Uncle Spielberg
Well-known member
Interestingly and a bit off topic the 95% mortgage was a staple part of the mortgage market. For this first 3 months this year 1 in 400 mortgages were for 95%.
Will Greece Be First Relegation From Eurozone ?
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Mellor 3 Ward 4
Well-known member
Peston's Programme is on BBC 2 tomorrow at 9.00pm
fork me
I have changed this
I wasn't being paid in Euros when it was 1.4. I've only been paid in Euros for about three years, and the Euro was almost 1:1 then, which I admit was an absurd rate, but good for me!
fork me
I have changed this
Not yet, but possibly later.
fork me
I have changed this
I find that a particularly disgusting attitude tbh. If it collapses, what it will really mean is millions of people, normal people, not the people who caused the problems, living in poverty all over Europe. There's already children being admitted to hospital in Athens with malnutrition, swollen bellies the lot, because their parents can no longer afford enough food. A genuinely collapsed Europe would mean that happening across the continent. Anyone who would raise a glass to that is sick, IMNVHO.
I think you will find it was NR's business model that took them down, effectively borrowing money on the money markets to lend on at higher rates then all of a sudden being unable to borrow any more money as a result of the credit crunch.
Pretty much every other bank funds their lending from deposits rather than having to borrow it themselves.
I had to chuckle at Cameron in PM Questions yesterday, shaking his fist and getting all manly and telling the Euro bunch what to do I guess it looked good for the cameras and his little England followers. At best I imagine they're rolling their eyes.
Kumquat
New member
- Mar 2, 2009
- 4,459
Funnily enough, that was my exact reply when my girlfriend asked me to f*ck her "the greek way"
Uncle Spielberg
Well-known member
True, Germany had strong growth in the first 1/4, France is not in recession, the UK however, in recession and a 0.1% negative growth in the last 18 months. Well done David. Him and Osborne utterly clueless I am sad to say.
Firstly I meant the collapse of the fake currency - you know, that political ideal rather than any financial sensible one, not the whole of Europe. I have every sympathy for those people in Greece currently living on handouts from charity. They would be much better off out of the Euro so their government could devalue whatever currency they had. It's the Euro that has assisted in that poverty coming about so celebrating the collapse of such a divisive and political currency isn't sick IMNVHO.
Instead of anti-EU rhetoric they need to be think about business and be pro-active. This lazy idea that "rolling back the state" alone will free up British business is not working. We need to spend more on infrastructure, help small to medium businesses finance growth, stop pissing about at the airports, stop screwing every single public sector and educate the kids of today to be the workers of tomorrow.
Uncle Spielberg
Well-known member
Odd how they blame the EURO, we are NOT in, for our shambolic " growth " figures when similar economies IN the Euro are doing much better than us. Its a smokescreen and a convenient one which some people fall for. Also the " we are clearing up the mess Labour left us " is wearing thin now.
Also. The government claims to want to reduce red-tape in one breath. In another they set up some arcane lending agency to provide funds to help small business, it's similar to a bank apparently. Then why not get a f***ing bank todo it then? Jesus. After all the government do own a few.
Uncle Spielberg
Well-known member
Their much trumpeted new build scheme and 95% deals has had 5 completions in the UK to date.
Cameron and Gideon knew the landscape they inherited. They made statements based on this landscape. They have delivered none of their economic promises.
We could have been at the heart of the EU, steering decisions and enjoying decent growth like our Teutonic chums. All those years ago we choose isolation and another recession.
Dandyman
In London village.
This is quite long but worth reading...
"1. The Greek narrative - Roots of the crisis
The orthodox account of Greece’s public debt crisis is one of fiscal profligacy, a country living beyond its means. This is not surprising, since Greece’s public deficit and debt, as well as its current account deficit have been persistently high in the past ten years. However, it is a superficial reading of the crisis, to the extent that it does not take into account the process that has led Greece to its present state. It is only through understanding this process, that one can attempt to change it.
Domestic factors
By ‘domestic’ are meant the particular features of the capitalist formation in Greece, as it developed in the past half-century, which help explain the present state of its public finances. In the early 1950s, the Greek economy was in tatters, following a devastating WWII and an equally destructive civil war. The period 1950-1973 was dominated by the authoritarian Right (1950-1967) and the dictatorship (1967-1973). During this period, economic policy, which had little concern for a social agenda, aimed at ‘growth at any cost’, on the basis of a particular type of ‘social compromise’, which tolerated various tax digressions, such as favourable tax arrangements for the industrial sector, exemption of farmers from income tax, tax evasion by small businesses and professionals, etc. So much so, that there emerged the idea of ‘legal tax evasion’, which holds to this date (Stathakis, 2010).
