EU, Germany & Greek debt restructuring

Posted on | mei 8, 2011 | No Comments

Spiegel Online published an article claiming that according to the German government Greece is considering leaving the Eurozone. The news temporarily shook up world markets, but all parties denied the story was true. Meanwhile, Friday was profitable for bond traders, as many speculators made money ‘shorting’ the euro and currency-and bond-linked investment products. This was all this a result of an article that the German Finance Ministry deliberately plugged in order to test markets, monitor domestic and international reaction to Greece leaving the Erozone, and using the story as a pressure tactic to force more austerity measures on the part of Greece that is preparing to arrange debt restructuring.

The Germans insist that if Greece left the euro, it would mean that its public debt would rise from the current 140% of GDP to 200% and that the country would go bankrupt while the euro would lose as much as half of its value. In short, they are really warning the West, as much as Greece. This is not the first time Spiegel has published stories about the ability of Greece to make it into solvency. Nor is this the first time that mainstream journalism has played havoc with the markets by using stories that feed speculation and make quick money for profiteers.

That the numbers for Greece just do not add up is a story I have repeated on my blog many months ago, as I have stated unequivocally that Greece is in effect bankrupt, but officially on a revolving credit lifeline insufficient to carry it through for the duration. One year after Greece accepted the IMF-EU bailout package of $160 billion, the country is much deeper in debt; its economy in negative GDP growth, unemployment expected to reach 20% once the tourist season is over in autumn 2011, and there are no growth prospects in order to service the sovereign debt now amounting to just under half a trillion dollars, while the GDP is well under that figure and dropping.

Greece currently spends two billion euros a month or 20% of GDP on debt service. Foreign banks that have bought Greek bonds have resold a portion back to Greek pension funds, most of which are in serious trouble of failing to meet future payments to retirees. Considering that yields on some Greek bonds are 25%, it is obvious that investors have no faith that Greece will be able to come out of its debt crisis in the absence of restructuring. In the interim, there are immense opportunities for profits to be made for the bold speculators.

Spiegel Online did a great service to German banks and government running the story that Greece is leaving the Eurozone. The IMF repeated its criticism that Germany does one thing during official EU-IMF official meetings, and going its separate route after the meetings to undercut what has been agreed officially. Is Germany reckless, playing politics with the EU’s debtor nations, or is it sending a message that it wants a new integration model of the EU, now that Portugal, Spain, Ireland, and Greece are deep in debt and a burden to German economic growth.

On numerous occasions, I have pointed out that the EU integration model was founded on “inter-dependency,” namely, the stronger northwestern EU countries would help with subsidies lift the weaker southern and Eastern members. Because of Maastricht Treaty’s (1992) rigid rules on members to keep annual fiscal deficits below 3%, the EU never had in place mechanisms to effectively deal with countries that experienced default-like conditions in case of global recession, any more than it had mechanisms for countries that simply lied about exceeding the treaty’s terms.

It is now public knowledge that EU officials were allowing the weaker countries in the union to spend at much higher levels than Maastricht permitted and to illegally strike swaps deals with Goldman Sachs. Banks and multinational corporations like Siemens, MANN, Deutsche Bank, Hypo Real Estate, etc., in the stronger countries decapitalize the weaker EU members through direct and portfolio investment; a situation made worse by the much higher level of official corruption in EU’s debtor countries concentrated in the south and east.

In essence this means that the EU is creating a two-tiered economy with the strong and thus hegemonic economies on the northwest tier and the weaker and “dependent” economies in the south and east. Especially amid this crisis, creditor countries demand from weaker EU members lower taxes for direct foreign investment, fewer restrictions on capital movement, liberalization of all vital sectors of the economy, including privatization of public enterprises so that foreign investment penetrates and eventually dominates such sectors.

In return, they (mostly German and French banks) extend loans with interest rates much higher than most home mortgages, and they saddle the debtor countries with cumulative foreign debt that will keep them perpetually dependent in every respect, from finance and trade to technology and essential pharmaceuticals. Many analysts in the West, as well as die-hard advocates of what is euphemistically called “free” enterprise (instead of state-supported corporate welfare system) insist that debtor countries are solely responsible for their own problems and financial demise. Therefore, “they must get their own house in order,” as though it was ever their own house and not a rental from northwest EU’s powerful banking houses.

In the campaign to impose austerity on the weaker members, creditor countries have the IMF to provide legitimacy and to insist that “austerity”–under formalized agreements or simply as piecemeal policies–is the only solution. Unless creditor countries agree to loan restructuring that entails debt forgiveness for a substantial percentage of the debt, EU member and associate members which are currently debtor countries and under some formal or informal austerity program will be reduced to “Third World” status and they will suffer cyclical debt crises like Latin America and Africa.

Greece is scheduled for a ‘hair cut’, that is, cutting the principal as much as 50% so the country can be able to service its debt. The ‘haircut’ is inevitable and the biggest loser will be the European Central Bank that holds 40 billion euros of Greek sovereign debt, excluding bonds it holds as collateral for lending purposes. The bottom line for Germany, EU and IMF is whether the private and public bondholders and EU is best served with Greece in or out of the Eurozone.

The answer is that Greece cannot leave the EU because the euro could drop as much as 50%, and a domino effect with Ireland and Portugal would be a realistic prospect. The only solution is to sink Greece deeper in dept, force it to sell more of its lucrative private assets to private corporations to pay off creditors, and continue austerity measures that impoverish labor and the middle class. What is the alternative to such a scenario, many ask. The answer is depending on the kind of society that you want to build within the constraints of global capitalist system, you carve policies accordingly.

AUTHOR: Jon Kofas
E-MAIL: jonkofas [at]


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