Download Introducing Financial Accountability at the IBRD:

Debt Crises in Latin America,
Euroland, and Iceland
Conference:
The Eurozone and the Americas: Debt and Democracy
Austin, November 2-3, 2015
Kunibert Raffer
http://homepage.univie.ac.at/Kunibert.Raffer
© K Raffer 2015
“Debt Management” - Some Common Features
1) Neoliberal Crises
caused by neoliberal deregulation & liberalisation and used to push and enforce
neoliberal policies further:
“Structural Adjustment” - a “unique opportunity to achieve a comprehensive
and timely approach to policy reform” (Stern 1983:104); response to a
“feasible ... call for increased sacrifices” (ibid.: 91) by the population; “firm
understanding” of monitoring needed; “focus on policy and institutional
reform; and the detailed articulation of the precise modifications in policy”
Polak (1991 p.12): “The purpose of the Fund's conditionality is to make as
sure as possible that a country drawing on the Fund's resources pursues a set
of policies that are, in the Fund's view, appropriate to its economic situation
in general and its payments situation in particular”
“Over the years, the Fund has increasingly come to the realisation that even
though a country's export shortfall was both 'temporary' and largely beyond its
control the country might still have balance-of-payments difficulties
attributable to inappropriate policies” (ibid.: 9; stress mine)
“prior actions” can be used to the country's advantage according to Polak (1991 p.13,
stress mine) “to minimize the policy commitments it must make in its letter of intent and
thus to present itself as opting for adjustment on its own rather than under pressure from the
Fund”.
Rodrik (1996: 17): debt crisis opportunity seized by orthodox economists for a
“wholesale reform of prevailing policies”, chance “to wipe the slate clean and mount a
frontal attack on the entire range of policies in use.”
As democratic decisions may interfere with neoliberal “reforms” - "a lot of economists
feel deep down but find [it] politically incorrect to articulate“ that they prefer autocratic
reforms to democracy; "especially in new democracies“ (ibid., p.33).
“government of the time had both sufficient will and political power to carry out the
adjustments to the fiscal budget that were necessary in order to confront the social
security deficit, … important in advancing the reform.”
Acuña & Iglesias (2001, p.36; Social Protection Unit, IBRD) on Pinochet’s Chile
Difference: only in Euroland EU involved; EU more adamantly antidemocratic, defending adjustment policies and opposed to necessary haircuts than IMF
Greece: one referendum stopped by pressure, other ignored by EU-creditors;
ECB capped ELA before referendum, releasing more funds again after Greek
Parliament voted for those “reforms” forced on Greece by creditors
Role of Democracy in the EU according to EU top brass:
Jean-Claude Juncker answering question whether it is not a curious
understanding of democracy if in cases of emergency politicians ought
to override the will of the people
“Of course, politicians should obey the will of the people as
much as possible, if in doing so they continue respecting
European agreements.“
Interview in DER SPIEGEL 11 March 2013,
http://www.spiegel.de/spiegel/print/d-91464871.html
Re. honesty towards the principal (=people in a democracy):
“If things get serious one has to lie„ – Juncker defends „honest lies“
Source: Youtube from ARD-programme Hart aber Fair,
s. also FAZ 10 May 2011 or Die Presse.com 13 May 2011
Different Strategies EU-IMF :The Irish Example
controversy on whether to impose losses on the holders of €19 billion of senior
unsecured and unguaranteed debt; IMF initially favored a haircut of roughly
50%, proposal which gained full Irish government support. ECB opposed
approach on the grounds that it might disrupt the flow of wholesale funding to
other Eurozone banks
“The banks’ creditors, other than holders of its equity, were shielded from losses
for the time being, while Irish taxpayers were saddled with an enormous bill.
The absence of burden sharing undermined public support for the program.”
Eichengreen (2015)
“Concern about cross border euro area spillovers was the main argument against
a bailin … adversely affect euro area banks and their funding markets”
“The evidence is not clear … Irish (senior unsecured) bank bonds traded at the
time at levels consistent with clear anticipations of a principal hair-cut, reflecting
that some burden sharing was anticipated by bondholders and markets.”
