- Tony Phillips is an Irish journalist and political economist, editor of the online magazine DensidadRegional.org He contributed to the newly published What If Ireland Defaults? (Orpen Press, 2012). The book presents critical perspectives of the current Irish and European situation from around the world. I interviewed Phillips at home in Buenos Aires.
IB: Tony, you were in Greece recently. Impressions?
TP: The day I arrived ferries all across Greece were on strike. I flew into the island of Corfu on a half-empty flight from London. It took a whole day to get to the mainland. The salaries of the ferry workers have been slashed in stagflationary Greece. They are not very happy, but with more than 50% youth unemployment they don’t have many options. The Troika …
IB: The Troika?
TP: The European Commission, the European Central Bank (ECB) and the IMF. They cut the minimum wage in half. There is misery, unemployment is out of control, and the church has taken to feeding thousands daily because they haven’t got enough to eat.
I was there for Orthodox Easter when the story broke about finding gold ingots in the family home of Akis Tsochadzopoulis, the former PASOK defense minister. PASOK (Center Socialist) was still in power. Tsochadzopoulis was arrested and charged with receiving an €8m bribe from Ferrostaal, the German defense company who sold four Class 214 submarines to the Greek navy 12 years ago. The Greek government still owes a billion Euros on those submarines! It’s part of their bloated national debt which just keeps growing and infecting other “peripheral” nations like my own (Ireland).
I call the contagion the Ouzo effect. It shares some similarities with the Latin American debt contagion of the 1990s that economists refer to as the Tequila Effect. The Tequila Effect began in Mexico, it culminated in the Argentine collapse. The Ouzo effect is, obviously, still developing.
Since the Greek & French elections there is some hope of change. The markets are not happy, they know that you can’t squeeze blood from a stone. Greece may need one more election to realize the change it needs – and that may involve a hard default.
I wish I could say that change was inevitable in Ireland too. The Greeks protesting in the Syntagma Square are pushing for change, trying to take on the markets and defend themselves against a regional speculative attack on bonds. The Greeks rejected the old political cadre of PASOK and New Democracy and shifted their vote to the extreme left and some for the Neo-Nazi Golden Dawn groups. I interviewed anti-debt activists, who are furious at the Germans and at their own corrupt cadre. Much of the Greek debt will be classified as odious due to corruption as should much of the financial corruption in Dublin.
In Greece the protestors say “We are not the Irish!” meaning the Troika can’t treat Greece like patsies; in Brussels, the Irish politicians whisper, “Ireland is not Greece.” Similar problems, similar enemies, different strategies.
IB: Leaving Greece for a moment, what specifically do the Irish politicians mean when they say, “Ireland is not Greece”?
TP: There is a somewhat derogatory tone in that statement. Irish diplomats like to think that their relationship with the central economies of Northern Europe is somehow more advanced, more on a par with Britain, Germany, Holland and France. It is delusional and somewhat racist. Their representatives have chosen to play ball and pay all debt irrespective of its source. This pits them against Southern Europe (Greece, Spain, Portugal and even Italy, the other countries in the PIIGS). One might like to think the Irish have some secret arrangement which shall play to their favour in the future, which is why they are playing the role of best boy in class. Were it even mooted I doubt it would materialize. I think the new Irish government, another centrist party (Fine Gael) is out of its depth in the financial negotiations with the Troika. Or should I say out of its debt?
IB: In your essay you write: “There is still time for Ireland to incorporate new ideas that can prevent an uncontrolled sovereign default, unnecessary payment of illegitimate debt, or both.” From that statement, I draw the conclusion that, far from being a doomsday scenario, default remains a distinct possibility for Ireland.
TP: Default is a distinct possibility and it is an unnecessary risk. Ireland is being forced to pay debt that it should not because of threats by the ECB to pull the plug on liquidity. The bonds that Ireland is paying for the the Anglo-Irish Bank’s “promissary notes” should not be paid. Every twelve months we pay over three billion Euros to private investors who cannot believe their good luck.
The specter of default exists because of our inability to pay “debt” that resulted from the “Blanket guarantee” of the financial sector –a serious mistake made by then dying Finance Minister Brian Lenihan and Taoiseach Brian Cowen– in September 2008.
IB: Let’s go into that a bit. Your essay, and others in the book, make the case for a sorting out of nominal debt and what is sometimes called subordinated or, in your words, illegitimate debt. You quote William Black to the effect that Ireland’s official response to their economic implosion was “The most obscene policy. [...] It just gratuitously took billions of Euros from the Irish people to give it to mostly German banks who had no right at all[...] ” Your response?