The beginnings of the welfare state date back to the 1980s, during which a number of former national champions were nationalised, with the state taking over their liabilities. The problems facing the economy were compounded by sluggish growth and high inflation, resulting in a severe worsening of public finances.
Joining the eurozone was the strategic goal of the 1990s and of the 2000s. The productive sectors - manufacturing and agriculture- fell further behind, while privatization and market liberalisation helped deepen the financialisation of the economy. While the state of public finances worsened, these were ‘massaged’ through the use of derivatives and with the help of such revered financial institutions, as Goldman Sachs, a point we shall come back to shortly. Further, the inflow of portfolio investment made up much of the shortfall in the current account.
Throughout the sixty year period 1950-2010, the question of boosting state finances through the elimination of tax evasion remained outside the political agenda. This is a salient feature of the chronic fiscal problems of Greece. The fact that it is not bordered upon even today, is indicative of the prevailing group interests in Greek society. For example, it is estimated that the richest 20% of the population pay the least amount of income tax!
Other features of the profile of the Greek economy and its fiscal basis can also be explained by taking a longer-term view of the development of capitalism. For example, the existence of ‘closed professions’ and high public sector employment denote the attempts of capitalists to tie in the interests of the middle class and sections of the working class to their own (Tsakalotos, 2010). In this sense, the resulting social and economic configuration is a component of contemporary Greece, rather than just the symptom of a ‘clientelistic state’.
Only radical social and economic transformation, starting with the tax system and public administration, can make a lasting impact. The EU/IMF package does not address the social nature of Greece’s fiscal problems, while the deepening crisis makes institutional change more difficult.
European factors
It has been said that Greece faces a triple constraint (a) the inability to devalue its currency; (b) global downturn and (c) a powerful partner determined to run a current account surplus (Papadimitriou et al, 2010).
Indeed, in adopting the single currency, the eurozone members solved the problem of exchangerate speculation. However, the lack of a government banker - ie, a central bank that can stabilise the sovereign bond market through open market operations, in the way the Federal Reserve and other central banks are able to do- exposed them to speculation in the bond market, to the extent that the ECB is forbidden by the Treaty from acting in that capacity.
At the same time, the fiscal arrangements of the monetary union rely on discipline and peer pressure, while the Union budget is minimal (less than 1% of EU GDP), excluding by definition the notion of a transfer union. Thus countries like Greece stand defenceless at a time of crisis.
The increase in the public deficit of Greece is largely endogenous. Ie, it is mainly the result of the global and European recession and the coming into play of the automatic stabilisers. Thus a chronically high public deficit and debt shot upwards in 2009-2010. Financial engineering exacerbated the situation.
The third constraint facing Greece, as well as other indebted eurozone countries, is the growing divergence in the performance of different countries. In particular, a persistent and growing trade imbalance between Germany and certain other mainly N. European countries, on the one hand, and most S. European countries, amongst which Greece, on the other, is indicative of the competitiveness problems faced by the latter even in normal times, let alone at a time of crisis. The macroeconomic stance chosen by a major economy in the eurozone, such as Germany, undermines any attempt at convergence.
Thus, although the Greeks work longer hours than the Germans on an annual basis, have one of the lowest per capita incomes in Europe, a very unequal distribution of income and a high level of poverty, especially among the working poor (OECD, 2010), they are less competitive than their German counterparts, because Germany is pursuing a low-wage growth strategy, which is consistent with its export-led model. On a long-term basis, such divergences are not compatible within a monetary union, unless the difference in the current account balance between surplus and deficit member states is compensated for by transfers. This however is precluded by design.
Overall, the restrictive institutional arrangements of the European Monetary Union and the diverging wage policies of its member states account not only for much of the predicament Greece finds itself in, but also for its inability to overcome it.
Global factors
As mentioned above, much of the increase in the Greek public debt was originally triggered by the global downturn. In addition, global finance played a significant part in exacerbating the crisis in its different stages.
Starting at the beginning, for nearly fifteen years, Goldman Sachs created currency swaps that enabled Greek government debt issued in dollars and yen to be swapped for euro-denominated bonds that would be paid back at a later date. The bond maturities range between 10-15 years. GS received a hefty commission and sold the swaps to a Greek bank in 2005. The Greek government kept its eurozone partners happy and the state of the Greek public finances was expertly and legally disguised!
