DEBT & DEMOCRACY IN NEWHAM
A citizen audit of LOBO loans Published by Research for Action ltd in October 2018 You are free to: • Share — copy and redistribute the material in any medium or format • Adapt — remix, transform, and build upon the material
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Executive Summary
A dramatic withdrawal of central government funding in the last decade has exposed the crisis in local government. Austerity measures are forcing closures of youth centres and libraries, reducing bin collection and increasing council tax; the cuts are also forcing homeless people onto the streets and into crammed, sub-standard temporary accommodation and leaving disabled people and those in mental health crisis without adequate support.
Voluntary organisations plug the gaps where they can, as the local state is shrunk and withdrawn under the political smokescreen of the “big society” narrative that promotes free service provision by communities.
Within this framework of false “localism” promoted by the government, councils are expected to support themselves by raising more funds locally, including hiking council tax and making residents pay for services that were once free. This hits the poorest hardest.
The overhaul in the way local government is financed is just the latest chapter in an ongoing story. Austerity is more than just cuts to services. It marks a deliberate shift in power relations where, with declining public spending, public scrutiny and democratic accountability are also eroded. Decisions are increasingly made as purely administrative actions, imposed from on high by unelected officials, citing neoliberal economic rationale, not social necessity.
Local authorities need to be guaranteed stable funding to fulfil their duties towards residents. Instead, they are treated as commercial actors encouraged to borrow from capital markets, hedge against risk and engage in speculative activities. Through financialisation, risk is introduced into the funding of essential services. With financial loss comes service withdrawal.
In this report, we have focused on how this happens through a type of bank debt: Lender Option Borrower Option (LOBO) loans. We have used the London borough of Newham as a case study to evaluate the legitimacy of LOBO loans. These risky and expensive loans were sold to hundreds of councils across the UK, among which Newham is the most indebted. Experts have stated LOBO loans are far too complex for council officials to know they were signing up for a “lose-lose bet”. Exiting LOBO loans now would prove extortionately expensive.
Debt is central to disciplining councils to play by the rules of financial capital. Interest payments are ring-fenced in councils’ budgets, which means savings have to be made elsewhere as the failure to service debts would lead to hefty financial penalties and the imposition of government administrators. This forces councils to prioritise paying banks above everything else. It also lays bare the power dynamic between the cash-strapped public sector and financial institutions with balance sheets that are multiples of local authorities’ collective budgets. It is often forgotten that rescuing these very same too-big-to-fail banks with public money is what prompted the recent wave of public sector cutbacks in the first place. This is why it is important to challenge the legitimacy of the debt- trap mechanism.
There are few better examples of financialisation and the contradictions of austerity Britain than the east London borough of Newham that hosted the 2012 Olympics. One of the most deprived areas in the country, Newham has since the Games seen an injection of investment that many residents we have spoken to feel has not improved their lives. Instead, they experience a housing crisis exacerbated by gentrification and impoverishment brought on by debt, cuts and neglect.
As we were working on this audit, Newham Council – as well as 14 other local authorities across England – announced they are legally challenging Barclays over the LOBO loans the bank sold them. We welcome this development, and see it as a testament to the work grassroots organisations, concerned residents and experts have done alongside us to raise the profile of the LOBO loan issue. 2
LOBO loans are merely a symptom of an unaccountable, undemocratic system that places the interests of finance above those of the people. This is why this report focuses not only on local government debt, but also on the democratic deficit and poor oversight structures that have enabled the LOBO loan scandal to happen.
In this report we explain why LOBO loans can be considered illegitimate. We have found the following: 1. LOBO loan contracts infringe the law and contain grossly unfair clauses that create excessive risk that was undisclosed to councils. 2. Councils were encouraged to take out LOBO loans by central government through HM Treasury reforms to Housing Revenue Account and interventions on Public Works Loan Board (PWLB) rates and repayment penalties. 3. LOBO loans result from an excessive power imbalance between too-big-to-fail banks and public institutions and were used by banks to circumvent regulation on derivative sales. Banks and brokers not only abused information asymmetries with councils, but also were involved in rigging the rates (LIBOR and ISDAfix) the loans were pegged to. 4. Treasury Management Advisors (TMAs), who are hired by councils to provide independent advice, recommended LOBO loans to councils while receiving commissions from brokers arranging the loans. Brokers in turn were being paid high fees by both by the council and the banks, which is not standard brokerage industry practice. 5. The council administrations committed actionable breaches when taking out LOBO loans, such as contravening national policies, borrowing from foreign banks without HM Treasury approval and not appropriately benchmarking the loans against PWLB debt. Councils are also destroying documents related to LOBO loans, or restricting access to them to councillors, journalists and residents. 6. Councils were not obliged to specify for what purpose LOBO loan debt was taken on, however there is evidence that in certain cases funds were not invested to benefit the population, and may have been used to speculate in financial markets. 7. Servicing LOBO loan debt in the context of austerity is exacerbating human rights’ violations for which Britain has been criticised by the United Nations.
