"Coming Debt Wars" - 'EU sinking into Depression'

worlds beyond · 09-04-2010, 11:06 AM

"The Coming European Debt Wars"

'EU Countries sinking into Depression

by Prof. Michael Hudson

April 9, 2010

http://www.globalresearch.ca/coverSt...ures/18545.jpg

Government debt in Greece is just the first in a series of European debt bombs that are set to explode. The mortgage debts in post-Soviet economies and Iceland are more explosive. Although these countries are not in the Eurozone, most of their debts are denominated in euros. Some 87% of Latvia’s debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. So their government borrowing by non-euro members has been to support exchange rates to pay these private-sector debts to foreign banks, not to finance a domestic budget deficit as in Greece.

All these debts are unpayably high because most of these countries are running deepening trade deficits and are sinking into depression. Now that real estate prices are plunging, trade deficits are no longer financed by an inflow of foreign-currency mortgage lending and property buyouts. There is no visible means of support to stabilize currencies (e.g., healthy economies). For the past year these countries have supported their exchange rates by borrowing from the EU and IMF. The terms of this borrowing are politically unsustainable: sharp public sector budget cuts, higher tax rates on already over-taxed labor, and austerity plans that shrink economies and drive more labor to emigrate.

Bankers in Sweden and Austria, Germany and Britain are about to discover that extending credit to nations that can’t (or won’t) pay may be their problem, not that of their debtors. No one wants to accept the fact that debts that can’t be paid, won’t be. Someone must bear the cost as debts go into default or are written down, to be paid in sharply depreciated currencies, but many legal experts find debt agreements calling for repayment in euros unenforceable. Every sovereign nation has the right to legislate its own debt terms, and the coming currency re-alignments and debt write-downs will be much more than mere “haircuts.”

There is no point in devaluing, unless “to excess” – that is, by enough to actually change trade and production patterns. That is why Franklin Roosevelt devalued the US dollar by 75% against gold in 1933, raising its official price from $20 to $35 an ounce. And to avoid raising the U.S. debt burden proportionally, he annulled the “gold clause” indexing payment of bank loans to the price of gold. This is where the political fight will occur today – over the payment of debt in currencies that are devalued.

Another byproduct of the Great Depression in the United States and Canada was to free mortgage debtors from personal liability, making it possible to recover from bankruptcy. Foreclosing banks can take possession of collateral real estate, but do not have any further claim on the mortgagees. This practice – grounded in common law – shows how North America has freed itself from the legacy of feudal-style creditor power and the debtors’ prisons that made earlier European debt laws so harsh.

The question is, who will bear the loss? Keeping debts denominated in euros would bankrupt much local business and real estate. Conversely, re-denominating these debts in local depreciated currency will wipe out the capital of many euro-based banks. But these banks are foreigners, after all – and in the end, governments must represent their own home electorates. Foreign banks do not vote.

Foreign dollar holders have lost 29/30th of the gold value of their holdings since the United States stopped settling its balance-of-payments deficits in gold in 1971. They now receive less than a thirtieth of this, as the price has risen to $1,100 an ounce. If the world can take that, why shouldn’t it take the coming European debt write-downs in stride?

There is growing recognition that the post-Soviet economies were structured from the start to benefit foreign interests, not local economies. For example, Latvian labor is taxed at over 50% (labor, employer, and social tax) – so high as to make it noncompetitive, while property taxes are less than 1%, providing an incentive toward rampant speculation. This skewed tax philosophy made the “Baltic Tigers” and central Europe prime loan markets for Swedish and Austrian banks, but their labor could not find well-paying work at home. Nothing like this (or their abysmal workplace protection laws) is found in the Western European, North American or Asian economies.

It seems unreasonable and unrealistic to expect that large sectors of the New European population can be made subject to salary garnishment throughout their lives, reducing them to a lifetime of debt peonage. Future relations between Old and New Europe will depend on the Eurozone’s willingness to re-design the post-Soviet economies on more solvent lines – with more productive credit and a less rentier-biased tax system that promotes employment rather than asset-price inflation that drives labor to emigrate. In addition to currency realignments to deal with unaffordable debt, the indicated line of solution for these countries is a major shift of taxes off labor onto land, making them more like Western Europe. There is no just alternative. Otherwise, the age-old conflict-of-interest between creditors and debtors threatens to split Europe into opposing political camps, with Iceland the dress rehearsal.

