New financial meltdown under way

The potential for a second, more catastrophic breakdown of the global financial system is the reality behind emergency support for the banks announced by the chancellor George Osborne and the governor of the Bank of England, Mervyn King.

While attention was directed at the proposal to stimulate the economy with an £80 billion fund to lend on to borrowers – which few think will make any difference – the other half of the package is more critical.

A new credit crunch is well under way, driven by the slow-motion collapse of the eurozone. Banks in Britain, like all others, need short-term loans to maintain liquidity. But borrowing rates are rising because of the crisis of the euro. This is adding to banks’ reluctance to lend to business or would-be home owners.

So the Bank of England in a scheme exotically called the Extended Collateral Term Repo Facility will make it easier and cheaper for banks to borrow at least £5bn every month to cover any shortfalls in cash, according to Robert Peston, the BBC’s man who first broke the news of the collapse of Northern Rock in 2007.

In exchange, the Bank will accept a call on virtually any kind of assets banks can offer, rubbish or otherwise. That’s how desperate things are.

Governor King said that the Bank “will provide banks with whatever liquidity they require given the prospect of turbulence ahead." There’s plenty of that about already. Yesterday, the interest on Spain’s sovereign debt rose to 7%. This is regarded as a threshold point at which repayment becomes unsustainable and a bail-out is required. Spain has already been given €100 billion this week to hand on to its bankrupt banks. Now the state itself is facing bankruptcy.

The world’s central banks are also nervously eyeing the outcome of Sunday’s second Greek election in two months. At best, it will result in another hung parliament; at worst, for capitalism, the left-wing bloc Syriza will win and demand a renegotiation of the draconian conditions attached to existing bail-outs by the European Union and the International Monetary Fund.

Either way, Greece’s membership of the euro is in jeopardy and its economy is seizing up altogether due to a lack of credit for the most basic commodities and services.

So stand by for an attempt at co-ordinated global action by increasingly anxious central banks before the markets reopen on Monday.

The options are rapidly closing, however. Providing cheap credit to banks won’t solve the problem of a contracting economy. Corporations and households alike are cutting back on spending at a time of a sharp decline in real earning power, part-time work and massive unemployment.

As King himself acknowledged in a graphic admission the “industrialised world have thrown everything bar the kitchen sink” at the global economic meltdown. Which makes his call for “bolder action” rather meaningless. Especially as China and India and other “emerging economies” are slowing rapidly, adding to what King called an “ugly picture” of the global economy.

In reality, global capitalism isn’t working and creating new credit facilities won’t make a jot of difference. The boom that collapsed in 2007 was driven by debt that ultimately undermined the financial system itself and precipitated a global recession.

Having thrown trillions of dollars, euros and pounds at the problem, nothing has changed. A “return to growth” remains a mirage. Once again, the global capitalist economy is at the precipice. An imminent lurch into outright depression is a distinct possibility.

The system of production for profit is the root problem, not the failure of currencies or banks. A more sustainable, co-operatively-based economic model is urgent. To achieve this, we want a democratic transformation of the political system to ensure we do not become the victims of a crisis not of our making.

Paul Feldman

Communications editor

Spectre of Great Depression looms over Spain

A new phase of the financial and economic crisis threatens to drag Spain and other so-called “peripheral” countries in the eurozone into a 1930s-style depression and trigger a renewed global crash.

Spain’s failure to raise all the foreign loans it requires has sent markets tumbling and renewed pressure on the ailing euro. The European Central Bank’s decision to rein back on cheap loans to cash-starved commercial banks also adds to the sense of crisis.

Astute observers like economist and academic Nouriel Roubini believe that the pressure on countries like Spain and Portugal to slash spending coming from the European Union, the ECB and the IMF, could trigger major events.

“Japan had a Great Recession, and a Great Stagnation, but it never had a Great Depression,” he says. “But recession in some eurozone countries could become a depression, just like the 1930s.”

Earlier this week, treasury minister Cristóbal Montoro, presented the Spanish parliament with the harshest budget since the death of dictator General Francisco Franco. Prime Minster Mariano Rajoy described the situation as “extreme, at the limit and exceptional”.

This was the day after news came that youth unemployment in Spain's rose to 50.5% in January compared with an average eurozone youth unemployment rate of 21.6%. Total unemployment is up by 10% in a year to stand at 4.75 million.

The Spanish government agreed the details of a savage budget, brushing aside a 24 hour general strike which saw more than 1 million people take to the streets on March 29 against laws making it easier to sack workers.

Spending cuts averaging 17% and a further freeze on public sector workers’ wages will be imposed along with sharp rises in gas and electricity bills. Business taxes are being reduced. These measures can only accelerate the contraction of the economy already predicted to be 1.7% smaller this year.

