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.
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