Thirty years since Mexico’s default, Greece must break this sadistic debt spiral

We must retake control of our economies from the banks.

As Greece’s leaders pay down the latest multi-billion euro instalment on their debt, they would do well to take notice that tomorrow is the anniversary of an event of great resonance.

On 20 August 1982, Mexico declared a debt moratorium - effectively defaulting on its massive debts. Although debts in many Latin American countries had caused suffering for a number of years, this was the moment the leaders of the West were forced to confront what came to be called the ‘Third World Debt Crisis’.

Mexico owed over $50 billion, 90% to foreign private creditors - primarily US, Japanese and British banks. These banks had gone on a lending binge during the 1970s using the profits oil exporting countries had deposited with them from the oil spike. American overspending, notably on the Vietnam War, was recycled as debt to the rest of the world and, to help this, controls on international movements of money were dismantled.

Just as in our current financial crisis, bank loans to Third World countries had tended to be organised through syndicates: loans were packaged up together and then lent on in one go. This bundling meant many banks felt no need to conduct their own risk assessment. Four of the fifteen largest lenders to Latin America by 1982 were British banks: Lloyds, Midland, Barclays, and Natwest. American lenders included Citicorp, Bank of America, and Chase Manhattan.

At the end of the 1970s the US Federal Reserve sprung the trap, massively hiking interest rates in order to save their banks from inflation. The costs for this move were pushed onto Third World countries like Mexico. Two years later, the inevitable happened.

Now US and British banks faced a crisis. If loans from Mexico and other Latin American countries were not paid, they could go bankrupt. The banks stopped lending to Latin America, pushing more countries closer to default, and lobbied the US government to get them out of their mess. The US responded by getting the International Monetary Fund, and later the World Bank, to provide bailout loans to Latin American governments.

In 1982 the IMF lent Mexico $4 billion, which went straight back out of the country to pay western banks - a perfect mirror of what is happening with so-called bail-outs to Greece and other Eurozone countries today. At the same time, the IMF insisted Mexico introduce radical austerity and liberalisation. There were cuts in every area of government spending.

The economy collapsed and stagnated, many industries shut down, with the loss of at least 800,000 workers altogether. By 1989, the Mexican economy was still 11% smaller than 1981. Meanwhile, the debt doubled from 30% of GDP in 1982 to 60% by 1987.

The same story was repeated across Latin America. In 1990 Latin American economies were on average 8% smaller than they had been in 1980, and the number of people living in poverty increased from 144 million to 211 million. Former Colombian Finance Minister Jose Antonio Ocampo calls the bail-out responses "an excellent way to deal with the US banking crisis, and an awful way to deal with the Latin American debt crisis".

Meanwhile, government external debt more than doubled (from an average of 17% in 1982 to 44% by 1988). Just as in Greece today, the bailouts had nothing to do with long-term sustainable finances - they were bailing out reckless lenders who had over-stretched themselves.  

In fact, the banks gradually wrote-down the ‘book value’ of how much they regarded the debts to be worth, even while they were being repaid. They were allowed to set these theoretical losses off against profit for tax reasons, greatly reducing the tax bill of US and British banks. In 1987 alone, Barclays, Midland, Lloyds and Natwest received a tax relief subsidy of up to $1.75bn across the four banks. Then campaign organiser for War on Want John Denham accused the Thatcher government of "joining in the banks' attempts to have the burden of repayment pushed onto taxpayers."

The policies of bailout and austerity went on to be practiced across the world in the years that followed the Latin American catastrophe. That experience forced dozens of countries through two lost decades of development and enthroned the financiers as the new masters of the universe.

Today Greece, as well as other European countries, can share in the experience of Latin America from the 1980s. Then as now, bailout money was used to repay reckless banks, whilst austerity has served only to shrink economies and increase the relative size of the debt. Since 2010 the Greek government’s external debt has increased from 118% of GDP to 150% in 2012. The economy has shrunk by 15% since the start of 2010 and unemployment has reached 19%.

