I came up with the idea for the book when I was walking back home from the annual May Day demonstration in Buenos Aires in 2010. I had been spending some time in town trying to learn more about the powerful social movements that had emerged in the wake of Argentina’s crippling debt crisis of the preceding decade. On my way back from the Plaza de Mayo, where a group of militant piqueteroprotesters had been facing off with riot police, I walked past a local corner shop and caught a glimpse of a TV news broadcast. In that split second, all I saw were images of massive crowds and Molotov cocktails exploding against the backdrop of stately buildings and palm trees.

My initial thought was that riots had broken out in downtown Buenos Aires, but when I approached the screen I realized the images were actually from somewhere else: from the streets of Athens. It was the beginning of the massive popular resistance to the draconian terms of the first EU-IMF bailout, and the Greek debt crisis was just starting to become a major topic of conversation in the international media. That’s when I realized that there was a big chance that Greece was going to become “the next Argentina,” so I decided to start working on a research proposal for a PhD project comparing the two countries’ trajectories. The basic question I sought to answer was why Argentina ended up defaulting on its debts, and what Greece could learn from this experience. I later ended up adding Mexico’s crisis of the 1980s to the project, because Mexico — in contrast to Argentina — dutifully repaid.

As I delved into the literature and became active in the anti-austerity mobilizations in Southern Europe, I soon realized that there was actually a much bigger story to be told here: about the ideological blinders of neoclassical economics, about the redistributive consequences of debt repayment, about the class conflicts at the heart of neoliberal crisis management, about the history of imperialism, the role of international institutions, and the growing power of finance. In short, I had sort of stumbled onto a seemingly arcane and somewhat technical topic — the political economy of sovereign debt — that then opened a door to develop a much broader critique of the growing tensions between capitalism and democracy in a highly financialized world.

There is a fundamental paradox at the heart of the global financial system that economists have been struggling to come to terms with for decades. It revolves around the fact that since the 1970s there has been a massive increase in sovereign debt levels, with the total amount of outstanding government debt skyrocketing to a record $60 trillion in 2016, or over 80 percent of global GDP. At the same time, we have witnessed the most severe financial crisis and the most protracted economic recession since the 1930s. And yet, for some reason, which mainstream economists have so far failed to adequately explain, sovereign default has become an increasingly rare phenomenon in these years. In fact, in the decade since 2008, the total share of government debt in a state of default fell to a historic low.

So here we arrive at a very important question: why did the governments of heavily indebted countries, especially those in the periphery, almost universally insist on repaying their enormous external debt loads in the wake of the global financial crisis? Why did they not simply default on their foreign obligations and shift the costs of the crisis onto private lenders abroad, as they regularly did prior to World War II?

The answer, I suggest, has something to do with the vast increase in the structural power of finance in recent decades. I trace the origins of this growing power back to three key developments. The first of these is the growing concentration and centralization of international credit markets, which has led to a situation in which the sovereign lending business is now increasingly dominated by an ever-smaller circle of systemically important banks and institutional investors in the rich creditor countries. Second is the resultant financial interventionism of the leading creditor states and the International Monetary Fund, which now regularly disburse sizeable international bailout loans under strict policy conditionality, to prevent countries from defaulting on their debts, thereby shielding their own overexposed financial institutions from losses. Thirdly, the growing dependence of most peripheral states on international credit, which has left borrowing countries increasingly vulnerable to a cut-off of foreign financing.

Taken together, I try to show how these interrelated developments have gradually strengthened the hand of financial elites and fiscally orthodox technocrats in the debtor countries, whose material interests and ideological convictions are closely aligned with those of foreign lenders. All of this comes at the expense of left-leaning politicians who still retain a degree of loyalty towards working people back home, or who simply favor a more heterodox policy response, like a temporary suspension of payments. Over time, this shift in domestic and international power relations has gradually caused fiscal discipline to become internalized into the debtor countries’ state apparatuses, through the formation of what David Harvey calls the “state-finance nexus.” Compliance then becomes the rule; default the exception.

