Tag Archive for Debt

What the banking inquiry doesn’t want to highlight in its report

The Report of the Joint Committee of Inquiry into the Banking Crisis, recently published, says that “no one single event or decision led to the failure of the banks in the lead in period to the Crisis, but rather it was the cumulative result of a series of events and decisions over a number of years.”
This, we believe, is false, because there was one single event that changed the whole nature of banking in Ireland, which gave rise to the cumulative effects that led to the banking crisis—and that was the adoption of the euro.
Irish banks’ traditional funding from deposit accounts was changed. Commercial banks, because of the anticipation and adoption of the euro, began to get a large part of their funding through wholesale external borrowing, where they took out large loans from mainly German, French and other foreign banks and financial markets.
The reason Irish banks were able to take out these large loans around this time has to do with Ireland becoming part of the euro, which halved the real interest rate—making it cheap to borrow money, and by removing exchange-rate risk.
New lending practices, mainly started by Anglo-Irish Bank, saw their market share grow from 3% to 18% in a decade and its loan portfolio grow at an average rate of 36% per annum (8% being the norm), which would see Irish banks becoming more and more open to risk, because the main sector for lending was in property development. The two largest banks, AIB and Bank of Ireland, would soon follow the business models of Anglo-Irish to reap the high profits that came from this risky lending.

The bigger picture

The euro in itself is a central part of the EU project of state-building. It was probably the pinnacle of the European superstate project, because since then the single currency has failed to integrate and harmonise the various European states through tacit consent. What has since unfolded has been a transfer of wealth from the peripheral to the core states, and a transfer of wealth from the majority of working people to the minority of the financial and industrial elite.
The idea that “no Irish bank is to fail” came straight from Europe, because in February 2008 the Department of Finance wrote that to “provide an open-ended legally binding state guarantee would expose the Exchequer to the risk of significant cost and should not be regarded as part of the tool kit.”
This clearly shows that the idea that the banks would have run out of money was a con, given that the Central Bank had put in place sufficient measures to ensure that all banks would have opened on Monday 30 September 2008, and no default of any bank would have taken place that day.
The Irish people had a gun put to their head twice by Europe: first of all to save the banking system, and then to agree to a bail-out package that ensured that Ireland would for ever be in debt to Europe.
Aside from our own cohort of bankers, developers and politicians looking after their own interest in giving a blanket guarantee, it was the euro and the whole EU project that was in jeopardy; and that is why banks such as Anglo-Irish and Irish Nationwide Building Society, which were the developers’ banks, were saved. It was to stop a Europe-wide systemic currency crisis, where the biggest European banks and their owners and shareholders would have suffered huge losses if certain banks were not guaranteed.
What has resulted has been a Europe-wide economic crisis, where working people have picked up the tab for the wealthy speculators through austerity policies. What it has shown is the weakness of the euro in an area that is not an optimal currency area, the domination of the EU over our own governments, and the willingness of the financial and political elite, the internal and external troika, to sacrifice the people of Ireland, and wider Europe, to protect and save their own interests.
The crisis that ripped through the euro zone was not isolated. Other states, such as the United States, Britain, and Iceland, went through a similar crisis, where the financial industry crippled their economies. It was an interconnected crisis of capitalism, where finance dominated domestic economies to stimulate growth by stringing debt to domestic banks.
Although the causes of the financial crisis varied around the world, the capitalists’ cure was and is the same: the people pay off the debts of big business through wage cuts and austerity, and business reaps the rewards and plans its next move.
The Dublin District of the CPI urges people to think deeply and critically about the role and nature of the EU in relation to debt and austerity, which has besieged our nation and our people. We cannot continue to harbour the illusion that we can democratise the EU. You cannot change from within something that was designed from its inception to be nothing but an instrument of capitalism.
Capitalism does not need democracy; and the people don’t need capitalism and its institutions!

Communist Party of Ireland

Don’t privatise the banks?

