A default by any other name

When is a default not a default? When the Greek government and the European Central Bank pretend otherwise. In the real world, the truth is quite different.

According to the Financial Times, the swap deal closed out between Athens and private investors overnight is, in fact, the “world’s largest ever sovereign default”.

Lenders that include banks, equity and pension funds have, in effect, had what’s owing to them reduced by 75%. They agreed on the basis that the alternative was a 100% loss.

The deal may have reduced Greece’s sovereign debt by over €100 billion but it still leaves twice that amount outstanding – and an economy that has collapsed under the weight of austerity measures.

Yesterday, unemployment figures showed that one in five Greeks is out of work, with more than 50% of young people without a job. Homelessness, suicides, emigration and absolute poverty have soared.

This is the price Greek people are paying for a bail-out deal imposed by the ECB, the European Union and the International Monetary Fund. They are being sacrificed on the altar of a monetarist gamble to save the euro as a single currency.

BBC Europe editor Gavin Hewitt rightly says Greece has become a “laboratory for austerity”, adding:

“Never, in recent times, has an economy of a Western country shrunk so fast - 16% in just four years. Its politicians are held in low regard. There is humiliation and shame that the running of the economy has largely been handed over to outsiders. Many see Greece as little more than a protectorate of the EU. It is widely believed that the purpose of the bailout was less about helping Greece and more about saving the euro and protecting international banks from a default.”

But the measures taken or proposed can’t and won’t work because the eurozone – as well as countries like Britain and the United State – is truly overwhelmed by mountains of government, corporate and private debt.

They are the result not of bankers behaving badly but more fundamental causes at the heart of the capitalist system of production itself. These revolve around the system’s inbuilt drive to expand, regardless. Unlimited credit financed this expansion – until saturation point was reached. Financial collapse and recession followed. The unravelling is far from complete. It may have only just begun.

Greece’s effective default intensified the financial crisis before it was a done deal. Banks had already written off most of what was due – and cut lending to compensate. The ECB has had to pump no less than €1 trillion into the banking system to keep it afloat in recent weeks.

Portugal is considered next in line for a default. The country’s combined public and private debt is 360% of annual output, well above Greece’s level. Portugal faces borrowing rates of 13.2% but no one is buying the country’s debt. Italy and Spain are not far behind in the bail-out queue.

In Greece, a general election is due probably next month and the outcome could yet scupper the best laid plans of EU and bankers alike. Support for the pro-bailout parties Pasok and New Democracy has collapsed and parties that reject the Brussels takeover could win a majority.

Ultimately, however, the crisis won’t be solved by rearranging the political deckchairs in Athens or any other capital. The European Union itself is a failed project, based as it is on a global capitalist economy that is without doubt unstable, unsustainable and undemocratic.

Paul Feldman
Communications editor