What I tried to do in the book was to identify the exact mechanisms through which these power dynamics operate in practice, and the precise conditions under which they are effective — or not. At the same time, I was also very interested in figuring out under what circumstances a heavily indebted country might still be able to defy its foreign lenders and default on its external debts anyway. This led me to develop a strong interest in popular mobilizations, anti-austerity protest and debt resistance more generally, which became important themes in the Argentine and Greek chapters in particular. Obviously, neoclassical economics has had very little to say about these things, which is why a critical political economy approach was sorely needed.

There have been some important similarities between the two crises. One thing that immediately comes to mind is the disastrous insistence on deflationary austerity policies in Weimar Germany under the Versailles Treaty. Clearly Europe has learned very little from that experience, and has fueled the rise of the neo-Nazi Golden Dawn party in Greece through a similarly disastrous insistence on punitive austerity. More recently, of course, there has also been a tendency towards trade protectionism, emanating above all from the Trump administration, which to some extent can be said to resemble the “beggar-thy-neighbor” policies of the 1930s.

When it comes to the question of international debt, however, there is one very important difference between the management of the two crises. During the 1930s, the vast majority of Latin American and European borrowers suspended payments on their foreign obligations to US bondholders. Their governments simply declared a unilateral debt moratorium and stopped paying. In the most recent crisis, by contrast, there has been a widespread insistence on uninterrupted debt servicing, and there have been no major or sustained unilateral payment suspensions to date.

This is quite puzzling, because subsequent research has shown that the prevalent policy response to the crisis of the 1930s was actually a good thing for many of the most heavily indebted countries: while the payment suspensions left the defaulters excluded from international capital markets, the money they saved in the process allowed them to recover much faster than they otherwise would have. The mass defaults also dealt a decisive blow to the power of Wall Street, which in the preceding decades had been pursuing increasingly imperialistic aspirations in Central America and the Caribbean.

Clearly, then, the outcome of the international debt crisis of the 1930s contrasts very sharply to the outcome of contemporary debt crises. Starting with Mexico in 1982, international crisis management has increasingly revolved around the disbursement of massive IMF bailout loans combined with an almost universal insistence on full and timely debt repayment. Debts may sometimes be restructured, but only at the initiative of the creditors themselves. Meanwhile, the type of unilateral payment suspensions that characterized the crises of the 1930s have been all but ruled out. Borrowing governments are now universally expected to behave as “responsible debtors” and never to pursue even a partial or temporary suspension of payments.

David Harvey puts this well when he writes that “the Mexico case demonstrated a key difference between liberal and neoliberal practice: under the former, lenders take the losses that arise from bad investment decisions, while under the latter the borrowers are forced by state and international powers to take on board the cost of debt repayment no matter what the consequences for the livelihood and well-being of the local population.”

There is no doubt that the neoliberal approach to crisis management has had far-reaching implications for democracy in the debtor countries. When international creditors become so powerful that they can rule out certain policy responses a priori, and once the expectation is entrenched that borrowing governments always will — and always should — try to squeeze every last drop of blood out of their societies, we have to ask to what extent these heavily indebted states can still be considered sovereign actors in their own right.

If we consider the Greek case, we very clearly have to answer that question in the negative: by no stretch of the imagination could the decision of the Syriza government to simply ignore the outcome of the 2015 anti-austerity referendum be considered a sovereign or democratic decision. What I personally find particularly fascinating is how uncontroversial this observation seems to have become in establishment circles over the past decade or so. It was always very clear, to all actors involved, that Greek democracy would have to take a backseat to the overarching priority of debt repayment. As the German finance minister, Wolfgang Schäuble, candidly put it ahead of the 2012 elections, the Greeks “can vote however they want, but whatever election result we have will change nothing about the actual situation in the country.”

I think one of the problems with this openly anti-democratic approach is that it has to some extent succeeded in dulling our sense of outrage at this state of affairs. It’s like our technocratic overlords and their neoliberal stooges in academia and the media no longer even feel the need to be apologetic about it; it’s simply taken for granted that the ascendancy of global finance would swallow democracy — and that there is really nothing we can do about this. At the height of the crisis in the eurozone, the Financial Times even ran an op-ed dryly celebrating the fact that “financial markets are acting like a global supra-government” — supposedly a good thing because it allows these markets to impose much-needed discipline on irresponsible borrowers like Greece.

