The
Dictionary of Debt This dictionary was created by members of the Economy Working Group of Syntagma Square. Its purpose is to demystify and clarify some economic and financial terms which have dominated our lives recently. It is a form of resistance to the powerful who, invoking various unheard of until yesterday terms and concepts, dump the burden of debt onto the shoulders of people which didn't create it. On the whole we explain these terms according to their official usage, but sometimes we propose more radical interpretations and connections. The data was sourced from economic journals, the press and the web. We have checked them for accuracy at the time of writing; we regret any residual errors; we are solely responsible for them. We do hope that we clear up the meanings of these terms, doing our small part to overcome the so convenient divide between experts and laypeople, and to demystify a convoluted technical language that simply tries to hide basic facts. And one of them is that those who created this crisis and have benefited from it are today passing the bill
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would stop servicing the debt would secure direct and immediate economic benefits, sparing the country almost €80 bln a year paid for the debt.
Austerity Measures: The economic policies most favoured by neoliberalism. Their basic characteristics are cuts in public spending, and increased taxes on an unequal basis. Implementing an austerity programme exacerbates the crisis, shrinking the state’s income even further. Why? Shrinking economic activity shrinks all tax receipts, and cuts wages and incomes which support domestic demand and economic growth. Austerity is a proven path to sink an economy into recession.
Henry Kissinger stated that the “The first step is to alter the framework of negotiations – we must remove the ‘weapon’ - to the extent that it is possible – of the possibility of debtors ceasing payments. Industrialised democracies need to urgently provide some sort of emergency aid for the needs of threatened credit institutions, as this will reduce the sense of panic, and the possibility of debtors to blackmail.” (Newsweek 24/1/1983)
Bond: A means of borrowing used by a borrower to gather funds. Bonds are issued by companies, public organisations, and governments. A typical bond is acquired by investors who pay its nominal value, and periodically receive a coupon – the interest payment. At expiry date, they receive the original amount of money that they had given. Alternatively, bonds can be traded in markets designed for this purpose.
Credit Default Swaps (CDS): Insurance contracts which cover the buyer (e.g. a bank that buys a bond) against the occurrence that the bond issuer (e.g. a country) defaults; they are a ‘fruit’ of the 1990s. A bank which purchases government bonds may insure its bond purchases with another bank, which undertakes to pay the insurance money if the government defaults, or is unable to repay the bonds when they expire, or finance its interest payments. Obviously, the more precarious and fragile the economic situation of a country, the higher the insurance price demanded by the bank that sells the insurance. In reality, with the use of CDS, big banks and hedge funds make massive profits by betting on default and then pushing entire countries to their demise.
When issued every bond has a nominal value (e.g. 100) which represents the amount the borrower received, and an interest rate (e.g. 5%) defining the amount the lender will receive periodically. From the moment it circulates in markets, and before its expiry date, a bond can be liquidated (made into cash, or cash equivalent); as such its price is subject to fluctuations, resulting in its trading value increasing or decreasing. The yield for the investor who buys it after its issuance is variable. Given a fixed rate of interest, the yield may increase or decrease. As the bond price decreases (due to the issuer being downgraded) the yield goes up, and vice versa.
The value of insuring Greek bonds recently exploded due to various factors, including the apparent lack of credibility of the country, the abuse of the renowned Greek statistics, whose quality was however well known to the EU authorities, and the threat of default. This allowed the holders of Greek CDS, who had bought them cheap, to profit massively. The problem with CDS is, at its base, very simple: It is forbidden to take out fire insurance on your neighbour’s house and then receive the insurance money if this house catches fire, since in this case you would have every incentive to have it burned down. But current law allows for holders of CDS (that is, insurance contracts) who do not have any legitimate basis for insurance, since they do not own the goods covered by that insurance (i.e. Greek
Cessation of Payments: Refusing to repay loans allows the state to protect the people’s incomes and interests, and avert the pillage of wealth-producing resources demanded to repay loans. Cessation of payments (stopping payments to creditors) would offload an unbearable burden from the backs of the people, and free up resources to cover basic needs of the country. For example, debt servicing for 2010 was over €30 bln, whilst interest payments were €12.3 bln, double what was spent on pensions (€6.4 bln). A government that
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The
bonds)! These are called naked contracts. In 2010 the profits of Deutsche Bank from CDS trading surpassed 10 billion. Three giant banking groups (Deutsche Bank, Goldman Sachs, and J.P. Morgan) control 75% of the
Dictionary of Debt
conflict of interest when the institution being rated is the one paying for the rating! Debt Audit Commission: A tool that can assist mobilisations against debt. It can take a variety of forms: official and parliamentary (e.g. Ecuador), or through citizens’ initiatives (e.g. Brazil, Uruguay, Greece, Ireland, Portugal), or both (e.g. Philippines). The findings of a citizens’ debt audit commission may not be binding, but they may help build a broad platform for the movement for debt cancellation, and they can offer arguments and provide data to the social movements struggling against debt. Such commissions employ internationally accepted legal definitions regarding illegal, odious, illegitimate and unsustainable debts, which can lead to the debt’s cancellation. The Greek Debt Audit Campaign aims at social control of the economy and production.
