Back to school for the Eurozone as the Greek deal collapses


Here we are at the end of the Summer and it’s time for the politicians and bureaucrats of the Eurozone to come back to the office and take a look at what’s lurking in their in-trays. By the same token, it’s also time for all of us interested in fighting back against a Europe of Austerity, to take stock of the lie of the land.

As far as the Euro goes, it’s been a far from quiet Summer, with a brief crisis at the beginning of August giving the lie to the rule that nothing important happens in financial markets between July and September due to the holidays. Time for a situation report then. The most fitting one word for the Euro at the moment is SNAFU - that mock acronym originating in the military during World War Two and standing for “Situation Normal, All F***ed Up”.

The deal to save Greece announced by the euroheads at the beginning of July worked for nearly a month until the markets finally woke up to the fact that behind all the fine talk and assurances of the politicians, all the tough decisions had been effectively sidestepped. In effect, that proposed second bailout deal - intended to stop Greece going bust in October - has been holed below the waterline by the newly euro-sceptic Finns deciding to push Greece for a unilateral promise of collateral (financial assets given to the lender as security against loans by the borrower - in this case, secure assets, i.e. not Greek sovereign bonds) in return for their (relatively minor) contribution to the new bailout package.

In an act of epic stupidity, the Greek government decided to give in to the Finnish blackmail, in the hope that it would make the problem go away. In fact, as soon as the other Eurozone countries heard that the Finns were going to get collateral for their contribution, naturally a lot of them are now refusing to front their cash without similar securities given in exchange - which of course, Greece does not have, that rather being the point. So the whole deal announced in July, after much arm-twisting and banging heads together, is now in pieces on the floor again.

Worse, even the next tranche of the current, first bailout, the €9Bn due later this month is currently suspended. The representatives of the troika (EU/ECB/IMF) assigned to exert colonial rule over Greece’s economy has suspended talks and flounced off back to Brussels. The Troika is in a huff with the Greek government who they accuse of dragging their feet in implementing the savage programme of cuts, “structural reforms” and privatisations they have signed up to. In short we are back to square one with the Greek debt crisis, and it’s only September.

Big deal over a small deal

But the big significance of the ongoing Greek crisis, is it’s relative insignificance in financial size. In terms of the amount of money involved, relative to the size of the Eurozone, Greece is virtually spare change. And this reveals that the nature of the crisis in the Eurozone is not really financial but political. The real crisis is the inability of the political heads of the zone to agree on any viable strategy to deal with the crisis. To put it bluntly, the political masters of the Eurozone have showed themselves thus far incapable of organising a piss-up in a brewery.

This uncertainty is having knock on effects to much bigger fish than the three little pigs (Portugal, Ireland and Greece) currently in receivership. At the beginning of August, the growing realisation that the July “solution” to the Greek debt problem was hogwash, combined with worries about the situation of Spain and Italy, sent the yields on those countries sovereign bonds soaring - and that determines the interest rates they have to pay on new borrowings.

Simultaneously the absurd pantomime in the USA over getting Congress to agree to raise their (self-imposed) debt ceiling - or theoretically go bust - and the Moody’s downgrading of US debt from triple A rating to AA, added to the fear levels of the junior traders left holding the fort while the big investors were off on their holidays. The resulting “flight to safety” meant a large flood of funds into supposedly safe stores of value like gold, the Swiss franc, or the bonds of the most powerful countries including (ironically) US treasuries and German bonds. As the prices of these bonds went down, the difference between the rising Spanish and Italian bond yields, and the falling German ones, caught the spread (the difference between the higher and lower rates) between the two in a double-pincer attack. There is a limit on how high this spread can go before the major clearing houses, like London’s LCH.Clearnet and Frankfurt’s Eurex refuse to take the bonds as collateral for short term cash loans (know as repos, from repurchase agreement) without ponying up large percentages of hard cash as extra insurance (called a margin call).

It was Ireland’s bond yield spread going over this limit that caused the receivers to be called in last November. Not because the state was out of money (in fact they had money to cover bills up until the next May) but because Irish banks couldn’t get any short-term cash in exchange for their holdings of Irish government bonds. Eventually, the attack on Italian bonds started to have an effect on Italy’s largest creditor - France. The contagion had wound it’s way up the domino chain and into the heart of one of the core countries of the Eurozone. In the face of paralysis by the holidaying politicians, the European Central Bank was forced to step in and start buying Spanish and Italian bonds to prop up their prices, thereby bringing yields back down from the danger zone.

