Debt & Austerity

Debt is the common denominator in the crises facing the US, Europe and most of the major capitalist countries. But debts are a problem because of the pervasive and intractable nature of the global crisis. Governments now find that the extraordinary measures they took to boost growth after 2008 are no longer working. This is why their policies will now take a more aggressive turn towards austerity.

Private debt drivers

Although the focus of government policy measures in most countries is to curb public spending, the crisis did not start out as a government debt crisis. Private sector debt is much bigger than government debt in every country outside Japan, and its growth has also been faster. A McKinsey study shows that from 1995 to 2007 (the year before the crisis struck), the stock of private sector debt in 79 countries rose from $42 trillion to $107 trillion.[1] The volume of outstanding public sector debt was smaller and it increased less rapidly, from $13 trillion to $30 trillion. But in the next three years to the end of 2010, public sector debt grew more quickly as the state took on private sector liabilities to try and bail out the system. It jumped by $11 trillion, while the private sector debt pile rose by another $9 trillion.

Chart 1 gives a snapshot of global debt at the end of 2010. The numbers show the size of the outstanding debt as a percentage of GDP in each country or region. Each bar shows the division of the debt into (bank) loans, private sector bonds and public sector debt securities. Two things come out clearly from the numbers.

Firstly, the relative size of the total outstanding debt in the richer countries is much higher than for poorer countries. For the US, Japan and Western Europe, the totals are between 330% and 390% of GDP. By comparison, China, India and other developing countries have debt levels below 200% of GDP, and even less than 100%. McKinsey’s report argues that it is because the poorer countries have less developed capital markets; the more important point is that they have been far less dependent on credit-fuelled growth than the rich ones. The rich countries’ dependence now sees them drowning in debt.

Secondly, only in Japan is public sector debt the largest component of the total, reflecting that country’s decade-long stagnation. In the US and Western Europe, private sector bonds (issued by both financial and non-financial companies) and loans (both securitised and non-securitised) are much larger than public sector debt. A similar pattern is found elsewhere. While public sector debt might have been an important driver of the latest debt crisis for some countries, the data show that this is not true for most countries and regions.

Chart 1: Global debt outstanding at end-2010 as a percentage of GDP

Source: Author’s calculations based on data in ‘Mapping global capital markets 2011’, McKinsey Global Institute, August 2011.

In the early 2000s, major countries cut interest rates to try and offset stagnating growth. Private capital then began a credit-fuelled boom, but this turned to bust in 2008 as it became clear that the debts could not be repaid. The US sub-prime fiasco was the main trigger, but the reason that the crisis spread so dramatically around the world was that many countries were already vulnerable from their own versions of the credit boom, even if they had no exposure to the defaulting US mortgage securities. Credit expansion and speculation had been on a huge scale, so governments were forced to take on private sector debt liabilities or risk a ‘systemic problem’ - the problem that the capitalist financial system could no longer function. The ‘unsustainable government debts’ result from the crisis of private sector capital accumulation.

Running on empty

The crisis has trashed many totems of ‘free market capitalism’. Major financial companies were nationalised, while central banks abandoned conservative policies, bought junk, discarded their sacrosanct inflation targets and slashed interest rates. Global growth recovered somewhat after 2009, but the main impact of these policies was to boost stock market and commodity prices, not investment. In 2011, growth in the major capitalist countries has more or less ground to a halt and equity markets have slumped again. But governments now find they have now run out of options to boost their economies, either through monetary policy or through more government spending.

On monetary policy, interest rates are already close to zero in the US, UK and Japan, and only 1.5% in the euro countries. Central banks have also tried to boost their economies with ‘quantitative easing’ – which means buying junk assets from the private sector and financing government debts directly with central bank money creation. Just three or four years ago, such policies would have been described as debasing the currency, risking hyperinflation or acting like a dissolute Latin American dictatorship.

The Federal Reserve has $900bn of mortgage-backed securities on its balance sheet (as well as $1.6 trillion of US Treasury debt).[2] The Bank of England has a scheme to buy up £200bn of assets in its smaller version of ‘quantitative easing’,[3] while the European Central Bank bought €60bn in covered bonds from private banks, €74bn of government bonds from Greece, Ireland and Portugal, and has other exposures to asset backed securities and commitments to fund national euro money markets.[4] Today (Monday, 8 August) the ECB bought Italian and Spanish government bonds to try and stem the contagion. There is no reason to believe that these schemes will do anything other than slightly postpone the day of reckoning. Japan has run its own version of zero interest rates and quantitative easing since 1999, with no escape from prolonged stagnation and high debt levels.

