Divisions between EU politicians are widening. If the much discussed possibility of a Greek default is realised, it would shake the entire eurozone, and trigger further global financial turmoil. Over two articles, LYNN WALSH assesses the situation.
GREECE IS TEETERING on the edge of a default on its government (‘sovereign’) debt, most of which is owed to European banks and financial institutions. Eurozone leaders are desperately trying to find a way of preventing a default, which would have a devastating effect on the European and world economies. A default by Greece – in effect, bankruptcy under which the Greek government would not be able to pay its debts – would trigger a new banking crisis, probably as severe as 2008. At the same time, a Greek default could trigger the breakup of the eurozone, with the emergence of two or more currency areas, if not a complete disintegration.
Greece, moreover, is far from being an isolated case. Ireland and Portugal have only avoided bankruptcy through massive eurozone/IMF loans on condition of devastating austerity measures. Spain, a much bigger economy, faces similar problems. The massive demonstrations before the municipal elections – against 40% youth unemployment and savage government cuts – are a further indication of the deep revolt that is developing throughout Europe against the ravages of finance capital and the bankruptcy of the system.
Since the sovereign debt crisis erupted early last year, eurozone leaders have scrambled to improvise stop-gap measures. They appear to be acting on the basis that countries like Greece, Ireland and Portugal are facing a temporary liquidity crisis, an inability to finance their debts because of the recession. The eurozone leaders refuse to accept (at least publicly) that these countries face a solvency crisis: they are effectively bankrupt. They have no strategy for dealing effectively with this crisis. At the same time, the rating agencies which act for big investors, like Moody’s and S&P, have downgraded Greek bonds to ‘junk’ status. The big banks are demanding that eurozone governments step in to guarantee the debts of Greece and other floundering states, effectively transferring the massive potential losses from private banks to official agencies and governments.
Whichever policy is followed by the eurozone capitalists, the working class faces a prospect of savage austerity. New loans will only be granted to the Greek government on the basis of even more drastic austerity measures. The Financial Times made this clear in an editorial (9 May): “Greece must do more to salvage its solvency. Athens last year enacted tax increases and spending cuts amounting to 8% of gross domestic output, cutting the deficit from 15.4 to 10.5% of GDP in a single year and pushing the economy to its knees. This tightening is extraordinary. It is also not enough”. The editorial was under the headline: ‘Athens must be put under the gun’!
On the other hand, some commentators now see a Greek default as inevitable, including Financial Times columnist, Samuel Brittan: “A severe debt write-off by Greece and Portugal is a forgone conclusion; and in my view both countries would be better off without the euro”. (12 May) However, a default and exit from the eurozone would also lead, on a capitalist basis, to a further degradation of living standards.
The colossal cost of bailouts
THE GREEK BAILOUT implemented last year has not worked. The Greek government was granted €110 billion of loans on condition that it carried out drastic attacks on the working class: welfare spending cuts, wage cuts, pension cuts, and increased taxes. However, it is estimated that Greece will require around €50 to €80 billion of new loans in 2012 to cover its borrowing needs. There is no way that Greece will be able to raise this on international financial markets. The main reason Greece has not met its economic targets is that the austerity measures have prolonged the economic slump.
Without sustained growth, there is no way Greece will be able to reduce its indebtedness. The Greek economy contracted by -4.4% last year and is expected to contract by -3.5% this year. In reality, the ‘rescue’ by the International Monetary Fund (IMF), European Central Bank (ECB) and eurozone has only increased the indebtedness of Greek capitalism and undermined its ability to pay off its debts. Greece is currently forced to pay around 14% interest on its ten-year bonds, while Germany pays only around 3%. This shows that bond investors are already pricing in the risk of a substantial default.
Eurozone leaders are discussing a further €30 billion loan to Greece, but only on condition that the government rapidly carries out a further €50 billion of privatisation of state industries and utilities. It has even been proposed that the privatisations should actually be supervised by the IMF, which would mean a complete loss of economic sovereignty for Greece. Another proposal is that the revenue from privatisation should be handed over to the IMF and European Financial Stability Fund (EFSF) as collateral for new loans. This is reminiscent of 1923, when French forces occupied the Ruhr to seize coal after Germany fell behind with reparation payments imposed after the first world war.