TP: There is a difference between private debt and public debt. Private debt is debt owed by a corporation or an individual and public debt (or sovereign debt) is owed by a sovereign state – a country– in this case the tax-payers in Ireland. When the banks went belly-up in Ireland their debt was private but they caused a “systemic risk” i.e., the Irish financial system became destabilized. The banks were technically bust due to bad debt, loans to speculators. To cope with this the Irish government decided – wrongly in my opinion– to take the private debt public. They called it “socializing” the debt. In Spanish this is called “Estatizacion de la deuda privada” – literally: “taking private debt public.” It happened in the dictatorship in Argentina in 1982. This is a common way for corrupt governments to do favors for their friends. In Ireland the blanket guarantee took this to a new, limitless dimension and essentially bankrupted the country.
Subordinated debt is risk capital– i.e., not a guaranteed investment. To cite one example, the subordinated debt in Anglo Irish Bank should never be paid back as it is risk capital. The Irish government is being forced by the Troika to pay this too –which is not just absurd but obscene.
If you’re an investor, you win some and you lose some. Risk capital has no risk in Ireland due to the excessive generosity of the Irish state.
IB: What you’re describing is a casino where, once you’re in, you cannot lose. In the case of both Ireland and Greece, the German banks win, while the Troika gets to demand ever greater austerity measures.
TP: Let’s not be anti-German. It’s true that the German banks and German industry win (from their export advantages both in and out of the EU) but the German worker, with flat wages for a full decade, doesn’t. As regards the banks, the Irish banks win, the French and British banks win. It is quite the bonanza for everyone except the Irish taxpayer.
The German private banks, principally Deutsche Bank, play an important rôle but they are not alone. The French have taken over many major Greek banks. The German issue is the Merkel government and its control over the Frankfurt-based European Central Bank (ECB). The ECB is a European resource; the money it prints is European (i.e., public) currency.
The problem is Christian Democrat control over European monetary policy and a private financial sector which was allowed to jeopardize European financial security. The banks need to be better controlled and the ECB needs to be brought back under public control: it never was a private resource, much less a German resource. It is as much a Greek bank or an Irish bank as it is a German bank.
IB: You have characterized The Anglo Irish Bank as a “piggy bank for speculators.”
TP: Anglo Irish Bank was the worst bank in Europe, according to the British Independent Banking Commission. It has now been put to sleep along with a number of other inviable, formerly private, Irish financial institutions.
IB: There is a growing movement in Ireland to stop the debt payments. Your essays mentions the Not Our Debt movement. Ireland seems rather quiet compared to Greece and yet their situations are strikingly similar: peripheral European countries with enormous, unconscionable debt of uncertain origin. The Irish are making 3.1 billion a year in debt payments – to whom? And when exactly is it supposed to end?
TP: A lot of the financial debt is questionable, it is being questioned even by the private markets – by everyone except the Troika and a compliant Irish government who are afraid to create a stir. The Not Our Debt group is a fairly innocuous alliance. Others focus on NAMA (a bad bank “solution” in Ireland) and then there is the Occupy movement who occupied the central bank plaza for months; they are now being a little more strategic in their strategy. The 3.1 billion payment is just the annual payment for Anglo Irish Bank. There is more badly “socialized” private debt the current government thinks they need to pay.
They don’t and they can’t.
IB: What, in your opinion, is the best alternative to the current arrangement?
TP: In Ireland the solution involves hard negotiation, a structured agreement, a separation of sovereign debt and private debt. In short, an end to this delusional policy that it is “all good” which was a mistake pushed on the Irish state by private financial consultants during the worldwide financial panic in September 2008.
Also important is a real attempt to get Irish speculators who took out the loans from the private Irish banks to pay more back. These Irish elite investors have hidden their money off-shore. They claim bankruptcy in Ireland, a state with a very weak legal system and few anti-corruption laws. That needs to change, too, or Ireland will never regain its credibility.
IB: Let’s play spin the globe and travel to your part of the world. A country in Latin America was facing default, it was chronically in debt without knowing exactly what those debts were, it was at the mercy of the banks and it somehow got out of the situation. We’re talking about Ecuador. Can you tell us what specifically the country did that might be applicable to both Ireland and Greece?
TP: Ecuador was an economic basket case, the original Banana Republic along with other chronically corrupt states like Honduras. It had many military coups and rampant corruption at all levels. Along came Rafael Correa, South America’s most enigmatic politician, who ran for the presidency in 2008 on an anti-debt platform and won. He took dramatic action.
Correa sponsored a presidential commission to investigate the “nominal” sovereign debt; using the findings of the investigation as proof, he declared much of Ecuador’s sovereign debt illegitimate; he used a private bank to buy up the by-now cheap Government bonds abroad, thereby reducing the debt and finally, he denounced his country’s relationship with the ICSID, the World Bank “court” used by the “vulture” capital industry to sue sovereign nations for unpaid debt. Masterful really, a great job and as a result, his country is doing very well.