Neither is there any way out of the crisis through increased state spending. This is a time-honoured policy recommendation from social democratic politicians and Keynesian pundits. But today public sector debts are so big that it is laughable to suggest that more spending would do any good. McKinsey’s report notes that government debt now equals 69% of global GDP, a dramatic jump from 55% in 2008. This is why, in the UK, the most that the Labour opposition can argue is that planned government spending cuts should be scaled down. In the US, one day after Congress reached a deal on raising the borrowing limit by an initial $400bn, 60% of the extra limit level was used up! It is little wonder that the US credit rating was downgraded.

Debt reckoning

A credit boom drove capitalism’s escape from stagnation at the turn of the millennium. This built a shaky edifice of debt, towering over the whole system. There is no pre-determined point at which the edifice will collapse, but the higher it gets, the more vulnerable it is to the slightest jolt. Governments have tried to prop up the structure, but now the debts have to be reduced or the system will topple. Extending further credit does very little to spur capitalist growth, and debts would just continue to grow faster than the prospects of paying them back. This should not be surprising, since the dynamic behind the rise in debt levels in the first place was the deteriorating profitability of investment.[5] Conditions for profitable capital accumulation need to be restored before extending any more credit will have a significant effect. This leaves two issues for capitalism to address, and for the rest of us to recognise and deal with.

First is what to do about the existing debts. Either the debtors pay in full, or the creditors accept that they will get less back than they bargained for. A ‘nobody pays’ solution does not exist. If the creditors forgive the debts, then they will take the hit, or current and future taxpayers will when the government bails out the financiers. If the debtors have to work harder to earn extra income, or sell their assets to generate cash to pay off their obligations, then they pay instead. That is it. All the theatrics, involved discussions and details of negotiations to ‘solve’ the debt crisis are simply about who will pay, how much and when.

Second is how conditions for profitable accumulation can be restored. The two classic mechanisms are the destruction of capital values and the increased exploitation of the workforce. Capital values can be destroyed through a collapse in asset and commodity prices. Those capitalists left standing can then buy means of production cheaply. Any new profit extracted is then measured over a smaller capital outlay, raising the rate of profit. A similar effect can be achieved by the political seizure of productive assets in other countries. This can risk conflict between rival powers, but that stopped neither the imperial adventure in Iraq, nor the latest in Libya. The other key mechanism for restoring profitability, increased exploitation of the workforce, is under way already. In many countries, real wages are falling as nominal wages rise less than inflation[6] and as companies impose onerous productivity deals.

Today we see a third important mechanism: the elimination of ‘waste’. By this I mean expenditures that capital can do without - those which do not directly contribute to profitability, either now or in the near future. Why bother educating workers when there are plenty of skilled and educated ones available already? Why bother to provide more than the absolute minimum of health and welfare services? In the public sector that is at the forefront of government spending curbs, a resetting of wages and conditions is under way, as well as cuts in jobs. In the formerly protected professions – both inside and outside state employment – the logic of capital will now aggressively ask: what’s the point of your job? There will be fewer state subsidies and less institutional protection for professional employment, and, ultimately, a proletarianisation of broad sections of the middle class. The latest example of this trend comes from Italy, whose government is coming back early from its summer holiday to implement austerity measures. These include a constitutional change that would force ‘closed professions’ to liberalise services, plus a ‘speeding up of welfare reforms, and other structural reforms designed to boost Italy’s stagnant economy’.[7]

Not many people think that life is easy, or that they are having a great time. But whatever they think now, the logic of the profit crisis demands a new wave of austerity as much as it will bring other forms of destruction in its wake. If the details of the debt piles in different countries are any guide, those living in the richer countries will feel the biggest shock to their living standards. So much more the pity then, that there are no anti-capitalist forces in these countries ready to counter the attack; and so much more the risk that the crisis of capitalism will be blamed on something else.

Tony Norfield, 8 August 2011

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[1] Figures calculated from a chart in ‘Mapping global capital markets 2011’, McKinsey Global Institute, August 2011, p2.

[2] See ‘The Real US Debt Problem’, 26 July 2011 on this blog.