These dynamics inevitably invoke memories of the imperialist era, when creditor states regularly dispatched gunboats and abrogated national sovereignty to force delinquent debtors to repay. Arguably even more troubling, however, are some of the deeper structural changes in the capitalist world economy that have driven these developments. From my perspective, the crisis of democracy today runs much deeper than a straightforward undermining of national sovereignty by supranational organizations and global economic forces — which at any rate is a rather superficial critique that could just as easily be made by anti-globalists on the nationalist right.

One of the more profound problems, as I see it, is that the process of financialization has allowed finance to penetrate ever deeper into social and political life. Irrespective of any concerns about national sovereignty, this development has steadily hollowed out society’s collective resilience to external economic shocks and rendered all of us increasingly dependent on continued credit circulation — and hence on the stability of financial markets — for our own livelihoods. Think, for instance, of the pension investments many working-class and middle-class people have in the stock market, or any savings we may keep in our bank accounts. These would be directly at risk in the event of a government default. Finance has effectively taken us hostage.

The upshot of this is that debtor governments, but also many voters, have become increasingly conservative and risk-averse in their dealings with this mysterious entity we call “the markets.” We could compare this to a political version of the Stockholm syndrome: policymakers nowadays, even those on the Left, are increasingly careful to avoid the type of policies that could be seen to be unfriendly to investors; they begin to appoint technocrats to key positions at the finance ministry, they begin to systematically insulate political decision-making from popular pressures — all out of some ill-defined concern that “pandering to the people” might “upset the markets” and thereby cause borrowing costs to rise and the economy to take a hit, with negative consequences for the government’s ability to legitimize itself in the face of its voters.

Of course, some of these fears may well be imagined or overblown, and governments do at times have considerably more room for maneuver than they think or pretend to have. Yet there is nevertheless a real material force behind the anti-democratic turn in the advanced capitalist countries. Above all, financialization has undermined society’s control over the creation and circulation of credit-money. This means that, in times of crisis in particular, the combined might of financial markets and official lenders — in the form of a collective threat to withhold further international credit — will often be strong enough to force even the most defiant credit-dependent borrower back into line. The tragic experience of the first Syriza government is a case in point.

Absolutely — and this is a key point. I already alluded to some of the risks that working people face in the event of a default: they may lose their life savings in the process, or they may lose their jobs and find it increasingly difficult to access the basic necessities of life. But working people also stand to lose from the austerity measures required to pay the debt, as well as the wage and pension cuts, the axing of public benefits, the privatizations of state assets — basically everything debtor governments are required to commit to under an IMF program. If ordinary citizens begin to see the latter as costlier than the former, they may eventually come to favor payment suspension over continued repayment.

The situation is very different for the wealthy upper classes, who tend to be much more exposed to their own government’s debt. Local investors may hold government bonds, for instance, or hold shares in financial firms that do. As a general rule, domestic capitalists tend to depend on financial stability to be able to continue accessing credit and investment. The entire international trade system runs on the constant provision of short-term export and import credit, leaving both industrial and merchant capitalists very reluctant to upset the prevailing financial order. As a general rule, we therefore find that political and economic elites in the debtor countries tend to be fiercely opposed to default and will do everything in their power to avoid it.

This may seem obvious, but it is an important observation that is often ignored by neoclassical economists, who do not recognize this fundamental class conflict at the heart of the question of sovereign debt repayment. For them, a country simply repays because it’s in the best interest of the country as a whole. In reality, heavily indebted countries are by no means unified actors: they tend to be internally divided and riven by profound class conflicts over who is to shoulder the burden of adjustment for the crisis. In the resultant social and political struggles, domestic elites will mobilize all their might to try to prevent the country from slipping into default. We saw this very clearly in the Greek case, with the aggressive fear-mongering campaign of the media-owning oligarchy against the Oxi vote in the anti-austerity referendum of July 2015.

