The European debt crisis and the threat of dictatorship

From World Socialist Web Site:

Stefan Steinberg
16 July 2011

Just two weeks ago, the Greek parliament passed a fresh round of austerity measures which will have a devastating impact on the living conditions of Greek workers. The parliamentary vote was preceded by a propaganda campaign by the finance houses, banks and leading European politicians, declaring that the new austerity measures were the only way to assuage the money markets and stabilize the euro.

Since then, the European debt crisis has only intensified. In line with the pattern throughout the crisis, the new round of social cuts and privatizations has been seized on as a benchmark to demand even more brutal attacks on the living standards of the working class in Greece, across Europe and internationally.

One week after the passage of the Greek austerity package, Moody’s downgraded Portuguese government bonds to junk status. A few days later a combined assault by hedge funds and rating agencies forced up the interest rate on Italian government bonds and precipitated a near-panic over that country’s sovereign debt.

This move by the financial markets was in response to reports that the austerity program agreed by the Italian government might be watered down in the course of its passage through parliament. Responding to the market offensive, the Italian finance minister announced he was doubling the total of spending cuts to be carried out over the next three-and-a-half years. Within days, a sweeping austerity package for Europe’s third largest economy had been passed.

At the start of this week, European finance ministers met in emergency session to discuss means to pacify the markets. In a major concession, they agreed to reverse their existing policy and make available the resources of the European Union bailout fund to directly buy up Greek debt.

The markets reacted to this concession with a renewed offensive. On Tuesday, Moody’s downgraded Ireland’s debt to junk status, and on Wednesday, Fitch Ratings downgraded Greek sovereign debt, declaring that default by Greece was “a real possibility.”

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10 Responses to “The European debt crisis and the threat of dictatorship”

  1. Andrea B. Says:

    You had better hope that Greece does not default. The money owed by Greece to French, German and UK banks is insured by futures investments on Wall Street. Interesting way to insure loans.

    If Greece defaults, your entire Stock Exchange disappears in a flash.

    If you think it is bad now in the USA, just wait to see what it is like, after a Greek default. You will need a wheelbarrow to carry the money to buy some milk, just like Germany in the early 1920’s.

    Also your US rating agencies are deliberately downgrading European countries, quite often unnecessarily, yet are refusing to downgrade the USA which clearly has more serious problems than every European country put together.

    There is talk now of building an European rating company. Should be interesting to see their rating of the USA.

  2. tinagrrl Says:

    Oh dear, I guess the press there is as bad as the press here. Our press tend to say the EXACT opposite of yours.

    As far as the credit rating of the USA, just hope we don’t either get downgraded or (worse yet) default — then I think you will see the mother of all meltdowns — for all of us.

    This from mid-June:

    How Badly Will a Greek Default Hurt US Banks? from

    $41 billion dollars bad according to MartketWatch. The article cites the most recent statistics published by the Bank of International Settlements on June 9th, that chronicle each creditor’s relative exposure to the financially embattled Greeks. 83% of that money is estimated to be at risk indirectly, or as cash that could be collected on insurance claims by direct debt-holders.

    Even with an official statistic from an NGO, the data is far from certain, and there may be much more capital that US bankers stand to lose. According to one economist, “We don’t know exactly what the form of exposure…We can only make educated guesses.” Our guesses may become more educated soon, as Moody’s (NYSE:MCO) and other credit agencies are starting to lower ratings on banks thought to hold large degrees of exposure to Greek Debt. Just yesterday, the investment service put long-term debt and deposit ratings under warning for possible downgrade at three large French banks, Credit Agricole SA (NYSE:ACA), BNP Paribas SA and Societe General SA.

    Moody’s made its reasoning very straightforward,”The primary focus of all three reviews will be the banks’ credit exposures to Greek government debt and the Greek private sector and the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels.”

    What likelihood do American banks have of sharing the same fate? Apparently a very slim one. According to SEC filings, Bank of America (NYSE:BAC), is the US bank with the largest direct exposure to Greek debt, at $$477 million. JP Morgan (NYSE:JPM) and Citigroup (NYSE:C) listed their exposure under “cross-border risk” and did not have to provide an exact amount unless it exceeded a certain percentage of the banks’ total assets (meaning it was probably very small).

    Default worries drove the market to the ground yesterday, compounding fears that the turmoil from a Greek Default would be worse than Lehman Bros, as one source recently suggest.

    I’m sure there is much more info but, this is a beginning.

  3. Andrea B. Says:

    @ tinagrrl,

    If Greece defaults, the first organisation to disappear will be AIG as they have insured the bulk of loans from BNP Parabis and Deusche Bank with a futures deal, instead of a tangiable asset. They have also cut deals with the main Wall Street banks to cross insure and re-insure themselves with more futures deals. They have built a Wall Street ponzy scheme, which could bring them all down.