“The lack of senior unsecured bondholder bail-in continues to have adverse
legacy effects ... many in Ireland question why Irish taxpayers should be the ones
covering the cost of addressing such euro area wide concerns”
IMF (2015) Ex Post Evaluation
2) Grave Regulatory and Policy Errors by Official Sector
Currency boards (“quasi monetry union”; Alcidi et al 2011):
“high credibility of Argentina’s currency board through 2000 helped enable the
country to borrow from the capital markets at spreads that did not fully reflect
the risks. … thus ultimately allowed a much bigger disaster to materialize” –
“currency board … encouraged the buildup of balance sheet mismatches”
IMF (2003) “Lessons from the Crisis in Argentina”, p.70
improvement in developing country access to international capital markets “has
been supported by regulatory changes, particularly in the Japanese bond
market. Quality guidelines for Samurai bond issues ... were relaxed further in
1992 and the minimum credit rating ... was lowered from A to BBB.”
(World Debt Tables 1993, pp.21f)
Pure coincidence: Mexico‘s Tesobonos had BBB before the 1994-5 crisis
IRELAND: banks’ officers with little practical experience with risk
management; lax internal controls and accountability; IMF 2007 Article IV
consultation praised banks for their “relatively high degree of arm’s length
transactions….[and] high standards in areas such as bank competition, investor
protection, and corporate transparency…”
Eichengreen (2015)
Eurozone (One Currency)
Regulatory Original Sins:
- Access to Eurozone even if/when official requirements were (clearly) not met
- Basel I and II: too low risk weights for euromembers (capital requirements
directives counteracting Basel II: EU-members’ captal weights of zero if debts
in own currency ; excluding highly rated sovereigns from “large exposure”
limit)
-
4
- Abolishing useful regulations
Watching Catastrophe Coming – Confessions of the IBRD after Asian Crisis
“Chile's structural adjustment loans highlighted the lack of prudential supervision of financial institutions in increasing the economy's vulnerability to the
point of collapse.“ - "key lesson ... prudential rules and surveillance are
necessary safeguards for the operation of domestic financial markets, rather
than unnecessary restrictions”, but this did not make "policy makers and
international financial institutions give these weaknesses appropriate weight” neglect of proper sequencing and institution building "featured prominently in
the Chile [1982] and Mexico [1994-5] crises.“
(IBRD, OED 1999)
3) Overoptimism
“Overoptimism appears to be a feature of most large IMF-supported programs.”
(IMF, IEO, 2003 p.30)
Overoptimism
at Work
(GREECE)
Source:
Guzman &
Heymann 2014
Redistribution towards the Rich/Asset Grabbing
Greece: “Bondholders were offered an exceptionally large cash sweetener in
the form of highly rated EFSF notes—worth 15 percent of the ‘old’ bond’s
face value and due to mature in 2013 and 2014. 40 These notes turned out to be
by far the most valuable component of the securities bundle offered to
creditors, representing almost two-thirds of its value”
“To our knowledge, this was the largest cash sweetener ever offered in a sovereign
debt restructuring (aside from outright cash buybacks). According to data by Cruces
and Trebesch (2013), the average cash sweetener across 180 debt restructurings since
1975 amounted to only 3.6 percent “
Zettelmeyer, Trebesch & Gulati 2013
40
“created a large risk for European taxpayers, and set precedents—
particularly in its very generous treatment of holdouts … likely to make
future debt restructurings in Europe more difficult. Partly as a result, it
will be hard to repeat a Greek-style restructuring elsewhere in Europe
should the need arise.”
ibid.,
Neoliberal Crises excellent pretext for further enhancing neoliberalism;
and neoliberalism by definiton against democracy ▬► Predator State
(© JKG)
“Vulture funds stand to make a fortune from a second Greek bailout
after buying hundreds of millions of euros of distressed sovereign debt
in the past few months.”
The Telegraph, Philip Aldrick, 25 June 2011
Robert Marquardt, founder of Signets, a fund of hedgefonds: Greek
crisis "certainly a great chance to make money".
(ibid)
Forced selling of state property at fire sale prices in Greece; shifting
losses onto taxpayers all over Euroland
Abusive credits (© JP Bohoslavsky): official sector lent knowing that
this would only delay open bankruptcy
NOT EVERYONE IS ALWAYS BAILED OUT: SPAIN
“Forcing investors in some of the banks’ debt to take losses was a condition
imposed by contributors to the bail-out funds to minimise the burden on
taxpayers. Yet it will probably prove unpopular in Madrid, since much of this
debt is held by tens of thousands of small investors*, many of whom bought it
after being assured by banks that it was as safe as deposits.”
