Parasite threatens host, the impact of the European bank bail-out
In a very useful and clearly argued post on Socialist Economic Bulletin, Michael Burke illustrates how the massive bail out for banks via increasing debts to Europe’s taxpayers and cuts in government spending are creating the conditions for a renewed economic crisis in Europe. It is the significant size of the banking sector in the ‘core’ European countries and the amount of debt in the peripheral countries that they are holding that is determining who in Europe must be saved and who must make ’sacrifices’ . Since these banks are the recipients of the bail out, their losses have even determined the size of the bail out too.
Michael also suggests that one reason why Ireland gets a lot of praise from the financial papers, IMF and the EU Commission and has largely avoided downgrades is due not only for our ’enthusiasm’ in applying the recommended austerity measures that don’t work. It is that Ireland’s banks are also a part of the ‘core’ group, as they hold about €10bn of external assets, at end-2009.
The stated purpose of the enormous €750bn bailout package announced by the European Union was to stabilise financial markets and halt the slide of all Euro-denominated financial assets including the currency. Although the initial reaction was to boost financial markets both in Europe and beyond, the relief was short-lived. Greek long-term interest rates are climbing back up to 8 per cent, leading European stock markets have lost between 5 and 6 per cent of their value since the announcement was made and the Euro fell from over 1.28 versus the US Dollar to under 1.22 in just three weeks.
This negative reaction is a repeat of the response to the earlier ‘rescue package’ of €120bn, which then prompted the much larger €750bn announcement. Ostensibly, the bailout is supposed to rescue Greece. Yet there is not a single cent in the package which will be aimed at reviving the Greek or any other economy. Instead, the bail-out is to provide a guarantee against a debt default by Greece and other European crisis-hit economies. It is therefore entirely a bail-out for holders of Greek government debt. According to the Bank for International Settlements (BIS), at the end of 2009 total foreign claims on all Greek entities amounted to US$217bn, of which US$193bn was held by European banks. The major European banks are the holders of Greek debt and the recipients of its interest payments. So the bail-out is to their benefit, ensuring the continuity of interest payments and capital repayment to them. Since taxpayers’ funds are being used to bailout these banks holding Greek debt, the €750bn is in effect an international version of the national bank bailouts which have created massive population opposition across the world.
Simultaneously Greece and other countries are saddled with ever-greater debt burdens - that is their obligations to other EU member states, the European Central Bank (ECB) and the IMF. Worse, Greece, Spain, Portugal and Italy have been arm-twisted into adopting fiscal contraction, involving huge cuts to public spending, services, welfare payments and job losses. These are among the most severe fiscal tightening packages by industrialised countries in the post-WWII period (in Greece, the fiscal tightening is equivalent to 11 per cent of GDP). Latin America in the 1980s provides some comparison. According to the FT’s chief economics commentator Martin Wolf, ‘Greece is being asked to do what Latin America did in the 1980s. That led to a lost decade, the beneficiaries being foreign creditors. Moreover, as creditors are now paid to escape, who will replace them?’ The failure of the initial package was foretold by Argentina’s President Cristina Fernandez, which has some bitter experience from the economic crisis and debt default of 2001.
In Europe only the 1930s provides the precedent of such deep and widespread measures that have now been adopted. The austerity policy failed then and worsened the Great Depression.
The authors of the austerity programmes have no explanation as to why an austerity package supposedly designed to reassure financial markets has led to the opposite. This is because the effect of fiscal austerity measures has been disastrous for the minority of European economies that have adopted them. Services, welfare, incomes and pay have all been slashed. Because of this, the taxes which governments rely on to service their debts have also plunged, and actually led to wider deficits. Feeding the parasitical bank shareholders is killing these economies.
This is only the beginning of a longer post, the rest of which can be read here.
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Comment by: Tomboktu
Jun 7th 2010 at 09:06
The crisis in a nutshell as explained in Australia, on YouTube