As Greece’s financial condition worsened in 2009, GS, JP Morgan and certain other banks backed an obscure company - the Markit Group of London- to introduce a new index - the iTraxx SovX Western Europe- made up of the 15 most heavily traded credit-default swaps in Europe and covering troubled economies such as that of Greece. This enables market players to bet on whether Greece, amongst others, will default or not. Trading in such swaps drives up the cost of insuring Greek sovereign debt and in turn what Athens has to pay to borrow funds. Hence the phenomenon of banks betting Greece will default on debt they helped hide!
As mentioned above, the monetary arrangements of the eurozone leave its members vulnerable to bond market speculation. As the Greek crisis demonstrated, such countries can be held hostage by financial markets and credit rating agencies alike. The multiple downgrades of Greek sovereign bonds are illustrative in this respect. In the first half of 2011 alone, the three big CRAs downgraded them 7 times! Not surprisingly, by July 2011, the spreads on these bonds exploded, as did the CDS.
Overall, global finance affected the emergence and the development of the Greek public debt crisis both directly and indirectly. The particular instances mentioned above are examples of direct involvement. Indirectly, global finance has been instrumental in fostering the ¡¥profligacy of the Greeks’ narrative, in an attempt to divert attention from its own part in the crisis and to secure fresh bail-out funds. Furthermore, as pointed out by Walden Bello, by throwing the spotlight on the high and rising government spending as the key problem of the economy worldwide, global finance is trying to deflect the pressures for tighter financial regulation demanded by citizens and governments since the start of the global crisis.
2. EU/IMF bail-outs -The cure killing the patient?
The run-up to the first bail-out
The saga of the Greek public debt crisis began in October 2009, when the newly elected socialist government announced that the public deficit for 2009 would reach 12.5% of GDP, instead of 3.7%, as projected in that year¡¦s budget. The 10-year bond spread (over the German bond), which was equal to 134 b.p. on 22 October 2010, started rising.
In early 2010, Greece announced a series of austerity measures, which were ‘welcomed’ by the European Council (at its meeting of 25 March 2010). However, the 10-year bond spread reached 586 bp on 22 April. On 23 April 2010, the Greek government formally applied for financial assistance from the eurozone and the IMF. This was agreed in early May 2010, while the ECB announced that it will accept Greek government bonds as collateral irrespective of their rating.
Even so, by 7 May, the 10-year bond spread reached 1038 bp, around which it hovered throughout 2010 and which it has by now exceeded.
The 2010 bail-out
This amounts to Euro 110 bn, of which Euro 80 bn are intergovernmental loans pledged by the eurozone countries and Euro 30 bn by the IMF. The projected disbursement of the loans is designed to meet the financing needs of Greece up to the first half of 2013. The loans carry a 3.5% interest rate and have maturities of 15-30 years, including a grace period of 10 years. The bail-out package is strictly conditional on the implementation of severe austerity measures, as well as of extensive liberalisation and privatization reforms.
More specifically, the austerity measures are based more on expenditure cuts (over 60% of the reduction of the deficit) than on tax increases. They are designed to reduce the public deficit from 15.4% of GDP in 2009 to 2.6% by 2014. Further, thorough-going and detailed reforms of the pension system, of healthcare and of education constitute explicit conditions of the bail-out package. Progress in all of these areas is checked at regular intervals by EU and IMF officials, determining whether whether the next tranche of the loans will be disbursed or not. In this way, additional pressure is exerted, leading to further austerity measures, in case of the targets not being reached.
The bail-out fiscal projections are based on a crucial assumption, that growth resumes not only in Greece, but also globally. As the experience of the past year has shown, this is a bold assumption, almost certain to fail in the short term. Greece is already in a downward spiral of falling wages, prices and production and rising unemployment (17% from 10% in 2009 and expected to exceed 20% shortly), poverty and inequality. As the Fourth Review of the ‘Economic Adjustment Programme for Greece’ notes, the recession is deeper and longer than initially expected. This results in the non-attainment of the bail-out fiscal targets, which leads to new measures, taken in a near-panic by the Greek government, perpetually chasing its own shadow!
The 2011 bail-out
This was decided in July 2011 and it marks a departure from the previous one, insofar as it contains a clause regarding the involvement of the banking sector, which is being asked to take on a loss of approximately 21% of their Greek government bond holdings. The actual form and rate of participation of the banks has not yet been finalised.