global CDS market.
Debt Negotiations / Restructuring of Debt: Debt restructuring takes place when borrowers officially announce that they cannot repay their creditors under the originally agreed terms. It involves negotiations in which these terms are changed, usually before the borrower announces default (or a credit event, as it is called officially by credit rating agencies and other bodies). From 1970 onwards more than 40 countries have renegotiated their debt repayments. The previous Greek public debt restructuring occurred in March 2011 and involved a loan from the EU. It included extending loan maturity by extending the repayment date from 4.5 years to 7.5 years. Already in 2010 the Greek government had hired foreign intermediaries, such as the firm Lazard, who specialise in renegotiations and debt restructuring. The current ‘voluntary’ restructuring of the Greek debt held by the private sector (see PSI) is, in absolute terms, the largest in history.
Credit Rating Agencies: Private specialist organisations, whose clients are mainly banks and private institutions. The global market is dominated by three market giants, Moody’s, S&P, and Fitch. Evaluating at regular intervals the credit worthiness of large companies, banks, public companies etc., they calculate how likely the latter are to repay debts. So lenders know what risk they are taking when lending money, and they can naturally demand corresponding interest rates. The most secure borrowers receive a rating of “AAA”, whereas the ones receiving “BBB” are less credible, etc. The downgrading of Greece’s credit worthiness, sparking the relentless attack which the country faces, exploded its cost of borrowing. After the breakout of the financial crisis, the rating agencies found themselves criticised internationally for partiality. The same agencies had previously extolled the country’s successful path towards the euro. These three shops provide not only rating services, but also consultancy, paid by the same banks that issue the titles. Thus, they gain twice from their services. There is a massive
Debt (Public): The total loan obligations of the state. It may refer to the debt of the central government (the ministries and the
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decentralised governance bodies), or the general government (central government plus hospitals, pension funds, public companies, and local authorities). Depending on its origin, debt is divided into internal and external. As for debt maturity, there is short-term debt (up to a year), mid-term debt (up to 10 years), and longterm debt (over 10 years). Public or sovereign debt attracts speculation by big private capital, banks and credit institutions, and vulture funds.
most suits them. For example, when they want to impose anti-people policies they can mask revenues to justify further borrowing or spending cuts. On the other hand, they can present certain revenues (e.g. from road taxes) when it suits them best. The dramatic adjustment of the deficit with the help the European statistical authority Eurostat provided the government after its election the motive to bring on the attack against Greece, as it decimated the countries international credibility. A few years earlier the other government party, New Democracy, had attempted a similar trick.
In 2011 the Greek public debt reached €352 bln, or 161.7% of GDP. In 2010 it was €329 bln, or 145% of GDP, while in 2009 it was €299.5 bln, or 129% of GDP. In the period 1991–2011 the Greek government paid debt repayments €513 bln, while in 2003–2011 it had repaid a further €151 bln in short term debt only. Even in 2009, with the deficit at €17.1 bln, new borrowing surpassed €85.2 bln. For 2012, servicing of the government debt will surpass €70 bln. Deficit (Public): The amount of money, as a percentage of GDP, that the government ‘goes under’ each year. It occurs when revenues of the government are less than its expenditure. The gap (deficit) is financed through borrowing, meaning short or long term loans (see Bonds). The government’s revenue comes mainly from taxes and its participation in public companies. Its expenditure covers spending for wages, pensions, education, health, military, public investment programmes etc, but also the repayment of debt (interest payments and the principal).
