The Gnomes of London (1966)

From the May 1966 issue of the Socialist Standard

At the end of March discussions, began between the British and Rumanian governments over various debts owed to British capitalists by Rumania. These discussions, of course, didn't involve the interests of workers either in Britain or in Rumania but they are interesting in so far as they show how capitalism works as an international system.

In the past the City was more the centre of international finance than it is today. Foreign governments and companies used the capital market of London to raise funds. The Rumanian government was no exception. The capitalists expected a price for the use of their capital and got it in the form of interest on the bonds. Up to the Second World War the Rumanian government “met its obligations”, i.e., the capitalists got their share of the exploitation of workers in Rumania, as contracted. In the war, however, Rumania was an ally of the Axis Powers and this source of interest dried up in 1941. Ever since, the owners of Rumanian bonds have been clamouring for compensation. Although Rumania was on the losing side in the war most of these debts have yet to be paid. After the war Rumania fell into the hands of Russian State capitalism and was along with the other States of Eastern Europe, ruthlessly plundered to build up Russian industry and military might. In addition, many foreign-owned industries were nationalised without compensation.

After the death of Stalin the native Rumanian exploiting class began to complain about having to send so large a share of the loot they got from exploiting workers in Rumania to their masters in Russia. They sought to sell their products for as high a price as possible on the world market. The capitalists who had loaned money to previous Rumanian governments saw their chance. Ably aided by the Council of Foreign Bond Holders, they exerted pressure to see that before being allowed favourable trading terms Rumania paid up. In 1960 an Anglo-Rumanian Financial Agreement was signed, under which Rumania agreed to pay £l¼m. to settle certain debts. A further clause said that the settlement of the remaining debts should be discussed in 1966. Hence the recent talks.

Rumanian bonds are still traded on the London Stock Exchange and quoted in the Stock Exchange Daily Official List. For instance, 4 per cent Consols exchange at about £13 for £100 nominal stock. So do 4 per cent External Loan 1922 and 7 per cent Monopolies Institute 1929. Considering that some foreign bonds, like the Chinese 4½ per cent 1898, exchange at only 40s, this shows that some capitalists think there's a comparatively good chance that their government can get something out of the Rumanian government as a price for access to the world market.

A glance at the list of foreign bonds quoted in the Official List gives a panorama of the past glories of British Imperialism. Russian, Chinese, Hungarian, Greek and South American bonds exchange for little or nothing. Interesting items are the Baltic bonds issued by Estonia, Latvia and Lithuania during their short period of political independence between the world wars. In 1940 they were grabbed by Russia and another source of interest dried up. Yet now these bonds exchange at what seems the surprisingly high price of £50-60. The reason for this is that although Russia got the land and industry of these countries unfortunately for them the gold reserves were kept in London. Talks between Britain and Russia over the division of the property of these former States still go on. The last round finished in April. These Baltic bonds are a better buy than those of Tsarist Russia (also still traded) which are never likely to be paid. 

Russia and Rumania are not the only States negotiating with Britain over debts. Last August a delegation from Hungary was in London to discuss Hungarian bonds (now exchanging at about £14). Poland settled most of its debts in 1955, paying £40 for £100 face value. In 1960 Yugoslavia agreed to pay interest on some pre-war bonds. Thus on June 15 the interest on its 5 per cent Sterling Fund Bonds 1936 is due. Greece has also been forced to pay up.

The States of Eastern Europe in recent years have been gaining a degree of independence of Russia. Their privileged rulers now no longer have to share so much of the loot with those of Russia—-instead they are having to share it with capitalists in Britain, France and elsewhere! This is the price of “independence”. It is no accident that Yugoslavia has been forced to pay the most, precisely because it has achieved the most independence of Russia. In capitalism might is right and capitalists and their governments always drive a hard bargain. Incidentally, the Labour government in the person of junior Minister Walter Padley has been just as zealous in pursuing the interests of foreign bondholders as previous governments—thus showing their attempts to stir up xenophobia by talk of “the gnomes of Zurich” to be the hypocrisy it is.

Finally, it looks as if British capitalists are again moving in on the workers in Rumania. In March last year Lazards, the merchant bankers, signed an agreement with the State Bank of Rumania for a loan of £2m. from three British banks to build two cargo ships. This loan is to be repaid over a ten year period after delivery of the ships. At 5½ per cent rate of interest.

