- REYKJAVIK -- The Icelandic
banking crisis must be seen not as an isolated event, but rather as a feature
of a new world economic depression of unprecedented severity. The crisis
of the Icelandic crown, combined with the insolvency of the three leading
banks Kaupting, Landsbanki, and Glitnir, can only be understood as a by-product
of the universal derivatives panic of 2007-2009 which precipitated the
bankruptcy of virtually the entire Anglo-American banking system, including
such large institutions as Countrywide, Northern Rock, IndyMac, Bear Stearns,
Lehman Brothers, Citigroup, Merrill Lynch, Washington Mutual, AIG, Royal
Bank of Scotland, Lloyds Bank, and untold others. Many US money center
banks are presently insolvent (thus the term zombie banks) and are being
kept alive under the "too big to fail" policy, which itself involves
a violation of federal law. As the saying goes, you can't tell who is swimming
naked until the tide goes out. Great embezzlers are frequently discovered
in the midst of financial panics, and this is what has happened in the
case of Iceland.
-
- A WORLD ECONOMIC DEPRESSION CAUSED BY DERIVATIVES
-
- At the heart of this cataclysmic event we find the $1.5
quadrillion derivatives bubble, a speculative mania which over-arches and
subsumes the nefarious activities of Kaupting, Landsbanki, and Glitnir,
making them appear almost as petty larceny in a world where the largest
financial institutions were animated by the spirit of Madoff. The crisis,
in other words, was born in the deregulated confines of Wall Street and
the City of London, and was made worse in particular by the policies of
the British New Labour regime of Gordon Brown, a man who was deeply complicit
in the unbridled derivatives speculation of the past decade, when he had
served as the Chancellor of the Exchequer. A neglected but highly important
feature of the initial panic phase of this depression is the impact of
the beggar-my-neighbor policies of Gordon Brown, Alistair Darling, and
Mervyn King, who followed the old British tradition of trying to unload
some of the worst consequences of the crisis on the other countries, their
banks, and their currencies. The suspicious role of Barclay's Bank and
British regulators in the Lehman bankruptcy is a case in point.
-
- CIVILIZATION TRUMPS GLOBALIZATION
-
- In a larger sense, the Icelandic crisis represents the
culmination of those reckless and irresponsible financial policies which
can be lumped under the headings of the Washington Consensus and of economic
globalization in general. In addition to the exorbitant growth of derivatives
(credit default swaps, collateralized debt obligations, structured investment
vehicles, asset backed securities, mortgage backed securities, etc.), globalization
has promoted the limitless dominion of speculative flows of hot money across
the globe, especially in the form of the deregulated currency carry trade,
from which Iceland has suffered in a particularly acute form. All of these
unwise and risky practices were validated by the extreme "free market"
theories of the Milton Friedman Chicago school and of the Mises-von Hayek
Austrian school, which had furnished the ideological basis of US and British
governments since the time of Thatcher and Reagan, and which had been incorporated
into a compulsory doctrine of the International Monetary Fund, World Bank,
World Trade Organization, OECD, Bank for International Settlements, and
other hegemonic institutions of world finance. These monetarist and neoliberal
ideas have been imposed on the world economy especially in the form of
the Washington Consensus -- the dismal litany of deregulation, privatization,
unhindered flight capital and hot money flows, the primacy of speculation
over production and of finance over economics, the abolition of the state
sector, measures against labor, and the general race to the bottom. Worldwide,
about 1 billion people live in hunger and under the threat of starvation
perhaps the most eloquent proof that 20 years of economic globalization
have been a failure.
-
- The supporters of these ideas are currently attempting
to foment the illusion that a recovery of the world economy from the depths
reached in late 2008 and early 2009 is now in progress. Using this illusion,
hedge fund operators and zombie bankers are attempting to restart derivatives
formation under new aliases with the goal of reflating and expanding the
$1.5 quadrillion world derivatives bubble. The Bush-Paulson-Bernanke and
Obama-Geithner-Bernanke administrations have given Wall Street financial
institutions a combined credit line of $24 trillion in funds from the Federal
Reserve, US Treasury, and Federal Deposit Insurance Corporation. Financial
institutions have enjoyed 0% interest, while the auto industry, its suppliers,
and its dealers have been driven into bankruptcy, while many factories
and stores and close their doors because commercial credit has not been
forthcoming from the struggling banks. Jobs in manufacturing industries
are now a vanishing species in the United States, in particular.
-
- THERE IS NO ECONOMIC RECOVERY
-
- It is imperative that Icelandic policymakers be aware
that recent gains in world stock markets are nothing more than a mugs'
rally at most, not much different in the last analysis from the Little
Bull Market of spring 1930 under Herbert Hoover in the United States.
These upwards blips may be harbingers of a coming hyperinflation. Whenever
the financial indices may have been doing, it is absolutely clear that
all measures of the physical economy has been continuing at depressed levels
worldwide.
-
- The World Trade Organization reports that world trade,
the most important single index of world economic activity, now stands
about one third below the year ago level in dollar terms. The Baltic Dry
Index remains severely depressed, reflecting the same decline in maritime
merchandise traffic. The official US unemployment rate is almost 10%, while
the US unemployment and underemployment has reached almost 17%. If we add
in discouraged workers who have given up on finding a job and have exhausted
their unemployment benefits, we reach a level of 21%, a figure which for
various reasons probably needs to be revised upwards to the neighborhood
of 25%. (For purposes of comparison, we can note that the most severe unemployment
in Germany during the 1930s was somewhat in excess of 30%.)