We have evaluated Newham Council’s LOBO debt on the basis of the evidence above and concluded that Newham’s LOBO loans can be considered illegitimate. We have looked at the terms of each contract and the responsibilities of central government, banks, brokers and TMAs in the origin of the debt. We have highlighted breaches committed by the former administration in entering the loans and have looked at how the funds were invested for uses that did not benefit residents, such as potential interest rate speculation via Icelandic banks, or the Olympic redevelopment, including a loan for the West Ham stadium that has since been written off. We are particularly concerned that by servicing LOBO loans in the context of austerity, Newham Council is violating the human rights of its residents.
We recommend that central government and Newham Council take immediate steps to act on LOBO loans, avoid accumulation of illegitimate debt in the future and improve effective scrutiny of local government finance.
To denounce illegitimate debt and reclaim local democracy, we propose the following: 1. Suspending interest payments on LOBO loans until their legitimacy is clarified. 2. Cancelling LOBO loan contracts deemed illegitimate and returning all interest paid up to now. 3. Terminating budget cuts, and implementing immediate steps to repair the damage done to people and communities by the financial suffocation of essential services. 4. Introducing radical policy alternatives to ensure decisions are made transparently in the public interest, with meaningful resident participation and effective oversight not constrained by private sector profiteering and conflicts of interest. 3
Contents
1 Introduction • A citizen audit of Newham’s debt 5 • Content of the report 6
2 Illegitimate debt • What is illegitimate debt? 7 • What is a debt audit? 8 • Municipal debt cancellation 9
3 Local government finance • Structure of local government 11 • Local government income, expenditure and cuts 12 • Local government borrowing 14 • Regulation and scrutiny of local government finance 15
4 LOBO loans • What is a LOBO loan? 19 • Types of LOBO loans 20 • A ‘lose-lose bet’ for councils 21 • Breakage fee 21 • Interest over the lifetime of the loans 22 • Risk associated with the options 23
5 Are LOBO loans illegitimate debt? • Evaluating the legitimacy of LOBO loans 24 • A. Illegitimacy based on the terms of the contract 24 • B. Illegitimacy based on the role of central government in the origin of the debt 26 • C. Illegitimacy based on the role of the banks and intermediaries in the origin of the debt 28 • D. Illegitimacy based on the role of the council in the origin of the debt 35
6 An introduction to Newham • One of the poorest areas in the UK 39 • Cuts to council services 39 • The council’s democratic deficit 40 4
7 Newham’s LOBO debt • Long term borrowing 42 • Types of LOBO Loans 43 • Breakage cost and fair value 44 • Interest payments vs council tax 44 • Risk 45
8 Are Newham’s LOBO loans illegitimate? • Evaluating the legitimacy of Newham’s LOBO loans 46 • A. Illegitimacy based on the terms of the contract 46 • B. Illegitimacy based on the role of central government in the origin of the debt 48 • C. Illegitimacy based on the role of the banks and intermediaries in the origin of the debt 49 • D Illegitimacy based on the role of the council in the origin of the debt 51
9 Impact of debt on rights in Newham • Illegitimacy of Newham’s LOBO loans based on the impact of servicing the debt 54 • Right to housing 55 • Right to health 57 • Rights of children and young people 58 • Right to social security and adequate living 59 • Right to democracy 61
10 The citizen debt audit • Documenting the audit process 63 • Who 63 • Investigation 64 • Action 66 • Impact 72
11 Conclusions and recommendations • Urgent and immediate action 75 • Recommendations for central government 75 • Recommendations for Newham Council 77 • Conclusions 78 •
12 Appendix 79 5
1 Introduction
A citizen audit of Newham’s debt
This report documents Research for Action’s citizen audit of Newham’s bank debt. It evaluates the legitimacy of the council’s LOBO (Lender Option Borrower Option) debt in the current context of austerity and is intended as a template that can be adapted to address the illegitimacy of LOBO loans in other local authorities across the UK.
1. 10 reasons Newham Council is the The east London borough of Newham has been chosen as a case study as it is the largest LOBO UK’s debt capital, Debt Resistance UK, 12 Nov 2017 - http://loboloans.uk/ loan borrower as well as being one of the most impoverished local authorities in the country. The DebtCapital housing crisis, declining wages and cuts to benefits and services are causing widespread deprivation in the borough. So many people have to rely on borrowing to make ends meet that Newham has been called the ‘UK’s debt capital’1.
