Greek Default: A game of Euro-Chicken?


Grekk riot police covered in red paint - photo By endiaferon on flckrThe big bad ECB wolf is a-huffing and a-puffing but the first of the three little pigs is showing no signs of surrendering just yet. And behind the spectacle of the Greek populace standing up against its government and the core EU powers, lurks a recent historical shadow - a spectre is haunting Europe, the spectre of Yugoslavia.

Today Greece is the target of pressure and brinkmanship by the European Central Bank and the International Monetary Fund who are holding back the next installment in the so-called "bailout" agreed last year. The payment of €12 billion was originally scheduled for this month and without it Greece will default on repaying its existing bonds due for redemption on Jul 15.

The aim of this blackmail is to convince the current government and Greek political class to vote through a "smash and grab" programme of privatisations and social spending cuts dictated by the Eurozone core countries in the face of the vocal opposition of the majority of the Greek population shown on the streets in these last weeks.

Yet there is more than simple brinkmanship in the current speculations about a possible collapse of the Euro in the business pages and nightly TV newscasts. There has been clear evidence of division on how to deal with this crisis between France and Germany, the two most powerful core Eurozone countries, and between them and the ECB and all three and the IMF. This division and disarray between the core powers themselves, is what is adding the uncertainty and unpredictability that has transformed this manfactured squeeze into a genuine crisis of the constitution of the Eurozone.

But first we need to step back to understand the conditions that have led to the ECB\EC\IMF "troika" putting the squeeze on Greece in the first place, before moving on to the causes of the emerging tensions within the core and then, finally, to look at some of the possible results of what happens if this particular game of chicken ends in a crash rather than the desired submission of the troublesome Greeks and their fellow PIGS.

The Credit crunch
The 2007-2008 credit crunch ended with a complete stoppage of inter-bank lending in October 2008. In the aftermath, liquidity (money) was provided directly to the insolvent banks of the Eurozone, both core and peripheral, by the ECB on a ‘no questions asked’ basis, as a temporary emergency measure. As the immediate risk of the financial system itself imploding receded in 2009 and government balance sheets went into the red, as a consequence of bailing out their insolvent banks, the ECB shifted to supporting banks’ short-term cash needs through lending against collateral. The collateral being the extra bonds (IOUs) that governments were forced to print, to cover the yawning gap in their budgets brought about by falling revenues due to earners losing their jobs and the capitalist class withdrawing funds from circulation, and the rising costs of welfare support to those newly unemployed. What money the capitalist class pulled out, the state had to put in.

Those bonds, say in Ireland's case, paying 8% interest, would be bought by banks like AIB & BOI for a certain sum, say €5 billion. Then these banks would then use these bonds as collateral to borrow the cost of their purchase, the €5 billion from the ECB at the latter’s base lending rate of 1%. So AIB and BOI would receive 8% on the €5 bn from the state (i.e. us, the taxpayer) and they would only pay out the 1% to the ECB. In the parlance, they would make the 7% spread as pure profit (at our expense). Thus the so-called sovereign debt crisis is simply the public face of the underlying bank crisis, not only in its origins (the initial bank guarantee and subsequent injections of around €70 - €90 bn in Ireland’s case) but even in the ongoing high rates the state is paying on its bonds.

What this means that for us peripheral countries like Ireland, Portugal and Greece who got squeezed out of the international borrowing market, our banks have huge holdings of state bonds, most of which are actually held by the ECB against cash loans to said banks. But we need to remember why the banks in the peripheral countries are effectively bankrupt in the first place.

The banks of the Peripheral countries are bust because of the huge inflow of money from the banks, pension funds and investment companies of the Core countries between the creation of the Eurozone and the 2008 crash. This money flowed from the core to the periphery because the higher rate of growth in the peripheral countries (themselves due to the impending Eurozone membership) promised the possibility of better returns than the rates in the core countries, still depressed by the aftermath of re-unification of Germany. The reason the governing political castes of Ireland, Greece and the other PIGS didn't dare let the bankrupt banks actually fall, is that this would have resulted in losses to the banks of the UK, France and Germany. The very sources of the capital that our local capitalist classes are entirely dependent on.

Default headache
So a default on the bonds of a peripheral country like Greece leaves the ECB with a potential headache. First of all it will have the problem of possibly being technically insolvent due to the bonds they have on their books as assets - due to direct buying in the secondary market during past attempts to support prices - and the collateral they are holding against bank liquidity loans.

As a central bank, that's not necessarily a big problem as it is possible simply to print more money to balance the books. But the problem with this is a political one. Effectively this is the same scenario that resulted in the breakup of Yugoslavia in the 1990s.