-
- About 100 US Banks have been seized so far this year,
while the FDIC's secret list of problem banks exceeds 400 institutions.
It is widely expected that about 1,000 US Banks will fail over the coming
year or so. In a with unemployment growing, increasing numbers of Americans
are defaulting not just on their home mortgages (10% of all home mortgages
are in default or behind on payments), but also on credit cards, auto loans,
consumer credit, and student loans. Over the coming months there will
be a cascade of upward adjustments in adjustable-rate mortgages (ARMs),
leading to still more defaults and foreclosures. Many of these losses will
accrue to banks. In addition, the country now faces a commercial real
estate default crisis, with about $500 billion of real estate loans coming
due, with an estimated default rate of about 50% or more. The fund used
by the Federal Deposit Insurance Corporation to reimburse the depositors
of failed banks is now at about 20% of the level prescribed by law, and
the funds of the Federal Housing Administration have also dropped below
the legal limit. Thus, another wave of banking panic cannot be ruled out
as a time when the Federal Reserve interest rate for banks is already 0%
and can hardly be lowered, and the ability of the US Treasury to come up
with funds for another Troubled Assets Rescue Program TARP or bail out
(to say nothing of the political willingness of the Congress to approve
such an exercise) make a new round of support measures for the zombie banks
appear unfeasible.
-
- JACQUES ATTALI: A "PLANETARY WEIMAR" IS IN
PROGRESS
-
- All of these problems are magnified by the weakness of
the US dollar, which has declined against the yen and the euro even as
the New York Stock market has advanced. It is now clear that world demand
for US Treasury securities is weakening, with the Federal Reserve purchasing
a large portion of all Treasury offerings in recent months. This tends
towards the pattern set by the German Reichsbank in 1922-23, when the central
bank was often the only buyer for German government securities. This parallel
alerts us to the danger of dollar hyperinflation, as suggested some months
ago by Jacques Attali, the economics adviser to President François
Mitterrand of France, who spoke of a looming "planetary Weimar."
Under President Jimmy Carter, the United States was beset by simultaneous
inflation and unemployment, leading to the coining of the new term stagflation
and the accompanying Misery Index. Under Obama, who has enacted no serious
reforms of the financial system whatsoever, we face the peril of hyperinflationary
depression or hyper-stagflation. It makes no sense to buy an admission
ticket to this game.
-
- The relevance of this quick sketch of the international
economic situation for Iceland today is that there will be in the foreseeable
future no world economic recovery which could provide assistance to Iceland.
It is impossible to assume a revival of world trade or of international
demand in most areas. Iceland must accordingly contemplate measures to
generate its own economic recovery on the basis of its own guaranteed national
economic assets, while doing everything possible to maintain national independence
and national sovereignty, especially in the face of international financial
institutions whose competence has been severely called into question by
the recent crisis developments. If there were in fact a world economic
recovery on going, it might make sense to offer concessions so as to be
able to join in that recovery and share in its benefits. But this is not
the reality of the world in late 2009, nor is this the perspective for
2010 and beyond.
-
- ICELAND'S PREDICAMENT: THE WORLD IN MICROCOSM
-
- Far from representing an exceptional case, Icelandic
is merely typical of the situation of many countries in the current globalized
economic depression. Iceland represents the human condition of our time
in microcosm. Early on in the crisis, the Icelandic banks owed the world
about $19 billion. At the beginning of the crisis, the Icelandic government
estimated that the cost of crisis might reach $9.4 billion, about 85% of
Iceland's 2007 GDP of $11 billion US. (All references to GDP are purely
indicative, since the monetarist notion of GDP includes speculation, financial
services, and derivatives on the same level as food, construction, energy
and other components of the real physical economy, and are therefore misleading.)
British Prime Minister Gordon Brown originally demanded up to £20
billion. In the more recent negotiations, Iceland has offered the Anglo-Dutch
more than ¤2.7 billion for the UK and over ¤1.3 billion for
the Netherlands, plus interest at 5.5%. This means the extortion of a sum
which seems to be a little more than half of Iceland's annual GDP, but
will soon grow to more than a full years Icelandic output, thanks to the
magic of 5.5% compound interest.
-
- Even so, Icelandic is not as badly off as the entire
world in the current depression, and not nearly as badly off as the superpowers
of the derivatives world, the United Kingdom and the United States. According
to the Bank for International Settlements, the world derivatives bubble
reached a level of $1.14 quadrillion during 2008. Because so many over-the-counter
derivatives are not reportable (especially in the United States), a more
realistic ballpark figure would be the $1.5 quadrillion of derivatives
in notional value already cited. This astronomical sum can be compared
to $55-60 trillion in world GDP, a figure much overstated by counting financial
services, speculation, derivatives, hedge funds, leveraged buyouts, private
equity, etc. This means that the world GDP represents a mere 4% of the
total notional value of over-the-counter and exchange traded derivatives.
This strongly suggests that there is not enough money beneath the moon
to honor the assertions of the international finance elite that their derivatives
represent value -- and this is independent of whatever ferocious austerity
measures the bankers may succeed in obtaining. Something's gotta give,
as the old song says.