LOBO loans are expensive and risky loans that banks have sold to councils. They have been described by experts as a “lose-lose bet” for local authorities who could have borrowed more safely from central government. Instead, they will be saddled with this debt to the banking sector for many decades to come.
The near complete withdrawal of funding from central government LOBO loans are is making a bad situation worse. Grants to councils have been expensive and practically wiped out as part of a wholesale change in the way risky loans that local government is financed. The devastating results of this crisis banks have sold are already being seen with the bankruptcy of Northamptonshire to councils. County Council, with other councils soon expected to follow.
Local authorities spend a significant amount of income on interest payments on their debt. Loan repayments and interest payments are ring-fenced, which means that reducing them is not an option when cuts are imposed. Essential services are impoverished instead with significant impact on residents, especially the most vulnerable.
Prioritising debt repayments over residents’ well-being and human rights is symptomatic of the way financialisation disciplines borrowers. Public authorities are forced – by contract, political imposition, and moral judgement – to prioritise their obligations towards the financial sector over duties towards residents. Yet few questions are asked about how debts were accumulated.
We are concerned that austerity and the current crisis in local government funding serve to normalise the position of power of the financial sector, instead of acting as a wake-up call to reverse the financialisation of public institutions that puts the logic of finance before the rights of people.
We place our work within a broader movement building counter-power at the municipal level to resist the financialisation of public institutions and to demand a more accountable and participatory local democracy. People across the world are using audits to challenge illegitimate debt and the power structures that have imposed it.
A citizen debt audit aims to improve the accountability of a council towards its residents in managing funds in the public interest: looking at past and present processes to see what has not worked and why so failures can be avoided in the future; identifying who is responsible for the problems that have occurred so they can be held to account. A citizen audit is a bottom-up process that aims to engage residents and civil society in defining what is meant by making financial decisions in the public interest and the impact those decisions have on people’s lives. 6
A citizen debt audit Newham’s citizen debt audit builds on the investigative work aims to improve members of Research for Action have undertaken with the campaign the accountability of group Debt Resistance UK that uncovered the national LOBO loan a council towards scandal in 2014. Through extensive use of Freedom of Information its residents requests, Debt Resistance UK found that at least 240 councils in managing funds across the UK had taken out LOBO loans with banks, totalling at in the public interest. least £15 billion. Through supporting residents to raise the issue in their local councils as well as campaigning at a national level that generated media coverage and a parliamentary inquiry, Debt Resistance UK and Research for 2. Councils sue Barclays over Action have successfully raised attention to the problems related to LOBO loans. In July 2018, 15 controversial LOBO loans, L.Sharman, LocalGov, 16 July local authorities, including Newham, announced they would be taking legal action against Barclays 2018 - http://loboloans.uk/ on LOBO loans pegged to LIBOR - a rate the bank rigged.2 BarclaysCourtCase-LocalGov
This citizen debt audit has had no official involvement from the council, although individual councillors have been interviewed as part of the evidence gathering process. Results will be shared with decision-makers. Its overall aim is to encourage fruitful co-operation between the council, residents and civil society to improve local democracy.
Content of the report
We start this report by introducing in the next chapter the concept of illegitimate debt and by situating Newham’s citizen debt audit in the broader international context of debt audits and debt cancellations.
In chapter 3 we set the context for the audit with an overview of how local government finance works, how cuts are being implemented and the accountability structures currently in place. In chapter 4 we explain in detail what LOBO loans are and how they impact council finances, and in chapter 5 we explain why the debt can be considered illegitimate.
After this initial framing, we focus specifically on the audit of Newham’s debt. This section starts with an introduction into the political, social and economic context of the borough in chapter 6, followed by details of Newham’s LOBO loan debt portfolio in chapter 7. Chapter 8 provides an in-depth analysis of why Newham’s LOBO loan debt should be considered illegitimate, followed by an investigation of the impact of austerity on residents’ human rights in chapter 9.
The report concludes with a description of the audit process and the impact it has had in chapter 10, followed by our final recommendations in chapter 11.
Disclaimer: All information contained in this report is provided for information purposes only, and is not intended as legal advice and should not be taken as such. 7
2 Illegitimate debt
What is illegitimate debt?
