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Who Benefits from the Greek Bailout?

Economics / Global Debt Crisis Jul 17, 2011 - 10:10 AM GMT

By: Andrew_G_Marshall

Economics

Diamond Rated - Best Financial Markets Analysis ArticleContinuing From Part 1 (The Great Global Debt Depression: It's All Greek To Me) - Greece has a total debt of roughly 330 billion euros (or U.S. $473 billion).[60] In the lead-up to the Greek bailout orchestrated by the IMF and European Union in 2010, the Bank for International Settlements (BIS) released information regarding who exactly was in need of a bailout. With the bailout largely organized by France and Germany (as the dominant EU powers), who would be providing the majority of funds for the bailout itself (subsequently charged to their taxpayers), the BIS revealed that German and French banks carry a combined exposure of $119 billion to Greek borrowers specifically, and more than $900 billion to Greece, Spain, Portugal and Ireland combined.


The French and German banks account for roughly half of all European banks’ exposure to those euro-zone countries, meaning that the combined exposure of European banks to those four nations is over $1.8 trillion, nearly half of which is with Spain alone. Thus, in the eyes of the elites and the institutions which serve them (such as the EU and IMF), a bailout is necessary because if Greece were to default on its debt, “investors may question whether French and German banks could withstand the potential losses, sparking a panic that could reverberate throughout the financial system.”[61]

In late February of 2010, Greece replaced the head of the Greek debt management agency with Petros Christodoulou. His job was “to procure favorable loans in the financial markets so that Athens can at least pay off its old debts with new debt.” His career went along an interesting path, to say the least, as he studied finance in Athens and Columbia University in New York, and went on to hold senior executive positions at several financial institutions, such as Credit Suisse, Goldman Sachs, JP Morgan, and just prior to heading the Public Debt Management Agency (PDMA), he was treasurer at the National Bank of Greece.[62] Before his 12-year stint at the National Bank of Greece, the largest commercial bank in Greece, he headed the derivatives desk at JP Morgan.[63]

In March of 2010, Greece passed a draconian austerity package in order to qualify for a bailout from the IMF and EU, as they had demanded. In April, Greece officially applied for an emergency loan, and in May of 2010, the EU and the IMF agreed to a $146 billion loan after Greece unveiled a new round of austerity measures (spending cuts and tax hikes). While Greece had already imposed austerity measures in March to even be considered for receivership of a loan, the EU and IMF demanded that they impose new and harsher austerity measures as a condition of the loan (just as the IMF and World Bank forced the ‘Third World’ nations to impose ‘Structural Adjustment Programs’ as a condition of loans). As the Los Angeles Times wrote at the time:

In Greece, workers have been mounting furious protests against the prospect of drastic government cuts. Officials are bracing for a general strike Wednesday over the new austerity plan, which includes higher fuel, tobacco, alcohol and sales taxes, cuts in military spending and the elimination of two months' annual bonus pay for civil servants. Axing the bonus is a particularly fraught move in a country where as many as one in four workers is employed by the state.[64]

The EU was set to provide 80 billion euros of the 110 billion euro total, and the IMF was to provide the remaining 30 billion euros.[65] Greece was broke, credit ratings agencies (CRAs) were downgrading Greece’s credit worthiness (making it harder and more expensive for Greece to borrow), banks were speculating against Greece’s ability to repay its debt in the derivatives market, and the EU and IMF were forcing the country to increase taxes and cut spending, impoverishing and punishing its population for the bad debts of bankers and politicians. However, in one area, spending continued.

While France and Germany were urging Greece to cut its spending on social services and public sector employees (who account for 25% of the workforce), they were bullying Greece behind the scenes to confirm billions of euros in arms deals from France and Germany, including submarines, a fleet of warships, helicopters and war planes. One Euro-MP alleged that Angela Merkel and Nicolas Sarkozy blackmailed the Greek Prime Minister by making the Franco-German contributions to the bailout dependent upon the arms deals going through, which was signed by the previous Greek Prime Minister. Sarkozy apparently told the Greek Prime Minister Papandreou, “We’re going to raise the money to help you, but you are going to have to continue to pay the arms contracts that we have with you.” The arms deals run into the billions, with 2.5 billion euros simply for French frigates.[66] Greece is in fact the largest purchaser of arms (as a percentage of GDP) in the European Union, and was planning to make more purchases:

Greece has said it needs 40 fighter jets, and both Germany and France are vying for the contract: Germany wants Greece to buy Eurofighter planes — made by a consortium of German, Italian, Spanish and British companies — while France is eager to sell Athens its Rafale fighter aircraft, produced by Dassault. Germany is Greece's largest supplier of arms, according to a report published by the Stockholm International Peace Research Institute in March, with Athens receiving 35 percent of the weapons it bought last year from there. Germany sent 13 percent of its arms exports to Greece, making Greece the second largest recipient behind Turkey, SIPRI said.[67]

Thus, France and Germany insist upon French and German arms manufacturers making money at the expense of the standard of living of the Greek people. Financially extorting Greece to purchase weapons and military equipment while demanding the country make spending cuts in all other areas (while increasing the taxes on the population) reveals the true hypocrisy of the whole endeavour, and the nature of who is really being ‘bailed out.’

