Gelpern’s paper concludes by suggesting a universal principle: contracts “used to advance military and political objectives … should lose their claim to court enforcement.” This opens quite a can of worms in view of the fact that “[t]he United Kingdom and the United States have both used military force in the past to collect debts and influence weaker countries. Is it legitimate for them to punish Russia for doing the same?” Are not the vast majority of inter-governmental debts either military or political in character? On this logic, in fact, shouldn’t all inter-governmental debts be wiped out?
IMF support for Ukraine reflects its policy of backing regimes friendly to U.S. investors. In April 2014 it approved a $17 billion loan program for Ukraine. Normal IMF practice is to lend an amount only up to twice a country’s quota in one year, but it lent Ukraine’s new junta eight times its quota! Almost immediately, Ukrainian President Petro Poroshenko announced new warfare against the eastern region to try and re-conquer Crimea. In June 2015 he announced that the €7 billion debt service falling due would be spent instead on more military attacks on Ukraine’s eastern provinces. The IMF loan thus comes near to funding economic warfare.
International law, national sovereignty and real human rights
Should loans be deemed to be extortionate when they require austerity and privatization selloffs? Such demands suggest that a radical change in legal and financial structure is required far beyond Ukraine. As Argentine writers were quick to point out:
When Argentina suffered a massive default in 2001, the global press, including Time and The New York Times, went so far as to propose that Patagonia be ceded from the country as a defaulted debt payment mechanism. The New York Times article followed one published in the Buenos Aires financial newspaper El Cronista Comercial called “Debt for Territory,” which described a proposal by a US consultant to then-president Eduardo Duhalde for swapping public debt for government land.
Some Argentineans claim that the reckless loans made to the military dictatorship and the neoliberal Menem regime that drove the country needlessly into debt were Odious Debts. If such loans are made in the face of evident public opposition, should they be deemed to have been imposed without proper democratic consent?
What is needed is a fair court to decide what is payable and what is not. As matters now stand, banks and bondholders seek to appoint their nominees as judges — the likes of Thomas Griesa treating sovereign debt as if there is no difference between a national economy and a family restaurant going out of business. It would take a different kind of public entity than currently exists to judge how far to impose austerity and transfer property to creditors to settle debts beyond the ability of governments to pay out of current revenue and, in the case of foreign-currency debts, out of balance-of-payments receipts.
In the face of concerted financial attempts to establish global neofeudalism, the world needs a declaration of sovereign human rights and political rights of nations. The principle of self-determination has long been written into international law, but the provision does not include self-determination from creditors taking over governments and appropriating their public domain to extract economic rent.
Failure to establish such a body of law will enable creditors to wage a divide-and-conquer strategy to break up one country after another, seize the public domain, impose interest charges as tribute, and shift political control to technocrats appointed to act on behalf of the world’s financial centers.
IMF, ECB and BIS policy is marketed with a false view of how economies work — junk economics aimed at convincing populations that There Is No Alternative to austerity, impoverishment, unemployment and emigration under the rulership of an emerging Oligarchy of the One Percent.
The financial conflagration — some scenarios
While governments seek to avoid being subjected to debt serfdom by writing off their debts, bankers and bondholders are strategizing about how to preserve their financial claims when the day arrives that the debts must fall into default or be written down when austerity-ridden economies are unable to pay, except by borrowing more. Creditors hope to use such conditions as leverage to turn debtors into financial colonies.
The first response is an attempt to insure the uninsurable. Realistic bondholders will see that the game is up and debtors cannot earn enough to pay the compounded interest and arrears that have mounted up, especially as economies succumb to debt deflation, austerity, unemployment and emigration. Farsighted financial institutions will take out default insurance from the likes of AIG and monoline insurers, and negotiate credit default swaps with whomever they can find as counterparties. This is how John Paulson made a fortune, betting that the junk mortgage market would collapse and “going short” with his Goldman Sachs derivatives — making AIG and other insurers pay. If a crash could be fully insured, investors would collect “as if” the economy could continue unimpeded in the face of debt deflation path.
But who could afford to pay them? The amount needed to pay far exceeds the reserves of banks and insurance companies. They would have to have set aside reserves equal in magnitude to the entire exponential debt buildup — by being invested in the debts that are among those being burned in the great financial conflagration. So either these counterparties holding CDS will go bankrupt when the time arrives that the debts can’t be paid, or governments will print the money or tax populations to reimburse the One Percent for losses on their investments gone bad.
Managers of these insurance companies and banks may sell increasingly risky debt-guarantee policies at rising prices. As the Ponzi-like accumulation of debt approaches its climax, their profits will rise and enable them to pay themselves higher salaries and bonuses. Then, when defaults wipe out the debts, insurers will say that there are not enough reserves to pay the CDS, or annuities and pensions for that matter, and will fold up business. But managers of companies writing these CDS will have enjoyed enough Bubble years to be able to emulate Rome’s patricians and convert their takings into landed estates, gated communities or farms onto which they can withdraw.
If the stock markets crash and deprive pension funds and other investors of the financialized savings on which retirees had depended, while the One Percent seek to make up their losses from labor and the government, blaming overly generous pensions to the 99 Percent. The reality, of course, is that corporate managers and local governments have under-funded them with overly utopian financialization forecasts. Also blamed will be central banks for spending money to revive employment and GNP. But in reality, austerity crashes markets because central banks refuse to do this.
The crash may become prolonged where governments lack the political ability to write off debts owed to the One Percent. There is no technological or inherent economic reason for this financial Ragnarök to become the fate of North America and Europe. But it is the choice that is being promoted by the financial sector’s lobbyists, pet academics and public media that fail to admit how debt deflation destroys the economy’s ability to grow.
Coda: Absence of an international court to adjudicate sovereign debts
Existing bankruptcy law from New York State to the London and Paris clubs is designed to carve up assets of money-losing family restaurants, other business and personal bankruptcies, not with sovereign debt restructuring such as have thrown world financial markets into turmoil since summer 2014. That is what has made Argentina so important a battleground to create a legal alternative to the hard creditor rules adjudicated in creditor-nation courts or the IMF.