Echoes of Yugoslavia
Just to flashback, in the early 1990s Yugoslavia was suffering under an IMF austerity programme (during the Cold War Yugoslavia had been effectively bankrolled by the IMF to keep them out of the clutches of the USSR for political reasons). The federation was basically divided between an unproductive, soviet-style heavy industry-dominated Serbia and a more or less solvent Slovenia and Croatia. In the end Milosevic, the Serbian president, when unable to pay the riot police to keep down the public sector workers rioting against not being paid, and they joined the riots themselves, used his control of the Yugoslav central bank to print dinars to pay Serbia civil servants (and cops). The other members of the Yugoslav federation, Slovenia and Croatia (the Bosnian question came later) saw this, correctly, as a direct transfer from them to Serbia. So they used this as the pretext for their secession from Yugoslavia, with the support and backing of Germany. Serbia fought to keep the secessionist regions within a Yugoslavia recast as a Serbian empire, but found it militarily and economically impossible.

Today, the chickens have come home to roost, in a certain way. For secessionist Croatia’s greatest supporter Germany, along with France and the ECB, now find themselves in a similar situation to Yugoslavia, on this level at least. For the ECB to print Euros to cover losses on peripheral bonds, would also effectively be a transfer from the surplus countries in the Eurozone core to the currently bankrupt peripheral countries.

At least this is how it is seen politically amongst the increasingly eurosceptic right-wing political forces within "Northern" countries such as Germany, Benelux, Finland and others. Hence why their right-wing politicians are increasingly beating the drum for no more bailouts for Greece or the other PIGS. This despite the fact that the bailouts are actually designed to shield the savings of the core countries from the losses that were originally incurred in the great crash. In this sense, as one recent commentator said, the idea that the current Greek default crisis could become a second "Lehman" is mistaken. It's still the same loss, all that has happened in the intervening time is that it's moved from the balance sheet of the banks to the balance sheet of the state. Of course the popular tabloids in the Northern Eurozone countries like to say that the losses currently booked on the balance sheets of the Peripheral states are entirely of the PIGS own makings. But then the interconnectedness of modern finance capitalism was never the stuff of tabloid stories.

However, believe it or not, the actual amount owed out by Greece is relatively minor. Around €340 bn, which may sound like a lot, but on a European scale is not unmanageable, in purely economic terms. As already discussed, this is not a purely economic matter, of course. But getting back to monetary matters, although the immediate “value at risk” figure may be small, like Lehman, it is the knock-on effects that are more threatening.

CDS domino chain 
The threat of a domino chain of Credit Default Swaps has been raised again. Not so much on the CDS held against the Greek Sovereign bonds, which are a mere €5bn in the publicly cleared market. Although some more are believed to be held in the opaque, private “over the counter” (or OTC) market, these are not believed to be significantly greater, as major players like the big Macro hedge funds have become increasingly suspicious of the EU’s ability to rig the rules on sovereign credit “events”. However, as already mentioned, this is more of a banking system crisis, and against the loans made by core EU banks to the banks of Greece and the other peripherals, a thickly interconnected web of corporate CDS has been spun.

The fear of “contagion” then does haunt the boardrooms of Europe. The possibility that the collapse of Greek banks, that a default would bring about, could have knock-on effects into the handful of global banks that sell over 95% of all corporate CDS in the world financial system. These giants are themselves so thickly interconnected as counter-parties to each other, that the fall of any one of them risks bringing the others down with it, like a set of bowling pins. Other tentacles of financial interconnectedness also link PIGS banks with the rest of the EU and world financial system in ways that make the fallout from a collapse in Greece potentially as serious as the 2008 AIG shock.

Since the beginning of the year it has become clear that the Greek bailout agreed last May would run out by early 2012, so a second bailout would need to be agreed. In the negotiations around this second bailout, a difference emerged between France and the ECB on one side, and Angela Merkel’s German administration on the other. The Germans have, up until last Wednesday, been insisting that a portion of the cost of the ongoing support should be born by the private bondholders of Greek debt, through a compulsory exchange of current bonds for ones with repayment delayed for seven years.

Riots focus the mind
Since the riots in Greece during last Wednesday's general strike, the Germans quickly decided that a united front amongst the core powers was necessary. Hence last Friday, Merkel and Sarko met up in Berlin to announce they'd buried the hatchet and that the plan by Schauble, Merkel's Finance Minister, to make bond-holders share some of the default losses, had been binned. However, if on Friday Sarko and Merkel thought their agreement meant that the obstacles had been overcome, on Sunday the IMF threw a spanner in the works by saying it could not release it’s part of the next €12Bn payment until the Greek parliament had passed the latest austerity bill, under some obscure clause.

