Maria Lucia Fattorelli

New York, October 26th, 2012

Debt Audit in the context of global crisis

GLOBAL SITUATION

Crisis

Social

Environmental

Food

Financial

Crisis of ethical values

Extreme power of financial market and media

DECLINING OF LIFE CONDITIONS FOR THE MAJORITY OF WORLDS POPULATION

Global Financial Crisis

Origin: Bank’s Crisis Deregulation of financial marketsUnbacked derivativesToxic assets and speculation

Effects:Largest international banks under risk of bankruptcyBad Banks? Parallel banking systemLarge bail out transactions in US and EuropeNationalization of parts of banksExpansion of Public Debt

GLOBAL SITUATION

Crisis of Private Financial Sector is turned into a

DEBT CRISIS

Instrument of “public” indebtedness is used as a system to embezzle public

resources:

“DEBT SYSTEM”

“DEBT SYSTEM”

How does it work

•Structure of privileges at many orders:• Legal• Political• Financial• Economical

•Guarantees absolute priority to financial payments•High social costs, violation of human rights

This “Debt System” should be unmasked.

Tool: PUBLIC DEBT AUDITS

DEMOCRATIZATION OF FINANCIAL KNOWLEDGE CONSCIOUS SOCIAL MOBILIZATION

RECENT AUDIT: Governmental Accountability Office in the US unveiled that US$ 16 trillion were spent on

secret bailouts by the Federal Reserve Bank to private banks and corporations www.unelected.org/audit-of-the-federal-reserve-

reveals-16-trillion-in-secret-bailouts

Citigroup: $2.5 trillion ($2,500,000,000,000)Morgan Stanley: $2.04 trillion ($2,040,000,000,000)Merrill Lynch: $1.949 trillion ($1,949,000,000,000)

Bank of America: $1.344 trillion ($1,344,000,000,000)Barclays PLC (United Kingdom): $868 billion ($868,000,000,000)

Bear Sterns: $853 billion ($853,000,000,000)Goldman Sachs: $814 billion ($814,000,000,000)

Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)JP Morgan Chase: $391 billion ($391,000,000,000)

Deutsche Bank (Germany): $354 billion ($354,000,000,000)UBS (Switzerland): $287 billion ($287,000,000,000)

Credit Suisse (Switzerland): $262 billion ($262,000,000,000)Lehman Brothers: $183 billion ($183,000,000,000)

Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)BNP Paribas (France): $175 billion ($175,000,000,000)

http://www.gao.gov/products/GAO-11-696

Source: Jorge Gaggero, Romina Kupelian y María Agustina Zelada - LA FUGA DE CAPITALES II. - ARGENTINA EN EL ESCENARIO GLOBAL (2002-2009) - Documento de Trabajo Nº 29 - Julio de 2010 – CEFID-AR – Pag 62 -63 - Disponible

en: http://www.tjnamericalatina.org/wp-content/uploads/2010/10/LA_FUGA_DE_CAPITALES-II.pdf

BANKS IN TAX-HAVENS

ACADEMIC RESEARCH43.000 EMNs : more than 1.000.000 of property attachments

40% of control in hands of 147 and high “core” conexion75% of the “core” are financial entities

75% of the 147 companies are in hands of central institutionsAbout 50 institutions of the financial sector have the control the center

S. Vitali, J.B. Glattfelder, and S. Battiston (2011) The network of global corporate control

To deal with the Debt Crisis, the system recomends

• CONTROL PUBLIC DEFICIT

• PAY PUBLIC DEBT

Method• Large budget cuts

• Tax Reform (Shift tax burden directing it to lower incomes)

• Neoliberal reforms

Where this debt came from?

DEBT AUDIT

Access to documents will answer

Where the debt comes from?

How much the country actually received?

How much have been paid?

How much do we really owe?

Who contracted these debts?

Where were the resources applied?

Who had benefited and profited from the debt?

How responsible are the creditors and international organizations in this process?

