EU Bailouts: For The Bankers Not For The Workers

Human Wrongs Watch

By Lee Sustar*

The euro will survive for now–but only because working people in Greece and other European countries face greater suffering. That’s the not-so-hidden agenda behind the new $227 billion bailout of Greece organized by most powerful countries of the European Union, mainly by France and Germany.

Riot police hits an old man during demonstrations in Athens on 29 June 2011| Author Ggia

In the weeks before the July 21 emergency meeting where the deal was announced, the common currency of 12 European countries seemed on the brink of collapse under the weight of the ever-widening debt crisis in Greece and other European countries.

The rescue–which comes little more than a year after an earlier $155 billion rescue that was supposed to stop the debt crisis–has dispelled such apocalyptic scenarios.

But less discussed in the media is the grim fact that the deal is contingent on even greater austerity measures in Greece, where workers have struggled for months against cuts in social spending, higher taxes and growing unemployment.

‘Blood, Sweat And Tear Gas’

“To secure the fresh funds promised by the eurozone last week, the Greek government has had to commit to years of strict austerity,” wrote Financial Times columnist Gideon Rachman. “The country’s future seems to promise blood, sweat and tear gas.”

But as with the previous bailout, the money isn’t really intended for Greece, but rather for the bankers who hold Greek government bonds.

Thanks to a guarantee by European governments, bankers who choose to contribute to a “voluntary” debt restructuring for Greece will get 69 cents on the dollar of their holdings of bonds. That’s a loss, but it’s vastly better than the 20 or so cents on the dollar that the banks would get if Greece out-and-out defaulted.

Instead, Greece has carried out a “selective default,” meaning that its creditors will roll over its old loans to new ones at much lower interest rates–3.5 percent–to be repaid over 15 or 30 years. European governments will provide collateral on those loans via the European Central Bank (ECB).

The European Financial Stability Fund (EFSF), created last year to organize the bailouts of Greece as well as Portugal and Ireland, will use the $632 billion at its disposal not only to make new loans, but also to buy government bonds and recapitalize European banks.

Portugal and Ireland will also have access to the 3.5 percent interest rates on government bonds.

Lot Of Money, But Not Enough To Pay Back Greece’s Debts

That’s a lot of money–but it isn’t enough to pay back Greece’s debts, much less alleviate the suffering of workers. Greece’s current debt is more than $500 billion, a crushing burden for a country of just 12 million people. The lower-interest loans will reduce that amount by only $38 billion–just 8 percent.

As a result, Greece’s debt would remain above 150 percent of gross domestic product (GDP)–higher than even the most pessimistic estimates made a year ago.

Given the limited relief in this latest bailout, there’s no conceivable way that Greece will be able to repay that debt. “This was no doubt a compromise that works politically,” wrote economist Wolfgang Münchau. “But it comes at the expense of debt sustainability. Even before the ink on this second package is dry, a third Greek package beckons.”

The Main Benefits Go To The Banks

In fact, the main benefits of the plan go to the banks that hold Greek government bonds, as Alexander Gloy of Lighthouse Investment Management noted:

“What a joke. While Greece does not benefit materially, banks can exchange their bad holdings for new bonds guaranteed by the European taxpayer.”

EU Blaming The Workers?

EUROPEAN OFFICIALS blame Greek workers–and workers across the continent–for “living beyond their means.” In fact, the roots of this crisis was an easy-money lending spree by big banks since the creation of the euro in 1999.

The banks were able to treat, for example, a Greek or Irish government bond the same as a German one, and they were able to hold far less capital in reserve than they would have if Greece had remained outside the eurozone. This, in turn, enabled them to dramatically expand lending in relation to the money they had on hand.

An Explosion Of Government Debt

When the bubble burst in 2007-2008, the banks had to be rescued by national governments, with tiny Greece and Ireland giving guarantees to huge financial institutions. The result was an explosion of government debt.

Then the same banks that had been bailed out demanded that governments repay that crushing debt in full. The so-called “peripheral” economies were the first to feel the crunch.

To keep the eurozone from unraveling completely, the two countries that dominate it, France and Germany, have now twice overcome their disagreements to bail out Greece.

This time, by giving Greece just a bit more breathing room, German Chancellor Angela Merkel and French President Nicholas Sarkozy–and the bankers whose interests they serve–hope that Greece will be able to stagger forward, making debt payments and avoiding the financial domino effect of an out-and-out default.

Foreign Investors To Grab Whatever They Can

Foreign investors will move in to grab whatever they can in a fire sale of Greek government assets, which is expected under the terms of the latest bailout.

Meanwhile, the newly empowered EFSF will, according to Sarkozy, act as a European version of the International Monetary Fund (IMF), making loans to heavily indebted countries to forestall a crisis–as long as they agree to conform to the austerity agenda.

