Junk bonds frenzy points to a new crash

After five years of austerity budgets, the headline on the latest survey from global financial information services company Markit sums it up: “Downturn deepens as business conditions deteriorate in all euro nations”.

Or put another way, the brutal assault on living standards of the people of the eurozone is certain to accelerate as the system’s self-destruct mode strengthens. 

It’s not just the weather that’s gone into deep freeze this spring. Markit reports a worsening of “manufacturing conditions across the currency union”. Germany and Ireland both fell back into recession, while rates of decline quickened in nearly all other nations. France’s rate of slowdown did not actually increase but its present speed of contraction is bad enough, only exceeded by that of Greece.

The survey’s gloomy report adds: “March saw total new orders decline for the twenty second successive month, dropping at the fastest pace since December. Demand was weaker in both domestic and export markets, reflecting lacklustre client confidence. The outlook for manufacturing also deteriorated, as the ratio of new orders-to finished goods inventories dipped to a three-month low.

“Job losses were reported for the fourteenth straight month in March, with steep rates of declines reported in France, Italy, Spain, the Netherlands, Ireland and Greece.”

  

So the terms of the Cyprus bailout “agreed” by its government at the point of a Troika gun, bad as they are, can only be an opening to something far worse.  There’s a huge 60% tax on bank deposits over the guaranteed limit of €100,000, which means that many businesses are closing with the loss of tens of thousands of jobs – 4,500 in the public sector alone– a heavy blow for a population of less than a million. Those in work will pay a “temporary insurance fee” of 1.5% on salaries for access to healthcare.  

The people of Slovenia are next in line for attention by the punishment squad led by the International Monetary Fund and the European Central Bank. Its economy is shrinking rapidly and its budget deficit is ballooning towards 5% of GDP. According to the IMF, “a negative loop between financial distress, fiscal consolidation and weak corporate balance sheets is prolonging the recession”.

This spiral of decline isn’t limited to the eurozone. Markit’s figures for the UK are hardly encouraging:  manufacturing output fell in March at its fastest pace since July last year, along with a further decline in new orders and employment. The Bank of England reported that lending to households and companies contracted in February in spite of its efforts to increase the flow of credit to the real economy.

The Bank of England has, of course, taken part in the unprecedented pumping of billions into the financial system via quantitative easing, aka as printing money. Since the crash started at the end of 2007, central banks around the world have created a staggering $12 trillion of new money in a desperate bid to stave off total collapse.

All this has done is to fuel inflation, encourage speculation in basic commodities like wheat and, all in all, create the conditions for another financial bubble to burst. According to Daily Telegraph finance writer Harry Wilson, huge sums have gone into sales of high-yield debt, formerly known as junk bonds.

In January alone, non-investment grade Asian companies, whose debt is ranked by credit rating agencies as riskiest, sold just over $9bn of high-yield bonds, a year-on-year increase of more 6,000%, he reports.

Wilson warns: “The massive increase so soon after a financial crisis that was caused in part by the credit meltdown has raised fears that less than five years on from the bankruptcy of Lehman Brothers and the near failure of Royal Bank of Scotland and HBOS, the world is setting itself up for another crash.”

Reports of investment banks and other institutions borrowing to buy junk bonds – what is known as leverage – only adds to the tendency towards a new, even more destructive crash.

All attempts to fix the capitalist system are just making things worse. These are the conditions which must make the campaign against austerity into a movement to replace the broken, bankrupt system of production for profit, once and for all time.

Gerry Gold

Economics editor

Banks in 'collateral crunch' as debts mount

Thousands of high school students took to the streets outside parliament in Nicosia yesterday. They were protesting against the harsh consequences the people of Cyprus can expect from the deal imposed by the European Union, International Monetary Fund and European Central Bank.

This conspiracy of non-elected bodies is the technical arm of a near-dictatorship ruling throughout Europe. It is fighting belligerently to save a social, economic and political system that is wrecking the fabric of societies. The resources that are being consumed, let alone the lives ruined, surely don’t justify the results. As for the people of Cyprus, they simply get no say as the deal is not going to parliament, just in case it’s rejected.

The banking crisis in Cyprus is just one of the storms in the vast clouds of credit and debt invented to finance the global growth of production and consumption from the 1980s onwards. This one was triggered months ago when Greece was forced to write down the value of its government bonds as part of the bail-out punishment for its people. At the end of 2011, the Bank of Cyprus had $14 billion tied up in Greek debt, while Laiki Bank had more than $24 billion.

The botched and brutal temporary patch designed to prevent a formal default by the smallest member of the eurozone will reverberate throughout Europe and the rest of the world. The imposition of capital controls to stop instant transfer of funds out of the country undermines the fragile state of both the eurozone and the wider European Union.

UK  civil servants won’t have been the only ones working through the night to minimise the impact on ex-pat Cypriot bank branches, like those in Mayfair and Birmingham. President Putin’s people will have been hard at it too, searching for ways to extricate the remains of the vast amounts of Russian wealth that found its way into Europe via Cyprus in recent years.