A cornerstone of both bail-outs is the fast-track privatization of the state’s holdings throughout the economy. In spite of the EU¡¦s presumed neutrality towards ownership (art. 345 of the Treaty), the European Commission takes a clear position in favour of privatization, as a means of reducing the public debt, as well as of promoting economic activity. Furthermore, the privatization process is to be monitored by an independent board, following the example of the TREUHAND agency, which was responsible for the privatization of the E. German economy, after unification. Obviously, it is considered to have been successful, even though 2,5 million jobs were lost in the process, while the whole exercise cost more than DM 300 billion, as compared with the privatization revenues, which did not exceed DM 60 billion.
Overall, the EU/IMF bail-outs fail to recognise the nature of the Greek debt crisis, be it domestic, European or global. In this way, they overlook not only the deeper aspects of the shortcomings of the Greek economy, but also the structural weaknesses and inadequacies of the euro construction, as well as the role of finance.
Furthermore, the same logic and political one-sidedness is displayed in relation not only to other indebted countries seeking financial assistance, such as Ireland and Portugal, but also with regard to the main policy guidelines for the eurozone as a whole. Pursuing fiscal consolidation simultaneously across an area of 17 member states (not to mention 27!) at a time of crisis is simply spreading ‘contagious austerity’ at the risk of provoking the ‘contagious downturn’ of the eurozone as a whole, in effect risking its very survival (Munchau, FT, 4/9/2011).
3. Outlook and alternatives
The austerity measures and the labour market reforms carried out in Greece are a form of internal devaluation, ie, a way of lowering the real effective exchange rate in terms of unit labour cost. This is a long-drawn process, with a heavy social cost, made even heavier by the current global and European uncertainties. Furthermore, it cannot go on for very much longer, not only because the economy will eventually collapse, but also because, in a society with diversified interest groups, those bearing the greatest share of the burden will reach the limit of their capacity to do so. Already, there are signs of political alienation and anger directed against the two major political parties, which have alternated in power in the post-WWII period. The extreme Right is also registering a rise in electoral preferences.
Overall, the situation in Greece is no longer economically or socially sustainable. The experience of the past year has demonstrated that fiscal consolidation without growth is not possible and that the continuation of the austerity and reform programme of the EU/IMF in fact deepens the recession, making a disorderly default more imminent. So, what is to be done?
The orthodox answer to this question is ‘more of the same’. Germany’s federal minister of finance, Wolfgang Schauble, maintains that ‘Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness, they need to start delivering on these now. The recipe is as simple, as it is hard to implement in practice: western democracies and other countries faced with high levels of debt and deficits need to cut expenditures, increase revenues and remove the structural hindrances in their economies, however politically painful’ (FT, 5/9/2011). A plain message, in clear neoliberal language, which unfortunately cannot work at a time of crisis. But what is the alternative?
The idea of issuing ‘eurobonds’ -ie, bonds collectively guaranteed by the eurozone member states- has been floated by various proponents and in a variety of forms. For example, according to the’ blue’ bond proposal, countries would have the right to issue blue bonds, collectively guaranteed up to 60% of their GDP, thus significantly lowering their borrowing costs.
Another ‘eurobond’ proposal would have the ECB issue bonds and buy up to 60% of the existing debt of the eurozone countries, while individual countries would be responsible for their share of the interest on the Eurobonds.
Both of these proposals could offer some relief to the current crisis of confidence in the eurozone and help indebted countries like Greece out of their current impasse. However, the ‘blue’ bond proposal implies a transfer from stronger to weaker countries, in the form of guarantees, while the’ eurobond’ proposal comes up against the ‘ no bail-out’ clause of the Treaty and of the ECB statute.
More proposals, not necessarily requiring the revision of the Treaty of the Union, have also been forthcoming. For example, Thomas Palley has proposed the establishment of a European Public Finance Authority, that would act as a treasury for the eurozone, in conjunction with the ECB, which in turn would assist budget financing by managing bond interest rates, as a government banker would normally do (Palley in FT, 31-8-2011).
All of the above proposals towards a more meaningful financial, if not fiscal, union of the eurozone have two things in common: (i) they require the political will to adopt and implement them and (ii) they are medium to long-term measures. In the best of cases, they cannot deal with the immediate issues facing Greece or the eurozone.
