This article is dedicated to the memory of Youssef Darwish 1910-2006 (in Arabic: يوسف درويش), the Egyptian activist who relentlessly fought for justice and internationalism. Repeatedly jailed and tortured for his communist commitment and his crusade for human rights (he was a lawyer), he fought till his last breath. |1| In 2005, shortly before his demise, he had contacted the CADTM International Network as he wanted to launch CADTM-Egypt.
Egypt’s early successful attempt at self-development was abandoned
During the first half of the 19th century, Egypt, although still under Ottoman rule, initiated a major project for industrialization and modernization |2|. Georges Corm summarizes the issue as follows:“Muhammad Ali achieved his most illustrious feat in Egypt when he installed state-run factories, thus laying the foundation of a state capitalism reminiscent of Japan’s Meiji era” |3| (Trans:CADTM). Egypt carried out this industrialization venture throughout the first half of the 19th century without recourse to external debt and by mobilizing internal resources. In 1839-1840, a joint military intervention by Britain and France, followed a little later by a second attack (this time, by Britain and Austria), compelled Muhammad Ali to give up control of Syria and Palestine, regarded as home turf by these powers. (See below map of Egypt’s expansion under Muhammad Ali).
The second half of the century witnessed a radical turn. Muhammad Ali’s successors caved in to British pressure and adopted free trade, dismantling state monopolies and relying heavily on external debt. This was the beginning of the end. The era of Egyptian debt was set in motion: Egypt would soon concede its infrastructure to the Western powers, European bankers and unscrupulous entrepreneurs.
The European bankers plan to lend generously beyond Western Europe
During 1850-1876, the bankers of London, Paris and other financial centres were looking forward to investing significant sums in Egypt as well as in the Ottoman Empire and other continents (Europe with the Russian Empire, Asia including China in particular, in Latin America). |4| Several banks were founded in Europe to organize financial flows between Egypt and the European financial centres: the Anglo-Egyptian Bank (founded in 1864), the Franco-Egyptian Bank (founded in 1870 and directed by the brother of Jules Ferry, a significant official of the French government) and the Austro-Egyptian Bank (founded in 1869). The latter had been founded under the auspices of the Creditanstalt where the Rothschilds of Vienna had stakes. The major London banks were also particularly active. The London bankers and the French bankers specialized in long-term and short-term loans respectively. The latter was more lucrative since the 1873 banking crisis affecting London and Vienna.
An apparent but fleeting success of Egypt’s economic development based on debt and free trade
Initially, the new model based on debt and free trade seemed to work very well. However, in reality, this apparent success stemmed from external factors and the Egyptian authorities had no inkling thereof. In fact, Egypt temporarily benefited from the conflict between the southern and northern states of North America. Cotton exports from the southern states plummeted as a result of the Civil War (1861-1865) on the other side of the Atlantic. This bolstered global cotton prices. Egypt, a cotton producer, reaped massive profits from its cotton exports. Consequently, Ismail Pasha’s government borrowed more from the banks (mainly British and French). When the Civil War ended, the southern states resumed their cotton exports and cotton prices plunged. Egypt depended on the revenues from its global cotton sales (mainly to the British textile industry) for repaying its debt to the European bankers. The decrease in export revenues led to the onset of Egypt’s troubles with repayments.
This did not prevent bankers, especially the British ones, from disbursing long-term loans (20-30 years) to Egypt, or the French bankers from granting new, mainly short-term, loans because these fetched towering interest rates. The historian Jean Bouvier described this enthusiasm as follows: Credit institutions, such as the Bank of Paris and the Netherlands, Credit Lyonnais, Société Générale, Comptoir d’escompte de Paris, Crédit Foncier – who had previously participated in rather slapdash business deals regarding Egypt’s “advances” and “loans”, began to systematically hunt for such investments and explore government operations in underdeveloped countries. In April 1872, as the Crédit Lyonnais was waiting alongside Oppenheim to issue an “advance” of £ 5 million to Egypt for 18 months, @14% p.a – its director Mazerat confided in a letter: “By way of this big advance we hope to ensure next year’s loan.” |5| (Trans: CADTM)
Egyptian debt reached unsustainable levels
In 1876, the Egyptian debt was £ 68.5 million (against 3 million in 1863). In less than 15 years, external debts increased 23 times, while revenues increased 5 times only. The debt service absorbed two-thirds of state revenues and half of export earnings.
The loans actually reaching Egypt were insignificant as the major part was paid to bankers.