Cyprus, already in a deep recession, now facing an estimated further 20-30% cut in its GDP as a result of the deal, will be devastated. Thousands of businesses and tens of thousands of jobs will disappear overnight. The story is being replicated throughout Europe.

Portugal, where unemployment is heading towards 20%, is entering a third year of contraction amplified by austerity; and Spain’s jobless rate will pass 27% according to its central bank as the Europe-wide contraction drives the country into a deeper slump. France, the second biggest eurozone economy, has seen 22 months of rising unemployment, now exceeding 10% and certain to rise further as car factories are shut down due to overcapacity.

The global recession is spreading like a virus across the United States too. Cities wrecked by the crisis, including Detroit in Michigan, San Bernardino and Stockton in California are seeking bankruptcy protection to exempt their pension funds from being raided to pay debts.

In the UK, observers are warning that the decision by the Bank of England today to require banks to raise another £25 billion of capital, will could lead to a “collateral crunch” that could shut down the market for credit. So don’t fall into the trap of thinking it’s just Cypriot banks that are over-stretched. UK banks have piles of debt that no one is paying interest on, which is why the Bank of England has stepped in.

Wherever you look, which ever way you turn, the conclusion must be the same. Capitalism as an economic and political system is in extermination mode. In this situation,  private and public sector employees and pensioners need to unite with finance sector workers throughout the world with one goal in mind. All the resources needed for production, distribution and exchange must come under social ownership and control. So long as they remain out of reach, the worse our prospects become.

Gerry Gold

Economics editor

Cypriots angry against bail-out at their expense

Punish the poor, protect big investors and retain Cyprus as an offshore banking haven for oligarchs. That was the meaning of measure rammed down the throats of Cypriots over the weekend under the direction of the infamous Troika.

Instead of restructuring broken banks, the right-wing government was told by the European Union, the European Central Bank and the IMF to cut the value of ordinary people’s deposits as the price for an £8.6 billion bail-out.

But if they thought it was a clever move, they have been proved completely wrong. Fears immediately grew of a run on banks around Europe after panic-stricken scenes in Cyprus. Cash points ran out as savers tried to pre-empt government measures to dock their accounts.

Even as an emergency session of the Cyprus parliament began, there were warnings that the Cyprus crisis could spark off of the next global financial crisis. Savers in Greece, Italy, Portugal and Spain may also panic if they think they are next. Anti-austerity Strikes and demonstrations around Europe are adding to the tension.

Eurozone finance ministers in Brussels and Berlin want to take 6.75% of the savings of those with less than €100,000 and 9.9% of those with over that amount. Cyprus’ new president Nicos Anastasiades’ claims that the measure will mainly hit Russian oligarchs who use the island for money-laundering has failed to convince as pensioners and life-savings are hit hard.

Financial experts like David Kotok of Cumberland advisors have expressed amazement: “The madness of this decision about Cyprus is unfathomable. We expect runs on Cypriot banks when they open on Tuesday. Europe has found a new way to shoot itself in the foot.”  

So is Cyprus – a small country of 1.1 million – simply a unique case? Well, of course every country is special, not least Cyprus, which has been divided into two for 40 years since being invaded by Turkey in 1974. Unemployment stands at a record high of 15%. 

Yet the banking sector has mushroomed – fuelled by speculation in the island’s property market – to become more than eight times the size of the nation's economy. The Russian mafia has exploited Cypriot banks for money-laundering and rubs  shoulders with native property-speculating millionaires in the luxury villas on the coastline.

And, in addition to its tax-evading oligarchs, the Russian government has strategic reasons for retaining influence there. It is a stop-off point for ships supplying the Assad dictatorship with arms. British bases on the island are to be turned into NATO bases, under a secret agreement made last autumn.

The rulers of Europe desperate to save the euro are bearing down on ordinary people to impose the needs of the banks and the economic system over which they preside. 

The needs of the ordinary people of Cyprus as well as modest pensioners from cold climates, let alone the country’s fragile eco-systems many of which have been destroyed by rampant speculative building, count for nothing in this entire debacle.

But this is the pattern, not only in Cyprus, but also in Ireland, Spain, Italy and UK. The demands of millions of people to end austerity have been ignored. In Italy, where a majority voted against further cuts, the electorate is left disenfranchised.

The disarray at the top of the European Union is leading to dismay in significant circles. Today the Financial Times commented: “The biggest risk is political. The prescription of universal austerity combined with kid-gloves treatment of big investors in banks is increasingly toxic to European voters. Leaders have just added fuel to the fire.”

Leaving the Euro, however, as some politicians in Cyprus and Britain are threatening to do, will not solve the deep debt crisis that lies behind the dictatorship of the Troika. That will require taking the power from the bankers and their political allies and re-structuring the economic system so that it works for people and not profiteering speculators.

Corinna Lotz

A World to Win secretary