As Greece was risking default in April of 2010, the derivatives market saw a surge in the trading of Credit Default Swaps (CDS) on Greece, Portugal, and Spain, which increased the expectations of a default, and acts as a self-fulfilling prophecy in making the debt more severe and access to funding more difficult.[68] Thus, the very banks that are owed the debt payments by Greece bet against Greece’s ability to repay its debt (to them), and thus make it more difficult and urgent for Greece to receive funds. In late April of 2010, Standard & Poor’s (a major credit ratings agency – CRA) downgraded Greece’s credit rating to “junk status,” and cut the rating of Portugal as well, plunging both those nations into deeper crisis.[69] Thus, just at a time when the countries were in greater need of funds than before, the credit ratings agencies made it harder for them to borrow by making them less attractive to lenders and investors. Investors wait for the ratings given by CRAs before they make investment decisions or provide credit, and thus they “wield enormous clout in the financial markets.” There are only three major CRAs, Standard & Poor’s (S&P), Moody’s, and Fitch. In relation to the S&P downgrading on Greece’s rating, the Guardian reported:

S&P has effectively said it views Greece as a much riskier place to invest, which increases the interest rate investors will charge the Greek government to borrow money on the open market. But S&P is also implying that the risk of Greece defaulting on its loans has increased, a frightening prospect for bondholders and European politicians.[70]

CRAs also have major conflicts of interest, since they are companies in their own right, and receive funding and share leadership with individuals and corporations who they are responsible for applying credit-worthiness to. For example, Standard and Poor’s leadership includes individuals who have previously worked for JP Morgan, Morgan Stanley, Deutsche Bank, the Bank of New York, and a host of other corporations.[71] Further, S&P is owned by The McGraw-Hill Companies. The executives of McGraw-Hill include individuals past or presently associated with: PepsiCo, General Electric, McKinsey & Co., among others.[72] The Board of Directors includes: Pedro Aspe, Co-Chairman of Evercore Partners, former Mexican Finance Minister and director of the Carnegie Corporation; Sir Winfried Bischoff, the Chairman of Lloyds Banking Group, former Chairman of Citigroup, former Chairman of Schroders; Douglas N. Daft, former Chairman and CEO of the Coca-Cola Company, a director of Wal-Mart, and is also a member of the European Advisory Council for N.M. Rothschild & Sons Limited; William D. Green, Chairman of Accenture; Hilda Ochoa-Brillembourg, President and Chief Executive Officer of Strategic Investment Group, formerly at the World Bank, a director of General Mills and the Atlantic Council, and is an Advisory Board member of the Rockefeller Center for Latin American Studies at Harvard University; Sir Michael Rake, Chairman of British Telecom, and is on the board of Barclays; Edward B. Rust, Jr., Chairman and CEO of State Farm Insurance Companies; among many others.[73]

Moody’s is another of the major Credit Ratings Agencies. Its board of directors includes individuals past or presently affiliated with: Citigroup, the Federal Reserve Bank of Dallas, the Federal Reserve Bank of New York, Barclays, Freddie Mac, ING Group, the Dutch National Bank, and Pfizer, among many others.[74] The Executive team at Moody’s includes individuals past or presently affiliated with: Citigroup, Bank of America, Dow Jones & Company, U.S. Trust Company, Bankers Trust Company, American Express, and Lehman Brothers, among many others.[75]

Fitch Ratings, the last of the big three CRAs, is owned by the Fitch Group, which is itself a subsidiary of a French company, Fimalac. The Chairman and CEO is Marc Ladreit de Lacharrière, who is a member of the Consultative Committee of the Bank of France, and is also on the boards of Renault, L'Oréal, Groupe Casino, Gilbert Coullier Productions, Cassina, and Canal Plus. The board of directors includes Véronique Morali, who is also a member of the board of Coca-Cola, and is a member of the management board of La Compagnie Financière Edmond de Rothschild, a private bank belonging to the Rothschild family. The board includes individuals past or presently affiliated with: Barclays, Lazard Frères & Co, JP Morgan, Bank of France, and HSBC, among many others.[76]