Eurobond: A bond proposed as a solution to the current crisis, covering all countries of the eurozone and not issued by each member state independently, but by the entire eurozone. This proposal was first formulated by the president of the Eurogroup (the Eurozone’s finance ministers), J.C. Junker, and the Finance Minister of the Berlusconi government, Julio Tremonti. Some maintain that the best solution is to issue a 20 year Eurobond with a 3% interest rate. The cost of Eurobond borrowing should be equal for all member countries, as it will supposedly be guaranteed by powerful countries such as Germany. It doesn't deal with the reasons for debt creation, only with its financing.
Given the statistics of the time, the Greek deficit in 2010 was 10.5% of GDP, including the 6.6% of GDP going for debt repayments, and 3.9% for all other public expenditure (wages, health, education, social security etc). The deficit in 2011 is estimated to be 19.6 billion euro, or 9% of GDP, and the 2012 target is 11.4 billion euros, or 5.4% of GDP. This expected divergence will bring on the usual threats and blackmails of further austerity packages.
Extending Loan Maturity: Prolonging the time in which a debt can be repaid. Usually the IMF, after the three year threshold loan period is over, proceeds to new lending to its borrower countries, equal to half the value of the original loan. And this is the amount that the IMF will most likely lend to Greece in the new agreement, with the conditionality that all public wealth is sold off, and catastrophic austerity is imposed.
We know however that the size of the budget deficit can change or be presented in a variety of ways, to serve the interests of those in power. The deficit is often technically enlarged according to the policy that
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The
First Bailout Package (€110 bln from EU and IMF):
Dictionary of Debt
Structural adjustment, such as market liberalisation (mainly labour market and financial market), and privatisation of public utilities (water, telecommunication, electricity, and all other profitable monopolies). Constriction of public deficits, of inflation, and of social spending (health, education, etc.) Wage freezes, and abolition of labour rights. Mass layoffs, especially of civil servants. The possibility for creditors to sell off the loans to third parties.
In April 2010, when the Greek bond spreads exploded to new heights, rendering impossible Greece’s funding from the capital markets, the Prime Minister requested, from the remote island of Castelorizo, a bailout package for the country. It is basically a 3-year loan worth €110 bln, with an original interest rate of 5%; €80 bln are given by the EU, and €30 bln by the IMF. This money is given on the conditionality of strict austerity policies: privatisations, cuts in wages and pensions, increases of indirect taxes etc. Their implementation is strictly monitored every three months by the EU and the IMF, in exchange for the financial flows.
This has defined the situation in Greece for the two years since the first bailout package. The new loan agreement however, and the haircut of the Greek debt, is accompanied by unprecedented austerity packages. They include layoffs in the public and private sector, massive wage reductions, the unconstitutional abolition of collective bargaining, the selling off of every profitable state business (state lottery, electricity company, ports), which is plunging society into impoverishment. Gross Domestic Product, GDP: The total value of all goods and services produced within a country during a given year, including those produced by units owned by people who live abroad. The Greek GDP in 2010 amounted to €230 bln, with a real fall of 4.5% in comparison to 2009. In 2011 the fall approached 7%, whereas the Troika predicted 3%. The fall for 2012 is predicted to be between 2.8 and 6.5%. A reduction in GDP means that goods and services of smaller value have been produced in comparison to the previous year. The Greek economy is now in its fifth year of recession. A cumulative loss of Greek GDP that may surpass 20 % renders this financial crisis one of the largest in recent decades.
Greece is a typical example of a controlled or orderly default. Through the implementation of the Memorandum, the Greek public debt is transferred from the hands of private creditors, who are easier for a government to control, to the hands of the IMF, the ECB, and the eurozone countries. The Memorandum, signed simultaneously with the loan agreement, transfers sovereign rights to creditors. Indeed, the agreement signed by the Greek government in early May 2010 with the Troika does not differ hugely from the typical IMF loan agreements. The conditionalities agreed include: An internal devaluation, through lowering the cost of labour and internal consumption
Haircut (see PSI): If a borrower country can’t pay creditors, then it can, unilaterally or in accord with creditors, decree that only a portion of its obligations will be paid. Usually this amount is around 70% or 80%,
The exploitation of natural and other resources by selling off mining rights, mining companies and handing out licenses for pittance in return.