[3] In the event, from 2009, the BoE only bought only some £2bn of private sector assets, compared to £198bn of government bonds. However, it has kept interest rates unchanged at 0.5% since March 2009, despite its targeted measure of inflation (CPI at 2%) having been breached every month from December 2009, reaching as high as 4.5% - a negative real interest rate on this measure of 4%!

[4] There is a debate on the size of the ECB’s total exposure to potentially toxic assets, which some argue is in excess of €800bn. For example, see Der Spiegel, ‘Europe's Central Bad Bank’, 6 June 2011, which also notes that the ECB considers as eligible security for collateral a Portuguese bond that matures in roughly 8,000 years on 31 December 9999! The specific numbers in the text above are taken from ECB reports to July. The ECB’s reports do not give many country or asset details of its exposures.

[5] See ‘Anti-Bank Populism in the Imperial Heartland’ 5 July 2011 on this blog for details of the trend in US profitability and its link to the credit boom.

[6] Central banks in the US, UK and Europe are happy to ignore the higher-than-target inflation rates as long as there is no sign that wage growth will respond to the higher cost of living and real wages fall. Signs of rising wage demands were the reason the ECB raised interest rates in April and July this year.

[7] See Financial Times, ‘Italy agrees to liberalise economy’, 5 August 2011.

Tea Party Antecedents

The US ‘Tea Party’ takes its name from the famous ‘Boston Tea Party’ of 1773, when hundreds of crates of Indian tea on British ships were dumped into Boston harbour by American colonial rebels. However, a common misunderstanding is that this event was a protest about high taxes. It was not. The reason for the anger was that the British had actually cut the tax on imported tea. This meant that American smugglers and merchants dealing in tea supplied by Dutch ships were going to be put out of business because their product would soon be selling at a higher price than the new imports of Indian tea!

It is true that the American settlers were also indignant about rules being changed without consulting them – ‘no taxation without representation’ - and about to whom the British would give legal rights for importing tea. Yet the relevant point is that the claimed forebears of today’s ‘Tea Party’ in the US Congress were smugglers and dealers threatened by changes in the global economy. It is this that makes the name more apt than its members will realise.

Back in the late 18^th century, history was on their side. Today’s tide of reaction will find success much more elusive as the US struggles over its own bankruptcy.[1]

Tony Norfield, 1 August 2011

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[1] See ‘The Real US Debt Crisis’, 26 July 2011 on this blog for details. The article ‘Anti-Bank Populism’, 5 July 2011, also explains how the build up of debt was due to the crisis of low profitability.

The Real US Debt Problem

The US government could shut down next week if Congress does not agree to raise borrowing limits. If the government shuts down, then the US could also default on its debts and add another dimension of crisis to the global economy. Here I argue why the US will not default, but also why this is not the real debt problem that the US faces.

Default or not

There are two reasons why the US will not default and, incidentally, why financial markets are not in a state of panic. Firstly, there has been a government shut down five times since 1981, as cash ran out and a new budget limit was not agreed on schedule. Hundreds of thousands of federal employees were told to go home, and many ‘non-essential’ services were stopped. However, on none of the previous occasions was there a risk that the US government would fail to pay its debts and default. Money to cover the debt and interest payments was always found from somewhere, and paid on schedule.

Secondly, it is the US Congress that will decide the new borrowing limit after wrangling over tax and spending plans. This is not a limit imposed by some external body, not by the IMF, nor by a foreign power. If Democrats and Republicans agree on a deal, then this particular crisis will be over.

The only caveat is that it is hard to over-estimate the recklessness of America’s radical right. They could block a deal in order to press their objective to slash welfare payments and stop taxes rising. However, if that meant the US failed to maintain its debt payments, their political victory would be crowned by financial chaos. Such an outcome is possible, but very unlikely because of the consequences of a default. It would be a trigger for America losing its triple-A credit rating, which would feed through to all US companies. As credit ratings fall, borrowing becomes more expensive and less easy for everybody, something that these representatives of the highly indebted US economy are unlikely to risk, whatever their supposed opposition to ‘big government’.

A mere $14.3 trillion?

