New banking crisis looms as credit crunch returns

Around the world’s biggest economies, gears are being thrown into reverse as credit, liquidity, broad money, leverage – whatever name you give it – turns from the antidote to recession to the source of volatility and a potent systemic threat.

Behind the optimistic PR spin of recovery, signs of growth, falling unemployment, etc., can be heard the unmistakeable beat of very different drums. Joining the credit squeeze by the financial big-shots –  the central banks of the USA and China – comes Danièle Nouy, the eurozone’s new chief banking regulator.

He is  warning that some of the region’s lenders should be allowed to collapse. “We have to accept that some banks have no future,” she said, anticipating imminent “stress tests” of the sector by the European Central Bank. “We have to let some disappear in an orderly fashion, and not necessarily try to merge them with other institutions.”

As the credit noose is tightened, warnings of debt-deflation grow louder. In contrast to inflation, which erodes the real value of loans, making it easier for borrowers to repay, deflation does the opposite. It makes money dearer, raising the burden of repaying existing loans — and it adds to the stress on fragile banks that hold the loans when borrowers cannot repay.

Just imagine what must be under discussion behind closed doors as inflation slows throughout Europe, and prices fall in Greece, Italy, Spain, Portugal, whilst those in Japan look like heading back in the same direction. What can be going through the heads of the ministers of finance in the heavily-indebted countries – like the UK, United States, Japan?  Let alone those in the IMF’s list of 39 heavily- indebted poor countries.

These are among the contradictory pressures that prompted Christine Lagarde’s plea for a new Bretton Woods post-war type meeting. The head of the International Monetary Fund is clearly concerned that unless concerted action is taken, the present stagnation will turn into a full-blown slump.

Her plan is a non-starter. The co-ordinated action that took place to rescue the banks in 2007-8 has given way to every capitalist for themselves. And tensions are growing between economies over scarce resources.

The Spratlys are a group of islands in the South China Sea, in a region hosting estimated oil and gas reserves which place it fourth in the world. The region is also one of the world's most productive areas for commercial fishing, accounting for 35% of the world’s catch in 2010. 

And it is one of the busiest shipping lanes in the world. More than half of the world's sea-going traffic, by tonnage, passes through the region's waters every year. Tanker traffic is three times greater than through the Suez Canal and five times more than through the Panama Canal. A quarter of the world's crude oil passes through.

No wonder that disputes have simmered since the first oil discoveries were made there in the late 1960s. Until recently, six countries – China, Malaysia, the Philippines, Taiwan, Vietnam and Brunei – were contesting rights over parts of the territory. Now the USA is making threatening noises in response to new claims by China.

US assistant secretary of State for East Asian Danny Russel told Congress that China's vague territorial claims had "created uncertainty, insecurity and instability" among its neighbours. "There are growing concerns that this pattern of behaviour in the South China Sea reflects incremental effort by China to assert control over the area.”  

Relations between China and Japan have deteriorated over a separate territorial row involving islands in the East China Sea known as the Senkaku islands in Japan and the Diaoyu islands in China. Last year, China announced an air defence zone in the East China Sea, and said that aircraft flying through the zone must follow its rules.

         

The United States, Japan and South Korea have ignored this declaration and flown military aircraft through the zone. Politics, nationalism, economic resources and territorial claims mixed with military aggression are, as always, a heady brew. Welcome to the global economy 2014.

Gerry Gold

Economics Editor

Sick global economy hit by new contagion

The list of countries hit by the wave of withdrawal of speculative investment capital lengthens by the day. Countries amounting to half the global economy are being forced to spend currency reserves, raise interest rates and consider controls over the movement of capital.

A contagion of capital flight is hitting Argentina, India, Indonesia, Russia, Brazil, South Africa, Hungary and Turkey. A dramatic reversal in the global marketplace, which began in May and is accelerating with every new shock statistic, is forcing the governments of “emerging” economies to savage the living standards for their already low-income populations.

Each country has a different story to tell: worse or better attempts at managing their economies; higher or lower levels of foreign currency reserves; more or less extremes of corruption of government ministers; levels of civil unrest ranging from the benign to insurrectionary. But the source of the crisis invading their borders lies elsewhere, beyond their control. 

Investors on the global financial markets – better known as speculators, or gamblers – were spooked last May by the US Federal Reserve’s announcement of its intentions to begin reducing its $85 billion per month programme of credit creation. The withdrawal of funds – known by the jargon quantitative easing – began soon after and has recently been accelerated.

The Fed will have taken many factors into account in the central bank’s decision to reverse the programme of credit creation which – together with the sharp reduction in take-home pay – has been a key factor in the jobless economic “recovery” following the 2007-8 crash. 

Ballooning levels of “margin debt” figured high among the triggers for the decision.  These are investments made with money borrowed on the expectation that the Fed would continue pumping credit into the economy. Indicators suggested that these investments had reached danger levels, threatening another financial collapse.

