The aim of this blackmail is to convince the current government and Greek political class to vote through a "smash and grab" programme of privatisations and social spending cuts dictated by the Eurozone core countries in the face of the vocal opposition of the majority of the Greek population shown on the streets in these last weeks.
Today Greece is the target of pressure and brinkmanship by the European Central Bank and the International Monetary Fund who are holding back the next installment in the so-called "bailout" agreed last year. The payment of €12 billion was originally scheduled for this month and without it Greece will default on repaying its existing bonds due for redemption on Jul 15.
The aim of this blackmail is to convince the current government and Greek political class to vote through a "smash and grab" programme of privatisations and social spending cuts dictated by the Eurozone core countries in the face of the vocal opposition of the majority of the Greek population shown on the streets in these last weeks.
Yet there is more than simple brinkmanship in the current speculations about a possible collapse of the Euro in the business pages and nightly TV newscasts. There has been clear evidence of division on how to deal with this crisis between France and Germany, the two most powerful core Eurozone countries, and between them and the ECB and all three and the IMF. This division and disarray between the core powers themselves, is what is adding the uncertainty and unpredictability that has transformed this manfactured squeeze into a genuine crisis of the constitution of the Eurozone.
But first we need to step back to understand the conditions that have led to the ECB\EC\IMF "troika" putting the squeeze on Greece in the first place, before moving on to the causes of the emerging tensions within the core and then, finally, to look at some of the possible results of what happens if this particular game of chicken ends in a crash rather than the desired submission of the troublesome Greeks and their fellow PIGS.
Those bonds, say in Ireland's case, paying 8% interest, would be bought by banks like AIB & BOI for a certain sum, say €5 billion. Then these banks would then use these bonds as collateral to borrow the cost of their purchase, the €5 billion from the ECB at the latter’s base lending rate of 1%. So AIB and BOI would receive 8% on the €5 bn from the state (i.e. us, the taxpayer) and they would only pay out the 1% to the ECB. In the parlance, they would make the 7% spread as pure profit (at our expense). Thus the so-called sovereign debt crisis is simply the public face of the underlying bank crisis, not only in its origins (the initial bank guarantee and subsequent injections of around €70 - €90 bn in Ireland’s case) but even in the ongoing high rates the state is paying on its bonds.
What this means that for us peripheral countries like Ireland, Portugal and Greece who got squeezed out of the international borrowing market, our banks have huge holdings of state bonds, most of which are actually held by the ECB against cash loans to said banks. But we need to remember why the banks in the peripheral countries are effectively bankrupt in the first place.
The banks of the Peripheral countries are bust because of the huge inflow of money from the banks, pension funds and investment companies of the Core countries between the creation of the Eurozone and the 2008 crash. This money flowed from the core to the periphery because the higher rate of growth in the peripheral countries (themselves due to the impending Eurozone membership) promised the possibility of better returns than the rates in the core countries, still depressed by the aftermath of re-unification of Germany. The reason the governing political castes of Ireland, Greece and the other PIGS didn't dare let the bankrupt banks actually fall, is that this would have resulted in losses to the banks of the UK, France and Germany. The very sources of the capital that our local capitalist classes are entirely dependent on.
As a central bank, that's not necessarily a big problem as it is possible simply to print more money to balance the books. But the problem with this is a political one. Effectively this is the same scenario that resulted in the breakup of Yugoslavia in the 1990s.
Today, the chickens have come home to roost, in a certain way. For secessionist Croatia’s greatest supporter Germany, along with France and the ECB, now find themselves in a similar situation to Yugoslavia, on this level at least. For the ECB to print Euros to cover losses on peripheral bonds, would also effectively be a transfer from the surplus countries in the Eurozone core to the currently bankrupt peripheral countries.
At least this is how it is seen politically amongst the increasingly eurosceptic right-wing political forces within "Northern" countries such as Germany, Benelux, Finland and others. Hence why their right-wing politicians are increasingly beating the drum for no more bailouts for Greece or the other PIGS. This despite the fact that the bailouts are actually designed to shield the savings of the core countries from the losses that were originally incurred in the great crash. In this sense, as one recent commentator said, the idea that the current Greek default crisis could become a second "Lehman" is mistaken. It's still the same loss, all that has happened in the intervening time is that it's moved from the balance sheet of the banks to the balance sheet of the state. Of course the popular tabloids in the Northern Eurozone countries like to say that the losses currently booked on the balance sheets of the Peripheral states are entirely of the PIGS own makings. But then the interconnectedness of modern finance capitalism was never the stuff of tabloid stories.