Let us examine the loan of 1862: the European bankers issued Egyptian bonds with a nominal value of £ 3.3 million, but they sold them at 83% of the nominal value, which means that Egypt received only £ 2.5 million before deducting fees charged by the bankers. The amount repayable by Egypt in 30 years soared to nearly £ 8 million considering the depreciation of principal and interest payments. Another example is the 1873 loan: the European bankers issued Egyptian shares for a nominal value of £ 32 million and they sold them at 30% discount. Consequently, Egypt received less than £20 million. The amount to be repaid in 30 years was £77 million (11% real interest + principal depreciation).
Obviously, this increase in debt and interest charged was untenable. The financial conditions imposed by the bankers made repayment unsustainable. Egypt was forced to borrow constantly for servicing its outstanding debt.
From 1870, the bankers coerced Egypt’s Khedive Ismail Pasha |6| into selling the countries’ infrastructures and granting various concessions in order to get cash for debt repayment. Similarly, he had to hike taxes on a regular basis.
After some fifteen years of external debt (1862-1875) Egypt’s sovereignty was compromised. Hounded by its creditors, the Egyptian government gave up its shares in the Suez Canal Company (inaugurated in 1869) to the UK in 1875. |7| Egypt sold its holding of 176,602 Suez shares – nearly half of the Universal Suez Ship Canal Company’s capital – to the British government at the end of November 1875 basically to meet the deadlines of December 1875 and January 1876 for paying hefty instalments of debt. Thus the British government became a direct creditor of Egypt, since the purchased securities were not meant to generate any profit before 1894. During this period the Egyptian government pledged to pay the buyer an interest of 5% p.a. on the purchase price, i.e. about one hundred million francs.
Historian Jean Bouvier writes: According to a Crédit Lyonnais official “the Khedive still owned the railways, valued at 300 million”. He also had the right to 15% of the Suez Company’s annual net profits. Once he could clear the year-end deadlines, thanks to the 100 million earned from the sale of shares, the Khedive renewed the “advances” from the Anglo-Egyptian Bank and the Crédit Foncier in January 1876 and early February @14% p.a for a term of 3 months. As guarantee he offered his 15% share in the Suez fees and the revenues from the city of Alexandria and his port rights. The Société Générale was involved in this deal of 25 million francs. (Trans: CADTM)
Egypt, like other countries, suspended debt payments in 1876
Despite its frantic efforts to pay off the debt, Egypt finally suspended its debt servicing in 1876. It is important to note that during the same year other countries also defaulted; for example, the Ottoman Empire, Peru (one of the major South American economies at that time) and Uruguay. We must therefore explore the reasons from an international perspective. The banking crisis which erupted in New York, Frankfurt, Berlin and Vienna in 1873, gradually affected the London bankers. Consequently, creditors were less keen to lend to peripheral countries, yet these countries needed to borrow constantly just to repay their outstanding debts. Moreover, the economic situation fell through the floor in the North and the exports of the South declined. So did export revenues, which contributed to the repayments. This international economic crisis, originating in the North, was a major factor behind the wave of suspensions of payment. |8| However, we must identify the distinctive features of each case individually.
In the case of Egypt, the French bankers, less affected by the crisis than others, made merry of the situation and issued mostly short-term loans to Egypt at enormous interest rates. In 1876, they tightened the noose on Egypt’s neck and restricted credits. This compelled Egypt to suspend repayments and accept the creation of a Public Debt Fund (Caisse de la Dette publique) controlled by the UK and France and pulled off in agreement with the London bankers.
The creation of the Public Debt Fund under British and French control
The British and French governments, rivals as they were, agreed to bring Egypt under their dual control through the Public Debt Fund. During the 1840s & 1850s and from 1898, they had done the same to Greece |9| and in 1869 to Tunisia |10|. They followed the same strategy with the Ottoman Empire in 1881. |11| In Greece and Tunisia, the International Financial Commission was the organization to allow the creditor powers to exercise command. In the Ottoman Empire, its counterpart was the Ottoman Public Debt Administration. In Egypt, the Public Debt Fund established in 1876 played this role. |12|
The Public Debt Fund had full control over a host of state revenues and represented the UK and France who ran it. Its establishment was followed by a restructuring of Egyptian debt, which met the expectations of all the bankers concerned because reduction of stocks was not allowed. The rate of interest was increased to 7% and repayments were scheduled over 65 years. This factor, along with Egypt’s state revenues (which the Fund could bleed dry), ensured a comfortable income for both France and the UK.