So clearly, with the immense number of bankers present on the boards of the CRAs, they know whose interest they serve. The fact that they are responsible not only for rating banks and other corporations (of which the conflict of interest is obvious), but that they rate the credit-worthiness of nations is also evident of a conflict, as these are nations who owe the banks large sums of money. Thus, lowering their ratings makes them more desperate for loans (and makes the loans more expensive), since the nation is a less attractive investment, loans will be given with higher interest rates, which means more future revenues for the banks and other lenders. As the credit ratings are downgraded, the urgency to pay interest on debt is more severe, as the nation risks losing more investments and capital when it needs it most. To get a better credit rating, it must pay its debt obligations to the foreign banks. Thus, through Credit Ratings Agencies, the banks are able to help strengthen a system of financial extortion, made all the more severe through the use of derivatives speculation which often follows (or even precedes) the downgraded ratings.

So while Greece received the bailout in order to pay interest to the banks (primarily French and German) which own the Greek debt, the country simply took on more debt (in the form of the bailout loan) for which they will have to pay future interest fees. Of course, this would also imply future bailouts and thus, continued and expanded austerity measures. This is not simply a Greek crisis, this is indeed a European and in fact, a global debt crisis in the making.

The Great Global Debt Depression

In March of 2010, prior to Greece receiving its first bailout, the Bank for International Settlements (BIS) warned that, “sovereign debt is already starting to cross the danger threshold in the United States, Japan, Britain, and most of Western Europe, threatening to set off a bond crisis at the heart of the global economy.” In a special report on ‘sovereign debt’ written by the new chief economist of the BIS, Stephen Cecchetti, the BIS warned that, “The aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to the boiling point,” and further: “Drastic austerity measures will be needed to head off a compound interest spiral, if it is not already too late for some.” In reference to the way in which Credit Ratings Agencies and banks have turned against Greece in ‘the market’, the report warned:

The question is when markets will start putting pressure on governments, not if. When will investors start demanding a much higher compensation [interest rate] for holding increasingly large amounts of public debt? In some countries, unstable debt dynamics -- in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels -- are already clearly on the horizon.[77]

Further, the report stated that official debt figures in Western nations are incredibly misleading, as they fail to take into account future liabilities largely arising from increased pensions and health care costs, as “rapidly ageing populations present a number of countries with the prospect of enormous future costs that are not wholly recognised in current budget projections. The size of these future obligations is anybody's guess.”[78]

In all the countries surveyed, the debt levels were assessed as a percentage of GDP. For example, Greece, which was at the time of the report’s publication, at risk of a default on its debt, had government debt at 123% of GDP. In contrast, other nations which currently are doing better (or seemingly so), in terms of market treatment, had much higher debt levels in 2010: Italy had a government debt of 127% of GDP and Japan had a monumental debt of 197% of GDP. Meanwhile, for all the lecturing France and Germany have done to Greece over its debt problem, France had a debt level of 92% of its GDP, and Germany at 82%, with the levels expected to rise to 99% and 85% in 2011, respectively. The U.K. had a debt level of 83% in 2010, expected to rise to 94% in 2011; and the United States had a debt level of 92% in 2010, expected to rise to 100% in 2011. Other nations included in the tally were: Austria with 78% in 2010, 82% in 2011; Ireland at 81% in 2010 and 93% in 2011; the Netherlands at 77% in 2010 and 82% in 2011; Portugal at 91% in 2010 and 97% in 2011; and Spain at 68% in 2010 and 74% in 2011.[79]

Further, the BIS paper warned that debt levels are likely to continue to dramatically increase, as, “in many countries, employment and growth are unlikely to return to their pre-crisis levels in the foreseeable future. As a result, unemployment and other benefits will need to be paid for several years, and high levels of public investment might also have to be maintained.”[80] The report goes on:

Seeing that the status quo is untenable, countries are embarking on fiscal consolidation plans [austerity measures]. In the United States, the aim is to bring the total federal budget deficit down from 11% to 4% of GDP by 2015. In the United Kingdom, the consolidation plan envisages reducing budget deficits by 1.3 percentage points of GDP each year from 2010 to 2013.[81]