-
- If we estimate that inside the United States there are
currently about $1 quadrillion of derivatives (in other words, about two
thirds of the world total) as against a mere $16 trillion of GDP (again,
an inflated figure), then total US output represents a mere 1.6% of the
total derivatives burden. Again, the situation is obviously unsustainable.
Any attempt to maintain the income streams demanded by these derivatives
or to attempt to value these derivatives at the rates mandated by the bankers
will threaten civilization itself. There is thus a world-wide choice between
the attempt to shore up a collapsing and doomed globalize derivatives bubble
on the one hand, and the maintenance of human civilization itself as we
have known it, on the other. So Iceland's predicament, while certainly
quite serious, is rather typical of the contemporary world after all.
-
- In many countries, derivatives were illegal for many
decades. In Germany, they were forbidden under the gambling laws. In
the State of New York, derivatives were banned under an ordinance governing
bucket shops, smalltime betting establishments. In the United States as
a whole, derivatives were outlawed between 1936 and 1982. Even after derivatives
were made legal, it took almost two decades to rehabilitate them to the
point where various counterparties could confidently assume that they would
stand up in court. It took all the efforts of Ronald Reagan, Alan Greenspan,
Wendy Gramm, and her husband Senator Phil Gramm (R-Texas) to bring back
derivatives in a process which culminated in the year 2000. But even this
year, Senator Mark Warner (D-Virginia) asked Fed Chairman Bernanke whether
a "bright line prohibition" of credit default swaps might be
instituted, and Bernanke replied that the proposal deserved consideration,
although of course he did nothing about it.
-
- FULFILLMENT IS PHYSICALLY IMPOSSIBLE
-
- The notion that a sovereign national government can be
forced to assume responsibility for debts incurred by private companies
is a relic of the gunboat diplomacy of the late 19th century. Gordon Brown's
use of the British anti-terror legislation must be considered an act of
economic warfare, an act of war which removes this issue from the normal
sphere of "the market," by anyone's definition. Given the barrage
of punitive actions, threats, and intimidation coming from London and The
Hague, we can say with certainty that any agreements entered into thus
far by Iceland have been extorted under duress, and must thus be considered
null and void. If Iceland were to accept the blackmail of the Anglo Dutch,
it would be tantamount to national suicide. Your country risks undermining
its entire future perspective for development and even for survival. Accepting
the extraordinary and illegitimate debt burden which the Anglo-Dutch seek
to impose is not a viable option. The Anglo-Dutch wish to extract their
dubious financial debt pretensions from the real productive economy of
the small nation of Iceland; this is a process which can only lead to mass
emigration, depopulation, economic decline, foreclosures on homes and businesses,
widespread personal bankruptcy, possible hyperinflation, and general economic
despair and ruin. At the end of the day, it is also certain that the Anglo
Dutch debt can never and will never be paid the exorbitant sums they have
in mind. This is not a matter of opinion, but a physical impossibility.
-
- JOINING THE EUROPEAN UNION WOULD MAKE MATTERS WORSE
-
- Some suggest that the way out of this impasse could be
found by having Iceland join the European Union. This may seem plausible
on the surface, but nonetheless represents a grave misconception. Today's
European Union is a creature of oligarchies, banks, and cartels, animated
by monetarist and neoliberal economic doctrine, and filled with contempt
for the ideas and needs of the working populations of the constituent countries.
This was not always so: during the first or Cold War quarter century of
the European Economic Community, European institutions were animated to
a significant degree by dirigistic ideas coming from the American New Deal,
from social democratic parties and from the labor movement, before a backdrop
of postwar reconstruction. Leaders like Adenauer of Germany and de Gasperi
of Italy also contributed positive impulses from the social and economic
doctrines of the Roman Catholic Church, many of them in direct contradiction
to be nostrums of the Austrian and Chicago schools. The last country to
gain anything from joining the European construct may well have been Ireland,
which benefited from the European Regional Fund in a way which would hardly
be possible today.
-
- After 1990, the combined effects of British monetarist
agitation under Thatcher and Major, and especially the monetarist criteria
embodied in the Maastricht Treaty have increasingly influenced Brussels.
Another critical watershed has been the creation of the European Central
Bank as a bastion of financier oligarchy. Outside of a tiny elite of Eurocrats
and Eurogarchs, the European Union has encountered growing rejection from
broad strata of the populations of the member states, as seen in the rejection
of the flawed and unworkable EU constitution turned down by France and
the Netherlands in 2005, and of the undemocratic and authoritarian Lisbon
Treaty by Ireland in 2008. As Marie France Garaud, who had served as a
minister of the French government, remarked in June 2005, the proposed
EU constitution would have represented a perpetual guarantee of nothing
but "la conduction oligarchique des institutions" -- the oligarchical
management of European institutions. The European Commission can be relied
on to favor the interests of banks and financial institutions over those
of productive industry and human need in every case. Surely this is not
the Europe which Iceland needs to join at the present time.
-
- Even a small country can exercise world leadership in
the present crisis by functioning as an exemplar of democratic reform of
financial and economic affairs and pioneering a better way of doing things,
without regard to the discredited orthodoxies represented by the international
financial institutions whose prescriptions have been so tragically wrong
in the recent past.