While European officials regularly railed against their Greek counterparts for their supposed lack of reliability and their unwillingness to implement key market reforms, the truth is that the Greek establishment parties — and the wealthy capitalist cronies with whom they were associated — always firmly insisted on repaying the debt and never threatened to unilaterally suspend payments. This reflects a broader tendency that I observed in the Mexican and Argentine cases as well. Here, domestic elites also actively colluded with foreign creditors to impose draconian austerity measures on their own working classes in order to free up resources for foreign debt servicing.

So, we can conclude that the creditor-friendly outcome of contemporary debt crises is never just purely imposed from abroad. Domestic capitalists, financial technocrats, and establishment politicians in the debtor countries all fulfill a crucial bridging role towards international finance, essentially acting as its foremen on the ground.

Yes, the social consequences of all this have obviously been horrific. In Mexico and much of Latin America, the 1980s are still remembered as la década perdida, or “the lost decade,” in which millions of people fell into poverty. Subsequent studies of IMF structural adjustment programs in the region found a consistent bias in favor of the capitalist class: the labor share of income fell across the continent, both in absolute and in relative terms. By the end of the decade, even the World Bank chief economist was forced to recognize that “most of the burden has been borne by wage earners in the debtor countries.” The head of UNICEF considered it “hardly too brutal an oversimplification to say that the rich got the loans but the poor got the debts.”

Yet these same disastrous IMF adjustment programs were subsequently re-imposed on countless developing countries in the 1990s and have formed the basis for the official response to the European debt crisis of the 2010s as well. Of course, the IMF has repeatedly claimed that it has changed its ways since the 1980s, but the facts speak for themselves. Even the IMF’s own internal evaluators were extremely critical of the Fund’s role in the management of the Greek debt crisis, concluding that “the burden of adjustment was not shared evenly across society,” that “ownership of the program was limited,” and that “the risks were explicitly flagged.”

Clearly, if you repeat that type of disastrous policy response over and over, for four decades in a row, in dozens upon dozens of countries, people will rightly start asking if there may be some kind of method to the madness. To most reasonable observers, it should now be overwhelmingly clear that, insofar as the IMF’s adjustment programs have served any purpose at all, it has been to consistently shield both private creditors and wealthy elites inside the debtor countries from the costs of adjustment. There is a naked class politics at the heart of the IMF’s interventions that has become all but undeniable in the wake of the recurring debt crises of the 1980s, 1990s and 2010s.

Not necessarily. I do believe that alternatives remain possible, even within the highly restrictive context of the eurozone. But defying the structural power of international lenders in a context of globalized financial markets and widespread credit dependence requires immense ingenuity, extensive preparation, and unshakable determination — always in combination with powerful popular pressure from below. Sadly, these are precisely the qualities that were in short supply inside the Syriza government in 2015.

What struck me the most about Syriza’s short-lived anti-austerity experiment was the apparent incapacity, not just of the party leadership, but also of some of its more outspoken “internal opposition” members, to present a credible strategy to neutralize the main weapons of the opponent: its control over the international credit supply and its liquidity assistance to the Greek banking system. It was always fairly obvious that in the event of non-compliance, the creditors and the European Central Bank were simply going to close the taps and squeeze the Greek government dry. Countering this would have required a degree of control over domestic credit and money circulation. In the absence of a national currency and an independent central bank, the only way to take that type of control would have been to set up a parallel payment system of sorts.

This, of course, is precisely what finance minister Yanis Varoufakis proposed at the height of the crisis, following the resounding victory of the anti-austerity camp in the July referendum, but Varoufakis was rebuffed by prime minister Tsipras and the most powerful figures in the party leadership. While I was never really an admirer of his swashbuckling style, I want to emphasize that Varoufakis’s parallel payment system proposal was theoretically extremely interesting. It demonstrates that he was one of the few figures inside the government who was aware of the structural power asymmetry between Greece and its lenders, emphasizing the need to reduce the country’s credit and liquidity dependence as a way to escape the lenders’ brutal asphyxiation strategy.