The federal government borrowing limit is $14.3 trillion, and the current debate is about making it bigger.[1] This sum close to 100% of US GDP, up from 65% just four years ago, and the curve is on a steep ascent. But, although massive, it does not include other government liabilities taken on after the financial crisis struck. The biggest of these is the $5 trillion of potential payments from the nationalised housing agencies, Fannie Mae and Freddie Mac. Furthermore, the US excludes from its debt figures the huge and unfunded obligations to pay future social security and medical bills.

The size of the US government debt relative to the economy is not unusual for major capitalist countries today, as a glance at Europe will testify. However, that is not the only problem. Far bigger than the government debt is borrowing by America’s private sector. This is sometimes ignored, on the blinkered view that private sector liabilities will ‘sort themselves out’ and trouble will only emerge from public sector debts. But that not only leaves out of account the $2.4 trillion of consumer debt, household mortgage debt of $10.1 trillion and business debts of another $10.9 trillion.[2] It also ignores the more fundamental problem of the whole economy.

Borrowing, both by the private sector and the government, grew in response to the crisis of capital accumulation and low profitability. Credit growth then accelerated in the speculative bubble after 2001.[3] Now the bubble has burst, leaving the whole economy drowning in debt. The Federal Reserve has kept interest rates at close to zero, hoping to keep the debt servicing sustainable for a bit longer, and hoping that the economy will recover. But it doesn’t, and meanwhile the Fed itself is also the owner of a mountain of US debt. Its balance sheet has grown from less than $900bn at the start of 2008 to a giant $2.8 trillion by June this year, following its ‘quantitative easing’ programmes. Around $1.6 trillion of this is US Treasury debt and another $900bn or so is made up of mortgage-backed securities that banks cannot sell.

The squabble between Democrats and Republicans over the debt limit ceiling is really about the looming bankruptcy of the country. That is why each party has to claim that it plans to cut the level of debt over the next decade, despite finding themselves having no choice but to raise the ceiling still further.

The foreign dimension

There has been a steady build-up of US borrowing from other countries too. This is shown in the persistent annual current account deficits, where the US imports more goods and services than it exports. Details of the funding of these deficits end up in the figures for the US international investment position. These figures are the best summary of America’s accumulated assets and liabilities with the rest of the world. At the end of 2010, net US foreign liabilities amounted to $2.5 trillion.

In other words, the US owns far fewer assets (ownership of companies, bonds and equities) in other countries than foreigners own in the US. That is a weakness, but so far it has not shown up as a problem. The US still manages to earn more on its smaller assets than it pays on its bigger liabilities. For example, in 2010 the US earned net investment income of $171bn. This extraordinary feat of making a lot of money on a net debt position is rivalled only by the UK.[4]

America can do this because it takes full advantage of its imperial position in the global economy: the US dollar is the world’s major reserve currency, based upon the global dominance of the US economy, banking and finance. Despite America’s relative economic decline in recent decades, it remains the major imperialist power, with not only an extensive military but also a dollar-centred financial infrastructure. There has been little challenge to this position so far. The euro countries have their own problems, and China is still some way from building a financial platform in the world economy.

America’s ability to earn large investment revenues is based on two key factors. Firstly, it has a surplus of foreign direct investment assets, and its return on these investments is far more than it pays for foreign direct investment in the US. For example, in 2010 it earned $275bn more than it paid on this account. Secondly, its net liabilities are for securities that pay only a small return, especially on government bonds, but also on corporate bonds and equities. By the end of 2010, foreign central banks and private investment funds owned $5 trillion of US government securities that were earning minimal rates of interest. These low rates were acceptable to foreign investors because the US government debt market is one of the few that is big enough easily to take flows of global capital, it was denominated in the most important global currency, the dollar, and America’s triple-A credit rating also promised maximum security.

The Triple A question

The US is given a credit grade of AAA by the three major US-based agencies that account for 95% of the ratings market. However, even these have recently become concerned about the escalation of US debts. Formerly they were impressed by America’s imperial might and its ability to borrow in its own currency. Now the numbers have become embarrassing, and some agencies threaten to cut the rating if no credible plan to control future debt is made. They have also warned that if the US government missed any debt interest payments, even if only temporarily, this would be labelled a default and the US would be downgraded.[5]

The loss of its triple-A rating would not only be a humiliation for the world’s major imperialist power. It would cost money too. The cost of borrowing would rise not just for the government, but for all US companies. Even a rate rise of just 0.1% would result in many billions of dollars of extra interest payments when the scale of debt is so high.