Adam Buick

Material World: Sri Lanka: capitalism unable to provide economic security (2022)

The Material World column from the March 2022 issue of the Socialist Standard

Across the world, workers are enduring the consequences of capitalism’s inability to deal with its many problems. Sri Lanka, the island state of 21 million people, is one more country to add to the long list where our fellow workers are facing deep insecurity in the coming months.

President Gotabaya Rajapaksa declared Sri Lanka to be in an economic emergency but has done little to ease people’s plight. Workers have to bear the brunt of the economic crisis by themselves due to the lack of effective social protection. It is working people who make the economy. 2020 figures show the garment workers brought in US$5 billion and tea plantation workers US$1.4 billion. Yet, most lead precarious lives forced to shoulder the effects of budget cuts on education, health care and public transport.

Sri Lanka is entering a humanitarian crisis caused in part by the impact of Covid. The World Bank estimates 500,000 people have fallen below the poverty line since the beginning of the pandemic. Within the tourism sector, more than 200,000 people lost their livelihoods. Once bringing US$4 billion to the country, the tourism industry is struggling to stay afloat. By October last year, it brought in just US$82 million. From close to 2 million tourists in 2018, the island nation received just 160,000 in 2021.

High government spending and tax cuts eroding state revenues, vast debt repayments to China and low foreign exchange reserves are also important factors.

The government printing money to help pay off domestic loans and foreign bonds has created overall inflation of 12 percent in December and those escalating prices have left many basic necessities unaffordable. Food prices rose by a record 22.1 percent in December. Supermarkets have for months been rationing milk powder, sugar, lentils and other essentials as banks ran out of US dollars to pay for imports.

A top agricultural official warned of impending famine and requested the government to implement an orderly food rationing scheme to avoid such a scenario. He was fired within hours of making the appeal.

The food crisis was worsened by the government’s April 2021 ban on agrochemical imports with an intention of switching agriculture to being organic. The policy was reversed in November after crop yield falls and protests by farmers.

Sri Lanka has a huge foreign debt burden. It owes China more than $5bn and last year took an additional $1bn loan from Beijing to alleviate its financial crisis, which is being paid in instalments. Struggling to pay back Chinese loans, it has handed over the majority share of the Hambantota port to a Chinese state-owned company on a 99-year lease.

In 2022, it will be required to repay an estimated $7.3bn in domestic and foreign loans. However, as of November, available foreign currency reserves were just $1.6bn.

The former central bank deputy governor W A Wijewardena warned the country was at substantial risk of defaulting on its repayments, which would have catastrophic economic consequences. In one article (tinyurl.com/2dsf9rzv), he attributes a reason for the crisis to the acceptance of the now fashionable but fallacious economic idea called the Modern Monetary Theory (or MMT ) that argues that there was nothing wrong in governments running budget deficits to create employment, output, and prosperity. Assured by the advocates of MMT that this does not affect inflation or exchange rates, the government allowed various measures of the money stock to rise excessively, Wijewadena says:

‘Credit to Government from the Central Bank and commercial banks – a method of inflationary financing – increased by Rs. 3.7 trillion or by 159% during end-2019 to end-November 2021. Correspondingly, money supply increased by Rs. 3 trillion or nearly 39%.’

The outcome of the increase in the money stock was an undue increase in the demand for imports, prompting the government to impose import controls even on raw materials. It affected the production of goods and services. Sri Lankans are now going hungry.

The government hopes to settle their past oil debts with Iran by paying them in tea, sending them $5m worth of tea every month in order to save much-needed currency.

It has introduced temporary measures, such as credit lines to import foods, medicines and fuel from India, as well as currency swaps with India, China and Bangladesh. However, these loans have to be paid back at high-interest rates, and simply add to the debt burden.

Sri Lanka’s history has shown that capitalism has not provided economic security. In response to the high prices and excessive money-printing, workers are going on strike demanding higher wages to compensate for the spiralling inflation, as in the health service whose strike the government has declared illegal (tinyurl.com/55tw2ayh). Several powerful trade unions in the country, from postal workers to railway workers, from teachers to doctors, have started demanding higher pay and are threatening to launch massive strikes unless their grievances are met.

