors who pressured these governments to sell off the
banks and public infrastructure to insiders.”
The Dysfunctional EU -
Where a Common Currency Fails
Greece may be the first in the EU outer circle to revolt.
According to Ambrose Evans-Pritchard in
Sunday’s Daily Telegraph,
“Greece has become the first country on the
distressed fringes of Europe's monetary union to defy Brussels and
reject the Dark Age leech-cure of wage deflation.”
Prime Minister George Papandreou said on
"Salaried workers will not pay for this
situation: we will not proceed with wage freezes or cuts. We did not
come to power to tear down the social state."
“Mr Papandreou has good reason to throw the
gauntlet at Europe's feet. Greece is being told to adopt an IMF-style
austerity package, without the devaluation so central to IMF plans. The
prescription is ruinous and patently self-defeating.”
The currency cannot be devalued because the same
Euro is used by all. That means that while the country’s ability to repay is
being crippled by austerity measures, there is no way to lower the cost of
“The deeper truth that few in Euroland are
willing to discuss is that
EMU is inherently dysfunctional – for
Greece, for Germany, for everybody.”
Which is all the more reason that Iceland, which
is not yet a member of the EU, might want to reconsider its position.
As a condition of membership, Iceland is being
required to endorse an agreement in which it would reimburse Dutch and
British depositors who lost money in the collapse of IceSave, an offshore
division of Iceland’s leading private bank.
Eva Joly, a Norwegian-French magistrate
hired to investigate the Icelandic bank collapse, calls it blackmail.
She warns that succumbing to the EU’s demands will drain Iceland of its
resources and its people, who are being forced to emigrate to find work.
Latvia is a member of the EU and is expected to adopt the Euro, but it has
not yet reached that stage. Meanwhile, the EU and IMF have told the
government to borrow foreign currency
to stabilize the exchange rate of the local
currency, in order to help borrowers pay mortgages taken out in foreign
currencies from foreign banks.
As a condition of IMF funding, the usual
government cutbacks are also being required.
Nils Muiznieks, head of the Advanced
Social and Political Research Institute in Riga, Latvia, complained:
“The rest of the world is implementing
stimulus packages ranging from anywhere between one percent and ten
percent of GDP but at the same time, Latvia has been asked to make deep
cuts in spending - a total of about 38 percent this year in the public
sector - and raise taxes to meet budget shortfalls.”
In November, the Latvian government adopted its
harshest budget of recent years, with cuts of nearly 11%.
The government had already raised taxes, slashed
public spending and government wages, and shut dozens of schools and
hospitals. As a result, the
national bank forecasts a 17.5% decline in
the economy this year, just when it needs a productive economy to get back
on its feet.
In Iceland, the economy
contracted by 7.2% during the third
quarter, the biggest fall on record. As in other countries squeezed by
neo-liberal tourniquets on productivity, employment and output are being
crippled, bringing these economies to their knees.
The cynical view is that may have been the intent.
Instead of helping post-Soviet nations develop
self-reliant economies, writes
“the West has viewed them as economic
oysters to be broken up to indebt them in order to extract interest
charges and capital gains, leaving them empty shells.”
But the people are not submitting quietly to all
In Latvia last week, while the Parliament
debated what to do about the nation’s debt, thousands of demonstrating
students and teachers filled the streets, protesting the closing of a
hundred schools and reductions in teacher salaries of up to 60%.
Demonstrators held signs saying,
"They have sold their souls to the devil"
and "We are against poverty."
In the Iceland Parliament, the IceSave debate
had been going on for over 140 hours at last report, a new record; and a
growing portion of the population opposes underwriting a debt they believe
the government does not owe.
In a December 3 article in The Daily Mail titled “What
Iceland Can Teach the Tories,” Mary Ellen Synon wrote that
ever since the Icelandic economy collapsed last year,
“the empire builders of Brussels have been
confident that the bankrupt and frightened Icelanders must finally be
ready to exchange their independence for the ‘stability’ of EU
But last month, an opinion poll showed that 54
percent of all Icelanders oppose membership, with just 29 percent in favor.