However, believe it or not, the actual amount owed out by Greece is relatively minor. Around €340 bn, which may sound like a lot, but on a European scale is not unmanageable, in purely economic terms. As already discussed, this is not a purely economic matter, of course. But getting back to monetary matters, although the immediate “value at risk” figure may be small, like Lehman, it is the knock-on effects that are more threatening.
The fear of “contagion” then does haunt the boardrooms of Europe. The possibility that the collapse of Greek banks, that a default would bring about, could have knock-on effects into the handful of global banks that sell over 95% of all corporate CDS in the world financial system. These giants are themselves so thickly interconnected as counter-parties to each other, that the fall of any one of them risks bringing the others down with it, like a set of bowling pins. Other tentacles of financial interconnectedness also link PIGS banks with the rest of the EU and world financial system in ways that make the fallout from a collapse in Greece potentially as serious as the 2008 AIG shock.
Since the beginning of the year it has become clear that the Greek bailout agreed last May would run out by early 2012, so a second bailout would need to be agreed. In the negotiations around this second bailout, a difference emerged between France and the ECB on one side, and Angela Merkel’s German administration on the other. The Germans have, up until last Wednesday, been insisting that a portion of the cost of the ongoing support should be born by the private bondholders of Greek debt, through a compulsory exchange of current bonds for ones with repayment delayed for seven years.
Apparently the US, via its current proxy, the acting head of the IMF John Lipsky, has seen an opportunity to jump in and ratchet up the crisis. In a particularly virtuoso display of neck, Lipsky, having blocked the payment (at US Treasury Secretary Tim Geithner’s request - it was Geithner’s people who warned the Eurocrats on Saturday that the payment would likely be blocked) went on to release a press statement urging the Europeans to get their act together and warning of dire consequences if they didn’t stop letting their squabbles block progress. Asked the next day, by gob-smacked financial journos, if his categorisation of the Franco-German infighting as “unproductive” was unusually blunt, Lipsky laughed it off saying that he thought he had asked for that word to be removed in the final release, much to the hilarity of the assembled journos. Clearly Lipsky is having fun sticking it to the Euros and no doubt his political masters in Washington are also enjoying the chance to backstop the core powers, just when they had decided that things were getting a little hot in Athens and now might be the time to back out of this particular game of chicken.
But why exactly were the Germans pushing in a different direction to the French and the ECB? The ECB’s opposition to burning the bondholders has been explained above, the French position in some ways also comes down to money matters. The exposure of French lenders to private Greek debt is nearly four times that of German corporations.
But in other ways, the difference between French and German positions is all to do with politics. Merkel’s Christian Democrat-led coalition’s grip on power on Germany is getting increasingly more precarious. Cynics say that Schäuble’s and Merkel’s initial position of making the private lenders share some of the pain was mainly for domestic consumption by German voters whipped up into high indignation about seeing their taxes go to rescue what the tabloids describe as the lazy, corrupt and incompetent “southerners” (including Ireland).
In actual fact, we are already in a Europe of transfers. Only the transfers are from the peripheral countries to the core. The so-called bailout deals are actually loans, loans at rates of interest far above what the lending countries themselves are paying for the money they lend. The net effect of these ECB & IMF brokered loans to Greece, Ireland and Portugal is a transfer of money from the borrowers to the lenders.
This then, is the nub of the problem. In any shared monetary space, be it the re-unified Germany or Yugoslavia post-1989, or indeed the Sterling Area of the old British Empire, where there is economic inequality at the beginning, then there is necessarily a system of transfers, one way or another.
In the old imperial model, whenever one of capitalism’s periodic crises hit, the core regions would try to push out the negative effects of economic depression, unemployment and destitution, to the population of the periphery, so as to maintain the loyalty of the workers in the core.