A credit downgrade could also lead foreign investors to buy fewer US bonds. That will matter for a country whose current account deficit was $470bn last year. There is a further risk that investors sell some of their existing bonds. Even a very small percentage sale would be dramatic, since the stock of bonds held by foreign investors is so big: $8 trillion, including corporate bonds. This would bring a funding crisis and a slide in the US dollar on foreign exchange markets.

Up to now, global financial markets have used America and the dollar as the benchmark for security. Seeing this benchmark shaken will lead many more to think that global capitalism is not as solid as it pretends to be.

Conclusion

A US credit default is much more important than a Congressman might recognise. However, US capital is likely to make it clear to its political servants that risking a default is more than their jobs are worth. That is why we are much more likely to see a budget deal that agrees to domestic austerity at home, in some form or another, rather than one that risks further the vulnerable global status of US imperialism. Yet, even if a deal is done in the next week, one day the cheque will bounce.

Tony Norfield, 26 July 2011

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[1] The $14.3 trillion is made up from $9.7 trillion in debt held by the ‘public’, ie outside the government in the form of US Treasuries, etc, and another $4.6 trillion held by other government bodies. This latter amount represents borrowing from the surpluses of the Social Security Trust Fund and other government funds to finance spending. It should definitely be included in the borrowing total.

[2] These debt figures are for the end of 2010. See the Federal Reserve report on this topic, Table D.3 in http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf

[3] See the article ‘Anti-Bank Populism in the Imperial Heartland’ on this blog, 5 July 2011, for details.

[4] See the article ‘Economics of British Imperialism’ on this blog, 22 May 2011.

[5] See Bloomberg News, ‘Moody’s Downgrade Warning Adds Pressure on US Debt Deal’, 14 July 2011.

Origins of the Greek Crisis

Is the Greek debt crisis the fault of predatory banks? It might look that way, given that banks are demanding their money back, Greeks face job cuts and tax rises, and the Greek government now has to pay rates of up to 30% to borrow, if it can borrow any money at all. But an examination of how the crisis began points the finger instead at the euphoria that gripped Greek politicians, businesses and the middle class once the country joined the euro in 2001. Far from euro membership helping the development of Greece’s economy, it has turned into a disaster. Blaming the banks for Greece’s troubles may be popular, but it hides the facts and feeds the delusions of those who think that the only problem with capitalism is finance.

1. Greece’s euro membership

Greece joined the European Union in 1981, and became part of the single European trading market. It began to enjoy strong economic growth, helped by the growing trade relationships with and development aid from the rest of Europe. But there was only limited success in making the poorly developed Greek economy move closer to the European average. The money from European funds – worth several billions of dollars per year - was largely used to plug gaps in the Greek budget that was struggling to meet the costs of pensions and other current expenditures. One study calculates that, up to 1995, 60% of European development funds were not used on infrastructure projects.[1] Although the aid money was better spent after 1995, helping to modernise the transportation network, when Greece joined monetary union in 2001 there was another opportunity to screw things up.

Major European powers decided, just about, that Greece had met the membership rules that focused on economic issues like inflation rates and government spending deficits. These rules were designed to prevent unstable countries from causing trouble for the key players who would have to pick up the bill for the system’s problems, especially Germany.[2]

The benefits to Greece of EMU entry were enormous. Gone was the dodgy Drachma; a tourist currency was now replaced by a big global currency, the euro. This allowed Greece’s borrowing costs to fall sharply, cutting the cost of public sector borrowing and the interest rates paid on business and personal loans.[3] Greece also got a status boost from being a member of the ‘single European currency’, despite its economy still being based mainly on tourism and shipping, with no local industrial output of significance. The Greek sidelines of trade with Balkan countries and being a nice pied-à-terre for some Middle East investment funds could now be presented as some of its advantages for the expanded euro system.