1. ‘Illegitimate’ Loans: lenders, There is no official definition of illegitimate debt, but it can be broadly interpreted as debt that was not borrowers, are responsible, 1 J.Hanlon, Third World Quarterly, 2006, improperly granted and is thus the responsibility of the lender and should not be repaid. p. 211-226 Illegitimacy can relate to: • The contracting of debt – are the terms of the loans legitimate? • The origin of the debt – are the reasons why the debt was incurred in the first place legitimate? • The servicing of the debt – is the way the debt is being paid for legitimate?
Illegitimacy is broader than other arguments that are usually used to justify debt cancellation, such as odiousness, unsustainability and illegality, however it can encompass them: illegitimate debt can also be odious, unsustainable or illegal.
2. Les effets de transformations des The concept of odious debt has been mainly used to describe debt of dictatorial regimes. It was first Etats sur leur dettes publiques 2 et autres obligations financieres, introduced by Alexander Sack in 1927 : A.N.Sack, 1927 “If a despotic power incurs a debt not for the needs or in the interest of the state, but to strengthen its despotic regime, to repress the population that fights against it, etc, this debt is odious to the population of all the state.”
Odiousness has often been used as an argument for the non-payment of dictator debts by campaigners for debt justice internationally, such as CADTM (Committee for the Abolition of Illegitimate Debt).
3. ‘Illegitimate’ Loans: lenders, Cancellation of odious debts has also happened from the self-interest of a new occupying force. not borrowers, are responsible, J.Hanlon, Third World Quarterly, 2006, When the US invaded Iraq in 2003, the government argued that debts incurred under Saddam p. 211-226 Hussein’s dictatorship should not be seen as the liability of the new regime. A similar argument was used when the US occupied Cuba in 1898 and refused to assume debts originating from the previous Spanish rule.3
The term unsustainable debt is used when debt cancellation or restructuring is introduced when the borrower does not have enough income to service and repay the debt without sacrificing essential services. Cancellation of unsustainable debt is usually referred to as debt relief.
4. FAQs, Jubilee Debt Campaign - The most successful example of debt relief in recent history was a result of the Jubilee 2000 https://jubileedebt.org.uk/faqs Campaign4 which led to the cancellation of $130 billion of debt to 36 poor countries between 2000 and 2015. It was undertaken via the Heavily Indebted Poor Countries (HIPC) Initiative of the World Bank and the International Monetary Fund (IMF), and to qualify for debt relief, the countries had to meet certain criteria relating to income and governance. Despite its limitations – such as the lack of focus on the structural causes of poor countries’ indebtedness or the origin of the debts – the debt cancellation and the campaign that led to it were very effective in mainstreaming the idea of debt justice. Results of the HIPC initiative were striking: in countries that had their debts cancelled, children’s primary school completion rate increased from 45% in the 1980s to 66% by 2012, and births attended by a healthcare professional increased from 37% in 2000 to 50% in 2012.
Debt can also be deemed illegal, for example if it has been taken out in contravention of legislation. This could relate to the authority to sign off loans, to conditions attached to loans or to misconduct by the lender. 8
In 2015, the Greek Truth Commission on Public Debt found5 that much of the country’s debt owed 5. Preliminary Report of the Truth Committee on Public Debt, 18 June to the European Central Bank (ECB) and the IMF was illegal. This was because the ECB had 2015 by Truth Committee on the overstepped its mandate by imposing macroeconomic adjustment conditions to loans and the Greek Public Debt - http://www.cadtm. org/Preliminary-Report-of-the-Truth measures attached to IMF loans were in violation of domestic and international law as well as human rights treaties which Greece is a party to.
Examining the Illegitimate debt is not a legal or financial term. Instead, it legitimacy of encompasses more broadly debt that was not incurred in the public debt reverses the interest and where debt servicing and repayment is detrimental to the common focus from rights of the population. And unlike odiousness or unsustainability, the responsibility of the illegitimacy of debt can be independent from the status of the the borrower to that borrower. Dictatorship or poverty are not prerequisites for debt of the lender. cancellation. In other words, the statement associated to illegitimate debt is not “can’t pay” but “shouldn’t pay”.
Illegitimacy relates more widely to the processes and power relations that have produced the debt in the first place and that are reinforced by the debt itself. Crucially, illegitimacy speaksof power imbalances between the lender and the borrower, whether they be economic, political, or based on information asymmetries. This viewpoint counters a common assumption about financial transactions: their neutrality. Economic theory sees money as neutral, omitting the power that in the real world comes with it. When a borrower needs funds and enters into a contract with a lender with a balance sheet many times its size, it cannot realistically influence the contract terms. Examining the legitimacy of debt reverses the common focus from the responsibility of the borrower to that of the lender and makes it possible to hold lenders to account.