-
- A PROGRAM FOR ICELAND
-
- Any attempt to fulfill the payment schedule demanded
by the Anglo-Dutch would cripple Iceland's economic and social development
for decades to come. The political effects of a policy of compliance and
fulfillment can only be guessed at, but the relevant historical precedents
are very ominous indeed. When Weimar Germany attempted to comply with the
reparations imposed under the Versailles Treaty, German politicians of
the 1920s like Gustav Stresemann were easily demonized as disloyal "Erfüllungspolitiker"
and were ultimately swept aside by a totalitarian fascist movement under
Hitler. Most of the debt was finally repudiated by the Nazi regime after
1933 in any case. If Germany had declared a debt moratorium in the early
twenties, whatever the consequences, the chances for maintaining a democratic
state would have been much better.
-
- DEBT MORATORIUM
-
- Here are some essential components of a program to defend
the general welfare of Iceland:
-
- Iceland should officially and formally declare a comprehensive,
open-ended debt moratorium. This should involve the immediate, unilateral,
and unconditional suspension of all payments of principal and interest
to the Anglo-Dutch, until further notice. Any future payments can only
be the result of international treaty measures negotiated by the self-styled
creditors with the government of Iceland as a sovereign state and ratified
by the Althing .or by referendum. The debt moratorium has routinely been
declared by national states in regard to sovereign debts which they had
officially contracted. In these cases, international negotiations regarding
the suspension of debt moratorium have focused on debt rescheduling, interest
rates, conditions of payment, and related issues. In the case of Iceland,
however, the overarching question is that of the legitimacy and legality
of the alleged Anglo-Dutch financial debt in the first place. The procedure
of transforming private debts of Icelandic corporations into public obligations
of the Icelandic government through the decree of foreign states which
act as the favored clients of supernational institutions is prima facie
illegal. In other words, it is extremely doubtful that Iceland owes the
United Kingdom and the Netherlands anything at all.
-
- If Iceland declares a debt moratorium, the country will
simply be following the path of a large number of countries during recent
decades. Here is a list, which makes no claim to being exhaustive, of some
27 countries which have, from the point of view of the international bankers,
defaulted between 1980 and 2004 more than one default per year, suggesting
that, under conditions of globalization, debt default represents a normal
and physiological process reflecting the deep flaws and contradictions
of the emerging world globalized casino and hot money economy. It will
be noted that this list includes large countries and small countries, European
countries and Third World countries, countries with extensive oil and other
natural resources and countries not so endowed, left-wing countries, right
wing countries, Moslem countries, Catholic countries, secular states, democracies,
dictatorships, and even one nuclear superpower, the Russian Federation.
There is no conceivable opprobrium or moral taint in joining this long
list. The list includes Albania, Algeria, Argentina, Bolivia, Brazil,
Bulgaria, Chile, Costa Rica. Dominican Republic, Ecuador, Jordan, Mexico,
Moldova, Morocco, Nigeria, Pakistan, Panama, Peru, the Philippines, Poland,
Romania, Russian Federation, South Africa, Turkey, Ukraine, Uruguay, and
Venezuela. If one country defaults, we can focus on the incompetence of
politicians and on the embezzlement carried out by individual Enrons or
Madoffs. But when 27 countries default, we need to look at the defects
of an entire world system and therefore at the remedies which sovereign
states can employ in their quest for economic self-defense and for the
exercise of their inherent right to economic development.
-
- Agencies of the United Nations are keenly aware of the
debt moratorium issue. "Debt-ridden developing countries already struggling
with the economic crisis will be particularly hard hit if they do not receive
some form of debt relief in the immediate future, Secretary-General Supachai
Panitchpakdi said at the annual dialogue at ECOSOC among the World Bank,
IMF, World Trade Organization, and UNCTAD on 27 April [2009]." Noting
that temporary moratoria on official debt servicing would give them some
breathing space, Panitchpakdi told the meeting:. "In the current global
crisis situation, both debtor and creditor countries would probably be
better served if scarcer foreign exchange earnings in the debtor economies
were used for the purchase of imports rather than for debt servicing,"
But debt moratoria need to be permanent until negotiated agreement is reached,
so as to avoid the insufficiencies of the Hoover Moratorium of 1931-32
(declared by US President Herbert Hoover on post-World War I reparations
and war debts). The Hoover Moratorium had real promise as an idea, but
it proved too short-lived to stop the German and British defaults of 1931,
and ended in chaos.
-
- This is not the place to attempt even a cursory overview
of recent debt moratorium measures enacted by the various nations of the
world. Some of the largest and most important of these have been Mexico
in 1982, Brazil in 1987, and Argentina in December 2001. Debt moratoria
sometimes involve attempted measures of coercion in retaliation against
the country in question by international lenders and international financial
institutions, particularly the International Monetary Fund. Countries
exercising the sovereign right to debt moratorium have been sanctioned
with lending freezes, exorbitant interest rates, and even the attempted
overthrow their governments by means of subversion fomented from abroad.
Government officials everywhere should by now be familiar with John Perkins'
Confessions of an Economic Hit Man (San Francisco: Berrett-Koehler, 2004),
which provides a typology of the methods used by international bankers.
Nevertheless, it seems clear that the ability of nation states to harvest
the beneficial effects of debt moratorium depends on the political skills
of their leaders and the willingness of those leaders to mobilize mass
support.
