System overload brings meltdown closer

Screaming headlines and scary language convey the immediacy of a renewed economic collapse as financial markets demand political solutions to a runaway debt crisis on both sides of the Atlantic.

According to the International Monetary Fund there is now "serious risk" of eurozone contagion with "large" potential knock-on effects worldwide. "Market participants remain unconvinced that a sustainable solution is at hand."

An emergency meeting of European presidents and prime ministers has been called for tomorrow to try and head off the break-up of the eurozone single currency.

According to the Daily Telegraph’s Ambrose Evans-Pritchard: “Only Germany can save EMU as contagion turns systemic.” He says “Europe's leaders have finally run out of time…. they risk a full-fledged run on South Europe's bond markets and a disorderly collapse of monetary union.”

But Germany’s banks are already heavily exposed to Greek debt and helping Greece would only serve to accelerate the spread of the contagious crisis throughout Europe. Now Portugal’s new government has discovered a gaping hole in the country’s finances, just as Papandreou’s PASOK administration did when it came to power.

Leading business commentator Jeremy Warner does not mince his words: “Financial confidence is again fast evaporating, threatening to plunge the world back into deep recession and some of the hardest times since the 1930s. This might sound unduly apocalyptic, but not since the depths of the banking crisis have conditions looked as perilous as they are today.”

While the failure to resolve Greece’s debt crisis would detonate a global explosion, the much bigger Spanish and Italian economies are under attack by market speculators.

Spain’s cost of borrowing has followed Italy’s soaring rates to unsustainable levels as investors demand higher and higher rates to cover the mounting risk of default. But compare their single digit rates to the punishing greater than 20% now demanded from Portugal and Greece.

Using the terminology of war, global bond trader Pimco says a plan of "overwhelming force to let the markets know that once and for all you’re putting out the fire" in Europe, should start with letting Greece, Portugal and Ireland default.

Attempts to break the US impasse grow ever more desperate as the August 2 deadline for raising its self-imposed $14 trillion debt ceiling approaches. The Financial Times warns that the “US faces economic suicide if spending isn’t restrained”.

President Obama has embraced the latest plan from the bipartisan “Gang of Six” which would sacrifice health and welfare and lead to a dramatic increase in unemployment. Yet there is doubt whether the political will exists for the Republicans to sign up to the deal.

So what of the UK? With the worst ratio of combined public and private sector debt to national income of the world’s developed economies, it is the most vulnerable to a renewed global recession, which would turn to depression immediately.

Says Warner: “The deleveraging [debt write-off] pressures are at their most acute in the[UK] banking sector, where bad debts and higher capital requirements are driving a sustained contraction in available credit. To meet these higher capital requirements, banks must either increase the cost of credit, so as to attract the necessary equity, or significantly reduce the size of their balance sheet.”

As the panic begins, the solutions being promoted become more extreme every day. No manufacturer can avoid the inevitable consequences of a sharp reduction in production. Whilst previously confident global corporations proclaim their prospects for growth to retain shareholders’ loyalty, in the shadows they are taking every opportunity to “restructure”.

Millions of people across the globe are determined that they can’t and won’t bear the costs of the systemic implosion engulfing the capitalist system. The revolutionary wave that began in Tunisia and Egypt is gathering pace as people become ever more impatient with the pace of change.

In town and city squares new democratic forms are in formation that can replace the discredited political systems. The creative genius of the people must now turn to seizing the resources of the system of for-profit corporations that are the source of the crisis and replacing it with a global society producing for need.

Gerry Gold

Economics editor