Greece was the ‘far East’ from the point of view of the EMU project, but Greece’s membership appealed to a version of European racism that was delighted to include the ‘home of western civilisation’. More importantly, Greece’s economy was so small that it didn’t seem to matter even if there were to be problems one day. How could a country of 11 million people with an economy that accounted for barely 2% of euro area GDP cause trouble for the big guys? By contrast, at the start of EMU Germany’s economy made up 30% of euro area GDP and France’s was close to 20%.[4]

2. Buying the dream

After EMU entry, Greece thought it had found a cornucopia. From 2001 until 2006-07, it saw progressively lower interest rates, expanding credit and strong economic growth. Greece’s household savings rate fell from 3.2% in 2000, pre-EMU, to minus 3.2% in 2006. People began to spend more than their disposable incomes, and by 2007 the debt-to-income ratio of Greek households had quadrupled to 65%. Regarding external trade, the country’s current account deficit also rose to an astonishing 14-15% of GDP, despite there being only very small inflows of direct investment to finance it.[5] This was one direct result of the big increase of consumer spending. Greece was also making itself uncompetitive, with inflation each year being 1-2% above the euro country average, and there were signs that foreign tourism to Greece was falling back even before the crisis struck.[6]

This was obviously a recipe for trouble, but a worldwide speculative boom after 2001 postponed the day of reckoning. During the boom, borrowers that capital markets had previously thought of as risky ended up paying interest rates on loans not much higher than those paid by the strongest countries. As interest rates fell globally, they fell even more for countries like Greece. In 2000, the year before Greece’s EMU entry, 10-year borrowing rates for the Greek government averaged 6.1% compared to 5.2% for Germany. This was a fairly modest gap by historical standards, because it was already beginning to price in the expected EMU entry. By 2005, the Greek rate was just 3.5% versus the German rate of 3.3%.[7] These lower rates for government debt fed through into cheaper consumer and business loans and borrowing jumped. So, when the speculative bubble finally burst in 2007-08, Greece had huge debts, but then it suddenly found cheap credit impossible to find.

Chart 1: Two-year government yield spread over Germany (basis points) *

Source: IMF World Economic Outlook Update, June 2011

Note: * The vertical axis indicates how many basis points extra the interest rate is for these countries compared to Germany’s government borrowing rate. So 1500 means a rate of 15% on top of Germany’s rate. For example, 18% for Greece compared to 3% for Germany.

After 2008, the gap between the interest rates paid by strong countries and riskier borrowers widened rapidly (see Chart 1 for the picture since 2010, in which Greek yields rose by much more than for Ireland and Portugal, the other EMU countries in trouble). In the face of Greece’s potential default on its debts, two-year yields on government securities rose to as high as 30% last week. Rates only fell back to 27% in the past couple of days – that is 27% per annum - after the latest Greek parliamentary vote that gave creditors some hope of getting repaid.

3. So was it the banks?

It is a travesty of the facts to blame the problems that Greece faces on foreign bankers. It is true that banks encouraged consumption spending with easily available credit, that they bought Greek government bonds to fund the public sector deficit and that they now want the money back. But their lending was matched by a ludicrous amount of borrowing and spending from the broad population in Greece: government, businesses and middle class consumers.

Most of the media discussion concentrates on Greek government debt. However, looking at the debt statistics gives you a different view of the problem. Total debt to foreign banks estimated by the BIS at the end of 2010 amounted to $174bn.[8] Yet the breakdown of this huge debt is roughly into 37% owed by the government, 8% by Greek banks and 55% owed by the non-bank private sector.[9] The biggest proportion is the accumulation of debt from businesses and middle class consumers – those with most access to credit. Nevertheless, there are some good reasons why government debt has become the focus.

The first is that Greece has a history of tax avoidance – by the rich, as elsewhere, and also by most of the middle class and self-employed. It has also allowed public spending to run well ahead of the deficient tax revenues. Not that public spending is especially high by European standards. Except for the past couple of years, Greek state spending has been around 45% of GDP, at the same level or a little below the average rate for the EMU countries. However, government tax revenues are much lower than the EMU average, at around 39-40% of GDP compared to the average of 44-45%.[10] This is because of the lower tax take from both wages and from business taxes than in other EMU countries.[11] This is why Greece has had a persistent and large government deficit. This has driven the rise in Greece’s public debt-to-GDP ratio from close to 100% in 2000 to a massive 150% now.