“The Icelanders may have been scared out of
their wits last year, but they are now climbing out from under the ruins
of their prosperity and have decided that the most valuable thing they
have left is their independence. They are not willing to trade it, not
even for the possibility of a bail-out by the European Central Bank.”
Iceland, Latvia and Greece are all in a position
to call the bluff of the IMF and EU.
In an October 1 article called “Latvia
- The Insanity Continues,” Marshall Auerback maintained
that Latvia’s debt problem could be fixed over a weekend, by a list of
not answering the phone when foreign
creditors call the government
declaring the banks insolvent,
converting their external debt to equity, and having them reopen
with full deposit insurance guaranteed in local currency
offering “a local currency minimum wage
job that includes healthcare to anyone willing and able to work as
was done in Argentina after the Kirchner regime repudiated the IMF’s
toxic package of debt repayment.”
Evans-Pritchard suggested a similar
remedy for Greece, which he said could break out of its death loop by
following the lead of Argentina.
“restore its currency, devalue,
pass a law switching internal Euro debt into [the local currency], and
‘restructure’ foreign contracts.”
The Road Less Traveled
- Saying No to the IMF
Standing up to the IMF is not a well-worn path, but Argentina forged the
trail. In the face of dire predictions that the economy would collapse
without foreign credit, in 2001 it defied its creditors and simply walked
away from its debts.
By the fall of 2004, three years after a record
default on a debt of more than $100 billion, the country was well on the
road to recovery; and it achieved this feat without foreign help. The
economy grew by 8 percent for 2 consecutive years.
Exports increased, the currency was stable,
investors were returning, and unemployment had eased.
“This is a remarkable historical event, one
that challenges 25 years of failed policies,” said economist Mark
Weisbrot in a 2004 interview quoted in The New York Times.
“While other countries are just limping
along, Argentina is experiencing very healthy growth with no sign that
it is unsustainable, and they’ve done it without having to make any
concessions to get foreign capital inflows.”
Weisbrot is co-director of a Washington-based
think tank called the Center for Economic and Policy Research, which
put out a study in October 2009 of 41 IMF debtor countries.
The study found
that the austere policies imposed by the IMF, including cutting spending and
tightening monetary policy, were more likely to damage than help those
That was also the conclusion of a study released last February by
Yonca Özdemir from the Middle East
Technical University in Ankara, comparing IMF assistance in Argentina
and Turkey. Both emerging markets faced severe economic crises in 2001,
preceded by chronic fiscal deficits, insufficient export growth, high
indebtedness, political instability, and wealth inequality.
Where Argentina broke ranks with the IMF, however, Turkey followed its
advice at every turn. The end result was that Argentina bounced back, while
Turkey is still in financial crisis. Turkey’s reliance on foreign investment
has made it highly susceptible to the global economic downturn. Argentina
chose instead to direct its investment inward, developing its domestic
To find the money for this development, Argentina did not need foreign
investors. It issued its own money and credit through its own central bank.
Earlier, when the national currency collapsed
completely in 1995 and again after 2000, Argentine local governments issued
local bonds that traded as currency. Provinces paid their employees with
paper receipts called “Debt-Cancelling Bonds” that were in currency units
equivalent to the Argentine Peso. The bonds canceled the provinces’ debts to
their employees and could be spent in the community.
The provinces had actually “monetized” their
debts, turning their bonds into legal tender.
Argentina is a large country with more resources than Iceland, Latvia or
Greece, but new technologies are now available that could make even small
See David Blume,
Alcohol Can Be a Gas.
Local Currency for
Issuing and lending currency is the sovereign right of governments, and it
is a right that Iceland and Latvia will lose if they join the EU, which
forbids member nations to borrow from their own central banks.
Latvia and Iceland both have natural resources
that could be developed if they had the credit to do it; and with sovereign
control over their local currencies, they could get that credit simply by
creating it on the books of their own publicly-owned banks.
In fact, there is nothing extraordinary in that proposal. All private banks
get the credit they lend simply by creating it on their books. Contrary to
popular belief, banks do not lend their own money or their depositors’
Federal Reserve attests,
banks lend new money, created by double-entry
bookkeeping as a deposit of the borrower on one side of the
bank’s books and as an asset of the bank on the other.
