Brussels summit fails to end eurozone debt crisis

After 11 hours of talks in Brussels throughout the night of October 27, the 17 leaders of the states that share the euro as their currency announced a package of measures they hoped would be regarded by international financial markets as a “comprehensive” solution to the eurozone debt crisis.

The package consisted of three broad measures: voluntarily acceptance by private bondholders of a 50% write-off of the face value of their holdings of Greek government debt, a €106 billion recapitalisation of European banks and an expansion of the eurozone’s emergency financial stability facility (EFSF) from €440 billion to €1 trillion.


Greek protests against austerity measures.

While global stock markets initially rallied upon the announcement of the package, US stocks plunged on October 31 amid renewed worries about not only its lack of detail, but whether it would work. The stock market plunge was led by major banks, Deutsche Bank’s US shares falling by 11.5%. Morgan Stanley lost 8.7%, Citigroup dropped 7.5%, Bank of America fell 7.1%, Goldman Sachs slid 5.5%, and JP Morgan Chase fell 5.3%.

At the same time, the eurozone debt crisis claimed its first major US casualty. Brokerage firm MF Global filed for bankruptcy protection following a string of losses on European public debt holdings. It was the largest failure of a US financial firm since the collapse of Lehman Brothers in 2008.

“Scepticism as to whether the eurozone’s debt plan can deliver was palpable, with funding the leveraging of the eurozone’s bailout facility topping the list of concerns”, market analysis firm Charles Schwab declared in the wake of the Wall Street plunge.

After deducting the EFSF’s existing emergency funding programs, the rescue fund has €250 billion left from its original €440 billion. However, if Portugal or Ireland needed another bailout, that sum could be reduced even further. Multiplying the EFSF’s “firepower” to at least €1 trillion is dependent upon persuading countries that have large foreign exchange reserves such as China, Japan, Russia and Brazil to invest their reserves in a “special purpose investment vehicle” (SPIV) yet to be created by the EFSF.

China, Japan reluctant

However, this seemed increasingly unlikely. China, holder of the world’s largest foreign exchange reserves at US$3.2 trillion, declared in an October 30 statement, issued via the official Xinhua news agency, that it “can neither take up the role as a saviour to the Europeans, nor provide a ‘cure’ for the European malaise”, adding: “Obviously, it is up to European countries themselves to tackle their financial problems”.

Japan, which already holds about €2.7 billion, or 20%, of the total bonds issued by the EFSF, has expressed reluctance to invest large amounts of its $1.2 trillion in foreign currency reserves in an EFSF SPIV. Both Russia, with $516 billion in foreign currency reserves, and Brazil, with $350 billion, have indicated they are more inclined to support the eurozone through boosting their commitments to the International Monetary Fund rather than directly investing in the new, and as yet ill-defined ESFS SPIV.

There are also growing concerns in financial circles about the European bank recapitalisation plan. At their Brussels summit, the 17 eurozone leaders decided to set June 30 as a deadline for major European banks to accumulate 9% in core reserves. According to European Banking Authority estimates, banks will need to accumulate more than €106 billion to meet this target. The EBA estimated this would require Greek banks to raise an additional capital of €30 billion, Spanish banks to raise an additional €26.2 billion, Italian banks an additional €14.8 billion, French banks an additional €8.8 billion and German banks an additional €5.2 billion. The recapitalisation is supposed to be achieved without resort to government loans.

Bloomberg.com reported on October 31 that Italian, Spanish and French banks were considering sales of assets and reductions in loans, even risking bringing on a new recession, to meet the target. It reported: “Europe’s largest banks may raise just a tenth of the total capital shortfall estimated by regulators, fueling concern policy makers’ plans to bolster the region’s lenders could fail”.

Finally, even the much acclaimed (in the capitalist media) 50% write-off of Greek government debt will still leave the Greek government with an unsustainable debt-to-GDP ratio in 2020. That is, even after all of the brutal austerity measures imposed upon the working people of Greece — now to include a 40% cut in public sector wages (which previously averaged €1300 per month) — Greece’s debt-to-GDP ratio will be higher at the end of this decade than it was last year (113%). This is because Greece’s economy has continued to contract under the impact of several years of government spending cuts. In September the Hellenic Statistical Authority estimated Greek GDP would contract by 7.3% this year.

The share of Greek government debt on which the Brussels summit decided to ask private bondholders to take a voluntary “haircut” amounts to only about a third of its total public debt of €353 billion. Another third, which is now held by the IMF, the European Central Bank and other national governments, was ruled off limits to the write-off. The remaining third is held by Greek banks and the Greek Social Fund. If there were to be a 50% write-off of Greek pension funds — which are already losing half a billion euros in revenue for every one percent increase in unemployment (now edging toward 17%) — they would be practically bankrupt.

Stunned and horrified

Greek Prime Minister George Papandreou stunned and horrified other European Union leaders by announcing on November 1 that he would ask Greek voters to vote on the Brussels summit deal. A “no” vote would have scuttled the deal, and one poll showed that 59% of Greeks were opposed. Anticipating a “no” vote, the French and German stock markets plunged 4.5% and 5% respectively on November 1. Greek stocks fell by 6.31%.

The Australian Associated Press reported on November 2 that Italy was “on the ropes” following the Greek announcement. “Stocks closed down 6.80 per cent with bank shares in free fall, in the worst session since the start of the global financial crisis in 2008. Borrowing rates also shot up and the spread between Italian and German benchmark 10-year government bonds widened to a record 455 basis points.” Analysts warned that the high borrowing cost risked making Italy’s public debt of €1.9 trillion (120% of its GDP) unsustainable. AAP commented that this could set the country on “a dangerous spiral that could ultimately force Italy, the eurozone’s third largest economy, to seek a bailout like Greece, Ireland and Portugal”.

