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

Vuvuzela politics won't beat the banks

On the eve of the G20 meeting in Toronto this weekend, which will see further attempts to bring about a recovery from global economic and financial crisis differences have emerged between the US and Europe. Representatives of the world's 20 richest nations will be arguing over how to "manage their divergence".

US president Barack Obama has criticised the European imposition of austerity programmes of spending cuts and tax increases. At this point, the US is much more concerned with increasing spending to stimulate demand than reducing sovereign debt. This international tension is the political reflection of the battle between opposing teams in the Capitalist Rescue cup.

When the debt-fuelled global financial system went into meltdown in 2008, there was a sudden rush of enthusiasm for a new age of regulation that would, it was said, prevent a recurrence of the conditions that resulted in the worst credit crisis since the 1930s. The ghost of economist John Maynard Keynes was raised from the grave.

In the panic-stricken meantime central banks and governments around the world turned to the injection of ‘liquidity’ in the form of trillions of every currency to prop up the previously hugely profitable but now bankrupt commercial and investment banks and non-bank financial institutions. The marvellous rediscovery of the fool's gold of ‘quantitative easing’, the modern, electronic equivalent of printing money, allowed balance sheets and credit to be further expanded – miraculously treating like with like.

Controversy raged around the world about the actions to be taken over institutions judged ‘too big too fail’. Some were indeed ‘taken over’ by the state. Others were allowed to go to the wall.

Many of the best brains in banking and finance were set to work, tasked with designing a package of measures that would restore a degree of sanity to the madness that had drowned the world in a tsunami of unserviceable credit and debt. The team in favour of regulation, led by the Basel Committee on Banking Supervision, have been on the pitch, slugging it out with their opponents, amongst them the Institute of International Finance. The IIF are worried about the damaging effects of regulation. Basel’s captain Nout Wellink says ‘Raising capital and liquidity standards will reduce the probability of the event of a crisis. We will get greater stability of economic output and associated increases in welfare.” The IIF fought back with a warning that ‘global growth in the eurozone, the US and Japan would be cut by three percentage points between now and 2015 and as a result, 9.7m fewer jobs would be created over the period.’

Amongst the most important of the reforms put forward was to be a return to a more prudent relationship between a bank’s easily available capital assets and the amount of money it lent out.

Despite the chorus of calls for regulation, the pressure for a return to growth continues unabated, and the banks have lost little, if any, of their power. As a result synchronised bubbles and speculative excesses will re-emerge to undermine those who seek to regulate the financial markets.

As the G20 opens, the Financial Times reports that ‘Plans by global regulators to compel banks to set aside billions of dollars in extra capital to cope with future crises are to be pared back after intense lobbying by the industry. The committee is likely to shelve the idea that banks should be forced to maintain a longer term “net stable funding ratio” that aligns the maturity of their assets and liabilities.’

And then comes the bottom line ‘Analysts had also calculated that the Basel III reforms, were they implemented in conjunction with new taxes around the world – such as the liability tax announced by the UK government this week – could have cut a typical bank’s return on equity from 20 per cent to 5 per cent.’ For the capitalists and the masters of finance that would be an entirely unacceptable attack on profitability.

The rest of us need a way of ending the rule of the banks. Protests, resistance, shaking fists or even blasts from the vuvuzela won’t be enough. We need to build the forces which can take the economic and financial systems into social ownership and recast them on a not-profit basis.

Gerry Gold
Economics editor

How to end 'dictatorship of the market'

Protests and strikes are mounting throughout Europe as governments begin to carry out the austerity measures required to attract the investment funds needed to postpone state bankruptcy.

Mounting civil unrest is undermining investors’ confidence in European governments’ ability to impose the brutal measures on their populations.

It is patently clear that agreement on a €750 bailout package to prevent the collapse of the euro is hopelessly inadequate to stem the attack on the currency.

Panic moves in the USA, Germany and Venezuela yesterday against speculative investment markets are adding to the global instability as hedge funds look to move their headquarters and activities to the less-regulated East.

The German government banned “naked shorting” – the selling of shares and bonds that the sellers neither own nor have borrowed.

In the US, Chris Dodd, the Senate banking committee chairman, proposed letting regulators decide whether banks should be banned from dealing in all derivatives in a last-minute amendment to the financial regulation bill

Venezuela's Chavez-led government took control of foreign currency trading in an attempt to prevent further attacks on the bolivar.

The International Monetary Fund has forced Romania’s six-month old centrist government to promise cuts to state wages of 25% and to pensions of 15% as part of an effort to meet the requirements for the release of the next tranche of loans in a 20 billion-euro bailout package. This scale of attacks on living standards will prove to be just the down payment.

Trade unions in Romania have called a mass demonstration in Bucharest today. If their forecast turnout of 60,000 proves correct, the protest outside government headquarters will be one of the biggest since the revolutionary overthrow and execution of the Stalinist Nicolae Ceauşescu and his wife Elena in 1989.

Greek unions have called the fourth in a series of general strikes for tomorrow against a 10% cut in wages and spending in the public sector, an increased retirement age, VAT increases and the freezing of pensions.

