1. Kunibert Raffer http://homepage.univie.ac.at/Kunibert.Raffer http://homepage.univie.ac.at/Kunibert.Raffer © K Raffer 2015 Debt Crises in Latin America, Euroland, and Iceland Conference : The Eurozone and the Americas: Debt and Democracy Austin, November 2-3, 2015

2. “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)

3. 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.” “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”. Difference: only in Euroland EU involved; EU more adamantly antidemocra- tic, 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 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

4. 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

5. 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

6. 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)

7. 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 super- vision 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)

8. 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

9. 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 ” 40 “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 “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.,

10. 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) Abusive credits (© JP Bohoslavsky): official sector lent knowing that this would only delay open bankruptcy Forced selling of state property at fire sale prices in Greece; shifting losses onto taxpayers all over Euroland

11. 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 20 12 “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 poin t.“ http://www.forbes.com/sites/afontevecchia/2013/05/28/spains-bankia-decimates- savers-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

12. 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

13. 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

14. ”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.)

15. “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)

16. “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 8 th UNCTAD Debt Management Conference, Geneva, 14 November 2011, p.2-3

17. Thank you very much! ¡Muchas gracias! Kunibert Raffer http://homepage.univie.ac.at/Kunibert.Raffer © K. Raffer 2015