What is a debt audit?
Illegitimacy of debt is usually defined through an audit that involves looking in detail at the terms of the debt, the political realities of how it was accumulated and the social costs surrounding how it is repaid.
An audit can be participatory or expert-led, and the nature of it will depend on the political entity who leads the process: the indebted government; social movements, civil society or concerned citizens; the lender itself; an independent external body; or combinations of the above.
The most successful debt audit by an indebted government was realised in Ecuador in 20086 6. Ecuador postpones debt repayment, launches critical audit by the government of Rafael Correa, following pressure from social movements. It examined the report, Eurodad, 24 Nov 2008 - country’s loans from international financial institutions, found that much of it resulted from corruption https://eurodad.org/3124/?lang=es and lack of transparency and did not benefit the people of Ecuador. It brought the country to the default on $3.2bn. Ecuador later strategically bought back much of the debt for a third of the original value, freeing up funds to be used for social spending instead of debt repayments.
Following the financial crisis and the bailouts that brought the debt crisis to the global North, social movements in Europe started demanding the non-payment of loans they deemed illegitimate. This was the case especially in Greece and the Spanish state, hit hardest by the Eurozone crisis.
In Greece in 2015, as part of the first Syriza government, the Speaker of the Parliament Zoe Konstantopoulou initiated an official debt audit after years of pressure from social movements. The Truth Commission produced an interim report that declared a lot of the country’s debt, resulting from the Troika’s (European Union, IMF, ECB) bailouts, illegal, illegitimate and odious. Unfortunately, the commission’s work was cut short by the change of government following the July 2015 referendum.
Since the onset of the crisis, concerned citizens across the Spanish state have organised local debt audits as part of the PACD (Platform for a Citizen Debt Audit) and have collectively worked on exposing the illegitimacy of loans that did not serve the public interest. Loans were often taken out in the pre-crash lending boom and used for infrastructure projects that quickly proved to be white elephants. The PACD describes7 an audit as: 7. What the PACD means by ‘Citizen Debt Audit’ and ‘Illegitimate Debt’, PACD, 8 June 2013 - https:// auditoriaciudadana.net/2013/06/08/ “a process to, collectively, understand how we have arrived at the current situation; what what-the-pacd-means-by-citizen-debt- economic, social, cultural, environmental, gender and political impacts has this indebtedness audit-and-illegitimate-debt/ created.”
Following the Spanish 2015 municipal elections that lifted progressive citizen platforms into power, 8. Oviedo Manifesto 28 Oct 2016 - many debt audits were replicated within the institutions. Many councils have been disobeying article http://www.cadtm.org/Oviedo- Manifesto 135 of the Spanish constitution that forces local authorities to prioritise debt payments over social spending.8 Madrid initiated an official audit of debt and public policy that analysed the council’s economic policies through a lense of economic and gender inequality as well as environmental 9
9. Auditoría de la deuda y las políticas sustainability.9 The plan was to have a participatory phase that would engage neighbourhood públicas, Ayuntamiento de Madrid - http://loboloans.uk/MadridAudit assemblies in the discussion of illegitimacy. Unfortunately, the audit was jeopardised when the Councillor for Treasury Carlos Sanchéz Mato, who was driving the institutional part of the process, was removed in late 2017.
10. Norway makes ground-breaking An example of the lender deciding unilaterally on debt cancellation is provided by Norway.10 In 2007, decision to cancel illegitimate debt, Eurodad, 27 March 2007 - Norway cancelled US$80million it deemed it had illegitimately lent to five countries (Egypt, Ecuador, https://eurodad.org/302/ Peru, Jamaica and Sierra Leone) admitting that the lending was irresponsible and motivated by domestic interests: the loans had been granted in the 1970s to allow the countries to import ships from Norway. In cancelling the debt, the Norwegian government acknowledged that the loans had been provided mainly to secure employment for the domestic shipbuilding industry in crisis, rather than for the needs of the borrowing countries.
11. “Resolution on Sovereign Debt Examples of external independent bodies judging the legitimacy of debt at a national level Restructuring Adopted by General Assembly Establishes Multilateral are provided by the case laws of each country, like the municipal cases described below. At the Framework for Countries to Emerge international level, there is currently no agreed process for debt cancellation. In 2014, the UN General from Financial Commitments”, 11 United Nations, 9 September 2014 Assembly voted overwhelmingly for a resolution “towards the establishment of a multilateral legal https://www.un.org/press/en/2014/ framework for sovereign debt restructuring processes” that urges debtors and creditors “to act in ga11542.doc.htm good faith and with a cooperative spirit to reach a consensual rearrangement” on sovereign debt. However, a binding mechanism for sovereign debt restructuring is yet to be created.