    JP Morgan, Bank of America and Citigroup are exposed to well over 100 billion US dollars, at minimum due to supporting AIG with futures deals on this issue.

    That does not include many deals that Wall Street banks illegally made so as to hide Greek debt, so as to deliberately get a financial basketcase into the Euro. The Wall Street banks are all at risk due to illegal debt credit swaps with the Greek government that are all due to mature over the next couple of years. The illegality of those deals will make it very difficult for the US government to bail them out if they go wrong.

    Also if the Euro survives which it most likely will, US banks will have to be bailed out again as all of Wall Street has taken positions against the Euro over the next couple of years.

    As for Moody’s and S&P. Investigations are being started in Europe into there activites. They are purely in the pockets of the Neo-Liberal investors who fund them and are incapable of independant reporting of actual fiscal situations as has been proven time and again.

    Moody’s, S&P and Wall Street institutions are on a mission to destroy anything that brings Europe closer together. They are ideology driven. That is what will destroy them.

  4. Andrea B. Says:

    Also I forgot to say.

    The article itself is needlessly alarmistic.

    There will be no revolutions in Spain, Italy or Portugal and there are definately no plans to remove democracy in Germany.

    The article is alarmist nonsense by an idiot who clearly has not knowledge of the present situation.

    Just read any newspapers or talk to anyone in Italy, Ireland, Spain, Portugal or any other European country and you will realise that.

    As for the European economy. The entire Northern part of the European economy is in growth. Poland was in growth the entire duration of the worst of the economic crisis. Estonia improved its economy to the point that it joined the Euro as did Slovenia. The Czech Republic is exporting more than ever. Slovakia is increasing exports. Germany is the worlds second biggest exporter, just behind China with 15 times the population. Serbia, Kosovo and Croatia are making significant progress towards joining both the European Union and eventually the Euro, while exporting like crazy.

    As for those countries in a mess. Two years from now, Ireland will have completed its process of winding up and shutting down its large banks. Industrial growth excluding banking last year in Ireland was officially 9%, but it is clear on the ground that it was well beyond that. The winding up of the banks has reduced overall growth to 1%. Remove the banks and the Irish picture looks very different. The number of new company start ups is at its highest ever in Ireland and most are export led at long last.

    In Greece, the number of new start ups is also increasing very rapidly, with the same occuring in Spain and Portugal. All they have to do is get through the banking crisis and they will come out of this stronger than ever.

    The IMF and other Wall Street bastards are trying to ensure they don’t get through this, but the longer they hold out, the more likely Wall Street will lose out, badly.

    The real problem countries in Europe are Greece, Italy and the United Kingdom, not Spain, portugal and Ireland and French-German refusal to accept that Europe needs a European Finance Ministry and European political Union to merge the economies completely.

    The choice in Europe is complete integration or break up. Breaking up leads to old nationalism, which no one needs. We had old nationalism in 1914 and 1939.

  5. Andrea B. Says:

    Now Wall Street are attacking non-Euro countries such as Poland, Hungary and Croatia.

    An example of what I am referring to.,zloty-na-spekulacyjnej-hustawce-frank-po-4-zlote.html

    The press in those countries are not amused to put it mildly. The ordinary people in those countries consider the actions of Wall Street to be on behalf of the US government, as does ordinary people in Brazil and South Africa who are also on the recieving end of Wall Street speculators at present.

    The fact that Wall Street is now attacking countries that are in serious growth shows the lies used against the Euro by Wall Street and US commentators such as in the article above for what they are, as the majority of the Euro area is actually in growth.

    I did a bit of digging as I found this article not only weird and a pack of lies, but thought I had recognised it from somewhere. It appears the article is actually quoting allegations made by Koch Brothers, Alex Jones and other fanatics who make bizarre claims against Europe, unionised workers, universal healthcare and free education. It is interesting to see a publication that claims to be left wing recycling 3 to 9 month old quotes by ultra ring wing fanatics. In plain language the article is a load of ultra ring wing lies, masquerading as a left wing position statement.

    An interesting method of maintaining polarisation in debates and controlling the entire debate.

    • Suzan Says:

      Wall Street does not act on the behalf of the US Government. It never has.

      The Government acts on behalf of Wall Street. We have always had a government that protects the oligarchs. We go to war to further the interests of Wall Street, we colonize in the interests of Wall Street.

      The same is true of Great Britain and every other country that extends its hegemony beyond its own borders.

  6. Andrea B. Says:

    @ Suzan

    You are missing my point.

    The non english speaking world see it very differently from the way US centered people do. That is the point I am making.

    You read a very US centric press. I read a semi global press from Brazil, Argentina, Europe and East Asia. They have very different opinions from Anglo-US media as do there citizens.

