Multi-Trillion Dollar Question: How Much of Our Debt Is “Odious”?

By Don Quijones, Raging Bull-Shit.

Debt, n. An ingenious substitute for the chain and whip of the slavedriver” – Ambrose Bierce, U.S. journalist and satirist.

If there is any two-word combination that is guaranteed to strike primal fear into the cold, dark hearts of global senior bankers and representatives of international financial institutions, it is “odious” + “debt”.

In international law, odious debt is a legal theory that holds that the national debt incurred by a regime for purposes that do not serve the best interests of the nation shouldn’t be enforceable. Such debts are hence regarded as personal debts of the regime that incurred them and not debts of the state.

The term was first coined in the year 1927 by Alexander Sack, a Russian émigré legal theorist. Sack drew his inspiration from 19th century precedents such as Mexico’s repudiation of debts incurred by the French Emperor Maximilian’s regime, and the rejection by the U.S. of Cuban liability for debts incurred by the Spanish colonial regime.

According to Sack, the reason why odious debts cannot attach to the territory of the state was that “they do not fulfill one of the conditions determining the lawfulness of State debts, namely that State debts must be incurred, and the proceeds used, for the needs and in the interests of the State.

Since 1927, the odious debt doctrine has been used to demand write-offs of debt accrued by tyrannical dictators. Post-Saddam Iraq was a prime example. Indeed, even before treating Iraqi cities to a vast, deadly spectacle of shock and awe pyromania, the U.S. and its “Coalition of the Willing” had allegedly already decided to write off much of Iraq’s debt, on the grounds that it had been amassed solely at the whim of an unhinged, mustachioed tyrant with a penchant for luxury palaces and costly weapons.

The allies’ reasoning was simple: the country’s vast debts would hamper any reconstruction efforts, since global creditors would be far less willing to lend money to an already over-indebted country. Eventually the U.S. and U.K. were able to persuade their fellow members of the 19-strong Paris Club of creditor nations to cancel 80 percent of Iraq’s public debt.

Yet not once during the negotiations was the term “odious debt” actually used, obviously out of fear that the notion of illegitimate debt might catch on among many other debtor nations. After all, if the global powers-that-be could, with the stroke of a pen, write off 80 percent of Iraq’s debt, on the grounds that it was accrued by a tyrannical dictator, surely the same argument could just as easily apply to the likes of post-Duvalier Haiti, post-Gbagbo Ivory Coast, or post-apartheid South Africa.

Odious Debt in the Developed World

Recent years have seen a growing chorus of demands for a large part of the debt owed by Europe’s struggling peripheral nations to also qualify as odious debt.

According to the Spanish NGO Citizen’s Debt Audit Platform, much of Spain’s soaring public debt, which is now being used to justify the biggest raft of public spending cuts in the country’s democratic history, is a product of the direct and indirect assistance given to the financial sector in the wake of the collapse of Spain’s historic real estate bubble — a bubble that both domestic and overseas banks played a leading role in fuelling.

Indeed, one of the most striking aspects of the Spanish economy’s ongoing depression is the massive growth in public debt. According to data published by the Bank of Spain, Spain’s public debt — including local government spending and social security commitments — has exploded from the relatively low point of 47 percent of GDP (much lower than Germany even) in 2008 to 108 percent in the first quarter of this year.

In the space of just four years, Spain went from having one of the lowest public-debt-to-GDP ratios in the euro zone to one of the highest. And despite what the Troika and Spain’s current government will have us believe, the economic crisis in Spain was not caused by excessive public debt, but rather by the wholly unsustainable growth in private debt, particularly in the financial, real estate and insurance (FIRE) sectors.

Perhaps most worrisome is the fact that, despite the massive injections of taxpayer funds into Spain’s banking sector, the supposed clean up of its bad debts and its capital restructuring, the level of debt of Spanish banks continues to increase unchecked. In the first quarter of 2013, it reached over 1.1 trillion euros — an increase of over 10 percent since 2008.

To paraphrase the Spanish economist Juan Laborda, while companies and families try to reduce their debts at whatever cost, the banking sector has reduced hardly any of its own debt, almost certainly because of “the poquería” (meaning “junk”) still festering on its balance sheets. As a consequence, banks are still not lending into the wider economy, resulting in the biggest contraction of credit in Spain’s modern history.  

Given this unprecedented transfer of wealth, from the pockets of the public to the banks — banks which remain, to all intents and purposes, insolvent and which are failing to fulfill even their primary public purpose, i.e., to support productive activity by lending money into the economy — there are certainly reasonable grounds to argue that a large part of Spain’s public debt is indeed “illegitimate”.

Odious, Immoral and Unpayable

But it’s not just in Spain and other peripheral nations where vast sums of taxpayers’ money have gone toward shoring up a financial sector that is, to all intents and purposes, already bankrupt, both financially and morally. Across Europe, member states committed an estimated total of nearly €4.9 trillion (or 39 percent of total EU GDP) toward the rescue of banks between September 2008 and October 2012. Of that, €1.7 trillion, or 13 percent of EU GDP (23 percent including the LTRO) will be directly paid by taxpayers. And judging by the continued structural weaknesses of Europe’s banking sector — European banks remain among the most undercapitalised in the world –, to very little avail.

Put simply, it is economic madness on a scale never before seen. Not only is it morally perverse, with the poorest and most vulnerable in society subsidising the reckless greed of the richest and most powerful, but it is also totally socially destructive. After all, the only way for a country to honor such elevated levels of debt — at least in the short to medium term — is to dismantle its public health-care, education and transport systems, confiscate pensions (as just happened in Poland) and unleash a system of internal devaluation that is as painful as it is ultimately futile.

More perverse still is the fact that most of this debt, with its ever-growing compound interest, will never get paid. I challenge any two-bit Ph.D.-holding economist to explain how Greece will pay its 321 billion euros of external debt; or Italy, its 2.5 trillion dollars; or for that matter, how each citizen of Ireland — babies, children and senior citizens included — will be able to raise the 500,000 dollars necessary to pay off their nation’s external creditors.

Perhaps it is time we took a leaf out of Ecuadorian President Rafael Correa’s book and set up an audit panel to examine whence our nations’ debts came. As in Ecuador, there would be intense opposition from the civil service, mainstream political parties and, of course, the financial sector — after all, it is they who have gorged the most at the trough of debt.

But unless we determine who it is we owe, and for what, and draw a big fat red line through all the debt that has served absolutely no public good, this super cycle of debt deflation will continue to spin faster and faster out of our control.

Michael Hudson’s mantra that “Debts that can’t be repaid, won’t be repaid” is the perfect summation of the eco­nomic dilemma of our times. And as the Australian economist Steve Keen says, the only sane and effective response to this dilemma is to ask ourselves “not whether we should or should not repay this debt, but how we are going to go about not repay­ing it.” By Don Quijones.


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