Until this debt problem is resolved – and the only way to resolve it is to negotiate a debt write-off – European expansion (the absorption of New Europe into Old Europe) seems over. But the transition to this future solution will not be easy. Financial interests still wield dominant power over the EU, and will resist the inevitable. Gordon Brown already has shown his colors in his threats against Iceland to illegally and improperly use the IMF as a collection agent for debts that Iceland doesn’t legally owe, and to blackball Icelandic membership in the EU.

Confronted with Mr. Brown’s bullying – and that of Britain’s Dutch poodles – 97% of Icelandic voters opposed the debt settlement that Britain and the Netherlands sought to force down the throat of Allthing members last month. This high a vote has not been seen in the world since the old Stalinist era.

It is only a foretaste. The choice that Europe ends up making will likely drive millions into the streets. Political and economic alliances will shift, currencies will crumble and governments will fall. The European Union and indeed, the international financial system will change in ways yet to be seen. This will be especially the case if nations adopt the Argentina model and refuse to make payment until steep discounts are made.

Paying in euros – for real estate and personal income streams in negative equity, where the debts exceed the current value of income flows available to pay mortgages or for that matter, personal debts – is impossible for nations that hope to maintain a modicum of civil society. “Austerity plans” IMF and EU style is an antiseptic, technocratic jargon for life-shortening and killing impact of gutting income, social services, spending on health on hospitals, education and other basic needs, and selling off public infrastructure for buyers to turn nations into “tollbooth economies” where everyone is obliged to pay access prices for roads, education, medical care and other costs of living and doing business that have long been subsidized by progressive taxation in North America and Western Europe.

The battle lines are being drawn regarding how private and public debts are to be repaid. For nations that balk at repayment in euros, the creditor nations have their “muscle” waiting in the wings: the credit rating agencies. At the first sign a nation is balking in paying in hard currency, or even at the first hint of it questioning a foreign debt as improper, the agencies will move in to reduce a nation’s credit rating. This will increase the cost of borrowing and threaten to paralyze the economy by starving it for credit.

The most recent shot was fired n April 6 when Moody’s downgraded Iceland’s debt from stable to negative. “Moody’s acknowledged that Iceland might still achieve a better deal in renewed negotiations, but said the current uncertainty was hurting the country’s short-term economic and financial prospects.”[1]

The fight is on. It should be an interesting decade.

Prof. Micheal Hudson is Chief Economic Advisor to the Reform Task Force Latvia (RTFL). His website is michael-hudson.com.

[1] THE ASSOCIATED PRESS, “Moody's Downgrades Iceland Outlook,” The New York Times, April 7, 2010."

http://www.globalresearch.ca/index.p...t=va&aid=18545

redsky · 09-04-2010, 01:27 PM

Can I ask an question.

What would happen if all debts were written off, exchange, interest & commodity prices where fixed at a sensible rates & effectively every country was told to start a new on Monday morning at 9am BST?? A bit like putting a computer back to factory settings.

Would it be chaos or wouldn't we notice any different?

bemore · 09-04-2010, 01:56 PM

Quote:

Originally Posted by redsky

Can I ask an question.

What would happen if all debts were written off, exchange, interest & commodity prices where fixed at a sensible rates & effectively every country was told to start a new on Monday morning at 9am BST?? A bit like putting a computer back to factory settings.

Would it be chaos or wouldn't we notice any different?

They would not do that, it would poss be too simple and not what they want to achieve.

rodin · 09-04-2010, 02:42 PM

Quote:

Originally Posted by bemore

They would not do that, it would poss be too simple and not what they want to achieve.