A group of left-leaning members of the European Parliament – the United Left / Nordic Green Left (GUE/NGL) – are attempting organise co-ordinated protests in the week of 21 to 26 June against the power of the financial markets.

The MEPs have put together a series of left-sounding demands:

• Workers must not pay for the crisis - Make the super rich and bankers pay

• Solidarity with the Greek workers and for the unity of working people across Europe

• No to cutbacks, wage cuts, unemployment and increases in the retirement age

• No to privatisation of public services

• End the dictatorship of the financial markets, credit ratings institutions and the IMF

• Stop the bailouts of the banks - nationalise the banks and financial institutions in the interests of working people

But their intention to send use these protests to send “a clear message to the European establishments” and “building a European-wide resistance to the ongoing neo-liberal agenda” is wholly inadequate.

Financial markets are not susceptible to protest or even actions of the German state, representing the most powerful economy in Europe. Shares on European markets tumbled further, as did the euro, after Germany’s attempts to ban short-selling.

One London-based bond trader commented: "Nobody ever thought they'd do this in a million years and it raises the long-term question of who is now going to want to buy their debt."

A World to Win has a different set of aspirations to the MEPs. We’ll be discussing our plans to replace the dictatorship of financial market and the for-profit capitalist system with collectively owned, democratically managed not-for-profit system at our conference on Saturday.

Gerry Gold

Economics editor

Coalition will provoke extra-parliamentary struggles

The collapse of the Tories and Liberal Democrats into each other’s arms to form the first coalition government in modern times does not so much signify a “new politics” but the suspension of old-style politics in the face of a calamitous financial crisis.

New Labour was prepared to go down the same road. Its failure to woo the Lib Dems – Britain’s oldest capitalist party – led to Gordon Brown’s late evening resignation and his replacement by David Cameron. Most of the New Labour cabinet – members of Britain’s newest capitalist party – were relieved to be out of office and not having to make the savage cuts that the money markets are demanding.

On entering Downing Street, Cameron accepted responsibility for implementing the demands imposed by an unprecedented financial and economic crisis. Hours earlier the International Monetary Fund (IMF), eurozone authorities and European Central Bank (ECB) came together with the US Federal Reserve in a desperate King Canute-style 750 billion euros/1 trillion US dollars global alliance:

• On Monday the ECB reversed its policy and began to echo the British government in “quantitative easing”, buying up eurozone government bonds and accepting junk debt to prevent a string of state bankruptcies

• 27 European countries created an emergency loan facility of 60 billion euros aimed at stopping the Greek crisis spreading to Spain, Portugal and Ireland.

• The 16 eurozone countries together with Sweden and Poland have put together a 440 billion euros “special purpose vehicle”, a fund to defend themselves against foreign currency speculation.

• The IMF offered 250 billion euros in loans to stricken countries.

• The US Federal Reserve renewed the emergency measures it used during the global meltdown of autumn 2008 allowing foreign banks to borrow dollars.

All of these actions, promises and offers are conditional on governments old and new ratcheting up the brutal austerity programme that has already precipitated general strikes and street battles in Greece and Spain.

The new coalition replaces an administration which had spent 13 years cultivating the relationship with the financial masters of the universe. New Labour helped create the conditions which resulted in a system crash that began in 2008 and that is still unravelling.

The Cameron-Clegg coalition’s announcement that it will start to reduce the budget deficit by cutting public spending immediately with a £6 billion programme of “efficiency savings” is aimed at reassuring the hedge fund managers and other market traders whose gambling with bonds determines government action throughout the world. Liberal Democratic manifesto intentions to postpone the cuts to avoid a deflationary spiral have been ditched.

The coming assault on services, jobs, wages, pensions and benefits is certain to trigger an avalanche of conflict with millions of workers in education, health, social services as well as in the civil service who together make up the majority of the workforce.

Some say the New Labour project failed and is over. On the contrary, it served its purpose. It held the reins and reorganised the state while the Tories were in crisis. There is no going back to an earlier form of Labour as a reformist party because globalisation and the merger of the state with financial and corporate interests does not allow for this. To think otherwise is to perpetuate illusions about electoral politics when new forms of struggle beckon.

There are no electoral or parliamentary “solutions” to this crisis. If New Labour had won the election, savage cuts would still have been top of the agenda. The struggles immediately ahead will be extra-parliamentary in shape and form, beginning with the British Airways cabin crew strikes planned for next week.

Giving these struggles a political shape and objective means going beyond a parliamentary politics that is in any case in deep freeze. A perspective around the building of a network of People’s Assemblies to challenge the state’s right to make the cuts is the best way to respond the anti-people coalition now in Downing Street. register for our May 22 conference to discuss how we can mobilise to take the revolutionary road with the aim of bringing the Cameron-Clegg regime down sooner rather than later.

Gerry Gold
Economics editor

Panic in Washington

The chaos in Washington last night, with members of Congress shouting at each other across the table, ignoring President Bush who was chairing the emergency cross-party summit, shows how the frenzy in the crumbling financial system is finding its mirror image in politics.