The big Greek debt number did not prevent it from joining EMU back in 2001. Allowances on this criterion had already been made for Belgium and Italy, core members who joined at the start in 1999, and whose debt ratios were also well above the 60% EMU rule. But Greece would only have been able to join if it could show that its annual public sector deficit was close to the maximum 3% level. It was not, but Greek politicians changed the numbers. They took advantage of derivative financial products to make a portion of the government deficit ‘disappear’ from the view of Europe’s accountants. Financial derivatives were all the rage at the time and trading volumes soared alongside the speculative boom. With the help of Goldman Sachs Inc, esteemed provider of plutocrats to the US Treasury and recipient of fawning coverage in London’s Financial Times, creative accounting with derivatives helped the Greek government’s deficit numbers appear small enough for Greece to qualify for EMU membership.[12]

* Correction, added 11 February 2015:  On further investigation, there is little evidence that Greece used derivatives to hide its debt ahead of its EMU entry on 1 January 2001. Greece certainly did afterwards, with the help of Goldmans, etc, but the EMU entry debt criteria were met before 2001 more probably by regular accounting tricks, not with off-market swaps, etc.

Fixing the government deficit numbers continued after Greece’s membership in 2001. However, by 2009, inconsistencies in the data began to show up. The Greek government had to revise its deficit for 2009 up from 6-8% of GDP to 12.7%, and then to 15.4%, as various accounting tricks unravelled.

Most calculations on Greece’s debts show that there is no plausible way that they can be paid in full from the income earned in the economy. Payment of such huge sums of interest to foreign banks from domestic income would depress the economy, as would big increases in taxation or drastic cuts in public spending. That is why foreign creditors also demand that cash is raised to pay the debts by selling Greece’s state assets. On these plans, all kinds of state-owned infrastructure – roads, ports, utilities, etc - would come under the auctioneer’s hammer for sale at bargain prices to foreign capital.

4. Conclusions

Greece is in trouble because of the huge rise in private and public sector debt, which spiralled after the country’s EMU membership in 2001. Though it may be politically expedient – there are few votes lost in knocking the banks - it makes little sense to blame foreign banks for this crisis, with the possible exception of the banks that helped Greece fiddle the figures and lie about its debts. These lies helped Greece gain access to the cheap loans, but the decision to borrow was taken by Greek ministers, businessmen and middle class consumers. Greek government debts were not a problem and were easily funded while the global economy was in a speculative boom. The financial crisis has now exposed the fictitious nature of this prosperity. Greece has debts it cannot pay, and is subject to interest rates at which it cannot borrow. It faces prolonged austerity and the auction sale of the country’s assets so that foreign governments and banks can get their money back. This is not a problem caused by predatory banks. It is a consequence of the failure to develop in the imperial economy.

Tony Norfield, 24 June 2011

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[1] See A Antonios, ‘EU’s Structural Funds and the Public Investment Programme in Greece: 1985-2005’, p15. http://www.psa.ac.uk/journals/pdf/5/2006/Aggelakis.pdf

[2] This stress on the economic rules for joining EMU was because the political treaties deliberately did not include any provision to leave the single currency, in order to make the new system appear to be more solid. Flying in the face of historical examples of broken monetary unions, European officials always declared that EMU membership was ‘irrevocable’.

[3] See David Marsh, The euro – the politics of the new global currency, Yale University Press, 2009. He notes (p228) that Italy, Spain, Ireland and Greece enjoyed much lower government borrowing costs on entering EMU.

[4] Data are for the year 2002, and taken from ‘European Economic Statistics’, 2010 edition, on the Eurostat website.

[5] Developing economies often have large current account deficits, but these can be the result of imports of capital goods paid for by inflows of foreign direct investment. In such cases, the deficits are a sign of economic development, not weakness. This was not true for Greece.

[6] These data are taken from the ‘EU economic data pocketbook, 3-2010’ and ‘European economic statistics 2010 edition’, published by Eurostat in 2011.

[7] Data taken from Eurostat’s ‘European Economic Statistics 2010 edition’, Table 4.33, p174.

[8] See the BIS Quarterly Review, June 2011, Table 6A, pA28.

[9] This breakdown is for 24 countries only, shown in the BIS Quarterly Review, June 2011, Table 9C, pA84.

[10] See ‘European economic data pocketbook, 3-2010’, Tables 32 and 33.

[11] See ‘European economic statistics 2010 edition’, Table 4.25 and 4.26.

[12] It has been widely reported that major US investment bank, Goldman Sachs, was instrumental in managing a derivatives-focused programme for the Greek government to hide the real state of its public finances from the EU authorities ahead of its membership of the euro in 2001. See for example ‘Goldman Sachs faces Fed inquiry over Greek crisis’, The Guardian, 26 February 2010.