    Also by pissing of so many various countries, Wall Street will drive a wedge between the US and its allies on the streets, which in some countries will translate to the actual governments. If the US government had any sense it would reel in the speculators, but instead it is backing them up, in attacking its own allies. A large proportion of non-english speakers consider Wall Street to be acting with the approval of the US government. It is how a lot of them see it.

    There is also the issue that most economies have started to decouple from the US over the last five years and that process is accelerating, which is why the IMF, Moody’s, S&P and Fitch are looking for countries to pick of to ensure short term returns. They have really pissed of the Czech, German, Polish, Lithuanian, Turkish, Hungarian and Croatian governments recently by making completely fabricated claims about there economies. Every economy is diversifying who it deals with. Sooner or later a European country will refuse to deal with the IMF and use Russian, Chinese, Korean, Brazilian or Middle Eastern countries for finance. When that happens the US deficit will rise even faster due to lack of trade for Wall Street which will decrease the value of the dollar substantially. Most African countries have already started to avoid the IMF completely which they now realise they should have done years ago.

    USA, UK, Greece, Spain and Portugal maybe in negative growth, however the majority of the rest of the planet is in positive growth as is the majority of Europe, contrary to the impression in the US media. The Anglo-UK recession is not really translating to the rest of the planet. Most other countries have already returned to growth.

  7. tinagrrl Says:

    Perhaps this might interest some folks:

    Marshall Auerback: The European Monetary Union is the Titanic

    By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Deal 2.0

    The Iceberg Cometh: An economic and financial crisis will soon be brought about by the collapse of the European Monetary Union. And everyone goes down with the ship!

    In the past, I have called the euro zone a “roach motel”. But as usual, I’ve been outdone in the metaphor design department by the Italians: Guilio Tremonti, the Italian Finance Minister, last week compared Germany and its small-minded Chancellor Angela Merkel to a first-class passenger on the Titanic. The underlying message is the same: You can be sailing in coach or you can be in the 1st class compartment. But when the ship hits the iceberg, everybody goes down together — Germans, Italians, Greeks, Irish and French alike. All euro zone members have an institutional wide problem of not being able to fund deficits, given that the countries of the euro zone have all acceded to impose gold standard conditions on themselves by forfeiting their fiscal freedom.

    To repeat: this is not a problem confined to the periphery. The sovereign risk problem applies to the central core countries, such as Germany and France, as it does to the Mediterranean “profligates”. Once a run on the currency starts and moves into the banking sector, then none of the governments will be able to do anything other than to oversee financial and economic collapse while the fiddlers in Brussels and Frankfurt try to spin some line about “special circumstances” or something without admitting the whole system they imposed on the area is the cause of this crisis.

    In the words of Stephanie Kelton:

    The risk for the fiscal authorities of any member country is that the ‘dismal arithmetic’ of the budget constraint leaves few palatable alternatives. If the yield on government securities demanded by markets exceeds a country’s nominal income growth, then interest expense on the outstanding debt must become a relatively larger burden (Jordan, 1997: 3).

    In a country like the United States, this should never cause financial stress; the U.S. government can always meet any dollar-denominated commitment as it comes due. But markets clearly recognize that things work differently in the Eurozone, where governments are no longer able to ‘print money.’ As a result, the bonds issued by member governments now resemble those issued by state and local governments in the United States (or bonds issued by provinces in Canada or Australia), where yields often differ by a sizable amount.

    The European Monetary Union has hitherto only survived because whenever push comes to shove, the ECB has stepped in as the “missing” fiscal agent and has kept the bond markets at bay. It continues to “write the check” whenever the markets seek to shut down the individual markets on the grounds of looming insolvency.

    But Finance Minister Tremonti is right: the underlying logic of the monetary system will continue to ensure these on-going crises will spread across the union. Each successive “resolution” is merely a place-holding operation. The EU bosses are just buying time and kicking the can down the road. Ultimately, to survive the system has to add a unified fiscal authority and abandon the fiscal rules embodied in the Stability and Growth Pact or accept the experiment has failed and dissolve the union. The constant stop-gap measures being introduced on a seemingly ad hoc basis are leading toward a very unpleasant dissolution, the end result for which could be Europe’s “Lehman” event. Meanwhile, the iceberg is approaching rapidly.

    Europe’s brokered marriage is in deep trouble. The partners have not grown together. For a long time, countries such as Greece and Portugal benefited from the illusion of economic convergence through the lower interest rates and stable currency that the euro brought with it. When the European economy was growing, the markets indulged the fantasy that there was little to choose between Greek and German debt. But that has now changed — and Greece has to pay a significant premium on its borrowing, as does Portugal and now Spain and Italy.