If the people only knew what the Jewsters were up to they could simple decide to print new national money, accepted for payment of taxes, not borrowed from the Rothschild swarm

andyh · 09-04-2010, 05:20 PM

Quote:

Originally Posted by rodin

If the people only knew what the Jewsters were up to they could simple decide to print new national money, accepted for payment of taxes, not borrowed from the Rothschild swarm

One key point to remember with this old idea. It'll work but only if the country is completely self-sufficient.
Why?
Because the money would not be accepted on the global market as the banksters control all of it now, the country and it's people would be labelled pariahs by the MSM. The banksters could simply have somewhere declare war on them for it even...
A country like Iceland for example would suffer as it is quite dependant on a fair bit of imports (notably food & oil) but it does have strengths! Iceland has an incredible geothermal power resource. The only way you could get foreign money is through tourism or by exporting tangible goods. That said, having learnt your lesson would you even want the stinking useless debt paper?

To sum up, yes in theory there's nothing stopping a sovereign nation state doing just what you describe and ignoring all the stupid illegal debt, in fact I'd cheer them on! Trouble is they'd be letting themselves in for a whole lot of pain but perhaps quite a reward socially. If left alone long enough they would become a shining example for others to follow, I doubt very much that the banksters would allow this to happen.
Despite Icelands little revolution if you want to call it that, they still ended up with a bunch of idiots at the helm, Icelands current leader has been clearly quoted as saying that the 97% referendum "no" answer is "totally irrelevant"!

I wonder actually after that referendum count if "sicky daughter" as I call her (lol) will need some pretty good bodyguards pretty soon...

I've been watching Iceland with great interest but not heard much lately, if there is one country where a revolution is possible it's here as the population is small and seriously pissed off. They're also relatively well educated and English is almost universal. They also have the potential to make a fair few bob hosting rackservers soon due to the carbon tax nullification as their electricity is 100% green.

EDIT: I should also add if there's any Icelanders reading this...I'm with you 101% all the way. As a Brit myself I am totally ashamed of what my govt has done to your people. We have traditionally had close ties with both Iceland and Norway and much of that closeness has been pi**ed away by Brown's co-operation with the banking elite. I'm ashamed to be British nowadays and I'm never going back to my "homeland" as there's nothing left to go back to now.
Iceland has always had a history of having a few rebels

Brings to mind Bobby Fischer, Iceland gave him a home away from the persecution he got from the likes of the ADL etc. I'd love to know from any Icelandic people who knew him. Long live Iceland and it's lovely people.

romas · 09-04-2010, 06:44 PM

Good article, thanks.

motleyhoo · 11-04-2010, 05:47 AM

The US, UK, EU economies are destiined to fail for one reason - they all consume way more than they produce. When you give up your jobs for "Cheaper Prices Everyday", sooner or later you won't have enough money to buy a shoelace, no matter how cheap it is. Everytime you shop in a store that is not locally owned, and every time you buy goods Made in China, et al, you are participating in this very destruction of your own way of life. Until people understand this and are willing to do something about it the destruction from within will continue.

.

samina · 11-04-2010, 06:17 AM

The answer's simple, write off their debt then print up more money to cover it. France doesn't mind paying, as LePen says, "France is the family allowance centre of the world."