Municipal debt cancellation
12. Closing the Swap shop, Most of the attention on unjust debt has been at the country level. However, debt cancellation can D.Campbell Smith, 2008 - http:// duncancampbellsmith.com/pdf/ also occur at the municipal level. One example is the Hammersmith and Fulham vs Hazell case ftm_chapter_6.pdf in the UK.12 In the 1980s, 137 UK councils were encouraged by banks and brokers to enter into multiple interest rate swap agreements. Hammersmith and Fulham Council was the largest player in the market and had signed hundreds of swap contracts with Goldman Sachs, placing taxpayers on the hook for £300 million in potential losses as interest rates moved against the councils in favour of the investment banks. The government as the lender of last resort to councils took an interest in the 13. British Court invalidates some case, as council defaults became a realistic proposition. Ultimately, judges in the High Court ruled financial swaps, M.Quint, The New York Times, 6 Nov 1989 - https://www. in 1989 that councils entering into standalone swaps and derivatives contracts was ‘ultra-vires’, or nytimes.com/1989/11/06/business/ 13 british-court-invalidates-some- outside councils’ legal powers. Despite an appeal by the banks , in 1991 the House of Lords upheld financial-swaps.html the ruling, deciding it was not the council’s role to be speculating upon interest rates, and taxpayers should not be held liable. The contracts were cancelled, much to the anger of banks.
14. UK-based banks accused of More recently, Italian municipalities including Milan were mis-sold derivatives by London-based massive mis-selling in Italy, J.Lynam, BBC, 11 Sep 2012 - banks. When the UK’s financial regulator failed to act, Milan’s chief prosecutor Alfredo Robledo https://www.bbc.co.uk/news/ resorted to locking the banks’ employees out of their Italian offices in 2009.14 The banks settled with business-19545849 Milan in 2012, tearing up the offending swap contracts and paying the city almost €500m.15 15. Mis-Selling Derivatives: Milan Court Finds Four Global Banks Guilty, L.Brinded, IBTimes, 2 July In France, local authorities have refused to repay in full loans to bailed-out Dexia bank, on the basis 2014 - https://www.ibtimes.co.uk/ mis-selling-derivatives-italy-city-milan- that they were misled into taking them out. One of them, Le Chevalier, a northwestern coastal town, deutsche-416758 stopped paying the variable Swiss franc-pegged rate on their loan that had reached 13%. Instead 16. French towns launch debt strike the mayor decided to pay only a fixed rate of 3% which corresponded to the initial rate of the loan.16 over “toxic” Dexia loans, L.Laurent, Reuters, 2 Oct 2012 - http://loboloans.uk/Dexia-France “I was not elected to raise taxes and to have those taxes “I was not elected go directly into banks,” said mayor Xavier-Martin of Le to raise taxes and to Chevalier, “Directly or indirectly, the state will end up having have those taxes go to pay the bill.” directly into banks.”
17. Saint-Etienne marque des points Another French city disobeying its creditors is Saint-Etienne in central France.17 In November 2011, en justice contre la Royal Bank of Scotland, C.Ferrero, Club Finances, the High Court of Paris dismissed the Royal Bank of Scotland’s request for the city to pay for the 25 Nov 2011 - http://loboloans.uk/Etienne-RBS swaps owed to the bank. The judge recognised the elected officials’ argument that the “speculative product [had been] wrongly proposed” to the cities.
18. UBS, others reach $100 million In the US, a group of cities led by Baltimore and the Central Bucks School District18 in Pennsylvania muni bond rigging settlements, J.Stempel, Reuters, 24 feb 2016 - accused banks of conspiring to fix prices for municipal derivatives, causing them to receive lower http://loboloans.uk/USMunicipalities interest rates than they would have got in a competitive marketplace. The resulting legal action prompted settlements against the banks amounting to hundreds of millions of dollars.
19. Notes on Wall Street’s Bid-Rigging Journalist Matt Taibbi who covered the municipal bid rigging scandal for Rolling Stone19 said: Scandal, M.Taibbi, Rolling Stone, 22 June 2012 - http://loboloans.uk/USMunicipalities “To me the most disturbing thing that came out in the Carollo trial was how easy it is for financial companies to rip off cities and towns once they start cooperating. Municipalities really have no defense against this sort of behavior; it’s not like they can arrange the bond issues themselves. So it surprises me that there hasn’t been more of an uproar from local 10
officials over this behavior. One can hope the only reason for that is that they don’t know about it.”
