As I write, the Greek trade unions are engaged in a 24-hour general strike in protest against the impact of the fiscal austerity measures imposed by their socialist government over the last year that were insisted upon by the EU and the IMF as part of the €110bn bailout package that the Greeks received last May. The Greeks needed the money to cover the borrowing that its government had to make to meet repayments on its bonds that were maturing as well as new borrowing to finance government expenditure that could not be paid for by tax revenues. In return for this money, the Greeks have had to endure a massive cut in their living standards through public sector job losses and wage cuts, pension benefit reductions, increased taxes across the board and reduced public services. Unemployment jumped to a new record high of 15.1% in January and the Greek economy contracted by 4.5% in 2010 and is expected to shrink by another 3% this year.
As I said in my post last February, (Greek countdown, 1 February 2010), “the Greek people have done nothing to deserve this and yet they must pay heavily for the failure of capitalism.” The Greek people have been forced to pay with their living standards and public services for the failure of the global banking system (see my post, Paying for Europe’s banking mess, 16 March 2011) . The socialist government agreed to take a €110bn in loans from the European Union and IMF to fund the buyback of its maturing government bonds and future government borrowing. It had to do so because capitalist bond investors (who are mainly Greek and European banks and pension funds) were refusing to buy any more Greek government debt unless the prices they paid were slashed.
Now one year later, the dread Troika (named after officials from the EU Commission, the European Central Bank and the IMF) are back in Athens to check the books of the Greek government and see if they have met the fiscal targets set by the bailout package. The short answer is no. So great was the budget deficit when the package started (15% of GDP) and so quickly has the public debt level mounted (heading towards 150% of GDP by the end of this year) that, despite the misery caused by the cuts in spending and tax hikes, the draconian targets set by the EU and the IMF have not been met. So the Troika must recommend whether to allow another tranche of the bailout funds to be handed over or not.
But the problem is even worse than that. The holders and potential purchasers of Greek government bonds, mainly the banks, pension funds and hedge funds around the world, are unwilling to buy any more Greek debt. They are already getting nearly 25% interest on their existing debt so any new debt issuance would be even more costly to the government. Indeed, it would be so costly that the government would find it would have to borrow more to pay for the interest cost – a true Ponzi-style situation. And yet the existing package is not enough to to fund all Greek borrowing next year and the Greeks are supposed to renew their borrowing from the banks in 2012.
That is clearly impossible. So what are the alternatives? One is that the EU-IMF decides to lend the Greeks more money to tide them over for a few more years. But that would be at the price of yet more public spending, wage and job cuts. Already, the Troika is demanding that the socialist government sell precious state assets (airports, motorways, power corporations, real estate, postal savings, the state lottery) to the tune of €50bn as part of the bailout package. The Troika will ask for more and for speedier sales. At this rate, the EU, the ECB and the IMF will own the Parthenon in return for funding Greek government borrowing! And of course, this solves nothing. The debt remains to be repaid, only the cost of borrowing might fall back. In the meantime, the huge cuts in government services and employment will mean that Greece will be in economic recession for years.
As the leader of the True Finns, a right-wing populist party that recently gained hugely in the Finnish elections on a platform of NOT bailing out the Greeks, the Irish or the Portuguese, recently wrote in the Wall Street Journal; “To understand the real nature and purpose of the bailouts, we first have to understand who really benefits from them. It is not the little guy who benefits. He is being milked and lied to in order to keep the insolvent system running. He is paid less and taxed more to provide the money needed to keep this Ponzi scheme going. Meanwhile, a symbiosis has developed between politicians and banks: Our political leaders borrow ever more money to pay off the banks, which return the favor by lending ever more money back to our governments.”
The holders of Greek, Irish and Portuguese debt, or for that matter government debt in all countries, are the major banks, pension funds and other financial institutions. In other words, the collapse of the global financial system forced governments to bail them out. Governments had to borrow money to do this from the very institutions that were being bailed out! These institutions want to maximise their profits from this lending without any defaults on payments. It’s a circle of capital. As the True Finn leader commented: “the EU project is being put in jeopardy by a political elite who would sacrifice the interests of Europe ‘s ordinary people in order to protect certain corporate interests.“
The circle could be broken if the governments decided not to pay the debt owed to their banks. This is called default. It would mean that the banks in Greece, Portugal and Ireland would suffer such losses that their shareholders would be liquidated and the banks would have to be taken over by the state. In the case of Ireland, they are already are. Even the True Finns leader can see the merit of this approach: ” If some banks are recapitalized with taxpayer money, taxpayers should get ownership stakes in return, and the entire board should be kicked out. But before any such taxpayer participation can be contemplated, it is essential to first apply big haircuts to bondholders.”
Where I leave the True Finns is what happens next. For me, the banks could then be used to provide lending not just to the government but also to small businesses and households. They would become a public service designed to help the economy, not an instrument for financial speculation that brought Greece and the other countries to their knees in the first place (see my post, Banking as a public service, 15 September 2010).
The added complication is that much of Greek, Portuguese and Irish debt is held not by just their own banks but also by banks in France, Germany and the rest of Europe. Those banks would be in jeopardy if Greece and the other governments were to default on their debt. That is precisely why the EU and the ECB are so strongly opposed to default or even so-called ‘restructuring ‘ (a disguised version of default) of Greek debt. They want to keep the financial sector viable but in the private sector – at the expense of the working people and their families. The whole issue then boils down to how Europe’s economy is to be structured: either as a capitalist economy with big banks and business in the private sector, designed to make profits; or mainly publicly owned with the big banks and financial institutions run as public services. Fo me, it is the latter, of course.
This is not the solution of the True Finn leader. His answer was: “In a true market economy, bad choices get penalized. Insolvent banks and financial institutions must be shut down, purging insolvency from the system. We must restore the market principle of freedom to fail.” That means bankruptcy for the financial sector and then apparently returning the banking phoenix to the free market from the ashes. No end to the Greek tragedy there.