Austerity programmes for all

All this argy bargy over sovereign debt is taking place against a background where the austerity programmes forced, not only on the 3 little pigs, but on both Spain and Italy and, more voluntarily, on the UK and other northern countries, is leading to growth flat-lining. Similar results in the US since the ending of QE2 (the second programme of “quantitative easing” where the central bank prints money to try and prevent the hoarding of funds by capitalists unwilling to invest in production) leading to deflation, creates the gloomy prospect of a “double dip” global recession. The pointy-headed wonks in the financial pages advise us that double dip is a misnomer, since this is still the fallout from the same crash that began in 2008. While true, it’s not a particularly helpful piece of information.

In different ways, the problem on both sides of the Atlantic stems from the same root cause. The incapacity of the existing political “art of the possible” to accept any of the possible options that would make a real difference. In the USA this is the rise of a reinvigorated right so cynical that the ruination of the country is seen as a price worth paying to bring down the Obama administration, combined with an irrational faith in the magical power of cutting state spending to regenerate the economy.

From a purely capitalist strategic viewpoint, Merkel and her cabinet know that the sums necessary to shore up the relatively minor peripherals are as nothing compared to the potential losses to the German export economy of losing the Eurozone. But they have to balance these systemic considerations against the more immediate personal risk of losing German voters backing and thus their seats. Thus the political impasse in the Eurozone is the unwillingness or inability of Germany’s right-wing politicians to go against the simplistic racist blather of the German tabloid media, that blames the debt crises of the peripheral countries on the alleged corrupt, lazy and feckless character of their peoples and politicians. Having spent a lifetime arguing against solidarity between peoples across borders, the Eurozone’s core right-wing politicians are no more able to change their political tune than a leopard its spots.

The Eurobond ‘solution’

This problem is clearly seen in the debate over Eurobonds. The Eurobond idea is that rather than each country sell their own sovereign debt bonds, the bonds sold would be backed by the Eurozone as a whole, rather than the individual country. The idea being, that currently vulnerable small countries under pressure from the markets, could sell bonds with the backing of the big fish like Germany and France, thus reducing the perceived risk and the price governments would have to pay in interest rates. According to some, this would take the strain off the smaller countries and allow them to return to the market for debt funding, rather than having to be on life support from the ECB as they are at the moment. Ever the optimist, Finance Minister Michael Noonan predicted a few days ago that Europe would surely be adopting the Eurobonds in the near future.

Back in the real world, the German government has repeatedly ruled them out as a solution, point-blank. Of course the grand irony of this overt “line in the sand” position over Eurobonds is that in the absence of any action from the politicians, the European Central Bank is being forced to buy the bonds of the problem countries with the backing of the Eurozone as a whole. Thus the burden is being shared around in any case. Just by the back-door instead of the front, and in a way to maximise uncertainty over the future, which makes the current problems far worse.

So once again the assorted politicians are doing what they do best, kicking the can down the road in the hope that something will come up. Meanwhile the storm clouds are gathering over Greece again and the Italians have just had their first general strike this week over the third attempt by Berlusconi to pass an austerity budget the ECB will accept. So what will the ongoing Eurozone car crash bring us for the Autumn?

Well we don’t have the Greeks fiery tradition of regular rioting, or the Italian’s striking. Our public spaces are far too cold and wet this time of year for any Spanish style camping. But we have a few traditions of our own, including resistance to evictions and boycotting new unfair taxes. While this government, like it’s predecessor, seems so far to be kicking the sleeping giant of mortgage arrears down the road, rather than face up to evictions, new taxes definitely are on the agenda. In theory, according to the announced government plans in compliance with the ECB/IMF Memorandum of “Understanding”, January should bring a new flat rate household tax and, later on, an additional “I can’t believe it’s not the water charges” tax. A mass non-payment campaign could put paid to that plan, just as it has in the past. The campaign for a default on a debt that is not ours, begins on the doorstep.

WORDS: Paul Bowman IMAGE: johndeighton.com/blog

More articles on the IMF / ECB austerity plans

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