China’s central bank is also being obliged to follow a similar path. Having fought the global recession with a huge programme of credit-financed construction of cities, roads and railways it recently made tentative steps in opening its borders to volatile international investors.

Some analysts estimate that foreign financial institutions now have almost $1 trillion tied up in the Chinese economy, either as investment in or loans to corporations. George Magnus, senior independent economist at UBS, says that the Chinese banking system resembles that of Japan during the 1980s in the years leading up to that country’s financial crash.

“If the dollar were to appreciate it could cause problems for those banks that have borrowed in dollars. Anywhere you have a banking system that uses a non-domestic currency, there is a possibility of a mismatch that could cause issues when the value of your liabilities runs away from you,” said Magnus.

In China, which became the manufacturing powerhouse for the global corporations in the last century, growth has slowed for 11 of the last 14 quarters. The Markit/HSBC manufacturing Purchasing Managers Index fell to a six-month low of 49.5 in January, suggesting the overall factory sector contracted again from December.

With 50 being the dividing line between growth and contraction, the omens are very bad indeed for a global economy depending on China sucking in raw materials and components and assembling them for sale back to the richer half of the world.

In the US, manufacturing grew at a substantially slower pace last month as new order growth plunged the most in 33 years. Some blamed the severe weather, as if things will improve along with the seasons. So the world’s two biggest economies are in deepening trouble.

Assessing the long-term prospects for humanity including the impact of environmental degradation and climate change, Christine Lagarde, managing director of the International Monetary Fund, is calling for a new Bretton Woods arrangement.

She said in a BBC lecture that such a meeting was needed to restore economic sustainability and reduce global tensions. She was invoking the spirit of multilateralism and a return to the “brotherhood of man” philosophy promoted by economist John Maynard Keynes at the 1944 meeting in the United States.

To this listener her lecture invoked only the spirit of Humpty Dumpty. She would be better off getting ready for global Meltdown II.

Gerry Gold

Economics editor

EU-IMF blackmail aimed at Ireland and Greece

The principle of self-determination of nations may, to some, appear irrelevant in the context of the eurozone crisis. The 17 countries signed up to the single currency are all, on the face of it, independent states free to determine their own destiny.

Dig deeper and it’s another story, however. Take the examples of Greece and Ireland, two of the so-called “periphery” eurozone states.

They may be at opposite ends of Europe but they share one thing in common – a clear and present threat to their right to determine their own future.

Irish voters have been told in no uncertain terms to vote “yes” in Thursday’s referendum on whether the country should back the new European Union fiscal union treaty that imposes strict spending controls on member states.

Yesterday, Irish prime minister Enda Kenny went on television to warn voters that a rejection of the new treaty would bring “uncertainty at a time Ireland definitely doesn’t need it”. He attacked the No side for “its politics of negativity, of defeat, of opportunism and of fantasy economics”.

This was a bit rich coming from a political class that helped drive the Irish economy and financial system into the ground in a rampant demonstration of the self-same fantasy economics.

Jim Stewart, senior lecturer in finance at Trinity College, Dublin, points out in the Social Europe Journal, says the fiscal treaty can be added “to the list of flawed policy making that has helped turn an economic crisis … into a national catastrophe.”

If the Yes vote succeeds, the treaty will be incorporated into the Irish constitution and gives other signatories the right to bring a case against Ireland in the event of non-compliance. “It is the same thinking that initially set penal interest rates on Ireland’s borrowing under the EU/IMF Programme.”

In practice, the long struggle for Irish independence is fundamentally weakened by a form of EU blackmail imposed by Germany, the European Commission, the European Central Bank and the International Monetary Fund. And this is the case in Greece too.

Christine Lagarde, the managing director of the IMF, has now added insult to injury with a fresh attack on the Greek people who are seen as thankless for daring to hold a general election on the bail-out terms imposed on the country in exchange for loans.

Lagarde said Greeks had to take responsibility for their fate, adding that deprived children in Africa needed more help than people in Greece. "I think they (the Greeks) should help themselves collectively ... by all paying their tax." That’s a bit difficult when one in five is out of work – rising to 50% amongst young people – and the economy is in free-fall as a result of the EU-IMF imposed austerity measures.

Just as in Ireland, ruling class politicians are passing on the threat if voters next month repeat their support for parties like Syriza that want to renegotiate the bail-out conditions. Antonis Samaras of New Democracy said a vote against the loan terms would leave Greece with “no food, no drugs, no fuel. It will have to live with permanent power cuts".

What Samaras is saying in effect is that there is no point in next month’s elections which follow the recent stalemate. You can vote against austerity but in the end, the EU-IMF will have their way. You can vote against the fiscal treaty in Ireland, but ultimately there’s no choice, according to prime minister Kenny.

The struggle for self-determination clearly needs renewing and not just in Greece and Ireland. Working people throughout the capitalist EU will have to create their own popular, democratic independence, working together across Europe on a new revolutionary and equal basis.

Paul Feldman

Communications editor