However, the paper went on, the austerity measures and “consolidations along the lines currently being discussed will not be sufficient to ensure that debt levels remain within reasonable bounds over the next several decades.” Thus, the BIS suggested that, “An alternative to traditional spending cuts and revenue increases is to change the promises that are as yet unmet. Here, that means embarking on the politically treacherous task of cutting future age-related liabilities.”[82] In short, the BIS was recommending to end pensions and other forms of social services significantly or altogether; hence, referring to the task as “politically treacherous.” The BIS recommended “an aggressive adjustment path” in order to “bring debt levels down to their 2007 levels.”[83] The challenges for central banks, the BIS warned, was that it could spur long-term increases in inflation expectations, and that the uncertainty of “fiscal consolidation” (see: fiscal austerity measures) make it difficult to determine when to raise interest rates appropriately. Inflation acts as a ‘hidden tax’, forcing people to pay more for less, particularly in the costs of food and fuel. Raising interest rates at such a time “would not work, as an increase in interest rates would lead to higher interest payments on public debt, leading to higher debt,” and thus, potentially higher inflation.[84]

In April of 2010, the OECD (Organisation for Economic Co-operation and Development) warned that the Greek crisis was spreading “like Ebola,” and that the crisis was “threatening the stability of the financial system.”[85] In early 2010, the World Economic Forum (WEF) warned that there was a “significant chance” of a second major financial crisis, “and similar odds of a full-scale sovereign fiscal crisis.” The report identified the U.K. and U.S. as having “among the highest debt burdens.”[86]

Nouriel Roubini, a top American economist who accurately predicted the financial crisis of 2008, wrote in 2010 that, “unless advanced economies begin to put their fiscal houses in order, investors and rating agencies will likely turn from friends to foes.” Due to the financial crisis, the stimulus spending, and the massive bailouts to the financial sector, major economies had taken on massive debt burdens, and, warned Roubini, faced a major sovereign debt crisis, not relegated to the euro-zone periphery of Greece, Portugal, Spain, and Ireland, but even the core countries of France and Germany, and all the way to Japan and the United States, and that the “U.S. and Japan might be among the last to face investor aversion.” Thus, concluded Roubini, developed nations “will therefore need to begin fiscal consolidation as soon as 2011-12 by generating primary surpluses, which can be accomplished through a combination of gradual tax hikes and spending cuts.”[87]

In February of 2010, Niall Ferguson, economic historian, Bilderberg member, and official biographer of the Rothschild family, wrote an article for the Financial Times in which he warned that a “Greek crisis” was “coming to America.” Ferguson wrote that far from remaining in the peripheral eurozone nations, the current crisis “is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.” Ferguson wrote that the crisis will spread throughout the world, and that the notion of the U.S. as a “safe haven” for investors is a fantasy, even though the “day of reckoning” is still far away.[88]

In December of 2010, Citigroup’s chief economist warned that, “We could have several sovereign states and banks going under,” and that both Portugal and Spain will need bailouts.[89] In late 2010, Mark Schofield, head of interest rate strategy at Citigroup, “said that a debt overhaul with similarities to the ‘Brady Bond’ solution to the 1980s crisis in Latin America was being extensively discussed in the markets.”[90] This would of course imply a similar response to that which took place during the 1980s debt crisis, in which Western nations and institutions reorganized the debts of ‘Third World’ nations that defaulted on their massive debts, and thus they were economically enslaved to the Western world thereafter.

In January of 2011, the IMF instructed major economies around the world, including Brazil, Japan, and the United States, “to implement deficit cutting plans or risk a repeat of the sovereign debt crisis that has engulfed Greece and Ireland.” At the same time, the Credit Ratings Agency Standard and Poor’s cut Japan’s long-term sovereign debt rating for the first time since 2002. As the Guardian reported:

The IMF said Japan, America, Brazil and many other indebted countries should agree targets for bringing borrowing under control. In an updated analysis on global debt and deficits, it said the pace of deficit reduction across the advanced economies was likely to slow this year, mainly because the US and Japan are preparing to increase their borrowing.[91]

Ireland was recently gripped with a major debt crisis. In 2009, Ireland was officially in an economic depression, and as one commentator asked in the Financial Times, “So will this be known as the Depression of the early 21st century?”[92] With the government of Ireland bailing out its banks in crisis, and descending into its own sovereign debt crisis, the European Union’s newly created European Financial Stability Facility (EFSF) and the IMF agreed to a bailout of Ireland for roughly $136 billion in November of 2010. However, as to be expected, the IMF and the European Central Bank (ECB) stated that the bailout “would be provided under 'strong policy conditionality', on the basis of a programme negotiated with the Irish authorities by the [European] Commission and the IMF, in liaison with the ECB.”[93] As part of the bailout, austerity measures were to imposed upon the Irish people, with spending cuts put in place as well as tax increases for the people (but not for corporations).[94]

As a Deutsche Bank executive stated in April of 2011, “the Global Sovereign crisis is probably still in the early stages and is likely to run through most of this decade, and we will be looking at the US for a possible denouement to the unfolding Sovereign issues still to play out globally.”[95]

Debt Crisis or Banking Crisis: Whose Debt is it Anyway?