Most analysts agree on the need to provide breathing space for Greece. The continuation of austerity policies does not only dampen aggregate demand. It also increases the real value of the outstanding debt, which will lead to bank failures and to bankruptcies of businesses. Hence, the need to reverse gear; ie, to reflate the economy by promoting economic growth. Since the private sector cannot do this, it will have to be the government.
Furthermore, there is an urgent need to restart growth in the eurozone and in the EU more generally. Surplus countries like Germany can boost consumer spending in co-ordination with the rest of the eurozone. The European Investment Bank can also contribute to reflation by financing public works. Needless to say, such reflation should take into account environmental and climate considerations and it should be designed so as to reduce inequality and poverty.
Lastly, it is essential that the reform of financial regulation policy in the EU, as well as globally, is concluded soon, after more than two years of deliberations. The attempts by the banks and other financial institutions to tailor the new regulations to their own interests has to be resisted. After all, growth and stability are prerequisites for a successful exit from the current crisis on the national, European and global level"
"1. The Greek narrative - Roots of the crisis
The orthodox account of Greece’s public debt crisis is one of fiscal profligacy, a country living beyond its means. This is not surprising, since Greece’s public deficit and debt, as well as its current account deficit have been persistently high in the past ten years. However, it is a superficial reading of the crisis, to the extent that it does not take into account the process that has led Greece to its present state. It is only through understanding this process, that one can attempt to change it.
Domestic factors
By ‘domestic’ are meant the particular features of the capitalist formation in Greece, as it developed in the past half-century, which help explain the present state of its public finances. In the early 1950s, the Greek economy was in tatters, following a devastating WWII and an equally destructive civil war. The period 1950-1973 was dominated by the authoritarian Right (1950-1967) and the dictatorship (1967-1973). During this period, economic policy, which had little concern for a social agenda, aimed at ‘growth at any cost’, on the basis of a particular type of ‘social compromise’, which tolerated various tax digressions, such as favourable tax arrangements for the industrial sector, exemption of farmers from income tax, tax evasion by small businesses and professionals, etc. So much so, that there emerged the idea of ‘legal tax evasion’, which holds to this date (Stathakis, 2010).
The beginnings of the welfare state date back to the 1980s, during which a number of former national champions were nationalised, with the state taking over their liabilities. The problems facing the economy were compounded by sluggish growth and high inflation, resulting in a severe worsening of public finances.
Joining the eurozone was the strategic goal of the 1990s and of the 2000s. The productive sectors - manufacturing and agriculture- fell further behind, while privatization and market liberalisation helped deepen the financialisation of the economy. While the state of public finances worsened, these were ‘massaged’ through the use of derivatives and with the help of such revered financial institutions, as Goldman Sachs, a point we shall come back to shortly. Further, the inflow of portfolio investment made up much of the shortfall in the current account.
Throughout the sixty year period 1950-2010, the question of boosting state finances through the elimination of tax evasion remained outside the political agenda. This is a salient feature of the chronic fiscal problems of Greece. The fact that it is not bordered upon even today, is indicative of the prevailing group interests in Greek society. For example, it is estimated that the richest 20% of the population pay the least amount of income tax!
Other features of the profile of the Greek economy and its fiscal basis can also be explained by taking a longer-term view of the development of capitalism. For example, the existence of ‘closed professions’ and high public sector employment denote the attempts of capitalists to tie in the interests of the middle class and sections of the working class to their own (Tsakalotos, 2010). In this sense, the resulting social and economic configuration is a component of contemporary Greece, rather than just the symptom of a ‘clientelistic state’.
Only radical social and economic transformation, starting with the tax system and public administration, can make a lasting impact. The EU/IMF package does not address the social nature of Greece’s fiscal problems, while the deepening crisis makes institutional change more difficult.
European factors
It has been said that Greece faces a triple constraint (a) the inability to devalue its currency; (b) global downturn and (c) a powerful partner determined to run a current account surplus (Papadimitriou et al, 2010).
Indeed, in adopting the single currency, the eurozone members solved the problem of exchangerate speculation. However, the lack of a government banker - ie, a central bank that can stabilise the sovereign bond market through open market operations, in the way the Federal Reserve and other central banks are able to do- exposed them to speculation in the bond market, to the extent that the ECB is forbidden by the Treaty from acting in that capacity.
At the same time, the fiscal arrangements of the monetary union rely on discipline and peer pressure, while the Union budget is minimal (less than 1% of EU GDP), excluding by definition the notion of a transfer union. Thus countries like Greece stand defenceless at a time of crisis.
