Greek debt crisis leaves Europe on the brink of financial collapse

With Greece on the verge of default the crisis is set to deepen, writes Simon Hardy and Richard Brenner. The Eurozone is in serious trouble with Spain and Italy sinking deeper into debt
The European financial system came within a whisker of collapse again in mid-June.
As police and workers clashed on the streets of Athens and the Greek government shattered, European leaders were forced into a desperate last minute compromise to avoid not only a Greek debt default but the potential collapse of the European banking system and the Euro itself.
In the face of a one-day general strike and massive street protests on 15 June, key members of the ruling PASOK party refused to back the regime’s vicious programme of cuts and privatisation, demanded by the International Monetary Fund as a condition for bailing out Greece. Prime Minister George Papandreou was forced to dump allies and invite bitter rivals into a hoped-for coalition national government. They are now racing to get the cuts and sell-offs voted through parliament over the next week.
A huge amount is riding on this, not just in Greece but across the world. On Friday German Chancellor Angela Merkel finally backed down in a dispute with French President Nicholas Sarkozy and the European Central Bank (ECB) over how to broker another Greek bailout. Merkel had wanted private lenders to Greece – including banks and other institutional investors – to “take a haircut” and be forced to accept some losses.
She blinked first in this stand off because the entire banking bourgeoisie, backed by the ECB, other European governments and the IMF, threatened a full-on meltdown of the system if she didn’t.
Greece’s total state debt is €330 billion. Like all the large state debts incurred since the 2007-08 crisis, it arose not because of “overspending” on welfare as the Tories and the lying right wing papers suggest, but because of plummeting tax revenues following the recession and the soaring cost of unemployment benefits. The capitalist crisis caused the debt, not the other way round.
The Greek government cannot afford to meet repayments and interest on its existing bailout. The Greek economy is nowhere near where it needs to be to start repaying; it would take a budget surplus of at least 7 per cent just to keep debt at the same level as it was at the end of 2010. But the likelihood of such a surplus is nil – recession is ripping through the Greek economy. More unemployed and less tax revenue is creating a scissor crisis of state finance.
As Swiss bank UBS’s George Magnus admitted last month, “I don’t think there is a question over whether Greece is going to default; it is just a question of whether it is an orderly or disorderly one.” But when Merkel suggested that private lenders should be forced to write off some of the debt, the financiers went into overdrive to block it. Their funds stopped buying Greek bonds (which is how governments borrow money), pushing the interest payable by Greece to investors on two-year bonds up to a staggering 30 per cent, while the bond price fell through the floor.
ECB president Jean-Claude Trichet then moved in, claiming that any compulsory write-offs of debt to private capitalists would be treated as a “credit event”, which is banker-speak for a default. And then, he implied, all hell would break loose. Simultaneously credit analysts at the big three rating agencies, Moody’s, Standard & Poor’s and Fitch, all warned that pressure on private investors would make them issue a default rating on Greek debt. Standard and Poor’s cut its rating on Greek debt to CCC – the lowest it has ever given for any country in the world.
One of the biggest issues for the major European powers is the amount of Greek debt held by their banks (see table). French banks are the most exposed, holding nearly four times as much as the German banks, which explains why Sarkozy took a tougher line against forcible write-offs than Merkel. And the ECB itself may hold more than €40 billion of Greek debt, according to estimates from Barclays. So in a classic example of financial blackmail it warned that in a default it would have to cut off funding to Greece altogether.
A default would also trigger the insurance policies held by investors against the risk of a government refusing to repay its debt. These policies – called credit default swaps – are what brought down the biggest insurance company in the US – AIG – during the great banking crisis of 2008, triggered by Lehman Brothers going bust after the US government failed to bail it out.
A Greek default would be like another Lehman Brothers collapse – a seismic event for the world economy. As the IMF puts it, “In a serious market event, a shock could be transmitted beyond the Eurozone”.
So Merkel made a humiliating climbdown and did a deal with Sarkozy. But now they have to make it work.
The Financial Times revealed just how fragile this deal could be. The proposed scheme will invite banks to voluntarily write off some of Greece’s debts. But it will affect only the €85 billion that Greece is supposed to pay back over the next three years and, as the European Commission has warned, “very much less than full renewal [i.e. repayment of the €85 billion] is to be expected from such a strictly voluntary operation”.
But while as the private bankers are allowed to decide voluntarily if they must pay for the crisis, the Greek people are given no choice at all. The new cuts package means €6.5 billion spending cuts and tax rises this year alone. This is twice what was previously agreed with the IMF and the bond markets, coming on top of an earlier cuts programme that has driven Greek unemployment up to a record 16.2 percent after three years of recession. And another 150,000 public sector workers will be sacked.
No one in Greece has voted for more austerity – but rather than elections or a referendum on the cuts and IMF privatisation package, the politicians just re-jigged and reshuffled the seats in the cabinet to fend off collapse.
The reshaped government in Athens will now take desperate measures to get the cuts through the parliament, warning that if they do not pass the package, the bondholders will refuse to do a deal. As The Guardian’s Nils Pratley put it: “If Greece doesn’t have an effective government capable of imposing the austerity measures demanded by its lenders, the game is close to up.” It is a clear and obvious example of the international financial institutions imposing cuts through the dictatorship of credit and debt.
And this crisis has the potential to sweep the world. Spain is next in line for a bailout – one which would exhaust the EU’s entire existing bailout facility and would threaten holdings of banks all over Europe. Investors are aware of the risk, which is why in the midst of the Greek crisis they stopped buying Spanish bonds, forcing the Spanish state to pay far more interest on its debt and making a Spanish default more likely.
Further and almost unnoticed in the chaos last week, rating agency Moody’s downgraded Italy, complaining that southern Europe’s biggest economy is mired in debt and that austerity measures being pushed by Silvio Berlusconi’s government may not be enough. As we have written before, the EU cannot afford to bail out Italy, raising the spectre of a collapse of the European financial system.
If Greece’s creditors cannot agree to a sufficient waiver of its debt and it defaults, if Spain or Italy need to be bailed out, then the only remaining possibility could be a break-up of the Eurozone. Either the poorer countries, busted out, will leave the Euro and devalue their currencies sharply, weathering years without support from international banks, or Germany will lose patience and walk away itself.
This crisis is not just about Europe even. In Japan debt has risen sharply following the tsunami and earthquake. In the US, Congress has a limit on state debt of a staggering $14.3 trillion, but federal reserve chairman Ben Bernanke warns that refusal to raise that limit might “require the federal government to delay or renege on payments for obligations already entered into”, which means default.
As we wrote last month, the whole system in which states are funded under capitalism is deeply unstable because it relies on lending by private capitalists, and taxes from their profits. As capitalism goes through its cycles in which rates of profit tend to decline, crises break out which reduce tax income and force governments to borrow more. So while governments privatise services, they nationalise private debt and force the working class and the poor to pay it back.
“I am here by patriotic duty to carry out a real war” said the new Greek finance minister Venizelos. Indeed – a war on working class people, on the unemployed, the youth, all the users of welfare and public services.
Workers and youth need to respond in kind to Venizelos, Papandreou and the IMF by extending their action into an indefinite general strike, bringing down the new government, and putting in its place a government based on popular committees of working class delegates, a government that would renounce the debt, confiscate the assets of the banks and corporations, sending out the clearest possible call on the masses across Europe and the world to do the same.