As of April 2009, EU governments had bailed out their banks to the tune of $4 trillion.[96] In February of 2009, the Telegraph ran an article entitled, “European banks may need 16.3 trillion pound bail-out,” as revealed by a secret European Commission document. However, the figure was so terrifying that the title of the article was quickly changed, and all mention of the number itself was removed from the actual article; yet, a Google search under the original title still brings up the Telegraph report, but when the link is clicked, it is headlined under its new name, “European bank bail-out could push EU into crisis.” To put it into perspective, however, a 16.3 trillion pound bailout is roughly equal to $34.5 trillion. As the secret report stated, “Estimates of total expected asset write-downs suggest that the budgetary costs – actual and contingent - of asset relief could be very large both in absolute terms and relative to GDP in member states.” In other words, the bad debts of the banks require bailouts so enormous that it could threaten the fiscal positions of major nations to do so. However, the report further stated, “It is essential that government support through asset relief should not be on a scale that raises concern about over-indebtedness or financing problems.”[97] In July of 2009, Neil Barofsky, the Special Inspector General for the U.S. bailout (TARP) program, warned that U.S. taxpayers could potentially be on the hook for $24 trillion.[98] Now, while this figure remains unconfirmed, other figures have placed the total cost of the bailout at $19 trillion, with over $17 trillion of that going directly to Wall Street.[99]

In November of 2009, Moody’s reported that global banks face a maturing debt of $10 trillion by 2015, $7 trillion of which will be due by the end of 2012.[100] In April of 2011, the IMF published a report warning that, “Debt-laden banks are the biggest threat to global financial stability and they must refinance a $3.6 trillion ‘wall of maturing debt’ which comes due in the next two years.” The report was specifically referring to European banks, and the report elaborated, “these bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources.”[101]

The real truth is that the true crisis is “an international banking crisis.”[102] Global banks are insolvent. For over a decade, they inflated massive asset bubbles (such as the housing market) through issuing bad loans to high-risk individuals; they also issued bad loans to nations and helped them hide their real debt in the derivatives market; and all the while they speculated in the derivatives market to both inflate the bubbles and hide the debt, and subsequently to profit off of the collapse of the bubble and sovereign debt crisis. The derivatives market stands at a whopping $600 trillion, with $28 trillion of that inflating the credit default swaps market, the specific market for sovereign debt speculation.[103]

With the onset of the global financial crisis in 2008, major nations moved to bailout these massive banks, thereby keeping them afloat and making them bigger and more dangerous than ever, when they should have simply allowed them to fail and collapse under their own hubris. The effect of the bailouts was to transfer tens of trillions of dollars in bad debts of the banks to the public coffers of nations: private debt became public debt, private liabilities became public liabilities, and thus, the risk was transferred from millionaire and billionaire bankers to the taxpayers. This is often called ‘corporate socialism’ (or ‘economic fascism’) as it privatizes profits and socializes risk. However, the bailouts did not ‘buy’ all the bad debts of banks, as they were specifically focused on the debts related to the housing market. The banks, still insolvent even after the bailouts, hold tens of trillions in bad debts in other asset bubbles such as the commercial real estate bubble (which is arguably larger than the housing bubble[104]), as well as derivatives, and now sovereign debt.

Global financial institutions – such as the IMF – and the major political powers – such as the U.S. and E.U. – continue to serve the interests of bankers over people. Thus, with the onset of the sovereign debt crisis, no one is questioning the legitimacy of the debt, but rather, they are forcing entire nations and populations to impoverish themselves and deconstruct their society in order to get more debt to pay the interest on old – illegitimate – debts to banks which are insolvent and profiting off of their countries plunging into crises. Like a snake wrapping around its victim, the more you struggle, the tighter becomes its hold; with every breath you take, its coils wrap closer and tighter, still. The world is ensnarled in the snake-like grip of global bankers, as they demand that the people of the world pay for their mistakes, their predatory practices, and their own failures.