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but there are cases, like the recent Greek one, where the borrower agrees to pay only 40%. The amount that the investor loses is called a ‘haircut’. In Latin America during the last decade, for example, creditors were repaid on average 75% of obligations. Such a legislative intervention, most often involving bonds, shuts out the borrower from capital markets for some time.
Greek banks, that made big use of the ECB, is that they have to return the money they had borrowed, but they are by now essentially bankrupt. Odious Debt: Under a UN proposal (of April 2010) a debt is considered odious not only if it is product of a suspicious exchange, but whenever its repayment involves the circumvention, violation or abolition of basic human rights. Whenever a country has to destroy jobs and cut people’s incomes, cut social and public spending, and sell off public wealth in order to repay creditors, then its debt is odious, and its repayment must be denied. This proposal was accepted by a majority at the General Assembly of the UN in 2010
Inflation: The increase in the general price level in the economy during a specific time period. In Greece in 2010 it reached almost 5%, whilst 2011 ended with inflation close to 3%. Inflation causes suffering mainly for wage earners, pensioners, and ‘vulnerable’ groups, whose income dissipates in value, as they have few chances to tie it to inflation. The poor become poorer, but creditors also lose, because the value of their loans decreases with inflation. Trying to guard the value of their loans, they support policies of inflation targeting, hence their commitment to price stability. They also move to make central banks independent of electoral control. Not too democratic a choice, is it? Labour Cost: The amount that employers pay for the use of their employees’ labour. According to the Troika ‘experts’, it is the basic reason for the low competitiveness of the Greek economy. However, in Greece after the Memorandum we have seen large cuts in labour costs (-6.5%) without competiveness being aided in the slightest, and the same holds for Ireland, Portugal, and Hungary. By the summer of 2011, in relation to 2010, wages were on average down by 11% in the private and 14% in the public sector.
Primary Deficit: The primary deficit, or surplus, is the net deficit which occurs when debt repayments (interest payments and debt servicing) are not included in the deficit calculation. If, for example we deduct the state’s expenditure (for wages, pensions of civil servants etc) from its revenue (from taxes etc) and the result is positive, then there is a primary surplus; but after deducting debt servicing too, the government may run an overall deficit.
Liquidity (money from the ECB): In June 2009, when the crisis intensified, banks stopped lending to one another in the interbank market, fearing bank defaults that might lose them money. Then the ECB intervened, lending to the private banks at very low interest (1%). Banks however lent to the state or to individuals at much higher interest rates, ranging from 5% to 15%.
One of the basic conditionalities imposed by the Troika on Greece was that the government should run a primary budget surplus by 2013, so that debt is repaid smoothly. In reality this means cutting pubic expenditure on wages, pensions and social services. The 2012 budget includes 17.9 billion euros for interest payments alone, much more than the cost of wages and pensions combined! Government claims that the PSI (‘haircut’) will reduce interest payments are rubbish!
The ECB also lends money to banks for lengths between one week and twelve months, on presentation of collateral. The ECB foresees even three-year lending, but claims that gradually these ‘facilities’ will be curbed, and talks of raising the interest rates. A problem for the
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The
Dictionary of Debt
recapitalise the banks, which hold €50 bln of government bonds. On the other hand, Greek society will sink into poverty: new austerity measures, reductions in wages, layoffs and privatisations. Promises to reduce debt to 120% of GDP in 2020 are hardly credible. If this debt level were sustainable, then why is Italy, currently having this level of public debt, asked to lower it? And why was Greece, which had this level of debt in 2009, forced to enter the ‘stabilisation programme’?
PSI (private sector involvement): the bond exchange programme of Greek debt: The recognition that Greek public debt is unsustainable led to negotiations for a bond exchange. The PSI decision was part of the 26/7th October 2011 agreement, after the failed agreement in July for a 21% haircut. It involves the “voluntary” participation of private lenders, who accept swapping the titles they hold for new ones, of 50% lower nominal value (‘haircut’). From the total €325 bln of Greek debt, €92 bln is in the form of loans and €260 bln is in the form of bonds. Private bondholders, covered by the PSI, hold around €205 bln of the latter, with the ECB holding the remaining €55 bln.
Secondary Bond Markets: The markets in which already existing debt contracts are bought and sold. These exchanges happen: (1) Between investors, for bond exchanges of companies, publicly listed or not. (2) Between banks and investors, in government bonds and treasury bills, without the mediation of the official regulatory authority, or the stock market. The secondary bond market is tightly controlled by “large institutional investors”, who are in a position to coercively influence the prices of bonds.