 DEBT AUDIT

Technical instrument, but not only accounting

• Explains the mechanisms that generate “public” debt

• Clarifies the reasons of immensurable growth of the debt

• Unveils the juridical structure of financial privileges

• Proves the political instrumentalization (dictatorship, tecnocracy) in benefit of financial sector

• Shows the speculation that benefits banks

EXPERIENCES in DEBT AUDIT

ECUADOR

• OFICIAL DEBT AUDIT

BRAZIL• CITIZEN DEBT AUDIT

• PARLAMENTARIAN INVESTIGATION

IRELAND• ACADEMIC DEBT AUDIT

Other initiatives

ECUADOR: lesson of sovereignty

Official Commission for Debt Audit

Participation of citizens

Created by Decree in 2007

In 2009: Sovereign proposal of recognition of a

maximum of 30% of the external debt represented by 2012

and 2030 bonds

95% of the bond holders accepted Ecuadorian proposal,

which means that 70% of the debt to private international

banks was cancelled

US$ 7,7 billion saved for the next 20 years

Increase of social expenses, especially Health Care and

Education

COMISIÓN PARA LA AUDITORÍA INTEGRAL DEL CRÉDITO PÚBLICO

ECUADOR – Audit Comission – CAIC – Decree 472/2007

Integral audit with social participation

Art 4º - The CAIC is authorized to audit and transparent all

indebtedness processes of state institutions.

Art 9º - All public sector entities are obliged to provide information

requested by the Commission in the terms and penalties

established in the Law on Fiscal Transparency.

LEGAL BASIS AND POLITICAL BACK UP ARE INDISPENSABLE TO CARRY OUT THE AUDIT

COMISIÓN PARA LA AUDITORÍA INTEGRAL DEL CRÉDITO PÚBLICO

Definition of the integral audit – Decree 472

Art. 2 - Integral audit is defined as:   

“the supervising action managed to examine and evaluate the

process of contraction and/or renegotiation of public

indebtedness, the origins and the destination of the resources,

and the execution of projects that are financed with domestic or

external debt, in order to determine its legitimacy, legality,

transparency, quality, efficacy and efficiency, considering legal and

financial aspects, and the impact on economy, society, gender,

regions, ecology, nationality and peoples”

COMISIÓN PARA LA AUDITORÍA INTEGRAL DEL CRÉDITO PÚBLICO

Final report of CAIC presented to President Rafael Correa on September 2008

Some general conclusions:The process of indebtedness of Ecuador, during the

period between 1976 and 2006, from the perspective of a structural continuity, has been developed for the benefit of the financial sector and transnational corporations, clearly affecting the nation’s interests.

Commercial debt:• Net transfer of resources in the amount of US$ 7.13 billion

in 30 years.• Increase of the debt from US$ 115.7 million to US$ 4,200

billion (1976-2006)• Debt has not been a source of financing for the state.

Actually, it represented a continuous loss of resources.

ECUADOR: Access to information that unveiled:

• Facts that also occurred to other countries, which should be backed up by integral audits

• Impressive similarities

• Disrespect to human rights due to the continuous subtraction of resources that should be destined to answer to the basic needs: health, education, assistance

• Possibility of articulation between countries that were submited to the same process of indebtedness

CITIZEN DEBT AUDIT - BRAZIL

• Historical approach of the debt: studies, documents, reports of Parliament

• Analysis of national budget and denouncing of the privileges of the debt

• Compilation of legal arguments

• Major political results

Audit in Ecuador - CAIC

Parliamentary commission of inquiry in Brazil CPI

• National demonstrations involving workers’ associations, students, and

other popular organizations.

• International connection – countries and organizations (Latindadd,

CADTM, JS, UNCTAD)

• Popular reports, participation in national and international events, books,

movies, studies, website: www.auditoriacidada.org.br

Brazilian

Paradox

• 6th Major World Economy

• 3rd Worst Wealth Distribution

• 84th on the ranking of human rights - IDH

Nota: Inclui o “refinanciamento” ou “rolagem”, pois a CPI da Dívida constatou que boa parte dos juros são contabilizados como tal.

