Greece is the first domino to fall

The global debt crisis has claimed its first sovereign state victim in the shape of Greece, which has effectively defaulted on its international loans. It won’t be the only country to suffer this fate or its population the last to feel its social impact.

The eurozone’s political heavyweights Germany and France sealed Greece’s fate last night when they agreed that private holders of Greek’s mammoth debt will take a hit of €50 billion over three years. Whether the banks and bond holders in the firing line will do so quietly is another question, however.

Not even achieving an agreement in Brussels can paper over the deep divisions between Bonn and Paris about how to prevent the collapse of the euro as a trading currency or prevent financial contagion moving on to other economies like Spain and Italy.

All the 17 eurozone governments could agree was that a "controlled" failure was the only way to prevent the collapse of the single currency and a global financial rout. In the end, the figures are meaningless and only add to the debt mountain facing Greece.

Athens will get another bailout package totalling €159bn. This is on top of the €110bn “rescue package” agreed less than two months ago. The country’s debt is by various manoeuvres, including subsidising interest rates, cut by a quarter.

So get this straight. You give someone more money to pay back existing debt, adding to the total outstanding, extend the repayment period by decades and ask some lenders, including the European Central Bank, to take less in return.

That’s the world of fantasy finance that was built by the banks and has now been adopted as the way to go by governments.

Refinancing is clearly a miracle cure of our age! Shame this arrangement is only available to states facing bankruptcy and not individual households running out of money for housing, food, transport and energy.

The deal means that banks could be forced overnight to write down as losses billions of euros in losses on Greek debts, leaving them short of capital. Financial experts say the

the debt restructuring could also trigger payouts on billions of dollars of credit derivative contracts, used to hedge against or speculate on a Greek default

The emergency summit was accompanied by a truckload of wishful thinking. Dutch Prime Minister Mark Rutte said: "We have thus sent a clear signal to the markets by showing our determination to stem the crisis and turn the tide in Greece, thereby securing the future of the savings, pensions and jobs of our citizens all over Europe."

What has actually happened is that the “peripheral” economies like Greece, Ireland and Portugal are being cut adrift or reduced to vassal states to buy up goods produced in northern Europe. The European Union is beginning to resemble a corporate empire with cheap labour subsidiaries disguised as countries.

France pushed through a plan to create the European eqivalent of the International Monetary Fund and there was agreement for most countries to rein in their spending to protect the euro. It won’t be enough to hold back a crisis generated by mountains of debt built up in every sector over decades.

As Reuters correspondent Felix Salmon noted: “Overall, this looks like a deal which can quite easily be scaled up and used as a framework for future default/restructurings … But there’s nothing here to reassure holders of Portuguese and Irish bonds — or even Spanish and Italian bonds, for that matter — that they’re home safe. Greece will be the first EU country to default on its debt. But I doubt it’ll be the last.”

The second wave of the global financial crisis that has shaken global capitalism is under way and is certain to be much more devastating than the first shock of 2008.

Paul Feldman

Communications editor