ALJO

After Greece, Italy? (2019)

From the January 2019 issue of the Socialist Standard

On 23 October the European Commission asked the Italian government to revisit its budget plan. This is unprecedented as no EU member state had been asked to do this before. The Italian coalition government, constituted by the populist Five-Star Movement and the Lega, had proposed a 2.4 percent deficit of Gross Domestic Product, and a structural deficit of 1.7 percent which was far beyond what the member states had agreed back in 2012 under the ‘fiscal compact’. The EU believes that the deficit is more likely to be 2.9 percent. The EU has threatened Italy with sanctions, which may result in concessions by the populist leaders.

The fiscal compact, (not agreed upon by Britain and the Czech Republic) set the limit for a general deficit not exceeding 3 percent of GDP, and a structural deficit (the part of the deficit due to spending programmes and not to how the economy is doing) not exceeding 0.5 percent of the GDP for countries with large debts such as Italy. This is nothing more than an austerity measure mirroring the debt brake model adopted by Switzerland in 2003 and by Germany in 2009. This consists of separating the structural deficit from the cyclical deficit, where the latter takes into account the fluctuations in economic growth. In simple words, the state was to not allow deficits when the economy is growing but only when the economy is shrinking. By doing so it would reduce the public debt across the business cycle.

Although this austerity measure has so far worked in Switzerland and Germany, it may have worked because of lucky circumstances, namely strong economic growth at the right time, but this may not be sustainable in countries where the GDP is consistently low. Not allowing for deficits or allowing minimal deficits in a struggling economy may be a recipe for strangulation.

Annual government budget deficits in a country with a huge historic national debt like Italy (138 percent of GDP) are, on average, more likely to be greater than in a country with a smaller national debt (for example, 57 percent of GDP for the Netherlands). For the record, the UK has a national debt equal to 88 percent of GDP. It should be noted that Japan has an even higher national debt than Italy (199 percent of GDP), yet only 11 percent of it is to foreign creditors, while in Italy’s case one third of it is owned by them.

The total annual deficit takes into account not only government spending being higher than tax revenues, but also debt interest payments. Thus, it would be unfair to judge the Italian or other governments in a similar situation as necessarily being extravagant. They are, in part, working to pay off the interest on the debt. As we know, government spending does not just supposedly benefit public infrastructures (see the bridges falling down), or education, health and pension systems. Italian spending on those services is in line with, if lower than, the other EU countries. Yet, Italy is stuck with this huge debt. Why?

Out of control

According to many, the Italian national debt spun out of control in the early 80s when the Bank of Italy and the Treasury ‘divorced’. Basically, the first stopped buying Italian bonds that were not sold.  State bonds are the way the government borrows money to finance its spending and to pay back its previous debt plus interest. Unsold state bonds triggered a steep rise in the interest rate. As with loan sharks, the Italian state found itself having to pay out more to borrow money, which in turn increased the accumulated national debt payments.

This ‘divorce’ was a defensive measure and, although it did mitigate the fleeing of savings and some argued that it helped reduce inflation, it did not help slowdown debt issuance. Yet, if we were to plot Italian public debt over the decades no particularly steep increase is to be seen after the 1981 divorce either. The oil crises in the 70s, political nepotism, which created an inflated state infrastructure, and a money-wasting corrupt administration, are probably more obvious original sins. Nevertheless, the real problem with Italy is the lack of economic growth. If we were to plot Italian GDP over time we can see that after crisis of 2007-8, this has struggled to increase and actually decreased by 10 percent (UK GDP decreased by 7 percent in the slump). Government spending on research and new technologies has also been neglected.

The official version of events for the M5S and Lega is that things started to go wrong in 1981 and that the EU limits and restriction did not help the ever-growing national debt problem. Both M5S and Lega had an anti-EU, anti-Merkel electoral campaign. Now they are continuing to play this card in view of the European elections later this year. However, it is fair to believe that the Italian government is not doing this only for the sake of going against the EU and being successful at the next elections. They do believe that an anti-austerity policy will help to boost the economy and will promote 1.5 percent economic growth (real GDP). The EU, on the other hand, do not trust this plan and are interested only in what Italy can pay back to their creditors. The EU’s doubts about this seem to have some validity as the spread, that is the ‘gap between Italian and German bond yields which the Italian media follow obsessively’ (Economist, October), is up to 3.2 percentage points.