At the same time, however, I have serious doubts about the practical feasibility of Varoufakis’s proposal in light of its technical complexity and Syriza’s poor preparation for such an eventuality. We have to keep in mind that Syriza ministers hardly even had effective control over the state bureaucracy at this point. The party was internally divided, and neither its leadership nor the internal opposition of the Left Platform had a very clear understanding of the forces they were up against. As for Varoufakis, it’s one thing to have a brilliant idea, but quite another to have the political capacity to carry it out — within a very limited time frame and under conditions of extreme duress.

At any rate, for me the key takeaway here is that the outcome of the Greek crisis was never simply written in stone. I do believe that there were alternatives on the table, and that things could have gone differently, but they would have required much more preparation and political effectiveness on the part of the Syriza government, and much more openness to popular participation and social mobilization.

When the people were finally involved in the political process through the anti-austerity plebiscite, the popular energy quickly overflowed the capacity of the government to regulate or contain it. To me, the mass demonstrations and stunning referendum result demonstrate that the Greek people were the truly radical and creative force here; they were willing to take the confrontation with the European creditors much further than their quivering prime minister. I believe there was a potential here to capitalize on this popular energy and radicalize the opposition to the lenders’ demands.

Grexit was always one possible outcome and the creditors’ intransigence made it more likely. But realistically, a controlled Grexit would have required even more complex arrangements than Varoufakis’s parallel payment system proposal, and I am yet to see any evidence that such preparations had proceeded to a point where this option could be responsibly implemented, in a way that would have allowed the Syriza government to survive the resultant fallout.

Clearly, there was a lot of talk of a Plan B at the height of the crisis, but also a woeful underestimation of the immense complexity involved and the vast social and economic dislocation Grexit would have caused in the short term. All of this was combined with what looked like a rather naïve assumption that international finance would somehow cease to exert its oppressive force on Greece’s fiscal and monetary policy autonomy outside of the eurozone, as if Grexit equaled the attainment of complete sovereignty and the end of global finance’s stranglehold.

Nevertheless, I do believe that — even if we should not idealize it as a panacea or an easy route — a credible argument could still be made that even a disorderly and extremely disruptive Grexit would, in the medium to long run, have been preferable to the eternal sovereign debt bondage in which Greece still finds itself shackled today. Tsipras’s surrendereffectively subjected the population to a permanent state of debt servitude. In the end, there were no good options — but Tsipras’s embrace of the neoliberal mantra that “there is no alternative” was the worst possible outcome.

In the book I pay relatively little attention to the proposals coming from the various factions of the Greek left. Rather, I was interested in identifying the power dynamics that render such alternative policies increasingly difficult — though not impossible — to realize in practice. In this respect, it is absolutely crucial to remember that the principal blame for the outcome of the crisis rests not with the Greek left but with the European creditors and global finance more generally. The international left should bear part of the responsibility for its failure to adequately stand up to these creditor forces in our own countries. Yes, the Syriza leadership may have failed its voters, but the real takeaway here is that the rest of us failed Greece.

Should we be surprised that an upstart leftist party with no experience in government, taking office in a small peripheral country with no financial resources, an imploding economy, and an extremely weak banking system, was crushed by the combined might of the European Union, the European Central Bank, and the International Monetary Fund? I think it is fairly obvious that the odds were always going to be stacked against Greece. The real tragedy here is that no one in Europe really came to Greece’s aid at this crucial moment. There were no mass demonstrations in Berlin, Frankfurt, Paris, or Brussels. The other EU debtor governments could easily stab their Greek counterparts in the back without facing any meaningful opposition at home. The Anglo-American press quickly warmed to Varoufakis’s antics — but that’s about it.

So, in my view the defeat of the Greek left was a defeat for the European left as a whole. Our failure was collective. We have to learn from this experience together and do much better next time around. Most importantly, we cannot allow ourselves to be played apart so easily. What we need is what the Burkinabé revolutionary Thomas Sankara already called for in the context of the African debt crisis in the 1980s: a united front against debt. It is only when the working classes in the debtor countries begin to unite with the working classes in the creditor countries that we can begin to see meaningful change. As Sankara put it, such a united front “is the only way to assert that the refusal to repay is not an aggressive move on our part, but a fraternal move to speak the truth.”

https://www.jacobinmag.com/2019/03/debt-imf-eurozone-greece-mexico-argentina