The increase in the public deficit of Greece is largely endogenous. Ie, it is mainly the result of the global and European recession and the coming into play of the automatic stabilisers. Thus a chronically high public deficit and debt shot upwards in 2009-2010. Financial engineering exacerbated the situation.
The third constraint facing Greece, as well as other indebted eurozone countries, is the growing divergence in the performance of different countries. In particular, a persistent and growing trade imbalance between Germany and certain other mainly N. European countries, on the one hand, and most S. European countries, amongst which Greece, on the other, is indicative of the competitiveness problems faced by the latter even in normal times, let alone at a time of crisis. The macroeconomic stance chosen by a major economy in the eurozone, such as Germany, undermines any attempt at convergence.
Thus, although the Greeks work longer hours than the Germans on an annual basis, have one of the lowest per capita incomes in Europe, a very unequal distribution of income and a high level of poverty, especially among the working poor (OECD, 2010), they are less competitive than their German counterparts, because Germany is pursuing a low-wage growth strategy, which is consistent with its export-led model. On a long-term basis, such divergences are not compatible within a monetary union, unless the difference in the current account balance between surplus and deficit member states is compensated for by transfers. This however is precluded by design.
Overall, the restrictive institutional arrangements of the European Monetary Union and the diverging wage policies of its member states account not only for much of the predicament Greece finds itself in, but also for its inability to overcome it.
Global factors
As mentioned above, much of the increase in the Greek public debt was originally triggered by the global downturn. In addition, global finance played a significant part in exacerbating the crisis in its different stages.
Starting at the beginning, for nearly fifteen years, Goldman Sachs created currency swaps that enabled Greek government debt issued in dollars and yen to be swapped for euro-denominated bonds that would be paid back at a later date. The bond maturities range between 10-15 years. GS received a hefty commission and sold the swaps to a Greek bank in 2005. The Greek government kept its eurozone partners happy and the state of the Greek public finances was expertly and legally disguised!
As Greece’s financial condition worsened in 2009, GS, JP Morgan and certain other banks backed an obscure company - the Markit Group of London- to introduce a new index - the iTraxx SovX Western Europe- made up of the 15 most heavily traded credit-default swaps in Europe and covering troubled economies such as that of Greece. This enables market players to bet on whether Greece, amongst others, will default or not. Trading in such swaps drives up the cost of insuring Greek sovereign debt and in turn what Athens has to pay to borrow funds. Hence the phenomenon of banks betting Greece will default on debt they helped hide!
As mentioned above, the monetary arrangements of the eurozone leave its members vulnerable to bond market speculation. As the Greek crisis demonstrated, such countries can be held hostage by financial markets and credit rating agencies alike. The multiple downgrades of Greek sovereign bonds are illustrative in this respect. In the first half of 2011 alone, the three big CRAs downgraded them 7 times! Not surprisingly, by July 2011, the spreads on these bonds exploded, as did the CDS.
Overall, global finance affected the emergence and the development of the Greek public debt crisis both directly and indirectly. The particular instances mentioned above are examples of direct involvement. Indirectly, global finance has been instrumental in fostering the ¡¥profligacy of the Greeks’ narrative, in an attempt to divert attention from its own part in the crisis and to secure fresh bail-out funds. Furthermore, as pointed out by Walden Bello, by throwing the spotlight on the high and rising government spending as the key problem of the economy worldwide, global finance is trying to deflect the pressures for tighter financial regulation demanded by citizens and governments since the start of the global crisis.
2. EU/IMF bail-outs -The cure killing the patient?
The run-up to the first bail-out
The saga of the Greek public debt crisis began in October 2009, when the newly elected socialist government announced that the public deficit for 2009 would reach 12.5% of GDP, instead of 3.7%, as projected in that year¡¦s budget. The 10-year bond spread (over the German bond), which was equal to 134 b.p. on 22 October 2010, started rising.
In early 2010, Greece announced a series of austerity measures, which were ‘welcomed’ by the European Council (at its meeting of 25 March 2010). However, the 10-year bond spread reached 586 bp on 22 April. On 23 April 2010, the Greek government formally applied for financial assistance from the eurozone and the IMF. This was agreed in early May 2010, while the ECB announced that it will accept Greek government bonds as collateral irrespective of their rating.
Even so, by 7 May, the 10-year bond spread reached 1038 bp, around which it hovered throughout 2010 and which it has by now exceeded.
