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

We must retake control of our economies from the banks.

By Nick Dearden Published 18 August 2012 18:39

Employees of Greece's ATEbank shout anti government slogans. Photo: Getty

Employees of Greece's ATEbank shout anti government slogans on August 3 in Athens. Photo: Getty

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.

Tags: Eurocrisis

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12 comments

Wed, 2012-09-05 16:12 — Will Podmore (not verified)

Greece will have to implement new spending cuts of €13.5 billion in 2013-14 – almost €2 billion higher than earlier estimates. However, the higher level of cuts will still only deliver a net saving of €11.5 billion, as demanded by the EU/IMF/ECB Troika, due to falls in government revenue, caused by the very same cuts!
The Greek people should leave the euro, devalue and rebuild their country. Leaving the euro is the most powerful policy tool to create growth.
During the past century, 69 countries successfully left currency areas. These countries then grew again quickly. For example, after their 1997 devaluation, Indonesia, South Korea, and Thailand suffered short, sharp downturns, but then grew quickly for the next decade and achieved pre-crisis GDP levels within two to three years.
In 2002 Argentina defaulted and devalued, imposing a 50 per cent loss on banking sector assets. The government drained the banks of capital (to the public’s gain) and sent the banking system into insolvency (to be rescued by the government). The world’s capitalists all screamed that its economy would crash because it would have no access to international credit and to international trade. But after just one quarter of contraction, Argentina’s economy grew by more than 8 per cent a year, led by an export boom spurred by the much lower exchange rate.

Wed, 2012-08-22 11:50 — Russell Lambert UK (not verified)

Debt forgiveness is not the answer, as there is no political support for that in Germany/France.

Pragmatism will prevail: Greece will leave the Euro, and probably Spain and Portugal too.

Jury is out on Italy and Ireland (probably stay/stay but could change).

Left wing whining about utterly unrealistic debt forgiveness is less effective than any other course of action I can imagine though...

Wed, 2012-08-22 06:07 — AAMVN (not verified)

I feel great sympathy for the Greek people. Blamed for the errors of past governments and the usery of the reckless lenders they become the new poorman of Europe.

Some kind of default is needed or at least a massive debt forgiveness programme so they can get back on their feet. It's in no-one's interest to keep Greece on their knees.

Tue, 2012-08-21 08:43 — Gray, Germany (not verified)

Right. Default now and return to the Drachma! Plan A, to keep Greece inside the Eurozone with a mix of financial support and austerity measures, very obviously isn't working, so its high time for a change now. Quite obviously, the Greek economic and politcal system can't create a sustainable recovery under the conditions of the rather stable Euro, so the most reasonable alternative is to go back to a proven, reliable receipe, a boost for competitivenessthrough a devaluation of the Drachma vis-a-vis the Euro. That did work in the past and has the best chance to revive the economy now again. Let the other Eurozone nations deal with the banks who get into trouble in a Grexit, they shall nationalize them, if necessary. The Euro didn't work for Greece, it was rather unhelpful for creating sustainable economic conditions, so it's high time to correct that mistake. Back to the Drachma now!

Mon, 2012-08-20 09:19 — jez42 (not verified)

THE BANKS' PUNISHMENT FOR THEIR LENDING BINGE WAS TO BE LET OFF $1.75 BILLION OF TAX?!

You couldn't make it up.

Mon, 2012-08-20 04:24 — BKWANAB (not verified)

Crouch. You've totally missed the point. Get your head out of your bum and stop looking at the world through your naval.

The point is that Banks have repeatedly made bad loans and then needed bailouts to survive, bailouts that come out of the taxpayers pocket. They won't change so we must.

Tue, 2012-08-21 08:56 — Gray, Germany (not verified)

No, you missed the point. It takes two to tango! And you can't simply ignore the role of the Greek governments (no matter if Pasok or ND, all lousy!) in wasting all that money without using it for any systemic changes. They had several years to adjust their administrative, legal and judicial framework to the conditions of a stable currency and the economic conditions of the 21st century, and they did a big fat NOTHING! Not surprisingly, this resulted in Greece being the least competitive Eurozone nation now, ranging even behind the formerly communist nations. T&he balme for this mess lies fair and square with the selfish, ignorant Greek politicians (and, sorry, partly with the voters who put such jerks into office).

So, what's to be done now? Imho, let's share the loss. Let the other Eurozone nations care about the foolish creditor banks, nationalize them if they need a bailout, and let the Greeks care about their own mess, with their own currency. A clean divorce is most probably the best that can be done now.

Sun, 2012-08-19 20:01 — Harold Stassen (not verified)

Greece and poverty are twins.

Sun, 2012-08-19 11:55 — Indu Pendent

Nick
I agree with what you are thinking --- its not possible to build an economy based on government debt piled on more debt. Labour's old economic policy is like a giant ponzy fraud -- eventually the state can not borrow more money and the economy collapses.

