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

Point of no return in Europe

Impasse. Tipping point. Crisis. Boiling point. Point of no return. Explosion. What words can convey the profundity of the present moment of transition?

The people of southern Europe in Portugal, Spain and Greece have reached the limits of their preparedness to tolerate more brutal assaults in the name of austerity.

But the leaders of the public and private sector unions who have called today’s general strike in Greece do not intend their collective action to bring down the three month-old coalition, let alone challenge the economic and social system. Quite the opposite. 

"We call on everyone to take part in the strike and resist the austerity measures that hurt Greek people and the economy," said Despoina Spanou of the ADEDY labour group.

With unemployment at a record high in Greece – hitting almost 24% at a national level and 55% among young people, the highest in Europe – the leaders want the action to emphasise how deficit-cutting measures at the expense of growth and development are creating an economic death spiral. As Stathis Anestis of the GSEE union group put it: “These policies have led Greece to an impasse and are totally counter-productive.”

The anger is intensified by the European Union, European Central Bank and the IMF who are pushing for further cuts in wages and pensions which have been drastically reduced in the five years since the crash. As well as proposing the introduction of a six-day working week, the Troika aim to cut the minimum wage by 22% and abolish collective labour agreements.

Union leaders, not just in Greece but throughout Europe, have no intention of going beyond resistance and protest actions. Their “alternatives” are based on the notion that present policies are “wrong” and that growth would be better.

But we are patently in a crisis of the capitalist system of global proportions, where contraction is driven by an inner momentum which governments of all persuasions are barely able to influence let alone halt. And the political crisis is growing too, especially in Spain where riot police fired rubber bullets to prevent crowds storming the parliament building yesterday.

In Catalonia, nationalists are turning the anger onto the federal government. Catalan President Artur Mas has called an early election for 25 November, a move towards secession that has stirred dark warnings from the military with echoes of the Spanish civil war.

The people of Portugal have also had enough of austerity, with one draconian package after another imposing longer working hours, 7% pay cuts, tax rises, and an erosion of pensions. Unemployment has reached 15.7% - with one in three young people jobless..

A week ago, more than half a million people marched in cities across the country in the biggest protests against the government since the end of the dictatorship in 1974. The peaceful marches were a milestone in a country where people are not known for a protest culture.

From left to right, from moderates to radicals, from young to old, from professional protesters to first-timers, it was an unmistakable warning shot for the government. Protests were scheduled even in wealthy Cascais, a coastal city near Lisbon famous for its upper-class demography.

In the shadows of the darkening clouds of the planetary emergency brought on by decades of debt-fuelled growth, the crisis engulfs, overwhelms and overpowers the increasingly desperate attempts by agencies and governments to build new defences as the old ones fail to deliver.

You can see that in Britain, where the deficit is rising and only the printing of vast amounts of money by the Bank of England is holding back economic collapse. Yet the TUC is restricting itself to a weekend demonstration and the threat of some scattered, one-off strikes over pay sometime next spring. It just won’t do.

Humanity stands at the threshold of an evolutionary leap in social organisation. Either we cross it, building a not-for profit economy and society based upon co-operation and collective stewardship of the world’s resources, or we will become capitalism's victims.

Gerry Gold

Economics editor

'Our cuts will be with a guillotine'

As official figures revealed that Britain is deep into its second recession in four years, with contraction running at a rate not seen for half a century, the European dimension of the global crisis is set to get a whole lot worse.

The IMF-led assault team is back in Greece insisting on impossibly severe additional austerity measures for an economy that has already contracted by 20% in the five years since the 2007/8 financial meltdown. 

As their plane touched down, Greek prime minister Antonis Samaras said the country was in a Great Depression and that the economy was now expected to decline by a further 7% in the coming year – far worse than the previous 4.5% estimate.

But, as has now become clear, Greece’s agony is just a small part of the global economic contraction of a depth and ferocity that is hard to grasp

As Spain auctioned off its increasingly risky debt to postpone an inevitable bailout, this stark assessment came from the Spiro Sovereign Strategy consultancy:

Pretty much everything that could go wrong in Spain is.
 • The bank-focused bail-out is perceived as insufficient
• a funding squeeze in the regions is putting more pressure on Spain's creditworthiness
• non-stop austerity is increasingly seen as self-defeating and
• the recession is deepening.
 The question is no longer whether Spain can persevere with its adjustment, but rather how much more its economy and citizens can endure.

Cities across Spain are the sites of a mounting revolt against austerity, raising the political stakes and increasing the risk that the country would be unable to service its soaring debt.

Film Actor Javier Bardem, who won an Academy Award for his role as psychopathic assassin in No Country for Old Men, joined the protest appearing next to a placard bearing a revolutionary threat, declaring “Our cuts will be with a guillotine”.

The financial markets are responding - in a self-defeating action - by pushing Spain’s cost of borrowing to 7.5% and through the limits of sustainability. The only way they can get their money back is by squeezing the population beyond its limits of endurance.

Something has to give.

The global contraction follows a relentless capitalist logic. Once the seemingly limitless 60 year expansion of credit and debt ended in 2007, an historically unprecedented bust was sure to follow.

The eurozone downturn is being led by an increasingly severe slump in manufacturing, where output is falling at a quarterly rate of around 1%. Germany is now contracting at the steepest rate for three years, while the rate of decline in the periphery is also among the highest seen since mid-2009.

Companies across the region are cutting staff numbers at the fastest rate for two-and-a-half years as the outlook darkens. Service providers are now the gloomiest since March 2009, while manufacturers are slashing their stocks of raw materials in the expectation of ongoing weak sales in coming months.

The US manufacturing sector is struggling under the pressure from falling exports, which showed the first back-to-back monthly decline for almost three years in July. Growth of production is slowing closer to stagnation as a result, and rising levels of unsold stock will mean companies seek to scale back production in coming months.

China’s growth rate is also slowing, as it must, in response to shrinking markets in the US and Europe for the commodities churned out by the millions of low-paid workers in factories sub-contracted by transnational corporations.

Under these conditions, resistance to austerity in the form of protests, demonstrations, occupations, however angry, daring or violent quickly reaches their limits. They will give way to a movement that can break through the constraints of the failing social relations imposed by capitalism.

Some 150,000 software engineers worked collectively, for the common good developing Linux, the open source software that now powers the internet. They are the same creative, young people who produce the software that runs the global financial systems. They have the knowledge, and potentially the power to make trading platforms and communication networks part of a democratically-accountable global system of production, distribution and exchange. They just need asking!

Gerry Gold

Economics editor