Greece Gets Another Bailout... for the Bankers

In March of 2011, Moody’s downgraded Greece’s credit rating to a lower rating than that of Egypt, which had recently experienced an uprising which led to the resignation of long-time Egyptian dictator, Hosni Mubarak. The move by Moody’s “prompted investors to dump the debt of other struggling European economies.”[105] In June of 2011, Greece was given the lowest credit rating ever by Standard & Poor’s, saying that Greece is “increasingly likely” to face a debt restructuring and be the first sovereign default in the euro-zone’s history. The S&P specified, “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.” At the same time, the Greek Treasury was attempting to sell $1.8 billion of treasury bills (selling Greek debt) in order to continue meeting financial needs. However, the downgrade by S&P made the treasury bills far less attractive an investment, and thus, pushed Greece into an even deeper crisis. At the same time, credit default swaps surged to record highs on Greece, Portugal, and Ireland. Simultaneously, Greece was seeking a second bailout, and thus, the lower rating would make any potential loans (which would carry extra risk due to the low credit rating) come attached with much higher interest rates, ensuring a continuation of future fiscal and debt crises for the country. In short, the lower credit rating plunged the country into a deeper crisis, though analysts at JP Morgan and other banks stated that the credit ratings agencies were actually following behind the market, as the major banks had already been betting against Greece’s ability to repay its debt (to them, no doubt).[106]

In June, the EU and IMF concluded a harsh audit of Greece’s finances as a condition for getting a further tranche of its previous bailout loan, with Greece “pledging further reforms and a privatisation drive that has put local unions on the warpath again.” The Greek Ministry “said it had discussed with auditors a four-year programme to reduce the Greek public deficit and its debt of some 350 billion euros ($504 billion) through further reform and sweeping, controversial privatizations,” which the IMF, the European Central Bank (ECB) and the EU made “a condition of further aid.” Greece was seeking a further 70 billion euro bailout, and the country announced the implementation of further austerity measures:

It has also pledged to hold a 50-billion-euro sale of state assets including the near-monopoly telecom and electricity operators, the country's two main ports and one of its best-capitalised banks, Hellenic Postbank.[107]

With major protests, strikes, and riots erupting in Greece against the draconian austerity measures, the economic and social crisis was more deeply enmeshed in a domestic political crisis. The Bank for International Settlements (BIS) published a list of those countries and banks which were the most heavily exposed to Greek debt. The total lending exposure to Greece by 24 nations was over $145 billion, with the exposure of European banks at $136 billion, and non-European banks at nearly $9.5 billion. France had an exposure of $56.7 billion, Germany of $33.9 billion, Italy of $4 billion, Japan of $1.6 billion, the U.K. of $14 billion, the U.S. of $7.3 billion, and Spain at $974 million. Thus, these were the countries with the most to lose in the event of a Greek default.[108]

However, the overall exposure includes lending not only to the country (sovereign debt), but industries, banks, and individuals. France’s overall exposure was highest with $56.7 billion, however, in terms of exposure to sovereign debt specifically, France had an exposure of $15 billion. While Germany had a lower overall exposure at $33.9 billion, German lenders were the most exposed to sovereign debt at $22.7 billion. French banks had a higher overall exposure because $39.6 billion of the $56.7 billion total was loaned to companies and households.[109]

In mid-June 2011, Moody’s warned that it might cut the credit ratings of France’s three largest banks due to their holdings of Greek debt, and placed “BNP Paribas, Crédit Agricole and Société Générale on review for a possible downgrade.”[110]

In June, it was reported that the IMF exerted strong pressure on Germany to give Greece another bailout, threatening to trigger a sovereign default if Germany did not agree to a bailout. As reported in the Guardian: “The fund warned the Germans in recent weeks that it would withhold urgently needed funds and trigger a Greek sovereign default unless Berlin stopped delaying and pledged firmly that it would come to Greece's rescue.”[111] As part of the new bailout, there would be “unprecedented outside intervention in the Greek economy, including international involvement in tax collection and privatisation of state assets, in exchange for new bail-out loans for Athens.” Further, there would be conditions in the package that would provide incentives for holders of Greek debt (i.e., European banks) to voluntarily extend Greece’s repayment period, by “rolling over” the debt into future bonds (i.e., pushing the debt further down the road), and of course, the package would also include a new round of austerity measures. Much of the funding is expected to come from the sale of state assets, with the IMF and EU providing roughly $43 billion extra.[112]

The major lenders were seen to have a role in the latest Greek bailout, with French banks agreeing to a possible roll-over of Greek debt, meaning that the banks would be extending the maturity of some of their holdings of Greek debt, and that “banks would reinvest most of the proceeds of their holdings of Greek debt maturing between now and 2014 back into new long-term Greek securities.”[113] German banks also agreed to roll over 3.2 billion euros of Greek debt falling due up to and including 2014.[114]

In late June, the Greek government approved another harsh austerity package, prompting more massive protests, strikes, and riots. The second bailout package has been running into significant problems, largely to do with its stipulations for private sector involvement, creating many conflicts between those parties which must agree to the bailout. The ultimate bailout package, expected to be in the range of 80 to 90 billion euros, might not be agreed upon until September. Meanwhile, hedge funds have been speculating in the derivatives market seeking to make financial gains throughout the unfolding crisis.[115]