Local authorities’ illegitimate debt drains resources from the public sector as severely as on the national level. Often, these cases receive little attention from campaigners, media and regulators, but are fundamental in showing how local democracies can stand up to too-big-to fail banks. With this report, we hope to provide some tools to do so in the UK .
Template 1: Evaluating Illegitimate debt
The following arguments can be used to evaluate the legitimacy of debt:
A. According to the contract of the debt: • Debt which terms and conditions infringed the law (both national and international) or public policy • Debt which contract contains abusive clauses that are grossly unfair and unreasonable • Debt which conditions included policy prescriptions that violate national laws or human rights standards
B. According to the origin of the debt: • Debt resulting from excessive power of the lender over the borrower • Debt contracted under threat or pressure, or imposed on democratically elected institutions • Debt contracted to the detriment of the population, for the benefit or preservation of those in power • Debt where the lender profited extortionately from the borrower • Debt contracted fraudulently or due to corruption of public institutions • Debt resulting from breaches of regulation or due process • Debt contracted by a public body to lend to a third party • Debt public institutions have assumed on behalf of private companies without the approval of the population or their representative • Debt for which part or all of the information regarding its contracting was omitted or for which there is currently no access to the information • Debt contracted to finance projects or processes that generate – directly or indirectly – environmental impacts, social inequality or violate economic, social, cultural and environmental rights • Debt contracted to subsidise poorly designed or programmed projects that have not benefitted the majority of the population
C. According to servicing the debt: • Debt which payment interferes with the sovereignty of the population • Debt which interest payments are excessive, preventing social expenditure and causing the impoverishment of the population • Debt which interest payments generate violations of economic, social, cultural and environmental rights.
Source: adapted from PACD 11
3 Local government finance
Structure of local government
Local government in the UK is made up of democratically elected bodies referred to as local authorities or councils, responsible for the economic, social and environmental well-being of their residents and the local area.
The sovereign body of a local government is the full council Local authorities are organised in meeting, in which all councillors, elected by us every 4 years, vote. different ways and vary in size and The council meeting is responsible for: structure:
• agreeing the budget • In most of England there is a • appointing chief officers two-tier system composed of county councils, which provide • setting policy framework 80% of services for the entire • making constitutional decisions area, and district councils, which cover local services for smaller areas. While councillors are responsible for the overall decision-making, the implementation of decisions along with day-to-day operations is • In some areas of the UK there is a single-tier structure, which managed by unelected officers. By law, every local authority must can be a metropolitan area or a appoint three key officers: unitary authority.
• a Chief Executive who advises on policy, procedure and • London is a unique two-tier legislation system composed of 32 unitary authorities (plus the City of • a Monitoring Officer who advises on the legal framework in London) called boroughs, which which the council can operate provide local services, and the • a Section 151 Officer who monitors the council’s financial affairs Greater London Authority, which provides some of the city-wide services. The three officers have delegated authority to sign financial contracts, such as loans, on behalf of the council.
However, given the progressive financialisation of local government and the complexity of financial markets, many local authorities lack inhouse specialised knowledge and skills required for investing and borrowing, so they hire external firms for advice calledTreasury Management Advisors (TMAs). TMA’s advice and opinion is unregulated and not always independent, as we will see in chapter 5 when we look at how councils entered LOBO loan agreements.
1. 2000 Local Government Act - The 2000 Local Government Act1 imposed the following governance structures for councils in https://www.legislation.gov.uk/ ukpga/2000/22/contents England and Wales: • a directly elected mayor with a cabinet • a directly elected mayor and a council manager • a cabinet with leader • alternative arrangements for a committee system, which smaller English councils and Welsh councils can opt in to.
2. Who Stole The Town Hall, P. Latham, 2017 Several London boroughs, including Newham, have a Directly Elected Mayor (DEM) with a cabinet. The system has been criticised2 as it makes councils vulnerable to corruption due to the concentration of power in fewer hands. This is perhaps most evident in the way in which outsourcing business has 12 expressed enthusiasm over the system. In his 2017 book Who Stole The Town Hall, Peter Latham quotes evidence by the outsourcing giant Capita on the Draft 1999 Local Government (Organisation and Standards) Bill, saying “the introduction of [directly] elected mayors”, had made it easier to “develop and negotiate effective leading edge(...) partnerships”, and noting that a leader in control of the council was helpful. Worryingly, DEMs cannot be removed if evidence of corruption emerges. Latham also criticises the DEM system for being undemocratic and creating a new political class, where getting elected focuses on personality, not politics. The mayoral referendum system has not increased voter turnout either.