09-04-2010, 11:06 AM	#1
worlds beyond Senior Member Join Date: Nov 2008 Location: by the sea... UK Posts: 3,124	"Coming Debt Wars" - 'EU sinking into Depression' "The Coming European Debt Wars" 'EU Countries sinking into Depression by Prof. Michael Hudson April 9, 2010 http://www.globalresearch.ca/coverSt...ures/18545.jpg Government debt in Greece is just the first in a series of European debt bombs that are set to explode. The mortgage debts in post-Soviet economies and Iceland are more explosive. Although these countries are not in the Eurozone, most of their debts are denominated in euros. Some 87% of Latvia’s debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. So their government borrowing by non-euro members has been to support exchange rates to pay these private-sector debts to foreign banks, not to finance a domestic budget deficit as in Greece. All these debts are unpayably high because most of these countries are running deepening trade deficits and are sinking into depression. Now that real estate prices are plunging, trade deficits are no longer financed by an inflow of foreign-currency mortgage lending and property buyouts. There is no visible means of support to stabilize currencies (e.g., healthy economies). For the past year these countries have supported their exchange rates by borrowing from the EU and IMF. The terms of this borrowing are politically unsustainable: sharp public sector budget cuts, higher tax rates on already over-taxed labor, and austerity plans that shrink economies and drive more labor to emigrate. Bankers in Sweden and Austria, Germany and Britain are about to discover that extending credit to nations that can’t (or won’t) pay may be their problem, not that of their debtors. No one wants to accept the fact that debts that can’t be paid, won’t be. Someone must bear the cost as debts go into default or are written down, to be paid in sharply depreciated currencies, but many legal experts find debt agreements calling for repayment in euros unenforceable. Every sovereign nation has the right to legislate its own debt terms, and the coming currency re-alignments and debt write-downs will be much more than mere “haircuts.” There is no point in devaluing, unless “to excess” – that is, by enough to actually change trade and production patterns. That is why Franklin Roosevelt devalued the US dollar by 75% against gold in 1933, raising its official price from $20 to $35 an ounce. And to avoid raising the U.S. debt burden proportionally, he annulled the “gold clause” indexing payment of bank loans to the price of gold. This is where the political fight will occur today – over the payment of debt in currencies that are devalued. Another byproduct of the Great Depression in the United States and Canada was to free mortgage debtors from personal liability, making it possible to recover from bankruptcy. Foreclosing banks can take possession of collateral real estate, but do not have any further claim on the mortgagees. This practice – grounded in common law – shows how North America has freed itself from the legacy of feudal-style creditor power and the debtors’ prisons that made earlier European debt laws so harsh. The question is, who will bear the loss? Keeping debts denominated in euros would bankrupt much local business and real estate. Conversely, re-denominating these debts in local depreciated currency will wipe out the capital of many euro-based banks. But these banks are foreigners, after all – and in the end, governments must represent their own home electorates. Foreign banks do not vote. Foreign dollar holders have lost 29/30th of the gold value of their holdings since the United States stopped settling its balance-of-payments deficits in gold in 1971. They now receive less than a thirtieth of this, as the price has risen to $1,100 an ounce. If the world can take that, why shouldn’t it take the coming European debt write-downs in stride? There is growing recognition that the post-Soviet economies were structured from the start to benefit foreign interests, not local economies. For example, Latvian labor is taxed at over 50% (labor, employer, and social tax) – so high as to make it noncompetitive, while property taxes are less than 1%, providing an incentive toward rampant speculation. This skewed tax philosophy made the “Baltic Tigers” and central Europe prime loan markets for Swedish and Austrian banks, but their labor could not find well-paying work at home. Nothing like this (or their abysmal workplace protection laws) is found in the Western European, North American or Asian economies. It seems unreasonable and unrealistic to expect that large sectors of the New European population can be made subject to salary garnishment throughout their lives, reducing them to a lifetime of debt peonage. Future relations between Old and New Europe will depend on the Eurozone’s willingness to re-design the post-Soviet economies on more solvent lines – with more productive credit and a less rentier-biased tax system that promotes employment rather than asset-price inflation that drives labor to emigrate. In addition to currency realignments to deal with unaffordable debt, the indicated line of solution for these countries is a major shift of taxes off labor onto land, making them more like Western Europe. There is no just alternative. Otherwise, the age-old conflict-of-interest between creditors and debtors threatens to split Europe into opposing political camps, with Iceland the dress rehearsal. Until this debt problem is resolved – and the only way to resolve it is to negotiate a debt write-off – European expansion (the absorption of New Europe into Old Europe) seems over. But the transition to this future solution will not be easy. Financial interests still wield dominant power over the EU, and will resist the inevitable. Gordon Brown already has shown his colors in his threats against Iceland to illegally and improperly use the IMF as a collection agent for debts that Iceland doesn’t legally owe, and to blackball Icelandic membership in the EU. Confronted with Mr. Brown’s bullying – and that of Britain’s Dutch poodles – 97% of Icelandic voters opposed the debt settlement that Britain and the Netherlands sought to force down the throat of Allthing members last month. This high a vote has not been seen in the world since the old Stalinist era. It is only a foretaste. The choice that Europe ends up making will likely drive millions into the streets. Political and economic alliances will shift, currencies will crumble and governments will fall. The European Union and indeed, the international financial system will change in ways yet to be seen. This will be especially the case if nations adopt the Argentina model and refuse to make payment until steep discounts are made. Paying in euros – for real estate and personal income streams in negative equity, where the debts exceed the current value of income flows available to pay mortgages or for that matter, personal debts – is impossible for nations that hope to maintain a modicum of civil society. “Austerity plans” IMF and EU style is an antiseptic, technocratic jargon for life-shortening and killing impact of gutting income, social services, spending on health on hospitals, education and other basic needs, and selling off public infrastructure for buyers to turn nations into “tollbooth economies” where everyone is obliged to pay access prices for roads, education, medical care and other costs of living and doing business that have long been subsidized by progressive taxation in North America and Western Europe. The battle lines are being drawn regarding how private and public debts are to be repaid. For nations that balk at repayment in euros, the creditor nations have their “muscle” waiting in the wings: the credit rating agencies. At the first sign a nation is balking in paying in hard currency, or even at the first hint of it questioning a foreign debt as improper, the agencies will move in to reduce a nation’s credit rating. This will increase the cost of borrowing and threaten to paralyze the economy by starving it for credit. The most recent shot was fired n April 6 when Moody’s downgraded Iceland’s debt from stable to negative. “Moody’s acknowledged that Iceland might still achieve a better deal in renewed negotiations, but said the current uncertainty was hurting the country’s short-term economic and financial prospects.”[1] The fight is on. It should be an interesting decade. Prof. Micheal Hudson is Chief Economic Advisor to the Reform Task Force Latvia (RTFL). His website is michael-hudson.com. [1] THE ASSOCIATED PRESS, “Moody's Downgrades Iceland Outlook,” The New York Times, April 7, 2010." http://www.globalresearch.ca/index.p...t=va&aid=18545 __________________ Peaceful Blessings