-
- The most recent Argentine debt moratorium was declared
in December 2001 during the short-lived administration of President Rodriguez
Saa, in a time of grave political instability. It was therefore a real
achievement that a democratic form of government was preserved. The Argentine
debt moratorium was largely administered by the government of President
Nestor Kirchner, who was able to negotiate a write-down of two thirds of
Argentina's foreign debt by about 75%, meaning that the foreign debt existing
at the beginning of the crisis was reduced by about one half. Argentina
unquestionably faced serious domestic economic dislocations during the
time that the debt moratorium was in force. However, it would appear that
many of these could have been ameliorated and mitigated by the development
of a more adequate social safety net, something which Iceland should be
able to accomplish without excessive difficulty.
-
- There is also always the possibility that a determined
stand by a single country might precipitate the formation of an international
movement of states or debtors' cartel in which economically disadvantaged
states (the vast majority) would join together for a kind of collective
bargaining to secure better conditions from the creditors, who already
enjoy cartel arrangements of their own through the London Club and the
Paris Club. We should also recall that the world is far less unipolar
today than it was in 2001, thanks to the emergence of the Shanghai Cooperation
Organization and related tendencies. The difficulties experienced by the
United States and the British in attempting to impose economic sanctions
against what they define as recalcitrant nations suggest that countries
invoking their right to debt moratorium would not today experience the
same pariah status which some have undergone in the recent past.
-
- In short, there is substantial reason to believe that
a debt moratorium could be instrumental in obtaining significant improvements
in the economic and political situation faced by Iceland. For any country
of the modern world to recover from economic depression, it is always necessary
to remove the burden of fictitious capital generated during the bubble,
which generally assumes the form of speculative claims on income from agriculture
and industry. On a world scale, this would take the form either of outright
bans on derivatives and similar toxic instruments, or else of measures
designed to neutralize the derivatives problem through taxation, as in
the form of the Tobin tax. In the case of Iceland, the eradication of
the overhang of fictitious capital necessitates the permanent freezing
of interest and principal on the illegitimate Anglo Dutch debt with a view
to its radical write- down or its outright elimination.
-
- AN OFFER OF 6% OF FUTURE GDP GROWTH AS DEBT SERVICE?
-
- The current offer to the Anglo Dutch of debt service
amounting to 6% of future GDP growth guaranteed by the Icelandic government
between 2016 and 2024, while conceding a 5.5% rate of interest on all supposed
arrears, represents an approach which is antithetical to and incompatible
with the strategy of a debt moratorium. This offer of a percentage of future
economic growth is counterproductive and unwise, and Iceland will indeed
be fortunate if the Anglo Dutch reject it and instead reiterate their demand
for full and unconditional payment.
-
- Unfortunately, such a percentage approach is not new
and has failed in the past. Professor Michael Hudson wrote of this offer
in the London Financial Times of August 17, 2009 that "this agreement
is, so far as I am aware, the first since the 1920s to subordinate foreign
debt to the country's ability to pay. Iceland's payments will be limited
to 6 per cent of growth in gross domestic product as of 2008. If creditors
take actions that stifle the Icelandic economy with austerity and if emigration
continues at current rates to escape from the debt-ridden economy, there
will be no growth and they will not get paid." But this assertion
is not accurate, and ignores the very well-known and thoroughly unsatisfactory
results obtained with a similar method by Peru under the initially wildly
popular Alan Garcia Perez regime during the years after 1985, with which
Professor Hudson must surely be familiar. As John Crabtree of Oxford Analytica
wrote of the Garcia experience, "for the first time, a heavily indebted
country was unilaterally limiting debt payment to its own perceived capacity
to pay."
-
- ALAN GARCIA'S 10% SOLUTION, 1985: A TRAGIC FAILURE
-
- Alan Garcia's July 28, 1985 proposal to Peru's creditors
took the form of an offer to pay them in the form of debt service 10% of
the export earnings of Peru. Even though 10% is more than 6%, Garcia's
proposal was more realistic than what Iceland is considering today. This
is because GDP growth as such does not directly provide foreign exchange
earnings in the form of dollars or euros or SDRs which can be used for
the payment of international financial debt. Foreign exchange can be obtained
primarily through exports. One can imagine a country with a growing GDP
which nevertheless has little in the way of foreign exchange earnings,
or even might have a foreign-exchange deficit, in which case GDP growth
would have very limited impact on the elusive Keynesian chimera of "ability
to pay." Garcia was at least focused on the specific economic variable
-- foreign exchange earnings in the form of dollars -- which bore most
directly on how Peru would pay foreign debt service. But even though the
Peruvian position had the virtue of specifically addressing on export earnings,
it nevertheless failed to provide any solution to the issue of Peru's international
debt.
-
- Within the 10% offered by Peru, Garcia prioritized newly
contracted debt which was to be paid in full, followed by multilateral
lending agencies who were to get paid up to the amount of new credits coming
into Peru. Then came government creditors, and last of all private banks.
But sometimes the Peruvians allowed themselves to be stampeded by the
US and the IMF into making last-minute debt payments to avoid being declared
in default. These moments of weakness were all the easier since payment
had not been completely terminated. (By early 1987, Peru was violating
its own policy in the other direction, since it could no longer afford
to pay the promised 10%.) Garcia thought that the bankers would be impressed
by his moderation, but they treated him as if he were incomplete default.
In October 1985, Peruvian debt owed to US banks was declared "value
impaired," forcing the US lenders to set aside larger loan loss provisions.
