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

EU leaders delude themselves

Driven to the brink of mental breakdown by the rapidly deepening crisis, European leaders last night agreed on an attempt at self-delusional trickery.

The “voluntary” agreement by banks to take a 50% cut in the money they’re owed by the Greek government – a default in all but name - is a green light to a frenzy of profitable, intense activity by hedge funds.

They will gamble on the likelihood that banks will or will not act on the agreement or, instead, cash in on their Greek debt insurance policies, known as credit default swaps.

A desperately inadequate bail-out package, it is no more likely to be successful than the previous one hammered out only four months ago. That one ran into the sands of slowing economic growth turning into accelerating global contraction.

The new one, also calculated on the false promise of a recovery, relies on an undefined method for turning €250 billion of the remainder of the €440 billion financial stability fund left after handouts to by Ireland, Portugal and Greece into €1 trillion.

It is called “leverage”, but neither of the two methods on offer can deliver what’s needed.

The first, which offers “insurance, or first-loss guarantees, to purchasers of euro zone debt in the primary market” is no more than a delaying tactic intended to draw more suckers into the black hole of global debt.

The second, “a special purpose investment vehicle aimed at attracting investment from China and Brazil” is nowhere near agreement. The best that could be said is that “it will be set up in the coming weeks”. Fat chance.

Europe’s sovereign debt crisis is a reflection at state level of the now toxic debt mountain that drove globalisation. Last night’s deal only reaches the margins of the problem and will deepen the recession.

Room at the top

The empty rhetoric that was David Cameron’s speech to the Tory Party conference speaks volumes about the dire state of the governing political class in Britain (and elsewhere) just as the global economy heads for the cliff.

Cameron and other Tories like chancellor George Osborne can criticise the inaction by eurozone governments over the sovereign debt crisis. But their own “leadership” amounts to no more than a call for the British to show some wartime spirit and create a “can-do” society.

As it has been noted elsewhere, patriotism is the last refuge of the scoundrel. Cameron’s bugle call to arms was delivered by a former (?) PR man in charge of a cobbled-together, weak government caught in the headlights of an historic crisis.

His claim to be a one-nation Tory is, of course, a sick joke. The term originates with Disraeli in the 19th century when British imperialism ruled large parts of the world and could afford to dispense some crumbs from the top table. It was also a feature of the post-1945 Tory governments which accepted the creation of a welfare state.

Since corporate-driven globalisation accelerated from the early 1980s, no government – neither Tory nor New Labour – has practised “one-nation” politics. Instead, politicians have extolled the market, deregulated the banks, rolled back the state, cut welfare, targeted the poor, privatised key services and utilities and introduced competition in health and education.

The budget crisis that propelled the ConDem coalition into existence has been offloaded onto public sector workers and service users. Tens of thousands have lost their jobs and are now fighting to keep their pension rights.

Standards of living have fallen dramatically as real purchasing power has slumped. Household spending on essentials has fallen to its lowest level in almost a decade as they struggle to meet fuel bills and the rising cost of food. A survey has found that another 11.5 million homes, around half, were in danger of sinking into debt along with large chunks of the population who are already.

Of course, you wouldn’t expect the Tories to do anything other than what they are doing. But the nervousness they exhibit over the potential impact of a eurozone crisis on the enfeebled British economy raises question as to whether they could cope in a full-blown crisis. Slick, motivational speeches without content that are Cameron’s forté will not cut the mustard.

The inability of the ruling classes to take measures to deal with the economic and financial crisis and restore the growth that capitalism depends on, is significant. It is apparent throughout Europe and in the United States and is due to a number of factors.

First, the forces at play – financial markets, global banks etc – are to a large extent immune to the actions of governments and agencies. For example, the sums involved in currency speculation each day are so vast that central banks, even working in concert, cannot buck the market.

Secondly, the crisis has gathered a momentum of its own. Once started, the “deleveraging” process that involves debt reduction and writing down of assets is impossible to stop. That is why the global economy is contracting. The bark of the British bulldog is lost in the noise of the crash.

Unfortunately, the crisis of leadership at the top does not equate automatically to a favourable outcome. The ruling class has other options, including national governments and states of emergency. In Greece, where society is close to break down as a result of spending cuts, the military is making threatening noises.

Nevertheless, the ruling elites have patently lost their confidence and popular support. It’s a once-in-a-lifetime opportunity for the mass of the people to put them out of power and begin to revolutionise society in a progressive way. That can’t and won’t happen spontaneously. To succeed, we will need to create a leadership of our own.

Paul Feldman

Communications editor

Delusional IMF in the dark

Confusion and disarray is apparent in every national and global capitalist institution – and nowhere more so than in the corridors of the International Monetary Fund. Despite access to confidential data, they don’t really have a clue as to what’s going on.

When Olivier Blanchard, the IMF’s director of the research, introduced its latest World Economic Outlook (WEO) with sombre demeanour and measured words, he wasn’t pulling his punches:

"The global economy has entered a dangerous new phase. The recovery has weakened considerably and downside risks have increased sharply,” he announced. "Fear of the unknown is very high. Stock prices have fallen. These will adversely affect spending and growth in the months to come.”

Blanchard added: "Markets have clearly become more sceptical about the ability of many countries to stabilise their public debt.”

Bad enough.

But in the first paragraph of his foreword to the WEO, in which he calls himself “economic counsellor”, he makes an astonishing admission:

“Relative to our previous World Economic Outlook last April, the economic recovery has become much more uncertain. The world economy suffers from the confluence of two adverse developments. The first is a much slower recovery in advanced economies since the beginning of the year, a development we largely failed to perceive as it was happening. The second is a large increase in fiscal and financial uncertainty, which has been particularly pronounced since August“

To repeat – “a development we largely failed to perceive as it was happening”.

With all the resources they have at their disposal, how did they get it so wrong? It surely does no good at all for the reputation of counsellors of all kinds.

With their oft-repeated mantra of a recovery, of a return to growth, the IMF has consistently underestimated the scale of the crisis, and overestimated the ability of governments and central banks to do anything about it.

They have deluded themselves, and they have deluded governments and central banks. In 2008, for example they forecast that the UK economy would fall by 0.1 per cent in 2009 but it actually fell by almost 5%.

Now that the necessity of a global contraction is evident to anyone with even a smattering of an understanding of the limits to growth, the IMF both continues on its delusional path, but is simultaneously forced to change tack.

It has downgraded its economic outlook for the UK, the US and Europe through to the end of next year, effectively pulling the rug from all the deficit reduction plans in the world.

It now predicts that UK gross domestic product will grow just 1.1% in 2011, compared with its April prediction of 1.7% The US, it says will grow by just 0.4% more than the UK and may already be in recession.

But at the same time it warns that “if growth threatens to slow down substantially”, if activity were to undershoot current expectations, countries like the UK and Germany should “consider delaying some of their planned adjustment”.

Which means, says the IMF, that the UK Coalition, adamant that its brutal austerity programme must stand, will have to think again. Government spending cuts may have to be delayed to avoid a greater catastrophe.

If you or I put up a piece of work like the WEO we’d be out on our ears, but the IMF is accountable to no-one. Its enforcers are due back in Athens next week checking on the government’s progress with cutting wages, putting people out of work, selling off national assets etc etc.

So now it’s time to build alternative, revolutionary governments everywhere, with the power to implement the May 27th vote of the People’s Assembly of Syntagma Square which ends:

‘We will not leave the squares until those who compelled us to come here, leave the country: the governments, the Troika (EU, ECB, IMF), banks, the IMF Memoranda, and everyone who exploits us. We send them the message that the debt is not ours.”

Gerry Gold

Economics editor