Apparently the US, via its current proxy, the acting head of the IMF John Lipsky, has seen an opportunity to jump in and ratchet up the crisis. In a particularly virtuoso display of neck, Lipsky, having blocked the payment (at US Treasury Secretary Tim Geithner’s request - it was Geithner’s people who warned the Eurocrats on Saturday that the payment would likely be blocked) went on to release a press statement urging the Europeans to get their act together and warning of dire consequences if they didn’t stop letting their squabbles block progress. Asked the next day, by gob-smacked financial journos, if his categorisation of the Franco-German infighting as “unproductive” was unusually blunt, Lipsky laughed it off saying that he thought he had asked for that word to be removed in the final release, much to the hilarity of the assembled journos. Clearly Lipsky is having fun sticking it to the Euros and no doubt his political masters in Washington are also enjoying the chance to backstop the core powers, just when they had decided that things were getting a little hot in Athens and now might be the time to back out of this particular game of chicken.

But why exactly were the Germans pushing in a different direction to the French and the ECB? The ECB’s opposition to burning the bondholders has been explained above, the French position in some ways also comes down to money matters. The exposure of French lenders to private Greek debt is nearly four times that of German corporations.

But in other ways, the difference between French and German positions is all to do with politics. Merkel’s Christian Democrat-led coalition’s grip on power on Germany is getting increasingly more precarious. Cynics say that Schäuble’s and Merkel’s initial position of making the private lenders share some of the pain was mainly for domestic consumption by German voters whipped up into high indignation about seeing their taxes go to rescue what the tabloids describe as the lazy, corrupt and incompetent “southerners” (including Ireland).

The Europe of transfers
What the increasingly eurosceptic right in the “northern” countries fears most is a “Europe of transfers” - that is, from their point of view, a Europe where money is transferred from efficient, hard-working northerners, to lazy, feckless southern spongers.

In actual fact, we are already in a Europe of transfers. Only the transfers are from the peripheral countries to the core. The so-called bailout deals are actually loans, loans at rates of interest far above what the lending countries themselves are paying for the money they lend. The net effect of these ECB & IMF brokered loans to Greece, Ireland and Portugal is a transfer of money from the borrowers to the lenders.

This then, is the nub of the problem. In any shared monetary space, be it the re-unified Germany or Yugoslavia post-1989, or indeed the Sterling Area of the old British Empire, where there is economic inequality at the beginning, then there is necessarily a system of transfers, one way or another.

In the old imperial model, whenever one of capitalism’s periodic crises hit, the core regions would try to push out the negative effects of economic depression, unemployment and destitution, to the population of the periphery, so as to maintain the loyalty of the workers in the core.

By contrast, a genuine commonwealth model, such as Western Germany applied to the process of German re-unification, requires transfers in the opposite direction, from the wealthier regions to the poorer ones.

The only possibility which is completely excluded, in the medium term, is the neoliberal utopian fudge that was adopted in the top-down constitution of the Eurozone as a shared economic space with no transfers between national entities. Like the adage about all military plans going awry on first contact with the enemy, so this fudge was always going to come apart at the first proper economic crisis. Now the crisis is here, it’s decision time.

That the right prefers an imperial model of European unity is of course only being true to their nature. But as Marx said, history repeats itself, first as tragedy then as farce. The age of empires is over, and any attempt to constitute a common Euro area on an imperial model is doomed to farcical failure. We are no longer in the days of gatling guns against spears and arrows. This also, the disintegration of Yugoslavia made clear. The 19th century and early 20th century empires were ones where the industrialised core ruled over a much larger pre-capitalist periphery. Today’s Eurozone core periphery dynamic is one where the numbers are reversed - the population of the periphery is a mere fraction of that of the core. The idea that we could absorb all the losses of the crash for the core banks is mathematically impossible. That’s why so many commentators see the disintegration of the Eurozone as the necessary outcome of the current impasse.

Refusal to submit 
But the top-down constitution of a shared European home on a commonwealth model cannot be achieved either. Only the active participation of the common peoples can create the solidarity necessary for a commonwealth that transcends national boundaries. But in the peripheral countries, that active participation of the working class must begin with a negative - a refusal to submit to internal colonisation, a resistance to the imperial constitution of the Eurozone.

Next Tuesday the workers of Greece will be on the streets to besiege the parliament debating the imposition of yet more austerity on an already devastated country. Workers in Ireland, Portugal, Spain and further afield will be watching them, willing them on and waiting for the day when we too will have to take to the streets to fight peripheralisation itself. Let’s see who swerves first. 

WORDS: Paul Bowman IMAGE: endiaferon on flickr