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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Forget planning for no deal. The government isn't really planning for Brexit at all

The British government is simply not in a position to handle life after the EU.

No deal is better than a bad deal? That phrase has essentially vanished from Theresa May’s lips since the loss of her parliamentary majority in June, but it lives on in the minds of her boosters in the commentariat and the most committed parts of the Brexit press. In fact, they have a new meme: criticising the civil service and ministers who backed a Remain vote for “not preparing” for a no deal Brexit.

Leaving without a deal would mean, among other things, dropping out of the Open Skies agreement which allows British aeroplanes to fly to the United States and European Union. It would lead very quickly to food shortages and also mean that radioactive isotopes, used among other things for cancer treatment, wouldn’t be able to cross into the UK anymore. “Planning for no deal” actually means “making a deal”.  (Where the Brexit elite may have a point is that the consequences of no deal are sufficiently disruptive on both sides that the British government shouldn’t  worry too much about the two-year time frame set out in Article 50, as both sides have too big an incentive to always agree to extra time. I don’t think this is likely for political reasons but there is a good economic case for it.)

For the most part, you can’t really plan for no deal. There are however some things the government could prepare for. They could, for instance, start hiring additional staff for customs checks and investing in a bigger IT system to be able to handle the increased volume of work that would need to take place at the British border. It would need to begin issuing compulsory purchases to build new customs posts at ports, particularly along the 300-mile stretch of the Irish border – where Northern Ireland, outside the European Union, would immediately have a hard border with the Republic of Ireland, which would remain inside the bloc. But as Newsnight’s Christopher Cook details, the government is doing none of these things.

Now, in a way, you might say that this is a good decision on the government’s part. Frankly, these measures would only be about as useful as doing your seatbelt up before driving off the Grand Canyon. Buying up land and properties along the Irish border has the potential to cause political headaches that neither the British nor Irish governments need. However, as Cook notes, much of the government’s negotiating strategy seems to be based around convincing the EU27 that the United Kingdom might actually walk away without a deal, so not making even these inadequate plans makes a mockery of their own strategy. 

But the frothing about preparing for “no deal” ignores a far bigger problem: the government isn’t really preparing for any deal, and certainly not the one envisaged in May’s Lancaster House speech, where she set out the terms of Britain’s Brexit negotiations, or in her letter to the EU27 triggering Article 50. Just to reiterate: the government’s proposal is that the United Kingdom will leave both the single market and the customs union. Its regulations will no longer be set or enforced by the European Court of Justice or related bodies.

That means that, when Britain leaves the EU, it will need, at a minimum: to beef up the number of staff, the quality of its computer systems and the amount of physical space given over to customs checks and other assorted border work. It will need to hire its own food and standards inspectors to travel the globe checking the quality of products exported to the United Kingdom. It will need to increase the size of its own regulatory bodies.

The Foreign Office is doing some good and important work on preparing Britain’s re-entry into the World Trade Organisation as a nation with its own set of tariffs. But across the government, the level of preparation is simply not where it should be.

And all that’s assuming that May gets exactly what she wants. It’s not that the government isn’t preparing for no deal, or isn’t preparing for a bad deal. It can’t even be said to be preparing for what it believes is a great deal. 

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