A letter from Alphonse Mallet (private banker and regent of the Bank of France) to William Waddington (French Minister for Foreign Affairs and future President of the Council of Ministers) makes it evident that the priority task during the resolution of the 1876 Egyptian debt crisis was to satisfy the bankers’ interests. What follows is a translated extract from the banker’s letter to the minister, written on the eve of the 1878 Berlin Congress, scheduled to discuss the fate of the Ottoman Empire (particularly, its assets in the Balkans and the Mediterranean): “My dear friend … If the Congress convenes as expected, all we’ll have to do is to devise an international mechanism … which can exercise an effective control over the administrative agents of the government, the courts, the collection of revenue and expenses. What has been done in Egypt under pressure from private interests without any consideration for the European public order both for the courts and the debt service … can serve as the cornerstone.” (Letter of May 31, 1878. Mémoires et documents, Turkey, No.119. Archives of the Ministry of Foreign Affairs.) |13|
The geostrategic stakes for the major European powers
While the establishment of the Public Debt Fund, followed by the Egyptian debt restructuring, primarily satisfied the bankers’ interests, the interests of the great powers (origin of the bankers) were also directly at stake. The UK was by far the leading European and global power. It wanted to control and completely dominate the Eastern Mediterranean area, whose geopolitical significance had increased owing to the Suez Canal and its direct sea-routes to India (a part of the British Empire) and the rest of Asia. The UK wanted to marginalize France, which had some influence in Egypt by dint of the banks and the Suez Canal (its construction was financed through the Paris stock exchange). The need of the hour was, first, to satisfy the interests of the French bankers (closely linked to the French authorities, this is the least we can say), then to offer compensation in another part of the Mediterranean, so that France could be talked into leaving the entire region to England. That is the backdrop for the tacit agreement between London and Paris: Egypt would be returned to the UK while France would have full control over Tunisia. The dates were not yet finalized in 1876-1878, but the plan was very clear. We should also remember that the UK had purchased Cyprus from the Ottoman Empire in 1878 and it was another pawn in the British domination of the eastern Mediterranean.
It was not only France and the UK that settled the future of Tunisia and Egypt. The recently-unified Germany, the most important upcoming European power alongside the UK, also had its say. Otto von Bismarck, the German chancellor was obviously clear-sighted: he stated repeatedly during secret diplomatic conversations that Germany would not take offence if London and France took control of Egypt and Tunisia respectively. In return, Germany wanted a free hand in other parts of the world. French political leaders were also well aware of Bismarck’s motives. In 1870-1871, France had suffered a humiliating defeat at the hands of Germany and had lost Alsace and Lorraine. By “offering” Tunisia to France, Bismarck wanted to distract Paris from the Alsace and Lorraine issues by way of a consolation prize. This matter has been extensively documented.
In short, the fate of Egypt and Tunisia foretold the great partition of Africa for which the European powers would fight a few years later, at another conference held in Berlin in 1885. |14|
The military occupation of Egypt begins in 1882 and the country is transformed into a protectorate
In the case of Egypt and Tunisia, the European powers used Debt as their most powerful weapon for ensuring domination, leading to the total submission of previously independent states.
Following the establishment of the Public Debt Fund, the French banks went all out to collect more payments and reap profits while they granted fewer loans. From 1881, French banks stopped disbursing new loans to Egypt. They simply collected repayments against restructured outstanding debts. When a stock market crisis broke out in Paris in January 1882, the French banks had other concerns than Egypt.
The Public Debt Fund imposed extremely unpopular austerity measures on Egypt. Those led to a rebellion; including a military one (General Ahmed Urabi defended nationalist positions and resisted the dictates of the European powers). Britain and France used the rebellion as a pretext and sent a task force to Alexandria in 1882. Finally, Britain went to war against Egypt, staged a military occupation and turned the country into a protectorate. Egypt’s development was greatly throttled by the British rule and it was subjected to the interests of London. As Rosa Luxemburg wrote in 1913: “European capital has largely swallowed up the Egyptian peasant economy. Enormous tracts of land, labour, and labour products without number, accruing to the state as taxes, have ultimately been converted into European capital and have been accumulated”. |15|
The Public Debt Fund was abolished in July 1940 |16| (See illustration below). The British Agreement, forced upon Egypt in 1940, ensured a financial and colonial domination since the UK could now pursue its collections against an everlasting debt. Egypt’s 15 year-long pursuit for a partially autonomous development came to fruition when progressive young soldiers led by Gamel Abdel Nasser overthrew the Egyptian monarchy in 1952 and the Suez Canal was nationalized on July 26, 1956. |17|
Anderson, Perry. 1976. L’État absolutiste. Ses origines et ses voies, French version, 1978, Paris : Maspero, 2 volumes, pg 203 & pg 409. (Original in English: Lineages of the Absolutist State. First published by NLB, 1974. Verso Edition 1979)
Batou, Jean. L’Égypte de Muhammad Ali. Pouvoir politique et développement économique, 1805-1848. Annales. Économies, Sociétés, Civilisations. 1991, 46th year, N°2. pg. 401-428, read in French
Bouvier, Jean. 1960. Les intérêts financiers et la question d’Égypte (1875-1876), Revue Historique, 1960, T. 224, Fasc. 1, pp. 75-104. (in French)
Corm, Georges. 1982. L’endettement des pays en voie de développement: origine et mécanisme in Sanchez Arnau, J.-C. coord. 1982. Dette et développement (mécanismes et conséquences de l’endettement du Tiers-monde), Editions Publisud, Paris (in French). (English version: Debt and Development, Praeger, New York, 1982).