Very early in the present crisis the CPI argued against nationalising the banks, on the grounds that this would be socialising tens of billions in debts, would bankrupt the state, and would create conditions for a general downward restructuring of the economy. The party introduced and popularised the slogan “Repudiate the debt” as the clearest anti-imperialist class position, which attempted to challenge both the Irish establishment and the European Union and indeed the global financialised economy.
Seven years later the crisis has not gone away, either for working people or for capital. Instability remains, and working people continue to be made to pay for capital’s problems. The banks, in particular AIB and Permanent TSB, are not out of the woods by any stretch of the imagination, but both are returning slowly to profitability and have provisions made—taxpayers’ money—for their debts (impaired loans, distressed assets, non-working book, etc.).
So, given that the state imposed the burden of such gigantic losses on our shoulders, now that there are signs of profitability should we not be arguing for holding the banks as public entities, not just to pay back the money received but as valuable state assets to help pay for vital services, as lending agencies that can be directed towards strategic and sustainable investment and as part of a progressive future housing policy?
The banking industry in Ireland previously had a public side, which was used for strategic investment and a degree of planned economic development. The privatisation of this is a small part of the beginning of the collapse of the industry.
Obviously a government led by Fine Gael or Fianna Fáil will not do this; but is the correct progressive policy to demand a continued majority public holding of AIB and PTSB?
Fine Gael’s and Fianna Fáil’s policy has been for the state to provide for the losses and to privatise the profits through either share sales or outright privatisation at the appropriate time. The banking policy of both these parties has been to drive up house prices. NAMA is premised on this basis; and for the provisions to be adequate for the bad books of these banks, house prices must not drop and preferably should rise.
For house prices to rise, supply needs to be restricted, and demand needs to outweigh supply. The more demand, the quicker the increase in house prices. To a large degree this has succeeded and is part of the reason for the improved state of Irish banks, but at the deliberate cost of increased homelessness, exorbitant rents, and the total waste of vacant and unoccupied dwellings and buildings remaining unused around the country.
At the electoral level, Fine Gael and Fianna Fáil know who their voters are, and many of these are in negative equity, not homeless, and so they have done their political calculations on the impact of their banking policy, and it suits their electoral agenda.
Their policy of socialising losses and privatising profits is class-based and has been implemented with violence and aggression against working people and communities.
We opposed the socialisation of losses. Should we not also oppose now the privatisation of profits?

