It's time to cancel unpayable old debts

 

Economic history is full of examples of successful debt default – so let's make 2012 a default jubilee for have-nots

Aditya Chakrabortty

guardian.co.uk, Monday 9 January 2012 20.00 GMT

In the week between Christmas and New Year, those bleary few days when the world has better things to do than catch up on news or check its Twitter account, The Guardian carried a story that bears repeating. It was about Dimitris and Christina Gasparinatos and their kids in the Greek port of Patras. For ever hard up, the parents had been pushed by the economic crisis into outright poverty; and just before Christmas Dimitris and Christina put four of their children into care.

Nor is the Gasparinatos' case an isolated one. Greece must be the most family-centric society in western Europe, yet its media is full of reports of newborns dumped outside clinics, or infants shunted into foster homes.

Such stories almost never come up when politicians and economists debate Europe's meltdown; implicitly, they are categorised as fall-out, for journalists and campaigners to highlight. Yet the abandoned children of Greece are not merely coincidental to those discussions about how to tackle the debt; they are integral to it.

Strip away the technicalities and you are left with two ways to think about the debt crisis. One is as a battle between the past and the future. The vast majority of Greece's debts are historic commitments made to creditors by previous governments, sometimes in very dubious circumstances. Yet Athens has been forced to prioritise repaying these old loans over generating economic growth, or future income. One result of that policy has been to snatch away whatever chance the Gasparinatos kids might have had of decent lives.

Something similar is happening in Britain. David Cameron came to office with the primary goal of paying down debt. Less than two years later, his ministers are now obliged to go on the BBC at regular intervals to explain why more than a million young people are out of work. Study after study shows that a young adult unemployed at the outset of his or her career suffers permanent damage to their prospects, yet this government's economic policy favours the past even though it means ruining the future.

Why? This brings us to the second way to think about any argument over debt: as a fight between creditors and borrowers, or the haves and the have-nots. The creditors have the money and therefore the whip-hand over the borrowers. They also have the political influence: the boss of Deutsche Bank would, one suspects, get more face time with Greece's prime minister or any other eurozone leader than the Gasparinatos family and a whole coachload of their neighbours. His demands are also more likely to get preferential treatment, which is a major reason why Angela Merkel and Nicolas Sarkozy has gone through such contortions over Athens' loans.

Before last summer, eurozone policy-makers swore blind that they would never countenance Greece failing to pay all of its debts in full. After finally accepting that that was impossible, they then asked if bankers would be good enough to knock 21% off the country's loans, rising over time to 40% and then 50%, or even a little more. Meanwhile, economists at the IMF estimate that Greece should actually have 75% wiped off its debt burden – and market prices indicate that figure should really be over 90%. But economic reality has been no match for the stranglehold bankers have on European politicians – who, by the way, swore last month that no other country would fail to pay its loans in full.

And yet economic history is full of examples of successful debt default. When American Airlines declared recently that it was bankrupt and couldn't carry on repaying its loans, it was applauded by Wall Street analysts as "very smart". The whole point of company insolvencies is to work out the value and viability of the underlying enterprise; if it can carry on, banks and other creditors get squared off at vastly reduced sums and the productive part of the firm is back in business.

The same goes for countries. Regimes sunk by revolutions don't repay their debts; nor do countries that lose wars. (When they are made to, as with Germany after the first world war, terrible things can result.) Over the past couple of decades, campaigners have successfully won debt relief for poor countries in Africa and Asia. Other nations, such as Ecuador or Argentina or Iceland, have simply declared they cannot repay all that they owe.

Ultimately, a loan is a social arrangement and, like any other contract, it can be renegotiated. A few decades ago, archaeologists discovered the first ever legal contract in Lagash in modern-day Iraq. Dated back 4,400 years and carved into the bricks of a Mesopotamian temple, it was for the cancellation of debt. It's claimed that countries that don't repay their loans will be frozen out by lenders. Yet, as I wrote here last year, IMF economists have recently argued that "the economic costs are generally significant but short-lived . . . we almost never can detect effects beyond one or two years."

In his recent, brilliant history Debt: the First 5,000 Years, the anthropologist David Graeber calls for a modern-day debt jubilee, a cancellation of all debts, just as they had in Mesopotamia. His suggestion is provocative, but it should be taken seriously. Because the longer we keep protecting the haves over the have-nots and honouring the past while destroying the future, the worse this debt crisis will get.

It's time to cancel unpayable old debts | Aditya Charkrabortty | Comment is free | The Guardian