Driault, Edouard and Lhéritier, Michel. 1926. Histoire diplomatique de la Grèce de 1821 à nos jours, Paris: Presses universitaires de France (PUF), 5 volumes (in French).
Foreign Affairs, United Kingdom, Treaties. 1940. CONVENTION RELATIVE A L’ABOLITION DE LA CAISSE DE LA DETTE PUBLIQUE EGYPTIENNE. 17 July 1940. London.
Luxemburg, Rosa, 1913. The Accumulation of Capital. English edition first published in 1951 by Routledge and Kegan Paul.
Mandel, Ernest, 1972, Le Troisième âge du capitalisme, Paris: La Passion, 1997, pg 500 (in French). (In English: Late Capitalism. London, NLB, 1976)
Marichal, Carlos, 1989. A Century of Debt Crises in Latin America, Princeton: Princeton University Press, pg 283.
The Ministry of foreign affairs, France. 1876. Décret d’institution de la caisse de la dette publique d’Égypte… et 6 autres décrets relatifs au Trésor et à la dette, Paris, 1876. 30 pages (in French). Retrieved May 14, 2016
The Ministry of foreign affairs, France. Arrangement financier avec la Grèce : travaux de la Commission internationale chargée de la préparation du projet, Paris, 1898, 223 pages. (in French)
Reinhardt, Carmen and Rogoff, Kenneth, Cette fois, c’est différent. Huit siècles de folie financière, Paris, Pearson, 2010. (in French). (In English: This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, NBER Working Paper No. 13882 Issued in March 2008.http://www.nber.org/papers/w13882)
Reinhardt, Carmen M., and Sbrancia, M. Belen. 2015. The Liquidation of Government Debt.Economic Policy 30, no. 82 : pg 291-333
Sack, Alexander Nahum, 1927, Les effets des transformations des États sur leurs dettes publiques et autres obligations financières, Recueil Sirey, Paris. (in French)
Thiveaud, Jean-Marie. Un marché en éruption: Alexandrie (1850-1880). Revue d’économie financière, 1994, n°30. Les marchés financiers émergents (II) sous la direction de Olivier Pastré. pg. 273-298 (in French).
Toussaint, Éric. 2004. La Finance contre les peuples. La bourse ou la vie. (in French) CADTM-Bruxelles/CETIM-Genève/Syllepse-Paris, 640 pg.
Toussaint, Éric. 2016. http://cadtm.org/Newly-Independent-Greece-had-an
Toussaint, Éric. 2016. http://cadtm.org/Greece-Continued-debt-slavery-from
Toussaint, Éric. 2007. The World Bank: a never-ending coup d’état: the Hidden Agenda of Washington Consensus. VAK, India, 2007.
Wesseling, Henri. Divide and Rule: the Partition of Africa, 1880-1914. Praeger.1997 (first edition in Dutch, 1991).
Acknowledgements: The author’s thanks for review and suggestions go to: Gilbert Achcar, Mokhtar Ben Afsa, Omar Aziki, Fathi Chamkhi, Alain Gresh, Gus Massiah, Claude Quémar, Patrick Saurin, Dominique Vidal.
The author accepts full responsibility for any errors that may occur in this work.
