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From Michael Robert's Blog
July 23, 2011 by michael roberts The new Greek bailout deal announced by the EU leaders late last week will leave Greece with a huge debt burden. The EU and the IMF have imposed massive austerity measures on the Greek government and its people. So it beggars belief that the ‘socialist’ government of PM George Papandreou should return from Brussels and congratulate themselves on ‘winning’ a deal. They have not ‘saved’ Greece, but instead left it to a 30% cut in living standards over just a few years, and under the fiscal heel of the other EU governments.
The so-called private sector involvement in the deal is nothing of the kind. The banks and other financial institutions of Europe hold €150bn of Greek government debt and are being asked to swap most of this debt for new Greek government debt that is of longer maturity (15-30 years) at a discount to the previous value of its holdings. The headline ‘haircut’ on the value of this debt is reported at 21%, but this is an illusion. Assuming 90% of their existing holdings are put into the debt swap, the final losses on the banks books will be just €17bn, or no more than 12% in losses. But in return, the banks get new Greek debt with 5% annual interest guaranteed by the EU fund and get rid of the old junk Greek bonds at a rate way higher than it would at current market rates (they are currently priced at 50c to the par value). Indeed, as the years go by, the banks will be able to get repayments on their EU-guaranteed Greek government bonds rated at top investment grade and so will get a big profit from the deal. Also, as a result, by the end of 2014, two-thirds of the remaining Greek government debt will be owed not to the banks, pension funds etc but to other EU governments, the ECB and the IMF.
The debt swap deal with the banks will reduce the amount of debt the Greeks will owe a little, maybe just 20% pts maximum out of a debt burden of 160% of GDP. Also, the Greeks get a delay in making repayments on the debt owed to the banks. But the government is still left with a burden much greater than any other in Europe. And the Greek people will be faced with a massive range of tax increases, cuts in pensions, social security and other public services and severe wage cuts; along with a rapidly contracting economy and unemployment at 16%.
The banks of Europe are only agreeing to take this small hit as the German government insisted on their ‘involvement’ because of the anger of its own electorate over the amount of taxpayers money that was going into bailing out the Greeks and others in Europe. And here is the issue. The Greek government has a massive debt of around 160% of GDP because it has had to borrow at ever higher interest rates from the banks and other financial institutions (pension funds, insurance companies). So bailing out the Greeks is really bailing out the banks. The banks gain either way – through the bailout (now) and through the debt swap (eventually).
What is the alternative? The Greek socialists don’t see any and neither does any other socialist leader in Europe. The alternative would have been for the Greek government to refuse to accept the draconian terms of the EU leaders and the IMF and instead negotiate a reduction of its debt with the banks. In effect, the government would default on its debt and offer payment at say 25% of the original value, so that its debt burden fell to 40% of GDP – much more manageable. If the banks refused, they would get nothing. If the banks say they would not lend any more to the Greeks (almost a certainty), the Greek banks could be nationalised (they would have to be anyway as the losses on their holdings of Greek debt of €50bn would wipe out their shareholders capital). The customer deposits of Greeks could be guaranteed to avoid a run on the banks.
This would be a very tough situation for the Greeks, but it would be no worse than what has been imposed by the EU leaders and the banks. At least, they could decide their own future and make any sacrifices that reduce the burden on average Greeks, rather than the EU deal that saves the banks. If the EU leaders moved to block funds to the Greeks and expel Greece from the euro, the government could appeal to the people of Europe and any friendly governments to resist this threat. The EU leaders could be forced into a deal as they fear that a Greek default could lead to further crises in the rest of the EU and they badly need to make Europe ‘Greece proof’.
But does it matter if Greece has a big government debt? Some Keynesian economists like Paul Krugman have condemned the Greek package because fiscal austerity measures will cause an economic recession in Greece and in the rest of Europe. That’s true, but they also argue that it does not matter if Greece runs up budget deficits and has a large government debt. After all, this can be financed by the Greek central bank just printing money for as long as is necessary to get the Greek economy going. Krugman says if Greece is restrained from doing this because it is in the Eurozone, then that’s a good reason to leave.