The cabinet overview and scrutiny system also marginalises non-executive councillors. According to research by the Association for Public Service Excellence quoted by Latham, 65% of executive members thought the reforms introduced by the Act had worked well, compared to 37% of non- executive members. The respective percentages for how many thought transparency had increased by separating transparency from scrutiny were 58% of executive members and 30% of non-executive members.
Local government income, expenditure and cuts
The UK has the highest population size per local authority in Europe and is one of the most centralised 3. Decentralisation: An assessment of progress, Greg Clark MP, 2012 - countries in the world. Most decisions on local government finance are taken by central government http://loboloans.uk/centralisedUK which determines how funds are allocated to each council and for what use.
The 2011 Localism Act4 strengthened the power of central government over local government even 4. 2011 Localism Act - http://www.legislation.gov.uk/ 5 further, as academics George Jones and John Stewart explain: ukpga/2011/20/contents/enacted 5. Who Stole The Town Hall, “It is ironic that a Localism Act contains so many means by which central government can P. Latham, 2017 prescribe how local authority powers are to be used, their procedures developed and criteria to be applied by them… [it] could as well have been called the Centralism Act.”
Local authorities find out their individual grant allocations from central government for thenext financial year through the Local Government Finance Settlement, which is published in December and approved by Parliament in February. Councils then set their budgets for the following year that runs from April to March. Local government funding amounts to approximately a quarter of all 6. Local Authority Revenue Expenditure and Financing: UK public spending. In the 2018/19 financial year, the total amount of grant funding from central 2018-19 Budget, England, MHCLG - government to councils in England is projected to be £48bn.6 http://loboloans.uk/2018Budget
Local authority income from central government has been progressively reduced since 2010 with the introduction of austerity measures. Under the coalition government’s plans that presented a major overhaul to public finances following the 2008 bank bailouts, local authorities were singled out to bear the highest proportion of cuts. The reforms to local government funding were phased in over a decade, resulting in today’s mounting crisis where local services are on the brink of collapse.
According to the National Audit Office (NAO), from 2010 to 2018, 7. Financial sustainability of Following the bank local authorities 2018, NAO - bailouts of 2008, funding from central government to local authorities has been cut https://www.nao.org.uk/wp-content/ by 49.1%. This figure is expected to rise to 56.3% by 2020,7 leaving uploads/2018/03/Financial- local authorities sustainabilty-of-local-authorites-2018. were singled out many councils struggling to meet their legal obligations to deliver pdf to bear the highest services to residents. In February 2018, Northamptonshire County 8. Struggling Northamptonshire Council declared it was effectively bankrupt, suspending all new County Council bans spending, proportion of cuts. BBC News, 2 Feb 2018 - https:// 8 expenditure decisions. More councils are expected to soon follow. www.bbc.co.uk/news/uk-england- northamptonshire-42920716 There is significant uncertainty as to how local government will 9. State of Local Government Finance LGiU MJ, 8 Feb 2018 - Chart 3.1: The jaws of doom 9 Survey, be financed post 2020. A recent survey among council officials https://www.lgiu.org.uk/report/lgiu-mj- £60bn suggested that 80% of councils fear for their financial sustainability state-of-local-government-finance- survey/ Funding and that Northamptonshire CC is just the tip of the iceberg. Net expenditure £55bn Councils do have other sources of funding available aside from 10. Local Authority Revenue Expenditure and Financing: government grants. The percentage of income from each source 2018-19 Budget, England, MHCLG - http://loboloans.uk/2018Budget £50bn varies significantly for each authority based on size, location, local wealth and social needs, but is projected to average as follows for 2018/19:10 £45bn • central government grants (50%) • council tax (31%) £40bn • retained income from business rates (18%) 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 • reserves, charges for council services and other items (1%)
Source: Room151 The relative percentages between these different sources of income 100% 18 21 21 1% 80% 18% 19 20 36 60% 50% 40% 41 31% 51
20% 46 20 8 0% 2010/11 2015/16 2019/20
Central government Council tax Central government (includes redistributed business rates) Council tax Business rates Other Business rates (locally retained) Other
0%
11% -10% 4% -20% 5% 37% 5% -30% 9% -40% 12% 17% -50%
-60% Education Adult Social Care Police Children Social Care Cultural Housing Environment Highways & transport Planning Health Other Environmental Central service Highways & transport
£100bn Other £90bn 7% £80bn
Banks £70bn 20% £60bn £50bn PWLB £40bn 73% £30bn £20bn £10bn
PWLB Banks Other 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2010/11 2011/12 2009/10 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
PWLB Banks Other