The Crisis Spreads Through Europe

Portugal descended into a major debt crisis in 2011. In March, the country’s parliament rejected a new austerity package to deal with its debt, and “the market” reacted by moving against the country, as “sovereign bond yields soared to new highs,” with Fitch Ratings downgrading Portugal’s credit rating and Moody’s downgraded the rating of several Spanish banks, which are heavily exposed to Portuguese debt.[116] In April of 2011, Portugal sought the assistance of the EU and IMF and requested a bailout of roughly 80 billion euros. As a condition for such a bailout, Portugal would be forced to impose harsh austerity measures in a ‘Structural Adjustment’ package which “will include structural reforms, spending cuts, a stabilisation programme for the country's financial sector and ambitious privatisation plans.”[117] As such prospects increase for Portugal’s neighbour Spain, which is considered both “too big to fail” and “too big to bail,” Spain’s government has imposed several rounds of harsh austerity measures.[118]

In May, an agreement was reached to bailout Portugal by the EU and IMF worth roughly $111 billion. As part of the agreement, Portugal had to implement the austerity measures that its parliament had rejected in March, cutting spending (including pensions), while roughly 12 billion euros (or $17.8 billion) of the 78 billion euro bailout would go to banks.[119] In July, Moody’s slashed Portugal’s credit rating to “junk status,” and European bank shares fell sharply, as they are heavily exposed to Portuguese debt. Moody’s warned that Portugal may need a second bailout (just like Greece), which pushed Portugal’s borrowing costs further up, plunging the country and Europe as a whole deeper into a debt crisis.[120]

In July, Moody’s downgraded Portugal’s debt to junk status, increasing fears that Spain and Italy will be targeted next. The downgrade also came with a warning that Portugal may, like Greece, need a second bailout, which pushed European stock markets down, “adding to the woes of Ireland, Spain and Italy as traders dumped their bonds, forcing their interest rates up.”[121] In July, Moody’s downgraded Ireland’s rating to “junk status,” putting it in the same category as Greece and Portugal, and further exacerbating the economic crisis there, and fuelling fears about Spain and Italy.[122]

Italy, with $2.6 trillion in outstanding debt, was plunged into a deep crisis in early July, and began to edge toward a potential need for a bailout.[123] French banks have an exposure of $392.6 billion in Italian debt (both public and private), which is more than double of the German exposure to Italy.[124] Amid the increased fears over Italy’s debt, its borrowing costs soared (plunging it even deeper into crisis). Italy’s government announced the intention to impose an austerity plan to cut 40 billion euros out of its budget.[125] Mario Draghi, governor of the Bank of Italy, endorsed the austerity package, calling it “an important step.” Mario Draghi is incidentally set to take over the position of President of the European Central Bank in November, when Jean-Claude Trichet steps down.[126]

Spanish banks reportedly had an exposure of 100 billion euros in Portuguese debt, meaning that a bailout for Portugal is in fact a bailout for Spanish banks.[127] UK banks were sitting on roughly 100 billion pounds (roughly $150 billion) of exposure to Greek, Portuguese, and Spanish debt, as of April 2010.[128] It was reported in April of 2011 that British banks had an exposure of roughly 33.7 billion euros to Portugal, comparing favourably with French and German exposure, unlike in Ireland, where British banks have the largest exposure of all foreign banks. Though, in total, European banks hold roughly $266 billion in exposure to Portuguese debt.[129]

As the Bank for International Settlements reported in March of 2011, the total exposure by foreign banks to what is referred to as Europe’s ‘PIGS’ (Portugal, Ireland, Greece, and Spain) is roughly $2.5 trillion. Germany has the largest exposure, at $569 billion, the U.K. is next with $431 billion, and France is in third with $380 billion. The British banks have an exposure of $225 billion in Ireland and $152 billion in Spain.[130]

With Italy in crisis, European banks are even more exposed, as their net exposure to Italian sovereign debt (not to be confused with total debt exposure, public and private) is more than their exposure to Greece, Portugal, Ireland, and Spain combined. Exposure to those four nations is roughly $226 billion, while European banks’ exposure to Italy’s sovereign debt is $262 billion, making the threat of a bailout or a potential default all the more pronounced.[131]

The European Central Bank (ECB) itself, through purchasing of government bonds from Europe’s weakest economies, reportedly has an exposure of 444 billion euros (or $630 billion) to Portugal, Italy, Ireland, Greece, and Spain (the PIIGS). As one think tank reported on the figures, “There is a hidden – and potentially huge – cost of the euro zone crisis to taxpayers buried in the ECB’s books.”[132]