Translated by Suchandra de Sarkar in collaboration with Christine Pagnoulle.
|2| Batou, Jean. L’Égypte de Muhammad Ali. Pouvoir politique et développement économique, 1805-1848. Annales. Économies, Sociétés, Civilisations. 1991, 46th year, N°2. pg. 401-428 (in French) (English version:“Muhammad Ali’s Egypt, 1805-1848: A Command Economy in the 19th Century?” in Between Development and Underdevelopment. The Precocious Attempts at Industrialization of the Periphery 1800-1870. Geneva: Librairie Droz, 1991. Ed. Jean Batou).
|3| Georges Corm. L’endettement des pays en voie de développement: origine et mécanisme in Sanchez Arnau, J.-C. coord. 1982. Dette et développement (mécanismes et conséquences de l’endettement du Tiers-monde), Editions Publisud, Paris, p.39. (in French) (English version: Debt and Development, Praeger, New York, 1982). Regarding Georges Corm’s reference to Japan’s Meiji experiment, it should be noted that Japan had almost no recourse to external debt for its significant economic development on its way to becoming an international power in the second half of the 19th century. Japan experienced a significant autonomous capitalist development following the reforms of the Meiji period (introduced in 1868), which, among other factors, prevented the West from making financial inroads in its territory while eliminating on-site obstacles to the movement of indigenous capital. At the end of the 19th century, Japan was transformed from a secular autarky to a robust imperialist expansion. To clarify, by this statement I do not claim that the absence of external debt was the only factor behind Japan’s leap to a vigorous capitalist development and its adoption of an aggressive foreign policy, whereby the country reached the ranks of major imperialist powers. Other factors equally mattered but they are too many to catalogue here. However, the lack of external debt evidently played a fundamental role. To learn more, read Perry AndersonLineages of the Absolutist State (first published by NLB, 1974. Verso Edition 1979) on Japan’s transition from feudalism to capitalism.
|4| During 1820-1826, loans flowed freely from the London and Paris bankers towards Greece and the newly independent Latin American states in particular. Between 1822 and 1825 the London bankers lent £20 million to the new Latin American leaders (Simon Bolivar, Antonio Sucre, José de San Martín etc.) who victoriously led the independence movement against the Spanish monarchy. During 1824-1825, two loans from London to Greece amounted to £ 2.8 million, i.e 120% of the country’s GDP at that time.
|5| Memo from Mazerat to Letourneur, Director of Crédit Lyonnais, April 4, 1872 as quoted by Jean Bouvier in Les intérêts financiers et la question d’Égypte (1875-1876), Presses Universitaires de France, Revue Historique, T. 224, Fasc. 1, 1960 (in French).
|6| Literally viceroy, hereditary title granted by Egypt’s Ottoman governor between 1867 and 1914.
|7| See http://www.chassan.org/ismailia/boo… (in French) and http://www.lesclesdumoyenorient.com… (in French).
|8| Also remember that the suspension of debt payments was not the prerogative of non-European economies during the 19th century. Spain had suspended its debt repayment six times, the Austro-Hungarian Empire five times, Portugal and Greece thrice, Prussia twice and Russia once. See Edouard Driault and Michel Lhéritier, 1926,“Histoire diplomatique de la Grèce de 1821 à nos jours” Vol IV, p. 301 (in French) (The Diplomatic History of Greece from 1821 to Today). Also see Carmen Reinhardt and Kenneth Rogoff, This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, NBER Working Paper No. 13882 Issued in March 2008.http://www.nber.org/papers/w13882)
|9| See Eric Toussaint http://cadtm.org/Newly-Independent-Greece-had-an, published on April 26, 2016. After the first experiment with a finance commission (1840-1850), an International Financial Commission was imposed on Greece in 1898 and it had full authority over much of the state’s income. See Eric Toussainthttp://cadtm.org/Greece-Continued-d… published on May 17, 2016.
|10| My next article will be on Tunisia’s surrender to France in 1881.
|11| See Louise Abellard. L’Empire Ottoman face à une “troïka” franco-anglo-allemande : retour sur une relation de dépendance par l’endettement] (in French), published on October 17, 2013.
|12| See le décret de création de la Caisse de la Dette 1876 (in French).
|13| Quoted by Jean Bouvier in Les intérêts financiers et la question d’Égypte (1875-1876), Presses Universitaires de France, Revue Historique, T. 224, Fasc. 1 (1960). (in French)
|14| See Henri Wesseling. 1996. Le partage de l’Afrique – 1880-1914, Paris, Denoël. Folio Histoire, 2002 (in French), p. 840. First edition in Dutch, 1991, (English translation: Divide and Rule: the Partition of Africa, 1880-1914. Praeger.1997)
|15| Rosa Luxemburg. The Accumulation of Capital. Section three: The Historical Conditions of Accumulation. Chapter 30: International Loans. https://www.marxists.org/archive/lu…
|17| See Éric Toussaint. The World Bank: a never-ending coup d’état: the Hidden Agenda of Washington Consensus. VAK, India, 2007.
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