Peru now faced a bankers' steering committee chaired by Citibank. In April
1986, the IMF, seeking to impose a program of monetarist shock therapy
on Peru, demanded the immediate payment of $70 million in debt arrears.
When Garcia failed to comply, the IMF blacklisted Peru as ineligible for
new loans, placing the nation in the same category with Vietnam, Zambia,
Somalia, Guyana, Sudan, and Liberia. Peru was then denied any new loans
by the World Bank and the Inter-American Development Bank.
-
- At the same time, the 10% policy meant that Peru could
not join with other countries who were interested in promoting debt moratoria.
This was a grave disappointment for Garcia, who had hoped to organize
large parts of Latin America around his 10% solution. The 10% policy emerged
over time as a dangerous half measure which was linked to other dangerous
half measures, such as the failure of the Garcia regime to mobilize national
credit for domestic production. When Garcia tried to correct his early
mistake after two years in office by attempting to nationalize 16 banks
and finance companies along with 17 insurance companies, his political
support collapsed. Inside Peru, Alan Garcia was now more widely blamed
for the crisis than was the IMF, which all Peruvians had previously agreed
was the villain. Despite Garcia's desire for moderation and gradualism,
foreign lenders refused to invest, and domestic investors converted their
funds into flight capital. According to one historian, the 10% policy failed
to deliver: "despite the posture of limiting debt repayment to 10%
of exports, more went out in debt payment than came back in new loans."
According to the World Bank, Peru's GDP declined by 8.8% in 1988 and by
14% in 1989. This amounted to Peru's worst depression of the 20th century,
and it was accompanied by hyperinflation of 4500% per year, which finally
had to be combated by means of a currency reform. For a multiplicity of
reasons, some not related to debt, Peru underwent a decidedly authoritarian
turn under Alberto Fujimori in the years after Alan Garcia left office.
As for Fujimori, he quickly capitulated to the IMF and the World Bank.
By 1994, he had also capitulated to the private banks. In the meantime,
he had dissolved the Congress and suspended the constitution in the infamous
"autogolpe" of self-coup of April 1991. The 10% or ability to
pay strategy had undermined Peru's political institutions to the point
where democracy itself had been eroded.
-
- DEBT MORATORIUM AND PERCENTAGE OFFERS ARE TWO DIFFERENT
WORLDS
-
- At first glance, the percentage ceiling approach and
the debt moratorium strategy might appear to be variations on the same
theme. They are not. The differences between the two methods are principled
and far-reaching. The percentage approach implies that the debt is legitimate,
and that it is only the Icelandic ability to pay that is in question. This
represents a fatal weakening of the Icelandic legal-juridical and political-moral
position, which is that the debt is illegal and being extorted under duress
in violation of international law. This approach also undermines popular
unity inside Iceland, opening the door to inevitable haggling about what
percentage of export earnings can reasonably be devoted to paying the demands
of foreign creditors, and related questions. With this approach, one part
of Icelandic society will inevitably appear in the role of imposing austerity,
sacrifice, tax increases, and cuts in the standard of living and vital
social services on other Icelanders. This is a recipe for crippling internal
divisions, as seen in Weimar Germany. With a debt moratorium, a clean break
with the creditor powers is established. After that, no matter what might
happen to Iceland in the way of economic sanctions and economic warfare,
it will be seen as an attack by foreign powers acting without legal justification,
and will thus increase social and political cohesion, and therefore the
ability to resist foreign dictation.
-
- The Icelandic debt alleged by the Anglo-Dutch is both
illegitimate in toto and unpayable in practice. Since it is unpayable,
why make a half-hearted attempt and pretend to pay it? Nothing but political
confusion, demoralization, and a weakening of the Icelandic national will
can result from this policy. The percentage approach represents a dangerous
half-measure against adversaries whose aggressivity appears to know no
limits. The percentage approach would get Iceland all the imaginable disadvantages,
including the raging hostility of the Anglo-Dutch, the international financiers,
the IMF, and the Brussels Eurogarchs, but none of the advantages that would
come from a clean and orderly principled debt moratorium.
-
- The percentage approach also recognizes the right of
the Anglo-Dutch to exact 5.5% in compound interest on the alleged principal
and arrears would be subjected. Under Versailles, Germany as the loser
of World War I had to accept a 5% interest rate on the mass of reparations,
meaning that Iceland is being treated worse than a conquered province.
Even if Iceland were to succeed in paying a percentage of GDP or export
earnings, the debt will increase through compound interest, and will grow
much larger over time. This is the curious process sometimes referred to
as bankers' arithmetic, which can be summed up in the proposition that
the more you pay, the more you owe, and so on into eternity, unless and
until the political authorities of the target nation summoned the political
will to call a decisive halt to the process of looting.
-
- To score any points at all, the advocates of the 6% solution
would have to show that, under their method, the future loans that Iceland
would receive would exceed the future debt service to be paid out. But
there is no assurance of this. In addition, world trade is falling, not
rising. It will be almost impossible to increase export earnings in a situation
where, according to the WTO, the level of world trade is now 33% lower
than it was a year ago.
-
- Thus, any percentage approach will never resolve the
problem of the foreign debt, but only pyramid both the debt and the difficulties.