Capitalist leaders are deeply divided. The ECB, German government and others favour more loans to Greece, on condition of further austerity measures and privatisation. Apart from its impact on the euro, a default would force eurozone governments to bail out the banks taking the losses. Leaders like Angela Merkel in Germany fear an electoral backlash against further bailouts. There is fear of the eurozone becoming a so-called ‘transfer union’ in which the stronger economies are effectively financing the weak economies.
This position was spelled out by Otmar Issing, former chief economist of the ECB: “The present seemingly unstoppable process towards further financial transfers will generate tensions of an economic and especially political kind. The longer this process is characterised by unsound conduct of individual member countries, the more these tensions will endanger the existence of EMU [economic and monetary union]”. (Financial Times, 11 January)
Praying for an orderly default
OTHER SECTIONS OF the capitalists, particularly in the finance sector, now believe that a default is inevitable. They recognise there is a limit to the austerity that can be imposed on the Greek people without provoking greater social conflict and uprisings. Last year, for instance, Hans-Werner Sinn, head of the German IFO Institute, warned a policy forum: “The policy of forced ‘internal devaluation’, deflation, and depression could risk driving Greece to the edge of a civil war. It is impossible to cut wages and prices by 30% without major riots… Greece would have been bankrupt without the rescue measures. All the alternatives are terrible but the least terrible is for the country to get out of the eurozone, even if this kills the Greek banks”. (Daily Telegraph, 3 September 2010)
It would be better, in the view of many financial strategists, to carry out an orderly default. This would involve the exchange of existing Greek government bonds for new bonds, guaranteed by the IMF/ECB, etc, that modified their terms. This could mean longer periods of repayment and possibly a lower interest rate. This ‘haircut’ for the bondholders would be regarded as a ‘soft’ restructuring, or ‘re-profiling’ of bonds.
But the most contentious issue is whether there should be a reduction in the face value of the bonds, which would hit bondholders much harder. Many commentators now regard this as unavoidable. A soft re-profiling, they argue, would not sufficiently relieve the debt burden of countries like Greece, which would require yet another bailout package – or default. To be effective, a reduction of the face value of bonds would have to be at least 50% - a serious default for Greece’s creditors.
Greek government bonds are already trading on the secondary bond market at about 60 cents in the euro, effectively a 40% devaluation of the debt. However, an official reduction of the face value of sovereign bonds would be regarded as a ‘credit event’. This would require financial traders to mark down the value of the bonds on their books, and would trigger claims on credit default swaps (CDSs, used to insure bonds and other securities from losses). As with the crisis with Lehmans and the American International Group in 2008, this could trigger massive losses for big investment banks trading in CDSs.
The main motive of these finance capitalists is to secure an effective rescue of the banks. Overall, foreign banks, mainly in northern Europe, have loaned $2.5 trillion to the four heavily indebted eurozone countries, Greece, Ireland, Portugal and Spain. There are $170 billion bank loans to Greece. Domestic banks also hold billions of euros of government bonds. A forced default, or a panic-driven rescheduling, could trigger a banking crisis on the scale of 2008. There would be huge losses for the banks, not only on government bonds but also on the various ‘derivatives’ linked to the bonds.
There is certainly the potential for Greece – or Ireland or Portugal – to become another ‘Lehmans’. Even if the EU leaders were able to agree on a course of action, there is no guarantee that they will be able to carry through an ‘orderly’ rescheduling. Such is the volatility of financial markets, the leaders’ efforts may be overtaken by events, with the unfolding of an uncontrolled, chaotic debt crisis.
The euro under threat
AT THE MOMENT, the Greek government is clinging to the euro (despite rumours early in May that it was considering withdrawal from the eurozone). It calculates that if it is part of the eurozone then the stronger eurozone governments will be forced to bail out the Greek economy.