    It is also now obvious that countries such as Greece, Spain, Italy, Ireland and Portugal are struggling to compete with the much more productive German economy. In a currency union they cannot devalue their way out of trouble. The only alternative solution on offer is a long and painful period of austerity to reduce their costs through cuts in wages and living standards, the so-called “internal devaluation” — in reality, a one-off coordinated reduction of wages and prices across the board. It is, as I have argued before, more like an “infernal devaluation.” It amounts to a domestic income deflation — as wages are crushed — in order to get the prices of tradable goods down enough so the current account balance increases sufficiently enough to carry the next wave of growth.

    This lack of economic convergence has revealed the lack of political convergence around a shared European identity. There is a striking lack of sympathy for the Greeks or Italians from Germany. Berlin continues to fiddle while Rome and Athens burn. The German position seems to be that the weaker European economies are paying the price for not being as hard-working and skilled as Germans — and must now shape up or ultimately leave the euro.

    Any suggestion that German under-consumption and export-addiction might have something to do with the crisis in the euro-area is brushed aside. Some Greek politicians have responded to German pressure with angry references to the Nazis’ brutal occupation of their country during the Second World War. So much for European solidarity.

    In this context, it is interesting to see that former German Chancellor Helmut Kohl is now apparently speaking out against current Chancellor Merkel, who has proven herself to be a small-minded burger who should not be entrusted with the leadership of a great nation like Germany.

    Merkel, of course, claims to be safeguarding the interests of German taxpayers. It is amusing to hear the Germans talk about the “cost” to them of staying in the euro zone as a result of “funding” so-called “profligates” such as Greece or Italy. First of all, the “funding” comes from the ECB which creates new net financial euro denominated assets at will, not the Germans.

    In fact, there has been zero cost to the Germans. They’ve locked their export competitors into the European Monetary Union at hopelessly uncompetitive exchange rates. German taxes haven’t gone up, they haven’t had their generous social welfare provisions cut (which are much larger than Greece’s, contrary to popular perception). At the same time, the periphery countries have had their economies destroyed by enforced austerity, in exchange for which they get ongoing ECB funding which (wait for it) helps them to buy yet more German imports.

    So the ECB keeps the game on the road to facilitate the continued expansion of German exports to the rest of Europe (although that strategy is, as Mr Tremonti amongst others, has started to notice, is becoming a touch self-defeating), and the Germans pay nothing for this privilege. No increased taxes, no austerity and no competitive threat to Berlin’s export base so long as the PIIGS are locked into the euro straitjacket.

    A further sad irony is that if Greece, Spain or the other periphery nations genuinely succeeded in implementing a successful “internal devaluation” a number of German businesses would relocate, or force further downward pressure on German domestic wages.

    Guilio Tremonti is right: Germany is in the first class cabin of the Titanic. Another way of looking at it is that figures like Chancellor Merkel are leading the PIIGS to slaughter in the abattoir, not realizing that they are on the same conveyor belt. The tragedy ushered in by the current crisis is entering into its critical phase, and the small mindedness of the policy response could well spell the death of not just a currency but also a vision for a unified Europe. The essential problem is that the EU was founded as a political venture but quickly grew into a (promising) economic venture. The irony is that the lack of a true political union — which would have permitted a unified fiscal policy — is precisely what will kill the whole idea.

  8. Andrea B. Says:

    The New Deal 2 article is written by a person who is fundementally opposed not only to the Euro but also to the European Union and all its institutions.

    Ireland will not need a second bailout and with the reduction in interest rates to normal market rates Ireland will have finished winding up its massive banks by the end of next year. The US still has banks that are draining the economy of everything it has.

    Irish debt is reducing very rapidly and Portual is starting to follow suit.

    As for what the author has written regarding German costs. That is a complete fabrication and has no basis in fact. This has cost Germany heavily as they are the majority funder for not only the bailouts but also the largest payer towards European infrastrure in the European Union and countries which are coming into the European Union.

    Most of the infrastrure and reconstruction money spent in the last decade in Serbia, Croatia, Slovenia, Kosovo, Macedonia, Bosnia, Montenegro, Albania and Ukraine has come from the German taxpayer to prepare those countries for eventual European Union membership. New Infrastructure in Poland, Romania, Bulgaria, Slovakia, Czech Republic, Hungary, Estonia, Lithuania, Estonia and Latvia are mostly paid for by German taxpayers. Marshall Auerback is in full knowledge of that, so is deliberately lying through his teeth.

    Also the New European ratings agency should be up and running in about a year. It will be very interesting to see how the US rating agencies, economy and banks are rated by the new agency. Also there are hints of a new Chinese rating agency which should really put the cat amongst the pigeons. Apparently some Brazilian and South African politicians have suggested they should set up rating agencies also.

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