Any export earnings paid to the self-appointed Anglo-Dutch creditors would
simply be lost to the urgent tasks of Icelandic internal development and
economic modernization. The amount paid would not placate the hostility
of the Anglo-Dutch, who would be free to block Icelandic exports with the
help of the EU, and possibly impose other sanctions. The lesson of all
these considerations is, once again, that Iceland needs to declare an immediate
sovereign debt moratorium. At the same time, it is imperative to recognize
that the successful prosecution of a debt moratorium strategy will require
a national economic policy incorporating strong elements of dirigism and
of mass participation in order to be successful.
-
- FINANCIAL RE-REGULATION
-
- In addition to removing the burden of the Anglo Dutch
demands, it is advisable to implement measures to prevent the re-emergence
of a bubble economy on the national scale. Icelandic banking needs to
be re-regulated, establishing an incompatibility of commercial banking
with proprietary speculative trading and also with insurance, as in the
US Glass-Steagal Act. The notion of too big to fail should be abolished,
and the notion of derivatives triage introduced. Bankrupt financial institutions
which fit the profile of zombie banks need to be seized and liquidated
forthwith, with their derivatives being canceled.
-
- A 1% TOBIN TAX ON DERIVATIVES AND OTHER FINANCIAL TURNOVER
-
- Iceland requires a 1% Tobin tax (also known as a trading
tax or securities transfer tax) on all transactions involving over-the-counter
derivatives, exchange traded derivatives (options, futures, and indices),
stocks, bonds, foreign currency, commodities, and asset-backed securities.
This Tobin tax would provide much-needed revenue for the national budget,
while at the same time discouraging the destructive excesses of speculation
which are at the heart of the current crisis.
-
- It is not advisable to deal with the IMF, since IMF loans
always bring with them the necessity of a letter of intent containing economic
conditionalities which are uniformly destructive of national sovereignty
and highly detrimental to economic growth. The history of the IMF offers
no success stories, but only failures. Rather than becoming embroiled with
the imperial IMF, Icelandic would be much better advised to seek support
among its peers, that is to say among other nation states, in which context
an equal partnership based on mutual advantage can be possible. Iceland
should therefore conduct a vigorous diplomacy towards the Brazil-Russia-India-China
BRIC combination, towards the Shanghai Cooperation Organization Members,
towards the nonaligned countries, and towards the developing nations in
general, with particular attention to oil producers. The IMF is the bearer
of the Washington Consensus, a set of failed and discredited economic doctrines
which are being increasingly rejected around the world in favor of a still
evolving Beijing Consensus inspired by the principles of noninterference
in the internal affairs of sovereign states and of mutual benefit. In
order to escape the IMF's net of conditionality and Diktat, it is advisable
to immediately pay off any and all IMF loans contracted thus far using
funds borrowed from other nation states or from other lenders. The recent
example of Argentina is instructive in this regard.
-
- NATIONALIZE THE CENTRAL BANK AND OFFER 0% LOANS FOR RECOVERY
-
- In a world dominated by the death agony of the various
zombie banks of Europe and North America, it is already prohibitively difficult
to obtain commercial bank loans on reasonable terms. It will be necessary
for Icelandic to secure a guaranteed source of development credit for domestic
purposes. The obvious solution is to nationalize the central bank and operate
it as a department of the Finance Ministry, with the national money supply,
interest rates, and approved categories for lending being determined by
public legislation approved by parliament. This is far more democratic
than the usual secretive practices of central banks. Iceland, in short,
should become its own bank for domestic purposes, since there are no commercial
banks in sight that could be equal to the task. We are thus talking here
about national lending, not government spending. Recovery loans from the
new national bank of Iceland should be issued at 0% interest for the duration
of the world economic depression. These loans should be earmarked exclusively
for productive purposes in the realm of tangible, physical goods production
in such areas as manufacturing industry, agriculture, building construction,
infrastructure, scientific research, mining, energy production, transportation,
and other productive fields. Production also includes such local activities
as auto repair shops, restaurants, dry cleaning establishments, tailors,
taxi companies, trucking firms, dairies, farms, airlines, railroads, ferries,
building contractors, home builders, painters, plumbers, and any other
business which provides transportation or produces a physical product.
Socially necessary activities like health services and education can also
qualify. Financial services and speculation emphatically do not qualify
for 0% national credit, and will have to turn to the private credit market.
As long as national credit is channeled preferentially into productive
activities, the loans can be repaid without difficulty and inflation will
not become a problem. As an additional safeguard against the transformation
of such loans into hot money flight capital for a new currency carry trade,
capital controls and exchange controls must be maintained and strictly
enforced. The Icelandic National Bank will also offer a rediscount guarantee
for all forms of commercial paper pertaining to the national infrastructure
program described below.
-
- The Icelandic government and the national Bank will need
to supervise available stocks of foreign currency with a view to maximizing
their effective use. Foreign exchange should be used to build up strategic
stockpiles of oil and other vital raw materials.
-
- After the recent catastrophic experience with de-regulated
financial globalization, it is time to re-balance Icelandic society away
from the hypertrophy of financial services, speculation, and the casino
economy in favor of a renewed emphasis on industrial and agricultural production,
infrastructure, scientific research, mining, and building construction.
In these troubled economic times, it is imperative to prevent debt issue
is in the domestic economy from strangling essential national production.
Iceland should therefore freeze any and all foreclosures of primary residences,
farms, factories, businesses, and other enterprises for five years or for
the duration of the world economic depression, whichever is longer. In
the current national emergency, the supposed primacy or sanctity of debt
and debt service must yield in every case to the requirements of maintaining
the fabric of human society and necessary production.