The meeting of 35 members of the two US parties in the US Senate called and led by the president around the cabinet table in the White House was meant as a show of political unity following Bush’s national TV warning of a panic in the markets if no agreement was reached. John McCain, Republican presidential candidate for the election due in under 40 days, suspended his campaign to attend the meeting and challenged Barack Obama, the Democrats’ candidate, to do the same. The two issued a joint appeal to the Congress to support the outline sketch of a plan hastily scratched together by the Treasury.

But there was no agreement. Members of Bush’s own party accused the president of socialism by bailing out the banks and refused to back the rescue package. Others wanted more direct help to millions of US householders struggling to meet their repayments as the deepening recession multiplies unemployment and drives more and more Americans from their homes.

Even while they were arguing, the crisis deepened on the home front. The mortgage lender Washington Mutual (WaMu) was closed by its regulator, making it the biggest US bank to fail. The Office of Thrift Supervision (OTS) stepped in to shut the mortgage lender before selling its assets to JPMorgan Chase for $1.9bn. The OTS said it was worried WaMu would run out of cash as $16.7bn of deposits had been withdrawn since 15 September.


The idea of the show of unity is/was to convince the markets that there could be an above-politics agreement on the proposed $700 billion dollar bail-out plan for the mortgage markets. The huge sum is larger than the vast US defence budget, and equal to about the value of half of US production. Yet it hardly touches the towering trillions in credit default swaps, the next hurricane about to barrel though the global economy.

The plan, if implemented, means that the US government would borrow this huge sum of money, largely from other governments, and use it to buy parcels of “toxic” mortgages, taking the pressure off the paralysed and nearly bankrupt peddlers of debt who could then return to business as usual. Responsibility for servicing the unpayable debt will then pass to the American people. Estimates put it at more than $2,000 each. All indications suggest that they aren’t happy.

Some commentators, sceptical about his true intentions, say that McCain’s suspension of his campaign – invoking instincts of the need for action in a crisis gained from his military career - is anything but. Instead they see it as another attempt to raise his profile, following his selection of ultra-right wing Sarah Palin as future Vice-President. But there’s another lesson here. Irrespective of the intentions of any of the individuals caught up as actors in it, the financial crisis engulfing politics is an objective process, itself the expression of a deeper crisis in the capitalist global economy.

What little remains of democratic niceties are subordinated to the survival of the system. As Gordon Brown emphatically stated at New Labour’s annual event (hardly a conference) last weekend, he’ll do “whatever it takes” to restore stability to the markets. And that includes following the US attempts at a national coalition, presiding over mass unemployment and homelessness, and cancelling democratic rights. Was it an accident that the new ID card was paraded on the day Brown flew to the US to support the lame-duck Bush? All the more reason to stand up for your rights at the forthcoming festival on October 18.

Gerry Gold
Economics editor

A rogue financial system

To describe Jérôme Kerviel, the man who allegedly wiped out a year’s profits for the French bank Société Générale by making the wrong call on which way stock markets would move, as a “rogue trader” is convenient but entirely superficial. Kerviel was, after all, only engaged in what traders all over the world are doing every minute of the day in New York, London, Frankfurt, Tokyo and other major financial centres.

Kerviel apparently came to inhabit a fantasy world of his own, creating a parallel yet secret system of deals hidden from SocGen’s top management. But what was his fantasy existence if nothing more than a perverse expression of what the bank itself was actually engaged in – the world of fantasy finance?

SocGen, like banks all round the world, has in the last 30 years become deeply involved in recycling debt, the buying and selling of exotic financial instruments such as derivatives and general speculation about the future movements of markets. While this seemed a great way to rack up profits, it was essentially a work of fiction rather than fact.

For the conjurer’s trick to work, the global economy had to keep on growing and create the increases in real wealth needed to service the mountains of debt that were clogging up financial markets. The recession in the US, expressed in the collapse in the housing and mortgage markets, was enough to begin the unravelling which are now witnessing.

SocGen’s losses of £3.7 billion are but a mere drop in the ocean compared to what the markets are facing. Some experts say, for example, that the amount of unrepayable sub prime housing debt alone held by banks worldwide amounts to $3 trillion – that’s with 12 noughts in case you are interested! As for the total debt in the system, no one is really sure of the total. As it revealed Kerviel’s calamity, SocGen also announced it had taken a £1.5 billion hit from the US mortgage crisis.

The revelations by SocGen are another blow to global markets suffering a dramatic loss of confidence. Banks started to refuse to lend to each other on the basis that they could not be sure whether borrowers secretly held loads of bad debt and therefore would prove incapable of making repayments. There are suggestions that SocGen held back on what had happened until it had sorted out its own position first. Such is the volatility in the markets, that it is even suggested that SocGen’s unwinding of the positions Kerviel had committed the bank to led to the sale of up to £40 billion of shares this week, reinforcing the slide in share prices.

Whatever the truth, you can be sure that the SocGen saga won’t be the last. The world of fantasy finance is coming down to earth with a bang, driving on the economic recession and calling into question the entire legitimacy of the capitalist market economy.

Paul Feldman
AWTW communications editor