But even if Greece manages to push through still more attacks on workers–no sure thing, given the scale of mass resistance in that country–the debt crisis threatens to bring down other countries as well.

Also Italy And France Under Fire

In the days prior to the July 21 European summit that came up with the latest Greek bailout, Italy and even France were under fire from investors worried about those government’s ability to repay their debts.

As a result, interest rates on Italian and French bonds–the equivalent of Treasury bonds in the U.S.–jumped sharply. Panicked, the Italian government pushed through an austerity budget in record time.

As for Germany, as Geoffrey Smith of the Wall Street Journal wrote:

Germany is no more responsible for Italy’s and Spain’s debts than it is for Greece’s. More importantly, Germany doesn’t have resources to write a check for Italy and Spain even if it wanted to. At most, with its debt burden already over 83 percent of GDP, Germany has the resources to recapitalize its own banks after a Southern European meltdown.

All this highlights a fundamental problem with the European rescue plans–the countries that fork over money to provide loans and collateral for Greece are themselves on shaky ground–certainly in relation to the scale of the bailouts. As financial trader and author Satyajit Das wrote before the latest Greek bailout:

The Guarantors Are Themselves Vulnerable

[T]he reliance on Euro-zone members guaranteeing each other is problematic. Some of the guarantors are themselves vulnerable with the real and contingent liabilities…In reality, an EU support mechanism of something the order of 1.5-2.0 trillion euros [$2-2.9 trillion] would be needed to ensure a credible ability to bailout the embattled economies.

Even if that sum was economically feasible–which is a stretch–raising that amount of money would likely be politically impossible, considering that Europe has a central bank, but no central treasury or fiscal policy.

As the euro crisis drags on, many are calling for just such a solution. But Germany–which would have to pick up the tab for much of such an effort–is unwilling to do so, and other countries are reluctant to surrender economic control to Germany.

The Likley Scenario Of A New Crisis

Rather than a comprehensive and decisive solution to the euro mess, the second Greek bailout is another effort to kick the can down the road and hope that economic recovery provides an eventual solution.

A more likely scenario, though, is a new crisis in other debt-burdened eurozone countries. As the Financial Times noted, “A broadening of the eurozone debt crisis to other, larger, countries such as Italy or Spain, would exhaust funds available to the European financial stability facility, the EU’s bail-out mechanism, which is due to provide much of the external help to Greece.”

No Reason To Believe That More Squeeze Wil Fuel Recovery

Austerity is already strangling growth in Greece as wages are cut, consumer demand plummets and investment dries up. There’s no reason to believe that the latest squeeze on Greece–and similar programs in Portugal, Ireland, Spain and elsewhere–will fuel a recovery.

And if the debt crisis breaks out anew in Greece or some other country, European banks–and some U.S. ones–which haven’t yet fully acknowledged losses from the Greece troubles will find themselves in need of yet another rescue. But a bailout of banks hit by a Greek default would stretch the European financial system to the breaking point.

In other words, the euro crisis is far from over. The weak economy means that debt burdens in the so-called PIIGS–Portugal, Italy, Ireland, Greece and Spain–will all likely grow relative to GDP.

Hammering The Workers

With the day of reckoning for the euro postponed for now, European governments will get on with the business of hammering the working class, wiping out decades of economic and social gains at breakneck speed.

In Greece, it’s unelected bureaucrats from the ECB, European Union and IMF dictating the terms–the center-left PASOK government simply rubber-stamps their edicts.

Portugal, too, has been hit with an austerity program in exchange for its $112 billion bailout last year. This includes an increase in the value-added tax, reducing workers’ purchasing power, and cuts in a range of social services. Ireland, which got a $122 billion bailout a year ago, is cutting its budget by $8 billion–a huge sum in a country of only 4.6 million people.

Spain, where unemployment has doubled to 21 percent since the recession, is on track to cut its budget by 8 percent. Italy has cut $100 billion from its budget, in part by targeting health care and family tax benefits.

And the austerity drive isn’t confined to the eurozone–Britain is carrying out its biggest wave of cutbacks since the Second World War, aiming to eliminate 490,000 public sector jobs.

Bankers Across Europe, Demanding Sharp Reduction In Social Spending

Bankers and corporations across Europe are demanding a sharp reduction in social spending and a transfer of wealth to capital to help them to survive the crisis. Thus, both conservative and social democratic governments are carrying out the same program of cuts, cuts and more cuts.

*Lee Sustar, International Socialist Organization, is the labour editor of Socialist WorkerThis is an abridged version of his analysis on SocialistWorker on July 28th

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2011 Human Wrongs Watch

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