By contrast, a genuine commonwealth model, such as Western Germany applied to the process of German re-unification, requires transfers in the opposite direction, from the wealthier regions to the poorer ones.
The only possibility which is completely excluded, in the medium term, is the neoliberal utopian fudge that was adopted in the top-down constitution of the Eurozone as a shared economic space with no transfers between national entities. Like the adage about all military plans going awry on first contact with the enemy, so this fudge was always going to come apart at the first proper economic crisis. Now the crisis is here, it’s decision time.
That the right prefers an imperial model of European unity is of course only being true to their nature. But as Marx said, history repeats itself, first as tragedy then as farce. The age of empires is over, and any attempt to constitute a common Euro area on an imperial model is doomed to farcical failure. We are no longer in the days of gatling guns against spears and arrows. This also, the disintegration of Yugoslavia made clear. The 19th century and early 20th century empires were ones where the industrialised core ruled over a much larger pre-capitalist periphery. Today’s Eurozone core periphery dynamic is one where the numbers are reversed - the population of the periphery is a mere fraction of that of the core. The idea that we could absorb all the losses of the crash for the core banks is mathematically impossible. That’s why so many commentators see the disintegration of the Eurozone as the necessary outcome of the current impasse.
Next Tuesday the workers of Greece will be on the streets to besiege the parliament debating the imposition of yet more austerity on an already devastated country. Workers in Ireland, Portugal, Spain and further afield will be watching them, willing them on and waiting for the day when we too will have to take to the streets to fight peripheralisation itself. Let’s see who swerves first.
WORDS: Paul Bowman IMAGE: endiaferon on flickr
Comments (4 of 4)
Jump To Comment: 1 2 3 4European social democracy has made the EU project it's own «credo» and would rather prevent a Greek default than allowing the Eurozone to fall apart. They don't care if some million more workers get unemployed and misery increases.
... This could well be the triggering factor for a revolutionary shift in Eureopean workers class.
The concentration of capital is in the stage of erasing economic borders in the developed capitalist states. The huge corporations/conglomerates evade tax payment and their huge surplus values storm the international capitalist system in the search for investments and profits. The accumulation of huge state debts was a futile efforts to resist the take over by the big international firms in the expense of the smaller/local capitalist elite and the working class.
Ilan, with respect I disagree. Capitalism seeks to overcome limits to its own growth. But it is not in the stage of erasing economic borders, even in the developed capitalist states. It is trying to make sure that those borders are not limits or boundaries to it in the stage of growth - but now, in the stage of devalorisation of capital - i.e. the realisation of losses - the core powers are attempting to use the economic borders of the Eurozone's monetary union without fiscal union, to try and avoid "contamination" (their revealing term) of the losses of European capital in general on the working class of the periphery. But the "old school" imperial bully boy tactics (and racist discourse, nb) of the populist right of the northern core, ignores the historical change of the few/many dimension of the core/periphery dynamic. The idea that the losses of Eurozone capital can be born by the 5% of its population with the least reserves (although there is some difference between Ireland and Portugal and Greece in this) is simply impractical, aside of any questions of immorality. They centrist right know this, and they also have the uneasy suspicion that if they start ejecting peripherals from the Eurozone, one by one, two things will probably happen - first of all, those 2008 losses will have to be taken onto the books of the core banks; second, from a German perspective, it would be eating away the majority of the export market their current economic performance is based on. But anyway, it's not up to us to square the circle for them.
This is a wonderful article, and it was fascinating reading. But the subject matter is very complex, and at times it could have been written in a less-confusing manner. Not all of us have formal training in economics. There is one 4-paragraph section that I had to read several times before the little light bulb went on over my head.
OK, enough on style, on to substance.
As Socialists, shouldn't we be hoping for the banks, (and indeed the whole capitalist economic system), to fail catastrophically?
Here in the USA there is much brouhaha at the moment over this looming deadline of August 2nd to raise the debt ceiling. Personally, I'd love to see the government default and bring the whole house of cards crashing down. Then again, I'm a 99er. I've been unemployed since Spring of 2008, and without benefits for a year and a month now. At this point, I'm feeling so bitter and disenfranchised that my nihilist tendencies, never buried all that deeply, have come to dominate my attitude. Your Mileage May Vary.
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