-
- INDICATIVE PLANNING
-
- Iceland should also consider the advisability of instituting
a national economic recovery plan. Indicative planning has nothing in
common with the failed command economies of the old Soviet bloc. Indicative
planning involves drawing up a list of national priorities which can become
the leading edge of economic progress over a period of several years into
the future. Indicative planning goes back to the methods used by Jean-Baptiste
Colbert in France in the seventeenth century, and by Alexander Hamilton
in the United States in the 1790s. The American New Deal of Franklin D.
Roosevelt incorporated elements of indicative planning, as in the case
of the highly successful Tennessee Valley Authority (TVA) and other regional
development plans. As part of a strategy of economic independence and
rapid development, Iceland should introduce indicative planning on the
model of the French Commissariat du Plan under De Gaulle after 1958 and
the extraordinarily Japanese Ministry of International Trade and Industry
(MITI) during the Japanese industrial boom.
-
- TAIWAN 1974-1979 AS AN EXAMPLE OF INDICATIVE PLANNING
-
- The basic principle that needs to be applied to the specific
situation of Iceland today is that the only adequate response to an international
economic crisis is to promote an ambitious program of the national infrastructure
and industrial projects capable of improving the productivity of labor
and at the same time of augmenting the national stock of capital goods.
A useful example for illustrating this idea can be found in another island
nation, the Republic of China on Taiwan, in the years after the world oil
shock of 1973-4. Taiwan has a land area about a third the size of Iceland
and a much larger population. After the oil shock, the Taiwan government
of Prime Minister Chiang Ching-kuo launched 10 infrastructure projects
to be completed over a period of about five years. These included a major
north-south highway with branches, the electrification of the rail line
along the island's west coast, the construction of a railway line in the
northern part of the island, a new international airport, two new ports,
a new shipyard, a new steel mill, a new oil refinery with industrial park,
and a new nuclear power plant. It is from these beginnings that Taiwan
was able to move forward to acquire the status of one of the Asian Tigers
or Newly Industrialized Countries (NICs) of the 1980s and 1990s. Iceland's
choices in 2009 will of course be much different, but the general principle
remains the same.
-
- BEYOND COD AND ALUMINUM: MAGLEV RAIL
-
- The economy of Iceland can no longer be based primarily
on codfish and aluminum. These products will continue to be very important,
but they must be supplemented by additional areas of economic activity.
One obvious area for infrastructure development is the need to address
the growing obsolescence of the internal combustion engine as a means of
transportation. Again, motorcars will continue to play an important role,
but they must be supplemented by the development of modern mass transit
facilities based on the magnetic levitation or maglev technology which
has been developed in Germany in the form of Transrapid, and which is now
operational in commercial settings in both China and Japan. Because maglev
rail is clean, quiet, and swift, Iceland is an ideal candidate for the
construction of a national maglev system. For shorter distances, various
forms of fast rail, traditional rail, and light rail can be adopted. This
technology also addresses current concerns about the carbon impact of conventional
automobiles.
-
- As already indicated, these and other components of the
national infrastructure program will be eligible for 0% long-term financing
from the national bank. Their subcontractors will be eligible for a rediscount
guarantee by the national bank of their commercial paper, bills of exchange,
and other instruments related to these projects.
-
- SELECT AN AREA OF ICELANDIC WORLD LEADERSHIP
-
- In addition to these infrastructural elements, Iceland
would be well advised to consider a national mobilization to establish
Icelandic world leadership in some critical area of science, research and
development, technology and industry. In this case, the goal of national
economic planning would be to establish the status of Iceland is the world
leader and world market powerhouse in that specialty. The area selected
should be on the most advanced frontier of human knowledge in an area such
as aerospace, high-energy physics, biomedical research, information technology
or some comparable field. It should be an area of high capital intensity,
high energy intensity, and high value added. The specific choice of what
specialty is to be cultivated would depend on the census of existing Icelandic
capabilities combined with the forecast of the future needs of world economic
development, and a guess cannot be hazarded here. Once the choice is made,
all elements of national policy including credit, taxation, trade and tariff
policy, labor market policy, education policy, diplomacy, and capabilities
should be coordinated to maximize the success of this great national enterprise.
A national Export-Import Bank to provide export financing for this project
with export credit guarantees along the lines of the German Hermes and
French government Coface systems, can also be instituted.
-
- What is already abundantly clear is that the principal
resource of the Icelandic economy will always be mental capital in the
form of an exceptionally capable and qualified workforce which must enjoy
the advantages of full employment in a high wage economy so as to permit
the necessary levels of education as we look towards the middle of the
21st century and beyond. In this time frame, virtually every worker will
need a college degree or the equivalent, and many will need an advanced
degree, especially in science, engineering, mathematics, physics, etc.
-
-
-
- Enderlein, Mueller, Trebesch, "Sovereign Debt
Disputes," May 2008.
- John Crabtree, Peru Under Garcia: An Opportunity Lost
(Pittsburgh PA: University of Pittsburgh Press, 1992), p. 40.
- Crabtree, p. 215.
- Crabtree, p. 148. Another estimate is that Peru experienced
2.2 million percent inflation between 1985 and 1990; see James D. Rudolph,
Peru: The Evolution of a Crisis (Westport CT: Praeger, 1991), pp. 132,
134.
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