Taken from http://www.communistpartyofireland.ie/sv/03-banks.html

Economic misery and bloody chaos

By Tommy McKearney

The soap opera that surrounded SYRIZA’s limp attempt to negotiate with the vicious, agenda-driven European Union, led by the financial sector, has understandably captured huge attention during the recent past. As with all the best action within that genre, viewers were kept in mock suspense while the inevitable dénouement was played out.
Pundits spoke solemnly about the risk of Greece leaving the EU, of threats to financial stability, or a break-up of the euro zone. Meanwhile the new government in Athens stuck out its chest and talked of taking on the mighty German finance ministry and the other members of the Troika. That the drama ended for SYRIZA with a timid whimper rather than anything so unsettling as a bang was, unfortunately, all too predictable.
The new Greek prime minister, Aléxis Tsípras, may be a handsome and articulate addition on the European political stage but he is no Fidel Castro. His finance minister, Varoufákis, strikes a dashing pose as he tours the Continent’s capitals, but, photograph him as you may, he hasn’t the steel of a Che.
Therein lies the essence of the Greek people’s disappointment. Not only did they need a determined and purposeful socialist government and instead got social democrats, but a hard-pressed population was allowed to believe that a different and better outcome was possible.
Not that any genuine socialist or working-class activist can be anything other than dismayed by what has happened. Many on the left throughout Europe greeted SYRIZA’s election victory with genuine enthusiasm. The Greek people had rejected a plundering, neo-liberal programme imposed on them by international financiers, and it appeared, from the newly elected government’s declarations, that someone, somewhere was finally prepared to reject the demands of rentier capitalism. That the initial rhetoric proved hollow is a set-back for all on the left, as early optimism (and not only in Greece) may well be replaced by disenchantment.
How often—some may justifiably ask—can we raise expectations before people stop believing in the possibility of meaningful change?
It would be a mistake, nevertheless, to ascribe the failure of SYRIZA to personal inadequacies, betrayal, or lack of moral fibre. The Greek social democrats’ misfortune was to be bit players in a much greater game, and one in which their leadership mistakenly believed they could effect change while staying within the parameters of the present system. The response to this regrettable situation should not be the sterile cry of “We told you so” but to endeavour to promote a deeper understanding of what went wrong, and why.
Following the crisis in capitalism created by the economic crash of 2008, Europe’s ruling class and its vehicle of delivery, the European Union, is in no mood to endure any challenge to its authority or to tolerate developments that might undermine its power. Like a wounded beast, the ruling class is even more aggressive and dangerous than it was when feeling stronger.
The nature of its response to this present crisis is manifesting itself in two different but related theatres. One is being played out with the Greek government and people; the other is the ever more lethal and dangerous conflict raging in Donets and the wider Don Basin. While acting tough in the negotiations between Athens and the Troika, the EU and its allies are also pursuing their agenda in eastern Europe.
Following a well-practised routine, the western European media prepared the ground as they promoted a narrative asserting that Russia and its president, Vladimir Putin, were intent on an aggressive policy of invasion and expansion. Old, crude anti-Soviet rhetoric was regurgitated. In February the second in command of NATO’s forces in Europe, General Adrian Bradshaw, told the Royal United Services Institute (the elite’s strategic think-tank in London) that NATO forces must prepare for a large-scale conventional assault by Russia on an eastern European member-state.¹ Shortly thereafter the British prime minister, David Cameron, announced that he is to send military personnel to Kiev to train the regime’s troops, and give additional funding to the BBC to “counteract Russian propaganda.”²
Ignored in the telling of this scaremongering and sabre-rattling was the fact that the EU and the United States had encouraged a coup against an elected government in Kiev, and supported its replacement with a regime that made no secret of its hostility to Moscow and to Russian-speaking Ukrainians. No mention either of NATO’s encroachment into an area of immense strategic sensitivity to a country that lost 26 million citizens within living memory. Donets is, after all, only a two-hour journey by car from the Russian city of Volgograd (or Stalingrad, as it was known when assaulted by Nazi Germany in 1942).
Deliberately concealed, moreover, is an underlying calculation being made by upper echelons of the dominant capitalist power-brokers in the United States and western Europe. Relentlessly pursuing, over the past few decades, a short-term neo-liberal policy of profit maximisation at all costs, they have caused their own manufacturing industries to re-establish themselves outside their home countries, often to the “BRIC” countries (Brazil, Russia, India, and China). Inevitably this has led to a decline in their own productive capacity, forcing them to become ever more dependent on finance and services.
In the long run this creates a dilemma for the western powers, because economic history and experience clearly demonstrate that finance follows production, rather than the reverse. Inevitably this must mean a decline in their global hegemony—unless, that is, they can offset this trend by a related policy of (a) using debt to subdue some and (b) undermining any potential zone of economic competition among others.
Yet the ruling order in the West persists with this twin-track policy, with the obvious intention that debt burdens will crush, contain and confound the social-democratically inclined states of Europe while creating chaos elsewhere, preventing the emergence of a rival economic powerhouse.³ The cynical unifying calculation in this strategy is that, with the absence of an alternative economic bloc, the indebted have fewer options and the BRICs have fewer outlets. Those who believe they won the “Cold War” by threatening mutual self-destruction now seem to feel they can retain influence by a stratagem of “We’ll rule or we’ll wreck.”
And the evidence to substantiate this assertion? The proof lies in the absence of any other possible or plausible explanation for the behaviour of those world leaders who have imposed economic misery on vast sections of the European and American working class, while bringing bloody chaos to the Middle East, Africa, Afghanistan, and now Ukraine. No rational market economist has demonstrated that austerity can achieve anything other than deflation and loss of production. No sane individual has ever argued that western intervention in North Africa, the Middle East, Afghanistan, Pakistan, Iraq, Syria or Russia can lead to anything other than world-engulfing catastrophe.
The adage that socialism is the only alternative to barbarism, or worse, has never held more validity than now.

1. Sam Jones, “NATO warned to prepare for move on territory,” Financial Times, 21 February 2015.
2. Chris Green, “British troops to ‘train soldiers in Ukraine’,” Independent (London), 24 February 2015.
3. For those who may argue that China disproves this contention it would be worth their while reading Martin Wolf’s article “How addiction to debt came even to China,” Financial Times (24 February 2015).

Debt: A Weapon Against the People

DWAP

This pamphlet follows two recent economic analyses of the crisis and its aftermath published by the Communist Party of Ireland: An Economy for the Common Good (2009) and Repudiate the Debt (2011). In this pamphlet we develop further our analysis of the crisis of capitalism, the role debt plays in the economic system, and, most importantly, the response of the establishment and its attempt to further extend its power and wealth, with devastating consequences for working people’s lives.