The 2010 bail-out
This amounts to Euro 110 bn, of which Euro 80 bn are intergovernmental loans pledged by the eurozone countries and Euro 30 bn by the IMF. The projected disbursement of the loans is designed to meet the financing needs of Greece up to the first half of 2013. The loans carry a 3.5% interest rate and have maturities of 15-30 years, including a grace period of 10 years. The bail-out package is strictly conditional on the implementation of severe austerity measures, as well as of extensive liberalisation and privatization reforms.
More specifically, the austerity measures are based more on expenditure cuts (over 60% of the reduction of the deficit) than on tax increases. They are designed to reduce the public deficit from 15.4% of GDP in 2009 to 2.6% by 2014. Further, thorough-going and detailed reforms of the pension system, of healthcare and of education constitute explicit conditions of the bail-out package. Progress in all of these areas is checked at regular intervals by EU and IMF officials, determining whether whether the next tranche of the loans will be disbursed or not. In this way, additional pressure is exerted, leading to further austerity measures, in case of the targets not being reached.
The bail-out fiscal projections are based on a crucial assumption, that growth resumes not only in Greece, but also globally. As the experience of the past year has shown, this is a bold assumption, almost certain to fail in the short term. Greece is already in a downward spiral of falling wages, prices and production and rising unemployment (17% from 10% in 2009 and expected to exceed 20% shortly), poverty and inequality. As the Fourth Review of the ‘Economic Adjustment Programme for Greece’ notes, the recession is deeper and longer than initially expected. This results in the non-attainment of the bail-out fiscal targets, which leads to new measures, taken in a near-panic by the Greek government, perpetually chasing its own shadow!
The 2011 bail-out
This was decided in July 2011 and it marks a departure from the previous one, insofar as it contains a clause regarding the involvement of the banking sector, which is being asked to take on a loss of approximately 21% of their Greek government bond holdings. The actual form and rate of participation of the banks has not yet been finalised.
A cornerstone of both bail-outs is the fast-track privatization of the state’s holdings throughout the economy. In spite of the EU¡¦s presumed neutrality towards ownership (art. 345 of the Treaty), the European Commission takes a clear position in favour of privatization, as a means of reducing the public debt, as well as of promoting economic activity. Furthermore, the privatization process is to be monitored by an independent board, following the example of the TREUHAND agency, which was responsible for the privatization of the E. German economy, after unification. Obviously, it is considered to have been successful, even though 2,5 million jobs were lost in the process, while the whole exercise cost more than DM 300 billion, as compared with the privatization revenues, which did not exceed DM 60 billion.
Overall, the EU/IMF bail-outs fail to recognise the nature of the Greek debt crisis, be it domestic, European or global. In this way, they overlook not only the deeper aspects of the shortcomings of the Greek economy, but also the structural weaknesses and inadequacies of the euro construction, as well as the role of finance.
Furthermore, the same logic and political one-sidedness is displayed in relation not only to other indebted countries seeking financial assistance, such as Ireland and Portugal, but also with regard to the main policy guidelines for the eurozone as a whole. Pursuing fiscal consolidation simultaneously across an area of 17 member states (not to mention 27!) at a time of crisis is simply spreading ‘contagious austerity’ at the risk of provoking the ‘contagious downturn’ of the eurozone as a whole, in effect risking its very survival (Munchau, FT, 4/9/2011).
3. Outlook and alternatives
The austerity measures and the labour market reforms carried out in Greece are a form of internal devaluation, ie, a way of lowering the real effective exchange rate in terms of unit labour cost. This is a long-drawn process, with a heavy social cost, made even heavier by the current global and European uncertainties. Furthermore, it cannot go on for very much longer, not only because the economy will eventually collapse, but also because, in a society with diversified interest groups, those bearing the greatest share of the burden will reach the limit of their capacity to do so. Already, there are signs of political alienation and anger directed against the two major political parties, which have alternated in power in the post-WWII period. The extreme Right is also registering a rise in electoral preferences.
Overall, the situation in Greece is no longer economically or socially sustainable. The experience of the past year has demonstrated that fiscal consolidation without growth is not possible and that the continuation of the austerity and reform programme of the EU/IMF in fact deepens the recession, making a disorderly default more imminent. So, what is to be done?