Compare Greece with the UK. Unfortunately for the Greece their government could not be stopped before borrowing so much as to destroy the prospects for the country. The UK has been lucky. Although Labour borrowed £600BN mostly before 2008, Alistair, labour voters and the country saw sense in time and stopped the cancerous administration from totally destorying the country.

Progress has also been made in Labour with Miliband's and Ball's U turn on Labour economic policy: Labour is now committed to reducing public expenditure to shrink the massive structural deficit left by Labour.

In light of Labour's current economic policy I do not get your article. Are you saying Labour should change course and do another U turn (making is an O turn) ? Are you representing a party within a party?

Sun, 2012-08-19 10:31 — Dave Crouch (not verified)

For someone writing about the European debt crisis, you seem to have very little understanding of it. To begin with, it's a mistake to lump together all the heavily indebted countries and then to write as if their all their problems were the same. Take Ireland for example; there was very little wrong with the Irish economy but a collapse in the Irish property market caused a banking crisis. Had the Irish government not elected to guarantee 100% of savers deposits they would not have required a loan from the ECB; they could have done what the Icelanders did and just walked away from their responsibilities.
Greece is a very different matter. Prior to joining the Euro, yields on long term Greek debt were in double figures; reflecting the fact that Greece is a serial defaulter. After joining the Euro the yields on Greek ten year bonds were within 50 basis points of the German Bund. The effect was immediate; thousands of new cars on the roads, new housing springing up throughout Greece, the shops bursting with consumer goods. Where did all this new money come from? It came from the government. The public sector, which formally had been a poor payer but a very secure job, increased wages and the private sector was forced to follow suit. Roads were built, the olympics were staged and the money was sloshing about Greece. In your article you imply that all this was financed by 'greedy banks' which I presume is your 'leftwing speak' for Anglo Saxon banks. This is simply not the case; over 50% of Greek government bonds were held by the Greek private sector, mainly pension funds and the like. Of the remainder, the bulk was held by French and German banks who wanted to hold bonds denominated in Euros but get a slightly better return than they would on their own government bonds for a similar risk.
Of course now that the chickens have come home to roost, the Greeks are blaming eveyone but themselves. They seem unable to understand that if you only work a 30 hour week, as all those who work in government offices do, it is impossible to justify being paid the same as a German for example, working 37 hours a week.
Of course the 'Troika' has the answer; reduce the government wage bill, collect more taxes and reform the labour market to reduce the restrictive practices.
And how many of these agreed requirements have been implemented? The answer is practically none.
It would be against the terms of the Greek constition to sack civil servants even if they are not doing anything. Something that they neglected to tell the 'Troika' when it was made a condition of the recent bailout.
Recently, a special tax was levied on all households to try to claw back some of the unpaid tax that is owed to the government (estimated to be 12 Billion Euros for fiscal 2009 alone).
So that people could not avoid paying the tax it was 'bundled' together with two consecutive electricity bills. The courts have recently ruled that it would be 'unconstitutional' to disconnect the electricity supply for non-payment of the tax. As it is bundled together with the regular electricity bill there are now over 500,000 households that hve not only not paid the tax, they haven't paid for the electricity either. As you can imagine, the electricity company is now heavily in debt and is forced to borrow from the central bank to pay its fuel suppliers.
As regards reforming the labour market almost nothing has been done, either because of the power of the unions for unionised labour or the power of vested interests for the professions.
The government has of course reduced pensions; I mean who cares if the old people go on strike.
Spain is a completely different case, too long to explain today.

Tue, 2012-08-21 16:45 — Correction (not verified)

Among the many other stereotypes and half-truths you arrogantly reproduced in your comment is that of the "lazy" Greek worker who works for 30 hours per week. Actually, according to OECD statistics, Greeks work more hours per week than the "hardworking" Germans, and every other OECD nation too except South Korea.

And if you don't think that the EU doesn't share blame in all of this, you're astonishingly naive. Don't tell me they didn't know all about the corruption when they were cashing in on the spending binge and companies like Siemens were paying bribes and buying politicians in order to get those infrastructure project contracts you spoke of.

Wed, 2012-08-29 15:31 — Dave Crouch (not verified)

As a resident of Greece I can assure you and the OECD that office hours for civil servants in Greece are from 08:00 until 14:00 every day, five days a week. This includes tax offices, post offices, utility offices (telephone, gas, water etc). In addition to all of the public sector, many other organisations work a 30 hour week, banks etc.
The reason that you may detect a note of arrogance in my post is perhaps due to the fact that I am an Oxford trained economist who for the past several has been seconded to one of the main Greek utility companies trying to untangle their Byzantine operating procedures.