To repeat such failed policies is more than carelessness. The future of Europe’s economy, indeed the world economy, will be decided by a battle between the financial masters on the one side, and the peoples of the most indebted states in Europe on the other - Greece first. We either retake control of our economy from the banks, or we deepen an economic experiment which has had an incalculable cost in terms of the lives and livelihoods of millions of people. 

Nick Dearden is the director of the Jubilee Debt Campaign

Employees of Greece's ATEbank shout anti government slogans on August 3 in Athens. Photo: Getty
Photo: Getty
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Want to beat Theresa May? First, accept that she's popular

The difficult truth for the centre and left, and advocates of a new party, is that people don't "vote for the Tories reluctantly".

An election campaign that has been short on laughs has been livened up by a modest proposal by an immodest man: the barrister Jolyon Maugham, who used to write about tax for the New Statesman as well as advising Eds Miliband and Balls, has set out his (now mothballed) plans for a new party called Spring.

The original idea was a 28-day festival (each day would be celebrated with the national costumes, food and drink of one of the European Union’s member states) culiminating in the announcement of the candidacy of Spring’s first parliamentary candidate, one Jolyon Maugham, to stand against Theresa May in her constituency of Maidenhead. He has reluctantly abandoned the plan, because there isn’t the time between now and the election to turn it around.

There are many problems with the idea, but there is one paragraph in particular that leaps out:

“Like Sherlock Holmes and Moriarty, Labour’s left and moderates are bent on one another’s destruction. No one knows what the Lib Dems are for – other than the Lib Dems. And we vote for the Tories reluctantly, lacking an alternative.”

Even within this paragraph there are a number of problems. Say what you like about Sherlock Holmes and Moriarty but it seems hard to suggest that there is not a fairly large difference between the two – regardless of which one you think is which – that might perhaps be worth engaging with. There are fair criticisms of the Liberal Democrats’ uncertain start to this campaign but they have been pretty clear on their platform when they haven’t been playing defence on theological issues.

But the biggest problem is the last sentence: “We vote for the Tories reluctantly, lacking an alternative”. A couple of objections here: the first, I am not sure who the “we” are. Is it disgruntled former Labour members like Maugham who threw their toys out of the pram after Corbyn’s second successive leadership victory? If you are voting for the Tories reluctantly, I have invented a foolproof solution to “voting for the Tories reluctantly” that has worked in every election I’ve voted in so far: it’s to vote against the Tories.  (For what it’s worth, Maugham has said on Twitter that he will vote for the Liberal Democrats in his home constituency.)

I suspect, however, that the “we” Maugham is talking about are the voters. And actually, the difficult truth for the left and centre-left is that people are not voting for Theresa May “reluctantly”: they are doing it with great enthusiasm. They have bought the idea that she is a cautious operator and a safe pair of hands, however illusory that might be. They think that a big vote for the Tories increases the chance of a good Brexit deal, however unlikely that is.

There is not a large bloc of voters who are waiting for a barrister to turn up with a brass band playing Slovenian slow tunes in Maidenhead or anywhere in the country. At present, people are happy with Theresa May as Prime Minister. "Spring" is illustrative of a broader problem on much of the centre-left: they have a compelling diagnosis about what is wrong with Corbyn's leadership. They don't have a solution to any of Labour's problems that predate Corbyn, or have developed under him but not because of him, one of which is the emergence of a Tory leader who is popular and trusted. (David Cameron was trusted but unpopular, Boris Johnson is popular but distrusted.) 

Yes, Labour’s position would be a lot less perilous if they could either turn around Jeremy Corbyn’s popularity ratings or sub him out for a fresh, popular leader. That’s one essential ingredient of getting the Conservatives out of power. But the other, equally important element is understanding why Theresa May is popular – and how that popularity can be diminished and dissipated. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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