The problem with this argument is that it does not recognise the nature of the capitalist economy. It depends on profitability and that depends on the capitalist sector of the economy having freedom to raise money to invest at reasonable interest rates. A bigger and bigger government owing more to the banks threatens the capitalist control of the economy and eats into profitability through higher taxes on profits and/or higher interest rates across the board. Capitalism does not want and cannot afford a big public sector without threatening its own existence. In that sense, under capitalism, public debt must be reduced. That is the real meaning of being Greece proof.
The so-called private sector involvement in the deal is nothing of the kind. The banks and other financial institutions of Europe hold €150bn of Greek government debt and are being asked to swap most of this debt for new Greek government debt that is of longer maturity (15-30 years) at a discount to the previous value of its holdings. The headline ‘haircut’ on the value of this debt is reported at 21%, but this is an illusion. Assuming 90% of their existing holdings are put into the debt swap, the final losses on the banks books will be just €17bn, or no more than 12% in losses. But in return, the banks get new Greek debt with 5% annual interest guaranteed by the EU fund and get rid of the old junk Greek bonds at a rate way higher than it would at current market rates (they are currently priced at 50c to the par value). Indeed, as the years go by, the banks will be able to get repayments on their EU-guaranteed Greek government bonds rated at top investment grade and so will get a big profit from the deal. Also, as a result, by the end of 2014, two-thirds of the remaining Greek government debt will be owed not to the banks, pension funds etc but to other EU governments, the ECB and the IMF.
The debt swap deal with the banks will reduce the amount of debt the Greeks will owe a little, maybe just 20% pts maximum out of a debt burden of 160% of GDP. Also, the Greeks get a delay in making repayments on the debt owed to the banks. But the government is still left with a burden much greater than any other in Europe. And the Greek people will be faced with a massive range of tax increases, cuts in pensions, social security and other public services and severe wage cuts; along with a rapidly contracting economy and unemployment at 16%.
The banks of Europe are only agreeing to take this small hit as the German government insisted on their ‘involvement’ because of the anger of its own electorate over the amount of taxpayers money that was going into bailing out the Greeks and others in Europe. And here is the issue. The Greek government has a massive debt of around 160% of GDP because it has had to borrow at ever higher interest rates from the banks and other financial institutions (pension funds, insurance companies). So bailing out the Greeks is really bailing out the banks. The banks gain either way – through the bailout (now) and through the debt swap (eventually).
What is the alternative? The Greek socialists don’t see any and neither does any other socialist leader in Europe. The alternative would have been for the Greek government to refuse to accept the draconian terms of the EU leaders and the IMF and instead negotiate a reduction of its debt with the banks. In effect, the government would default on its debt and offer payment at say 25% of the original value, so that its debt burden fell to 40% of GDP – much more manageable. If the banks refused, they would get nothing. If the banks say they would not lend any more to the Greeks (almost a certainty), the Greek banks could be nationalised (they would have to be anyway as the losses on their holdings of Greek debt of €50bn would wipe out their shareholders capital). The customer deposits of Greeks could be guaranteed to avoid a run on the banks.
This would be a very tough situation for the Greeks, but it would be no worse than what has been imposed by the EU leaders and the banks. At least, they could decide their own future and make any sacrifices that reduce the burden on average Greeks, rather than the EU deal that saves the banks. If the EU leaders moved to block funds to the Greeks and expel Greece from the euro, the government could appeal to the people of Europe and any friendly governments to resist this threat. The EU leaders could be forced into a deal as they fear that a Greek default could lead to further crises in the rest of the EU and they badly need to make Europe ‘Greece proof’.
But does it matter if Greece has a big government debt? Some Keynesian economists like Paul Krugman have condemned the Greek package because fiscal austerity measures will cause an economic recession in Greece and in the rest of Europe. That’s true, but they also argue that it does not matter if Greece runs up budget deficits and has a large government debt. After all, this can be financed by the Greek central bank just printing money for as long as is necessary to get the Greek economy going. Krugman says if Greece is restrained from doing this because it is in the Eurozone, then that’s a good reason to leave.
The problem with this argument is that it does not recognise the nature of the capitalist economy. It depends on profitability and that depends on the capitalist sector of the economy having freedom to raise money to invest at reasonable interest rates. A bigger and bigger government owing more to the banks threatens the capitalist control of the economy and eats into profitability through higher taxes on profits and/or higher interest rates across the board. Capitalism does not want and cannot afford a big public sector without threatening its own existence. In that sense, under capitalism, public debt must be reduced. That is the real meaning of being Greece proof.
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