But it wasn’t enough to satisfy the profit-hungry investors. Despite the severity of the budget measures, Spain’s debt was still forecast to rise to record levels, soaring to 80% of annual income.

In the latest auction of its bonds intended to raise the funds needed to keep the economy breathing, and the acid test of the market’s reaction, investors showed that they were losing confidence in the Spanish government’s ability even to make the interest payments. They forced up interest rates and only bought two-thirds of what was offered.

In Spain, as in other countries, the people have reached the limits of their endurance and a new kind of response is maturing. The Assembly of the Neighbourhood Los Austrias in Madrid played its part in mobilising for the general strike.

As Global Voices correspondent Lidia Ucher put it, the movement that sprung up on May 15 “has been a turning point in terms of supporting the calls of a part of civil society, organised in collectives, neighbourhood assemblies, and local or individually-led associations. In this general strike, the citizen movement has taken different forms in the streets, neighbourhoods, social organisations, and digital social networks.”

This new movement is seeking creative ways for all affected to join the action. Among the proposals from the neighbourhood assemblies was for those without jobs to support the withdrawal of labour, with a consumption strike, taking to the streets without paying to consume food for 24 hours. Another was to involve women in a “care and gender strike”.

Together with the Arab Spring, and the revolutions in North Africa, the 15M movement has been the inspiration for the worldwide Occupy movement. As the global capitalist crisis continues to seek its victims, the new movement for democracy should seek to go beyond more inventive protest which the state can cope with.

We need a strategy for mobilising millions of people to actually defeat the present political and economic system, which M15 rightly identified as the problem not the solution. Our aim has to be the creation of a not-for-profit society of ecologically sustainable production satisfying the needs of the 99%. That’s the only alternative to a capitalism heading for a new Great Depression.

Gerry Gold
Economics editor

London banks in doomsday planning

Reports that London-based global banks are playing “war games” to work out what to do if a country quits the eurozone or the currency collapses, is a stark indication that the financial crisis is out of control. Survival is the only item on the agenda as meltdown looms.

The scenario planning coincides with rising political tensions across Europe, with the Franco-German alliance seeking to sideline Britain. Der Spiegel has dubbed Britain the “sick Empire” in advance of today’s meeting between chancellor Merkel and prime minister Cameron. Other right-wing papers and members of her ruling party have stoked up old enmities between the two countries.

Merkel and French president Sarkozy want, it seems, to make Frankfurt and not London the pre-eminent financial centre in Europe. It is hard to see how that squares with the deepening crisis of the euro itself, with Spain and other countries facing unsustainable interest rates on new loans.

Traders are selling bonds (fixed-term loans) as fast as they can. No one wants to be holding Spanish, Italian or anyone else’s debt when the music stops. And stop it will, with

Terry Pratt of IG Markets remarking that Spain’s difficulties are “the latest blow to the common currency, which is now looking ever more moribund as each day passes”.

According to the Bank of England, UK banks do about half their lending outside Britain, with Europe accounting for about a third of the total. But it’s their ability to absorb large losses that is in the spotlight. Their exposure to France and Germany alone is equal to 130% of their core capital. At least one lender has Italian exposure equivalent to 54% of capital, according to the Financial Times.

And then there are indirect exposures which no one seems to be able to total up. A UK-based bank may have lent to an overseas hedge fund which in turn is tied up in Greek or Italian bonds. Hence the “war games”, with the FT reporting:

It is Friday night, after stock markets have closed across Europe, and there is some shocking news: Greece has pulled out of the euro. By the time markets reopen on Monday morning, UK banks must be prepared for the worst. How dangerous could this be for other eurozone governments and banks? What would it mean for customers? Investors? Would funding markets freeze instantly? These are some of the war-game scenarios UK bankers are acting out – often in real time over a weekend – as they plan for some grim possible consequences of the eurozone debt crisis.

A new credit crunch is well under way, with inter-bank lending crucial to sustaining the financial system, drying up. As in 2008, the fear is of lending to another institution and then finding they can’t pay it back. This only adds to growing liquidity problems and the UK authorities are apparently monitoring funding levels twice daily.

Not all the FT’s readers are sympathetic about the plight of the banks, with one writing: “Looks like the bank's bonus pools are finally under threat owing to the destruction of the real economy through excessive leverage, reckless mortgage lending based on fraud and deceit, financial speculation and looting. The sooner the banks are nationalised, bonus pools used to invest in the real economy and bank management put in jail the better.”

The question is, how do we achieve that goal? Ed Miliband, the Labour leader, has again committed his party to building a “responsible capitalism” and the parliamentary system is a proxy for corporate and financial power. While the bankers do doomsday planning, a strategy for a new political and economic democracy ought to be top of our agenda.

Paul Feldman

Communications editor