* approx. € 5 B of €6.85B
Economist, 1 December 2012
“Conditioned by the Troika … Bankia forced its shareholders to take losses to
finance a bailout, and after engineering an exchange of preferred shares and
convertible bonds, priced the new stock at €1.35 last month ($1.75).
All along, the exchange was a trap for retail investors. Last week, the stock fell
more than 50% when institutional investors were allowed to sell out of their
already losing positions. Savers and retail investors had to wait until Tuesday,
when the stock fell as low as €0.475 ($0.61) at one point.“
http://www.forbes.com/sites/afontevecchia/2013/05/28/spains-bankia-decimatessavers-as-stock-plummets-police-officer-stabs-banker-who-sold-him-shares/
see also, e.g., http://www.elmundo.es/elmundo/2013/05/27/economia/1369665761.html
The Case of Iceland
”Private creditors ended up shouldering most of the losses relating to the
failed banks, and today Iceland is experiencing a moderate recovery.”
IMF Survey online, 3 November, 2011
Capital controls; referenda; fiscal policy NOT tightened during first
year of the programme, NO reduction of social expenditure in first year
of programme ==► 2011: again access to capital markets
General government expenditure on social protection, health and education (% of GDP)
Source: Statistics Iceland, General
Government Finances 2013,
revision, 23 September 2014
Public health expenditures:
7.22% of GDP (2008) - 6.99% (2012)
“As the economy contracted by about eight per cent between 2008 and 2010, it
should be noted that in real terms painful cuts were made to public health
services and education. Compared to 2007 expenditures, funds spend in 2013 on
public health care and education were by 7.2 and 8.3 per cent lower”
Bohoslavsky, Report, 2015, p.11
2007: central Government debt 43% of GDP – 109% in 2013
(33 % in foreign currency)
2010: Supreme Court - foreign currency indexed loans offered by Icelandic
banks to many clients for buying vehicles and houses illegal
Savings deposits of Icelandic customers secured; debt of many local
businesses largely written off
2009: Welfare Watch - monitor social impact of crisis, advice State
institutions, coordinate targeted interventions on the ground
”combination of tax increases and expenditure cuts while keeping its social
protection system largely untouched.
…rebuilding of the banking sector and protection of core social expenditures
from cuts required borrowing by the Government.”
Bohoslavsky (2014), p.8
“adjustment programme focused to a lesser extent on public expenditure cuts,
but had a strong emphasis on increasing revenue generation through taxation”
(ibid., p.12)
-
reintroduction of a progressive income tax system
flat tax on capital income increased
a wealth tax temporarily introduced
1% increase of VAT (from 24.5% to 25.5%)
disposable income fell, but poorest 20 % lost around 9% (2008-2010); richest
decile of households (accumulated assets during boom of bubble economy) lost
38%
▬►
“Social transfers and taxation policies reduced
inequality in Iceland significantly. They also helped stabilising internal
demand”
(ibid.)
“The report identifies several good practices on how States facing a financial
crisis can prevent negative human rights impacts in the context of economic
adjustment programmes. The Independent Expert concludes that
international organisations and other countries can learn from the particular
path chosen in Iceland which included protecting its core social welfare
system, efforts to ensure citizens participation in the decision making process,
and endeavours to establish political, administrative and judicial
accountability.”
JP Bohoslavsky 2015, Report of the Independent Expert, Human Rights Council, UN
“Iceland set an example by managing to preserve, and even strengthen, its
welfare state during the crisis.”
IMF Survey online, 3 November, 2011
Investigation (Special Investigation Commission of Parliament); criminal
prosecution (even of fromer Prime Minister)
“First, how far, if at all, the state should be forced to shoulder the
responsibility for debt created by private banks. Or, to put it differently:
Should ordinary people, the nation, be responsible for bad management
of private financial institutions, especially if the potential losses are due
to operations in foreign countries? Should we have a banking system
which privatises the profits but socialises the losses and turns private
failures into sovereign debt?
The second dilemma goes to the heart of our democracies: if a conflict
arises between the interests of the financial markets and the will of the
people, which should reign supreme: the market or the people? “
Speech of the President of Iceland, Ólafur Ragnar Grímsson, at the 8th UNCTAD Debt
Management Conference, Geneva, 14 November 2011, p.2-3
Thank you
very much!
¡Muchas
gracias!
Kunibert Raffer
http://homepage.univie.ac.at/Kunibert.Raffer
© K. Raffer 2015