Eurozone debt crisis increases fears of new global recession
On September 29 the European Financial Stability Facility cleared a major hurdle when German MPs voted to ratify an increase in its size and scope, including enabling it to buy government bonds from eurozone nations facing bankruptcy. The expansion of the bailout fund from 440 billion to 780 billion euros almost doubles Germany’s contribution — to €211 billion.
However, British former PM Gordon Brown warned in an opinion piece in the same day’s New York Times that many European banks were “close to insolvency” and that “a far larger rescue fund - two, perhaps three trillion euros — is needed to stabilise the eurozone” . The larger rescue fund referred to by Brown is anticipated as needed to save European banks in the event of a much-feared declaration of bankruptcy by the Italian government.
Italy’s public debt in 2010 was 119% of its gross domestic product, compared to Greece’s debt-to-GDP ratio of 142%, Ireland’s ratio of 96.2% and Portugal’s 93%. In November 2010, eurozone leaders approved an €85 billion bailout package for Ireland, and in May this year they approved a €78 billion bailout for Portugal, conditional on both governments imposing harsh austerity measures on the two nations’ working people.
In his annual state of the union speech to the European Parliament a day earlier, European Commission president Jose Manuel Barroso revealed, “In the last three years, [European Union] member states have granted aid and provided guarantees of 4.6 trillion euros to the financial sector”.
This amount was considerably less than the secret loans and guarantees provided by the US central bank (the Federal Reserve Board) to private banks since the beginning of the 2008-09 “Great Recession” and the accompanying global financial crisis - the most severe crisis to hit the world capitalist economy since the 1930s Great Depression.
According to a preliminary report issued by the congressional Government Accountability Office on July 21 as part of its first audit of the Federal Reserve Board since the Fed was established in 1913, from December 1, 2007, through to July 21, 2010, the Fed provided secret loans and guarantees of US$16.1 trillion to US and foreign, principally European, banks. Among the main beneficiaries were Citigroup ($2.6 trillion), Morgan Stanley ($2 trillion), Merrill Lynch & Co. ($1.9 trillion), Bank of America ($1.3 trillion), the UK Barclays bank ($868 billion) and the Royal Bank of Scotland ($541 billion).
On September 29, Agence France Presse reported that auditors from the European Union, European Central Bank and International Monetary Fund met with Greek government officials as part of their audit to decide whether to disburse €8 billion needed to avert the Greek government declaring bankruptcy by the end of October. The money is part of a first €110 billion bailout loan approved last year, and follows a second €109 billion bailout loan approved in July.
Of course, when debt-strapped governments like Greece’s receive hundreds of billions in new loans, that money is immediately sent into the coffers of private banks as payment on past loans. The whole situation, observed former IMF official mario Blejer, now governor of Argentina’s central bank,“resembles a pyramid or Ponzi scheme”, in which original lenders are paid back with new loans. The difference now is that the original private bondholders are being paid with taxpayer-funded bailouts.
The EU-ECB-IMF auditors arrived the day after the Greek parliament approved a new “property tax” that marks a sharp escalation in the austerity measures imposed by Greece’s social-democratic PASOK government for more than a year. The new tax will be added to the electricity bills of some 5.5 million home-owners — about 80% of households. It is expected to cost the average family €1000-€1500 a year, and those households that refuse or are unable to pay will have their electricity cut off.
The “property tax” is the centrepiece of a new wave of austerity aimed at satisfying the EU, ECB and IMF auditors. Among the measures is the slashing of the public sector workforce by a fifth, cuts in public sector pay by 20% (on top of 30% cuts already imposed) and new cuts in pensions by an average of 4%, in addition to a previously imposed 10% cut. Over the past 12 months, some 200,000 workers have lost their jobs, taking the official unemployment rate to 16%, with 40% of under 24-year-olds out of work.
The same day, Athens was hit by a second consecutive day of transportation strikes, including action by subway and bus drivers. Tax collectors and customs officials also began a 48-hour strike to protest cuts in wages. A general strike is scheduled for October 19. Antonis Papayiannidis, who publishes the Greek Economic Monthly, told the September 30 London Daily Telegraph: “In an almost detached way people have just watched the catastrophe happening to them. They were very displeased but they did not erupt. They became withdrawn and they are still withdrawn. But it could erupt very quickly, because the feeling of helplessness is very intense right now — in a way that makes the petrol bombs and barricades of June [initiated by small groups of anarchists] look pathetic.”
Greek debt default
Largely as a result of two years of government-imposed austerity, Greece has failed to recover from the 2008-09 Great Recession and its debt-to-GDP has continued to balloon - from 113% in 2010 to 160% this year. To reduce its debt-to-GDP ratio to the eurozone average of 80% would require a 50% write-down of almost all of Greece’s €353 billion public debt. While eurozone leaders, including the Greek government, have rejected such an idea, Reuters reported on September 21 that “private sector economists and political analysts are largely agreed that it is only a matter of time”.
The Reuters report added: “That Greece’s debt dynamics are unsustainable is no longer seriously in question. With a debt-to-GDP ratio of around 160 percent and climbing, the burden on the state is close to unbearable. Further EU/IMF emergency aid is not guaranteed. Some analysts now expect a default as early as November or December … The biggest impact would undoubtedly be felt by Greek banks and financial institutions, which together hold around 40 billion euros of the nation’s sovereign debt, according to figures from the Greek central bank. French and German banks are the next biggest private creditors, although estimates of their exposure vary. The Bank for International Settlements puts French banks’ total liabilities in Greece at $56 billion and Germany’s at $24 billion.”
However, a 50% cut in Greece’s debt — the so-called orderly debt default option— might lead to a similar demand by other highly indebted eurozone countries. “The effects would be enormous and probably very difficult to contain”, Janis Emmanouilidis, a senior analyst at the European Policy Centre, a think tank in Brussels, told Reuters. As a result, he said, eurozone leaders will wait as long as they can before accepting the inevitable.
This fear has been heightened by the related fear that the world capitalist economy could rapidly slide back into recession. A June 16 American Broadcasting Company report explains the connection: “Although US businesses, even banks, are not severely exposed to Greece’s economy, investors worry that if Greece defaults on its debt and leaves investors such as Greek bond holders out in the cold, financial trouble would spread to other troubled European economies, such as Spain’s, Portugal’s and Ireland’s. If the European economy were to implode in a wave of defaults and associated bank failures, it could pull the US economy down as well, since there is a lot of trade between the US and Europe.” The fear is that, the more money that eurozone countries have to spend on bank bailouts, the less they will have to spend on buying US exports.
It is already clear that the post-June 2009 economic recovery has faltered. US GDP grew at an annual rate of only 1.3% in the second quarter of 2011, according to the third estimate the US Bureau of Economic Analysis released on September 29. It had peaked at an annual rate of 3.5% in the third quarter of 2010, following a contraction of 6% during 2009. The combined eurozone GDP slowed from 2.5% in the first quarter of 2011 to 1.7% in the second quarter. This was largely a result of a sharp slowdown in Germany, the eurozone’s largest economy — from a post-recession peak of 4.7% in the first quarter of 2011 to 2.7% in the second quarter.
A Bloomberg.com survey on September 26 of 1031 investors, analysts and traders found that 59% of them expected China’s economy to decline from an annual growth rate of 9.5% this year to less than 5% by 2016, while 47% of respondents expected it to halve within the next two to three years. China, which is heavily dependent upon manufacturing exports to the US and Europe, needs to sustain economic growth above 8% a year in order to avoid a rise in socially destabilising unemployment.