Both Ireland and Greece have public commissions to audit the sovereign debt. Both commissions are independent, not sponsored by their governments. In Ireland they published the results from an audit from the University of Limerick, which made for frightening reading. In Greece, the debt audit is a more organic grass-roots affair which is ongoing and, in my humble opinion, a huge boost to invigorating to participatory democracy – it’s important to know what your elected representatives have been doing with your taxes. Ignore this at your peril!
IB: The Tequila Effect hit Argentina in the late 1990s. The IMF entered the picture, privatizations abounded, capital outflows were enormous, people’s savings were wiped out. The picture was bleak. Yet Argentina recovered. Is there anything in their experience relevant to Europe today?
TP: Argentina as a country recovered and the worst of the damage, which as always afflicted the poor, has been only partially resolved, with a widening gap between rich and poor.
There are two lessons for the peripheral nations, the first being obvious: try to avoid a hard default with the exhaustion of funds, negotiate your terms early while you still have funding at reasonable prices or reserves to keep you afloat for a time.
Second, the market can take a dose of restructuring if it has to. Everything is negotiable, unless the negotiation team refuses to believe that negotiation is possible, in which case they fail at the outset.
Privatizations are the icing on the cake of a regional debt crisis driven by contagion. When public assets are privatized they are typically sold at rock bottom prices due to lack of competition, corruption and the mechanism of paying in bonds bought in secondary markets at reduced prices. Reversing privatizations can be even more costly. It’s better to avoid them in the first place or to go further, to nationalize certain natural resources to help with public funding. The natural gas fields off the Irish coast might be a reasonable candidate. Sometime the best defense is attack.
IB: Didn’t Argentina receive help from its regional neighbors?
TP: It’s called “solidarity funding.” In the case of Argentina, Venezuela was cash rich and Chavez came on a buying spree, buying bonds denominated in national currency and futures on products in cooperative enterprises – so they didn’t need to sell themselves to “the markets.” In one case Venezuela bought milk products from an Argentine cooperative called SanCor which was in difficulties. It worked, SanCor recovered from default and Venezuela get some great deals. Iceland got some from its traditional allies, too. It isn’t charity, it’s directed funding. Ireland has many friends as do Greece and Portugal.
IB: Can you briefly explain the term Odious Debt?
TP: Odious debt is a term coined by the United States after the American invasion of Cuba in 1898. Having taken control of the country, Cuba’s debt became their debt. The U.S. argued that it was illegitimate (odious) because the debt was imposed by Spain on Cuba without benefit to the Cuban people. The U.S., as an invading power, therefore did not owe the odious debt to Spain.
The interesting thing is that odious debt is not cancelled. It becomes the responsibility of those who generated it in the first place.
Elites don’t like debt audits – they can be personally expensive. The gold bars in the possession of the Greek defense minister or the debts owed to the Europeans by Iraq after the second invasion by the U.S. are other examples.
In Iceland the electorate was twice asked in referenda whether they should pay foreign entities what their defunct nationalized banks owed. They said no both times.
IB: What’s striking to me is the real lack of movement in the upper stratosphere. Greece is in the middle of a popular uprising, Spain suffers terrible unemployment and financial austerity, the Irish debt agreement is crying out for reexamination. The Eurozone is being torn apart, bit by bit. Yet the informed consensus of the central banks, international financial institutions, the elites and leaders seems to be, Sit Down and Shut Up – Don’t Rock the Boat. On Monday, President Obama called JP Morgan Chase “One of our best managed banks.” They just reported losses of 2 Billion USD. No new ideas from Obama, Merkel, Christine Lagarde at the IMF. Hollande? He really has a once in a lifetime chance to make a difference. We’ll have to see how he plays his cards.
It’s hard to make sense of the total failure to take action so far. Has Western Democracy become a captive of Big Finance?
TP: If you were a bond dealer receiving 100% payouts on debt you bought at 30 cents on the Euro would you be complaining? No, you be doing all that you can to keep those payments coming in as long as possible. A nation’s debt is someone else’ s speculative gain. Elites run the show with the media behind them. And yet they are quickly becoming a visible and loathed minority.
IB: On May 14 Paul Krugman, in one of his blog entries, predicted Greece’s exit from the Euro as soon as next month, with, in the attendant chaos, the eventual, sooner-rather-than- later End of The Euro. Your take on that?
TP: Ah don’t they love a short, simple, tragic story. Especially when it leaves the dollar (now flat on its back) the supreme fiat currency again. The world is more complex than the view from New York or Washington.
It is important to note that there is no exit mechanism from the Euro. Maybe it is time to get some more democracy into public finances? The European Central Bank is not a private bank, the Euro is a public currency owned by the Greeks and the Irish, too. The time has come to run the ECB and the Euro in the interest of the public that own them!
What if Ireland Defaults? can be purchased through the Orpen Press website: http://www.orpenpress.com/
Iddhis Bing lives in Paris. He is the author of The Apartment Thief, a novel.