The PSI reduction to the public debt will be small and unevenly distributed; for example, the debt held by the Troika and the bonds held by the ECB are exempted. An eventual ECB contribution to the PSI is key to the latest negotiations, whose results will be announced shortly. Direct victims of the haircut are the pension funds, that lose half their reserves (around €24 bln, invested under government orders in state bonds). The haircut puts the final nail in the coffin of the pension system.
Spread (difference in interest rates): In the current crisis, this term primarily means the difference between the interest rate paid by an EU country borrowing money, and the rate paid for equivalent borrowing by Germany. It represents the premium paid by Greece to investors who prefer Greek from German bonds.
The new guaranteed bonds, issued to replace the old ones, will not be governed by Greek law, but by English and Luxembourg law, further strengthening the creditors’ position, as these legal jurisdictions are renound for being creditor friendly. The rate of interest is a central element of the negotiations; the Eurogroup, refusing an interest rate of over 4%, threatens the entire deal, since the bondholders presently don't accept anything less.
Before Greece fell prey to the markets the spread was very small. These days it has rocketed up to 14% for some categories of bonds (meaning that if Germans borrow at 3% we borrow at 17%). Just like the CDS (see CDS), the spread presents a prime opportunity for every sort of speculator to enrich themselves on the back of the people. Characteristically, the head of the investment fund Marian stated: “Our job is to make money and not to think what will happen to Greek citizens. In any case, there isn’t any law that states one cannot exploit an idiot”.
Because the PSI agreement is accompanied by €130 bln worth of new loans the expected reduction in debt will be much less than promised, and total public debt will even increase! Of these €130 bln, €50 bln will
Taxation: The main way in which states gather the revenues needed for their operations. During recession,
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economic activity slows down, so tax revenues fall, making deficits larger. There are two main types of taxation, direct and indirect.
(down from the 45% of a few years ago), while if tax exemptions are included this falls to 15.4%. Church property is taxed at just 0.5%, whereas an average civil servant is taxed at 24%.
Indirect taxation is mainly the imposition of VAT and Special Consumption Taxes on goods and services bought. If, for example, two people, A with an income of 1000 euros and B with an income of 5000 euros, buy the same product worth 100 euros, the indirect tax paid (the VAT) is 23 euros for both of them, i.e. 23% of the price of the product. However, the burden relative to their income is different; for A it is 2.3% of his income, whereas for B it is 0.46%. So, when indirect taxes are raised (this happened repeatedly since the onset of the Greek crisis), lower incomes are most pressed; this contradicts the redistributive character that a taxation system ought to have.
Unemployment: The “inability� to find employment for a person willing and able to work. More and more people experience it in Greece, in Europe and throughout the world due to the crisis. Official unemployment in Greece was 14.8% for 2010 (733,645 persons out of the 4,967,410 who form the labour force), compared to 10.2% in December of 2009. In the 15-24 age group the unemployment rate reached 40%, and has gone over 50% by now. Official unemployment in the third quarter of 2011 was 17.7% in comparison to 16.3% for the same quarter of the previous year. In 2012 the unemployment rate is expected to surpass 20%. For 2011 the total number of those employed was 4,233,765, whereas the economically non active persons were, due to the crisis, more, that is 4,343,149.
Direct taxes are those levied on individuals and companies. A progressive income tax system has redistributive character. However, a look at the tax income of the Greek state shows that it redistributes wealth from the poor to the rich. In 2010 individuals paid 9.4 bln in direct taxes, whilst companies paid only 3.2 bln. For 2011 the equivalent numbers are 10.6 bln and 2.8 bln, while the 2012 numbers are even worse, as the Mid-Term Austerity Plans promises 2.1 bln taxation of companies, while individuals will pay 11.1 bln. Tax Exemptions: Various business sectors have permanent tax exemptions, such as the shipping industry, the banking sector, and the church. They pay much less tax than we do, relative to their actual profits. Furthermore, official taxation for businesses is 20%
Greek Debt Audit Campaign
info@elegr.gr
www.elegr.gr
Pamphlet created by Christina Laskaridis and George Papalexiou, 2/7/2011; Version II created in January 2012.
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