Fonte: SIAFI / Elaboração: Auditoria Cidadã da Dívida, OBEDECENDO-SE O PRINCÍPIO DA UNICIDADE ORÇAMENTÁRIA

R$ 708 bilhões (17% do PIB)

Orçamento Geral da União – Executado em 2011 – Total = R$ 1,571 trilhão

WHO PROFITS? WHO LOSES?

Fonte: Banco Central - http://www4.bcb.gov.br/top50/port/top50.asp

Apparent fallIncrease of supplies

SOVEREIGN DEBT

CONCEPTS

Public Debt

Domestic DebtNew “FACE” of external

debtExternal debt

MULTILATERAL

BILATERAL

COMMERCIAL (Debt with

International Private Banks)

PRIVATE*

BRAZIL: Relevance of External Debt to Private International Banks EXTERNAL DEBT: Registered by Central Bank US$ million – 1969 to

1994

-

20.000,0

40.000,0

60.000,0

80.000,0

100.000,0

120.000,0

140.000,0 19

69

1970

19

71

1972

19

73

1974

19

75

1976

19

77

1978

19

79

1980

19

81

1982

19

83

1984

19

85

1986

19

87

1988

19

89

1990

19

91

1992

19

93

1994

Outros

Agências Governamentais

BID

Banco Mundial

Empréstimos do FMI

Empréstimos em Moeda

Bônus de Dívida Renegociada com bancos

Fonte: Relatórios Anuais do Banco Central disponibilizados à CPI da Dívida.

Fonte: Banco Central - Nota para a Imprensa - Setor Externo - Quadro 51 e Séries Temporais - BC

Pre-payment to IMF; goodwill

• Interest increase• Debt

converted to CB

Dictatorship debt

Fonte: Banco Central - Nota para a Imprensa - Política Fiscal - Quadro 35.

CPI: Ausência de Contrapartida

realMecanismos financeirosConflito de interesses Falta de transparência

Debt Investigation Parlamentary Comission:

Transformation of External Debt into “Domestic”

Lack of real counterpartFinancial mechanisms

The strategy of keeping power under

capitalism

Increasing profits of financial and big corporate sectors

Financing of electoral campaigns and corruption

Extreme power of the press linked to the large capital

Illusory distribution of wealth• Small advantages for poor people: “Family Basket” • Minor adjustments for workers • Access to cheap products: sensation of a better life• Access to credit/financing

Model of accumulation

Parliamentary Comission of the Debt - Brasil

CPI – HOUSE OF REPRESENTATIVES

Created in December 2008 and settled in August 2009, after an effort of Deputy Ivan Valente (PSOL/SP)

Finished on May 11th 2010

Identification of serious evidences of illegalities in public debt

At the present: under investigation by Federal Prosecutors’ Office

CPI of Debt: Large social participation

Strategies

DEBT AUDIT with CITIZEN PARTICIPATION

Regional centers to dismantle the “Debt System” and democratize knowledge of financial reality

CONSCIENT SOCIAL MOBILIZATION

CONCRETE ACTIONS• Centers of Citizen Audit

• Follow investigations

• Review monetary and fiscal policy to guarantee income distribution and social justice

• Respect human rights

• TRANSPARENCY and access to TRUTH

Challenges and Proposals

• Disseminate the experiences of Debt Audit in Ecuador and Brazilian Debt Parliamentary Investigation Commission and encourage the implementation of new audits;

• Emphasize the importance of the audit of debt in the global financial crisis, the increase of illegitimate debt due to governments borrowing to bail out private banks, making neoliberal reforms;

• Identify in each country the process of exchanging external debt for domestic debt

• Deepening legal studies on responsibility of creditors, asymmetry between the parties, violation of international principles (fairness, rebus sic stantibus), violation of human rights, the right to development and financial sovereignty;

• Discussion on the need for debt auditing in the forum of experts set up by UNCTAD

Stop “Debt System” consecuences

THANK YOU

Maria Lucia Fattorelli

www.auditoriacidada.org.br