Two days earlier, the Paris-based Organisation of Economic Cooperation and Development cut its forecast for eurozone GDP growth in 2012 to just 0.3%, far below the 2% growth it forecast five months ago. It also sharply revised downward its forecast for US GDP growth in 2012 — from 3.1% last May to 1.8%. It forecast that China’s GDP would slow from its current rate of 9.1% to 8.6% next year, and that debt-to-GDP ratios would keep rising in the developed economies, reaching in two years’ time 108.7% in the US, 97.6% in the eurozone and 227.6% in Japan.

The OECD predicted that a “deterioration of financial conditions of the magnitude observed during the [2007-2009] global crisis could lead to a drop in the level of GDP in some of the major OECD economies of up to 5 percent by the first half of 2013”.

The UN’s International Labor Organization issued a report the same day also predicting that the global capitalist economy was on the verge of a new recession. It noted that 80 million new jobs would need to be created over the next two years to return employment levels to their pre-2007 rates — 27 million in developed economies and the remainder in underdeveloped countries. The ILO said the number of jobless across the world has hit a record high of more than 200 million, and that the risk of social unrest is rising in 45 of the 118 countries it examined — particularly within the European Union and the Arab countries.

On November 3, as Greek government borrowing costs on 10-year loans ballooned to an interest rate of 31% (compared to 2% for German government 10-year loans), French President Nicholas Sarkozy and German Chancellor Angela Merkel agreed that the Greek government would not get the sixth instalment of its original €110  billion bailout, amounting to €8 billion, if it did not abandon the referendum proposal. A Greek government official revealed that without this instalment Papandreou’s government would run out of funds by mid-December.

Later that same day, Papandreou announced that he had scrapped the referendum. Greek finance minister Evangelos Venizelos declared that, since Greece’s main opposition party, the centre-right New Democracy, now supported the debt deal, a referendum was no longer necessary. ND had previously refused to vote for the Papandreou government austerity measures, pushing for early parliamentary elections, which it was confident of winning.

Getting ND’s support for the debt deal, and its accompanying austerity measures, appeared to be the main aim of Papandreou’s cynical referendum announcement. “Let everything be discussed — the makeup of the government and anything else ... I am not glued to my seat”, Papandreou said on November 3, adding: “My position is crystal clear: Let talks start immediately to create a formation that is broadly accepted, efficient and able to deal with the national interest in this difficult time for the country”.

Bankers installed as premiers

The result of these discussions was an agreement between ND, the far-right People’s Orthodox Party (LAOS)  and the “centre-left” PASOK for a new coalition government to be headed by an unelected leader — Lucas Papademos, the former governor of the Bank of Greece and former European Central Bank vice-president. The new government was sworn in on  November 11.

A similar, though even more undemocratic process in Italy resulted on November 16 in the replacement of the elected centre-right  government of Prime Minister Silvio Berlusconi with an entirely unelected cabinet made up of academic economists, business managers and bankers headed by former European commissioner Mario Monti, who is also an international adviser to the US giant Goldman Sachs investment bank. In the week before Monti’s government was sworn in, interest rates on 10-year Italian government bonds had climbed to 7.5%, forcing the Berlusconi government’s resignation. The new government will be required to report to the International Monetary Fund every three months to account for its budgetary policy. While the installation of the Papademos and Monti governments was welcomed by international stock and finance markets, on November 17 the French and Spanish governments, governing the eurozone’s second and fourth largest economies, were both hit with sharply rising borrowing costs. Voice of America reported on November 17 that Spain had sold “nearly US$5 billion in government bonds” that day at a 7% interest rate — “the same rate that Greek, Irish, and Portuguese bonds hit before those countries were forced to ask for bailouts”.

VOA also reported: “French government bonds were selling at an interest rate more than double what Germany pays even though both countries have the same top AAA credit ratings”. A Reuters dispatch in the Sydney Morning Herald reported: “Fears that the euro zone’s second largest economy is getting sucked into the debt maelstrom have taken the two-year-old crisis to a new level …

“In Rome, Monti outlined a broad raft of policies including pension and labour market reform, a crackdown on tax evasion and changes to the tax system in his maiden speech to parliament ahead [of] a confidence vote to confirm backing for his technocrat government.

“With Italy’s borrowing costs now at untenable levels, Monti will have to work fast to calm financial markets given Italy needs to refinance some 200 billion euros ($273 billion) of bonds by the end of April.

“Ireland, which has been bailed out and gained plaudits for its austerity drive, will also be forced to do more. Dublin will increase its top rate of sales tax by two percent in next month’s budget, documents obtained by Reuters showed.

“But no amount of austerity in Greece, Italy, Spain, Ireland and France is likely to convince the markets without some dramatic action in the shorter term, probably involving the European Central Bank. Many analysts believe the only way to stem the contagion for now is for the ECB to buy up large quantities of bonds, effectively the sort of ‘quantitative easing’ undertaken by the US and British central banks.

“France and Germany have stepped up their war of words over whether the ECB should intervene more forcefully to halt the euro zone’s debt crisis after modest bond purchases have failed to calm markets. Facing rising borrowing costs as its ‘AAA’ credit rating comes under threat, France has urged stronger ECB action but Berlin continues to resist, saying European Union rules prohibit such action ...

“Investors and euro zone officials hope that if Merkel and others find themselves staring into the abyss, the unthinkable will rapidly become thinkable. With turmoil reaching a crescendo, euro zone banks are finding it harder to obtain funding. While the stresses are not yet at the levels during the 2008 financial crisis, they have continued to mount despite ECB moves to provide unlimited liquidity to banks.”