When you lend a friend €20, whatever way you put it you are down €20 until they pay you back. Even if they make a commitment to pay you back €30, you are still down €20, and no shop will take your friend’s commitment to pay you back €30 as real money.

However, when a bank lent someone €300,000 for a mortgage, not only did it not deduct €300,000 from its accounts but it actually added the full amount that would be paid back over the lifetime of the mortgage—close to €1½ million—to its assets. It “created” €1.2 million, that doesn’t exist, through the loan.

It is this type of growth—unearned and future—that gave credence to the monetarist belief that there could be unlimited growth and expansion. The lines between asset and liability disappeared on the balance sheets of capitalism. Debt—credit—would make the world go round. Crisis could be overcome.

Or so they told us.

Marx recognised that credit and debt have always played a role in production and consumption within capitalism. But what is different today is the dependence of the system on it, where the rate of profit steadily falls, and the fundamental role it plays in the creation of profit, both as a fund and an avenue for investment. Without debt, capitalism would cease to grow; yet with its systemic reliance on debt capitalism is even more anarchic and volatile, with production and supply even further divorced from demand and consumption. To quote John Maynard Keynes, “when the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”[3]

This pamphlet outlines the principal points of development in the economic system during the second half of the twentieth century and then looks at the nature and extent of the debt crisis in Europe, particularly here in Ireland, which is exposing the contradictions and vulnerability of European economies and ultimately of monopoly capitalism. The crisis, like any crisis, is an opportunity for some, and the European Union and the Irish establishment have seized on this opportunity to further strengthen their power.

It is a naïve mistake to say, as some do, that austerity is not working. This misunderstands the root causes of the crisis, and the system’s response. “Austerity” is not designed to create jobs. It is not designed to ease the burden being placed on workers’ shoulders. It is not designed to reduce the bankruptcy of states. The purpose of the austerity programmes being imposed throughout Europe, particularly in the periphery but more recently also in core countries, is to free up capital and transfer it to finance houses and institutions so as to shore up the primary source of growth in the system: finance capital.

Get your copy of the pamphlet from Connolly Bookshop, Temple Bar.

CPI Pamphlet Repudiate the Debt

Repudiate Debt Thumb

Repudiate the debt pamphlet

This pamphlet is a contribution to the debate that is urgently needed in every home, village, town and city, by all public and private-sector workers, the unemployed, small business people, the self-employed and family farmers in relation to what our establishment calls Ireland’s “sovereign debt.” The socialisation of private and corporate debt, making our people pay a debt they neither caused nor are responsible for, constitutes the biggest transfer of wealth ever from working people in Ireland to foreign banks in Germany, France, and Britain.

Our country is being dictated to and controlled by the European Union and the International Monetary Fund, not in the interests of our people but in the service of global finance houses. Our people, our children and future generations have become virtual indentured labour for as long as it takes to pay off the debts of a speculative clique–the Golden Circle–that has controlled our country. They will sell off more and more public companies and
assets, including our rich natural resources, in their efforts to pay
back money owed to these bankers.

We are calling for the repudiation of this illegitimate, perpetual and unpayable debt. Working people have a choice to make. Do we sacrifice all that we have struggled for over many generations? Are we going to sacrifice our children and grandchildren and future generations to pay a debt that does not belong to us?

Staggering levels of debt

The diagram above (taken from a recent report by the McKinsey Group of global business and financial consultants) shows the staggering level of debt in the Irish economy. Their analysis places the value of debt in Ireland at over 650 per cent of GDP—well ahead of other heavily indebted countries, including the United States, Japan, Britain, Greece, and Spain.

This 650 per cent is made up of personal, non-financial business, government and financial institutions’ debt. Of course a significant amount of the so-called government debt is actually finance’s also, while much of the financial institutions’ debt is just “resting in accounts” in Ireland’s tax haven, the International Financial Services Centre.

Nonetheless it is evidence of the decay of monopoly capitalism, such is its reliance on debt and debt-led innovations for the meagre growth it has achieved over the last few decades, and further evidence of the specific weakness of Ireland within the global order.

It also raises questions about many of the “alternatives” that are based on borrowing-led investment, or stimuli that don’t challenge the fundamental question of the ownership of production and wealth.

Alternatives must have at their core the objective of claiming wealth and production for labour and reducing the control that private capital and debt have over the system—otherwise they are not alternatives and will only exacerbate the contradictions within monopoly capitalism. [NL]