09-04-2010, 01:27 PM	#2
redsky Senior Member Join Date: Apr 2009 Location: UK Posts: 296	Can I ask an question. What would happen if all debts were written off, exchange, interest & commodity prices where fixed at a sensible rates & effectively every country was told to start a new on Monday morning at 9am BST?? A bit like putting a computer back to factory settings. Would it be chaos or wouldn't we notice any different? __________________ One of the saddest lessons of history is this: If we've been bamboozled long enough, we tend to reject any evidence of the bamboozle. The bamboozle has captured us. Once you give a charlatan power over you, you almost never get it back Carl Sagan

09-04-2010, 06:44 PM	#6
romas Senior Member Join Date: Mar 2008 Location: Memelburg Posts: 5,353	Good article, thanks. __________________ Above the planet on a wing and a prayer, My grubby halo, a vapour trail in the empty air. Across the clouds I see my shadow fly. Out of the corner of my watering eye. A dream unthreatened by the morning light Could blow this soul right through the roof of the night. There's no sensation to compare with this. Suspended animation, a state of bliss.

11-04-2010, 05:47 AM	#7
motleyhoo Senior Member Join Date: Mar 2009 Location: North Carolina Posts: 5,084	The US, UK, EU economies are destiined to fail for one reason - they all consume way more than they produce. When you give up your jobs for "Cheaper Prices Everyday", sooner or later you won't have enough money to buy a shoelace, no matter how cheap it is. Everytime you shop in a store that is not locally owned, and every time you buy goods Made in China, et al, you are participating in this very destruction of your own way of life. Until people understand this and are willing to do something about it the destruction from within will continue. . __________________ "Reason obeys itself; and ignorance submits to whatever is dictated to it ... It is not a field of a few acres of ground, but a cause, that we are defending, and whether we defeat the enemy in one battle, or by degrees, the consequences will be the same." -- Thomas Paine

11-04-2010, 06:17 AM	#8
samina Inactive Join Date: Feb 2010 Location: Paris Posts: 458	The answer's simple, write off their debt then print up more money to cover it. France doesn't mind paying, as LePen says, "France is the family allowance centre of the world."