Besides thawing frozen credit pipes, credit created by governments has the
advantage that it can be issued interest-free.
Eliminating the cost of interest can cut
production costs dramatically.
Government-issued money to fund public projects has a long and
successful history, going back at least to
the early eighteenth century, when the American colony of Pennsylvania
issued money that was both lent and spent by the local government into the
economy. The result was an unprecedented period of prosperity, achieved
without producing price inflation and without taxing the people.
The island state of
Guernsey, located in the Channel Islands between England
and France, has funded infrastructure with government-issued money for over
200 years, without price inflation and without government debt.
During the First World War, when private banks were demanding 6 percent
interest, Australia’s publicly-owned Commonwealth Bank financed the
Australian government’s war effort at an interest rate of a fraction of 1
percent, saving Australians some $12 million in bank charges.
After the First World War, the bank’s governor
used the bank’s credit power to save Australians from the depression
conditions prevailing in other countries, by financing production and
home-building and lending funds to local governments for the construction of
roads, tramways, harbors, gasworks, and electric power plants.
The bank’s profits were paid back to the
A successful infrastructure program funded with interest-free national
credit was also instituted in New Zealand after it elected its first Labor
government in the 1930s. Credit issued by its nationalized central bank
allowed New Zealand to thrive at a time when the rest of the world was
struggling with poverty and lack of productivity.
The argument against governments issuing and lending money for
infrastructure is that it would be inflationary, but this need not be the
case. Price inflation results when "demand" (money) increases faster than
"supply" (goods and services). When the national currency is expanded to
fund productive projects, supply goes up along with demand, leaving consumer
In any case, as noted above, private banks themselves create the money they
lend. The process by which banks create money is inherently inflationary,
because they lend only the principal, not the interest necessary to pay
their loans off. To come up with the interest, new loans must be taken out,
continually inflating the money supply with new loan-money.
And since the money is going to the creditors
rather than into producing new goods and services, demand (money) increases
without increasing supply, producing price inflation. If credit were
extended for public infrastructure projects interest-free, inflation could
actually be reduced, by reducing the need to continually take out new loans
to find the elusive interest to service old loans.
The key is to use the newly-created money or credit for productive projects
that increase goods and services, rather than for speculation or to pay off
national debt in foreign currencies (the trap that Zimbabwe fell into).
The national currency
can be protected from speculators by:
imposing exchange controls, as Malaysia
did in 1998
imposing capital controls, as Brazil and
Taiwan are doing now
imposing a “Tobin tax,” a small tax on
trade in financial products
Making the Creditors
If the creditors are really interested in having
their debts repaid, they will see the wisdom of letting the debtor nation
build up its producing economy to give it something to pay with. If the
creditors are not really interested in repayment but are using the debt as a
tool to exploit the debtor country and strip it of its assets, the
creditors’ bluff needs to be called.
When the debtor nation refuses to pay, the burden shifts to the creditors to
make themselves whole.
Michael Rowbotham suggests that in the
modern world of electronic money, this can be accomplished by
creative banking regulators simply with a change in accounting rules. “Debt”
today is created with accounting entries, and it can be reversed with
Rowbotham outlines two ways the rules might be
changed to liquidate impossible-to-repay debt:
“The first option is to remove the
obligation on banks to maintain parity between assets and liabilities...
Thus, if a commercial bank held $10 billion worth of developing country
debt bonds, after cancellation it would be permitted in perpetuity to
have a $10 billion dollar deficit in its assets. This is a simple matter
“The second option... is to cancel the debt bonds, yet permit banks to
retain them for purposes of accountancy. The debts would be cancelled so
far as the developing nations were concerned, but still valid for the
purposes of a bank’s accounts. The bonds would then be held as
permanent, non-negotiable assets, at face value.”
If the banks were allowed either to carry
unrepayable loans on their books or to accept payment in local currency,
their assets and their solvency would be preserved.
Everyone could shake hands and get back to work.