The orthodox answer to this question is ‘more of the same’. Germany’s federal minister of finance, Wolfgang Schauble, maintains that ‘Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness, they need to start delivering on these now. The recipe is as simple, as it is hard to implement in practice: western democracies and other countries faced with high levels of debt and deficits need to cut expenditures, increase revenues and remove the structural hindrances in their economies, however politically painful’ (FT, 5/9/2011). A plain message, in clear neoliberal language, which unfortunately cannot work at a time of crisis. But what is the alternative?
The idea of issuing ‘eurobonds’ -ie, bonds collectively guaranteed by the eurozone member states- has been floated by various proponents and in a variety of forms. For example, according to the’ blue’ bond proposal, countries would have the right to issue blue bonds, collectively guaranteed up to 60% of their GDP, thus significantly lowering their borrowing costs.
Another ‘eurobond’ proposal would have the ECB issue bonds and buy up to 60% of the existing debt of the eurozone countries, while individual countries would be responsible for their share of the interest on the Eurobonds.
Both of these proposals could offer some relief to the current crisis of confidence in the eurozone and help indebted countries like Greece out of their current impasse. However, the ‘blue’ bond proposal implies a transfer from stronger to weaker countries, in the form of guarantees, while the’ eurobond’ proposal comes up against the ‘ no bail-out’ clause of the Treaty and of the ECB statute.
More proposals, not necessarily requiring the revision of the Treaty of the Union, have also been forthcoming. For example, Thomas Palley has proposed the establishment of a European Public Finance Authority, that would act as a treasury for the eurozone, in conjunction with the ECB, which in turn would assist budget financing by managing bond interest rates, as a government banker would normally do (Palley in FT, 31-8-2011).
All of the above proposals towards a more meaningful financial, if not fiscal, union of the eurozone have two things in common: (i) they require the political will to adopt and implement them and (ii) they are medium to long-term measures. In the best of cases, they cannot deal with the immediate issues facing Greece or the eurozone.
Most analysts agree on the need to provide breathing space for Greece. The continuation of austerity policies does not only dampen aggregate demand. It also increases the real value of the outstanding debt, which will lead to bank failures and to bankruptcies of businesses. Hence, the need to reverse gear; ie, to reflate the economy by promoting economic growth. Since the private sector cannot do this, it will have to be the government.
Furthermore, there is an urgent need to restart growth in the eurozone and in the EU more generally. Surplus countries like Germany can boost consumer spending in co-ordination with the rest of the eurozone. The European Investment Bank can also contribute to reflation by financing public works. Needless to say, such reflation should take into account environmental and climate considerations and it should be designed so as to reduce inequality and poverty.
Lastly, it is essential that the reform of financial regulation policy in the EU, as well as globally, is concluded soon, after more than two years of deliberations. The attempts by the banks and other financial institutions to tailor the new regulations to their own interests has to be resisted. After all, growth and stability are prerequisites for a successful exit from the current crisis on the national, European and global level"
Lord Bracknell
On fire
I question the competence of these lending agencies. I'm aware of the workings of a £100 million fund that the government set up in early 2011 to support small social enterprise businesses to weather the impact of public spending cuts. The fund was farmed out to The Big Lottery to administer. Money was distributed through a process that involved not much more than ticking the right boxes on an application form - but there was little evidence that The Big Lottery understood the strategic issues involved, or the real investment needs of the organisations that were eligible for the funding.
But the government is happy. They've off-loaded a chunk of public money into a cuddly sector of the economy. But it would be a mistake to imagine that any of the disciplines that automatically apply to conventional bank loans were in place. The same risks no doubt apply to all these other new-fangled lending agencies that are springing up.
Uncle Spielberg
Well-known member
Frighteningly now a lot of small businesses have to go to " Wonga for business ". What a state of affairs. But they have to as the banks are not lending and the quantative easing has done nothing, well except destroy elderly people's pensions, as it has just been held in the banks reserves as the QE went to the banks, not into the economy. Due to this numerous small businesses have been allowed to go to the wall even when they had very healthy order books. Another epic fail.
Uncle Spielberg
Well-known member
Still Super Dave is doing a speech to business leaders ( and UK public generally ) today to tell everyone how wonderful eveything will be in 2 years time.
Oh come on stop now ........
No doubt you have bored your friends and used the patronising 'little Englander' swipe on many of them.
Just accept that you got it totally wrong, it was a flawed political project woven together by arrogant politicians and accepted fair too readily by naive ( or politically driven ) people like you.
And god how you are squirming and you and others are scrambling around just trying to glean something that might offer your view some authority, just like those European politicians that took us there in the first place.