Past experience shows that the type of ‘pump-priming’ Keynesian policy as proposed by M5S and Lega does not work. It will not reduce the public debt, and it will not promote research and development of new technologies. As with the Greeks (who the EU and the IMF forced the government there to squeezed), the Italian workers will be portrayed as lazy extravagant tax-evading people. This does not reflect the reality, but benefits the ruling class. We workers should look beyond national borders and opt for a society where meeting people’s needs is not subordinated to meeting interest payments to international loan sharks.

Cesco

Foreign Debt and the Workers (1933)

From the January 1933 issue of the Socialist Standard

The continuance of the world depression drives the spokesmen of capital to all kinds of shifts to account for the trouble, and for the growing army of unemployed.

One of the “explanations”—the international debt question—is very much to the front just now and causing much heartburnings to small investors, who see their savings dwindling under the stress of the economic situation. The latter are always the most vulnerable material for the propaganda of reduced taxation, and while they throw up their hands in holy horror at the suggestion that Ireland should be so unprincipled as to back out of previous debt arrangements, they wholeheartedly support the idea of repudiating England’s debt obligations to America.

The matter is one that concerns the master class exclusively and is no concern of the working class. It is just a question of which group of masters shall reap the principal share of the surplus wealth wrung from the workers and is simply the peace-time reflection of the war-time process. Incidentally, the anxiety of the capitalists to get rid of their foreign debts shows the absurdity of the Labour Party argument that the capitalists can pass such burdens on to the backs of the workers.

The present international debt ferment originated in the capitalists of one country giving credit during the War to those of another. country for war material, on the understanding that the lenders would obtain substantial interest for their obliging conduct. Many years have passed since the debts were incurred, and the material that was purchased, being of an unproductive nature, mostly went up in smoke—carrying multitudes of workers with it. The capitalists of the debtor countries look with growing dismay at the constant drain on their profits caused by the recurring interest payments on this unproductive expenditure, and with still greater dismay to the dwindling prospect of getting rid of the capital burden for a long time to come. Consequently, by emotional appeals, veiled threats and various financial dodges, they seek to cajole the creditors into allowing them to back out of their “sacred” pledges and to throw overboard as much of their liabilities as possible. It is just another aspect of the shady side of commerce,

The international intertwining of business relations helps the debtors’ game. This was well illustrated by the financial conduct of German capitalists a year or two ago, when they threatened to go bankrupt if forced to meet certain short-term loan obligations. The creditors were faced with the threat of losing all if they forced the immediate payment. While the creditors politely fell out among themselves, Germany just smiled and sat tight.

In the middle of the present debt discussion a report came through from America which pointed again to the real source of low prices and business depression—a too lavish nature and a too highly developed productive force for a social system based on production for profit instead of production to meet the needs of all. The following quotation is from the Evening Standard for December the 9th, and appeared under the heading, “Another Cotton Crop Shock”:—

   The market estimates of the American cotton crop this year have been all along quite out of touch with actualities. Successive shocks have been administered by the monthly publication of the official estimates, which have been well in excess of private forecasts. The biggest shock of all has come from the latest Bureau report just issued.
  This estimates the crop at 12,727,000 bales, an increase on last month’s official estimate of 780,000 bales, whereas the market was looking for, at most, an increase of about 250,000 bales. As a consequence the price in Liverpool has fallen from 5.64d. per lb. a month ago to 5.03d. per lb. now, while the price in America has dropped from 6.30 cents to 5.75 cents per lb.
  Evidently the private estimators have misjudged the probable effect of weather conditions and the possibilities of boll-weevil damage. That the latter has been very small is demonstrated by the high average yield of 162.1 bales per acre.

The settlement of the debt question will not of itself set the wheels of business turning rapidly again. The easing of that problem is reserved for bankruptcies and the boll-weevil.

Anyhow, from the workers' point of view it is not unkind America or France that is the root of their troubles, but the ruthless exploitation by capitalism for the profit of the few

Gilmac.