However, at a certain point the conditions of such a bailout will become unsustainable. Writing in the Daily Telegraph, Ambrose Evans-Pritchard points to a downward spiral: “An ominous pattern has emerged across much of the eurozone periphery: tax revenue keeps falling short of what was hoped. Austerity measures are eating deeper into the economy than expected, forcing further fiscal cuts”. (1 November 2010) This process will actually increase the indebtedness of the already bankrupt countries.
The conditions attached to new loans would make them intolerable, making withdrawal from the eurozone preferable. Then, countries like Greece and most likely Ireland and Portugal (and possibly Spain) would at least have the option of devaluing their new national currencies and boosting exports, as well as encouraging inflation which would reduce the real (inflation-adjusted) value of their debts. In any case, they would almost certainly re-denominate their foreign-held debt in their new national currencies (thus reducing its value in euro terms), which would mean devastating losses for the bond-holding banks.
The euro may or may not survive this crisis. Its short-term fate depends on the direction of the world economy (a new recession could prove fatal for the euro) and the strength of the working-class movement against the austerity measures being imposed to ‘save the euro’ – and the big banks which financed the debt-driven bubbles that have now collapsed.
But, in the next few years, the eurozone will be wrecked on the rocks of insurmountable economic problems and the conflict of national interests between the member states. Until the present crisis, ‘exit’ from the eurozone was considered unthinkable. An EU working paper even declared that unilateral withdrawal by a eurozone member would be illegal under international treaties, though they accepted that, in practice, the major EU powers could do little about it. Today, the prospects of a eurozone breakup are being openly discussed by financial strategists and media commentators – and no doubt are being intensely discussed behind the scenes by EU leaders.
HORRENDOUS AUSTERITY measures have provoked massive resistance from the working class throughout Europe, especially in the countries facing the most acute debt crisis. Workers are furious that they are being forced to pay for a crisis triggered by the banks and other predatory speculators. The real bailout is the rescue of the banks and big business by the working class.
In Greece there have been nine general strikes and seemingly endless protests against cuts. There has been resistance in Ireland, Portugal and Spain. Commentators, however, have noted that there appears to be a lull in the strikes and protest action, a certain ‘protest fatigue’. Any such pause, however, will be purely temporary. It arises because the leaders of the workers’ organisations, while calling strikes under pressure from below, have no alternative to the policy of bailouts and austerity measures.
Faced with this deep, long-term crisis of capitalism, the working class needs a bold alternative. This should be based on a clear refusal to pay the debts run up by capitalist governments, from which banks and other speculators hugely profited when the going was good. Repudiation of debts, however, is not in itself a solution. On the basis of capitalism, bankruptcy of the state would mean a period of prolonged poverty and suffering for the working class.
Control of the banks and the commanding heights of the economy – the major industrial and commercial companies – must be taken out of the hands of the capitalist class, which is responsible for the present global crisis. The economy should be planned and managed in the interests of working people, controlled by elected representatives of workers, trade unions, consumers, community organisations, and so on. This would be the beginnings of a socialist planned economy, which would have to be developed on an all-European and international scale.
POSTCRIPT: Reports confirm that European leaders are planning to take direct control of Greek state assets to force through privatisation to raise at least €50 billion. These plans were discussed at a secret meeting of some EU leaders held in Luxembourg on 6 May. According to the Financial Times (24 May), there are proposals to put Greek assets into a fund controlled by ‘international experts’. According to one unnamed diplomat, this is because “the [Greek] state is not functioning”. Some EU leaders, led by Netherlands, want to go much further than €50 billion. “Officials involved in the discussions believe far more than €50 billion could be raised in sales of state-owned assets, with estimates ranging from €250 billion to €300 billion – or almost all of Greece’s outstanding debt”. The Netherlands finance minister, Jan Kees de Jager, arrogantly brushed aside warnings that a seizure of Greek assets would provoke massive opposition in Greece. “Mr De Jager said such considerations should be set aside. ‘Right now, we’re beyond sensitivities’.” (FT, 24 May) Such measures, however, recall the French seizure of assets in the Ruhr in 1923 or imperialist expropriations in colonial lands. If there is an attempt to implement these plans, they will not only provoke parliamentary opposition to the Papandreou government but will arouse the fury of the Greek working class.