Greece is burning as the country struggles to comply with conditions set by the IMF, the European Community Bank (ECB) and Germany, to secure the loans necessary for it not to default on its debt – primarily to private banks. In scenes that would be familiar to most citizens of the Third World, 50,000 protesters, almost stormed the Greek parliament after hurling firebombs. Inside, parliament emotions ran high over the price the country was being forced to pay for its second bailout, a €130bn (£110bn) loan from the EU and the IMF to head off the threat of bankruptcy and withdrawal from the euro.
A second austerity package was being passed that would further cut pensions, wages and jobs in the public sector adding to the pain of years of recession, high employment, lower wages and high unemployment. For instance, another 150,000 public sector jobs will have to be cut by 2015. The voting itself was not without drama, dozens of parliamentarians that opposed the package as too draconian on the Greek people, were summarily expelled by their parties. The vote also prepares the way for new elections in April, which could see the present coalition thrown out and a less cooperative new government installed.
The varying views that have surfaced on the Greek tragedy, which will certainly be replayed in several other European nations in the months and years ahead, bears repetition in our country where there is some clamour for development at any price. First there is the notion readily grasped by Greece, Spain and the less developed southern tier European countries that they could borrow their way into joining their more developed partners in the EU.
Then there were the private banks – Greek and foreign (primarily EU based however) that calculated that even though the countries wanted to borrow beyond their means, since this was ‘sovereign debt’ – debt owned by the countries themselves – it was risk-free lending. They felt that the ECB would backstop such loans because the Union would not want to have its members default. This would affect all their credit ratings, eventually. The banks made a killing as they charged higher than usual interest for their ‘riskless’ loans. These were the ‘Ninja’ loans – no income, no jobs loans – transmitted to the country level that had brought down the US financial system.
The ECB however, influenced heavily by Germany, had other ideas when the bubble started to burst and the weaker economies just could not generate enough revenues to service their loans. Public opinion in Germany, voiced by its economic and political elites, felt that these countries were looking for a free ride on Germany’s strength, while the German people had been much more disciplined in their spending and savings.
The ECB balked at backstopping what the Germans called “profligate and wasteful’ spending and insisted on the present austerity medicine to be imposed by the IMF. For all intents and purposes, it is the EU’s funds that are being intermediated through the IMF, specifically so that Greece does not get a free ride.
But what is most interesting is that why is default ‘verboten’. Why can’t Greece default on its loans, leave the Eurozone, forcing the banks to absorb their losses (or fold if necessary) and reconfigure its economy? The banks had made and pocketed their profits during the high-flying years – why can’t they bear the fruits of their greed and miscalculation now. There is of course, the old “too big to fail’ argument, but it is getting a bit worn.
Serious voices are questioning why the democratically elected Greek government had to be thrown out and the present beleaguered one consisting of technocrats imposed, just to pass on the banks’ losses into the real economy. And not incidentally will force Greece into a depression worse than the one in the 1930s.
Ironically, the present policy will not solve the ongoing financial crisis. There is significantly more debt outstanding globally than the borrowers can afford to pay. Until this fact is addressed, the financial crisis will continue. The banks must take their losses now.
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