Banking on a Depression

In late June of 2011, the BIS “urged Europe to end its dithering and find a permanent solution to the sovereign debt crisis,” and wrote in its annual report: “For well over a year, European policy makers have been scrambling to put together short-term fixes for the hardest-hit countries while debating how to design a viable and credible long-term solution,” adding, “they need to finish the job, once and for all.” Further, the BIS warned, “Governments that put off addressing their fiscal problems run a risk of being punished both suddenly and harshly.”[133]

The BIS further warned that inflation needs to be fought by central banks raising their interest rates, thus making money more expensive, and that “with the scope for rapid growth closing, monetary policy should be quickly brought back to normal and countries should act urgently to close budget deficits.” The recommendation by the BIS was for both emerging market economies (such as China, India, Brazil, etc.) and advanced industrialized economies (Europe, United States), and the BIS “warned policymakers not to expect a normal recovery because much of the pre-crisis growth had been unsustainable and capacity will have been destroyed for ever, particularly in finance and construction.” As the Financial Times reported:

Rising food, energy and other commodity prices underscored the need for central banks around the world to begin raising interest rates, perhaps even more rapidly than they brought them down, said the BIS in its report. “Highly accommodative monetary policies are fast becoming a threat to price stability,” it concluded.

 

The fact that interest rates have been so low for so long also introduces new risks into the world’s financial system even though these policies were put in train initially by a desire to reduce risk, the report added.

 

“The persistence of very low interest rates in major advanced economies delays the necessary balance sheet adjustments of households and financial institutions,” the BIS said.[134]

In other words, according to the BIS, it’s time to tighten the grip. Raising interest rates will mean that loans and debt become more expensive for governments, corporations, banks, and individuals. The stated aim of this, according to the BIS, is to reduce inflationary pressure, where money is printed easily and crosses borders easily with near-zero interest rates, making it cheap. The free flow of money (low interest rates) allowed the housing bubble (and other bubbles, such as the commercial real estate bubble) to grow and inflate. Low interest rates are designed to encourage investment and lending, but of course, the major banks that got the bailout money did not increase lending, they increased their executive’s bonuses. Thus, low interest rates were designed to encourage economic growth, which is why they were kept low following the onset of the economic crisis. However, with the major bailouts and stimulus packages, unprecedented amounts of money were pumped into the economy, and as such, the value of the currency being printed goes down (the more there is, the less valuable it becomes). This causes inflation (which acts as a hidden tax on the consumer), because it means that it requires more of the currency to buy less. The prices of food and fuel in particular increase, which is largely detrimental to the middle class consumer, whose wages do not increase with inflation. Thus, they make less when they need to spend more to buy less.

The BIS warned in June of 2010 that the record low interest rates “aimed at spurring economic growth, were keeping households and banks from reducing the huge debts that led to the credit crunch.” Its 2010 annual report warned: “Keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for the financial and monetary stability.”[135] Even in its 2009 annual report, the BIS said it feared that central banks would raise their interest rates too late, which would ultimately lead to inflation anyway. As the report stated, keeping the rates low would “lead to inflation that feeds inflation expectations or it may fuel yet another asset-price bubble, sowing the seeds of the next financial boom-bust cycle.”[136]

The hesitation to raise interest rates comes from the fact that there has been no economic ‘recovery,’ and thus, raising rates would lead to a protracted stagnation, or a double-dip recession, or perhaps more bluntly, a very deep depression. The raising of interest rates in an attempt to reduce inflation could potentially be irrelevant, as the increased rates would prompt higher interest payments on debts, forcing governments to print more money (or get more bailouts or loans) in order to make their payments, and thus, more money being pumped into the economy would further exacerbate inflation, itself. Already, the Chinese central bank (which is a member of the BIS) raised its interest rates, with India having increased interest rates over the year as well.[137] The European Central Bank also raised its interest rates in July, for the second time this year, to 1.5%, and may be expected to raise it further by the end of the year.[138] The BIS annual report for 2011 stated:

All financial crises, especially those generated by a credit-fuelled property price boom, leave long-lasting wreckage. But we must guard against policies that would slow the inevitable adjustment. The sooner that advanced economies abandon the leverage-led growth that precipitated the Great Recession, the sooner they will shed the destabilising debt accumulated during the last decade and return to sustainable growth. The time for public and private consolidation is now... We should make no mistake here: the market turbulence surrounding the fiscal crises in Greece, Ireland and Portugal would pale beside the devastation that would follow a loss of investor confidence in the sovereign debt of a major economy.[139]

Whether inflation, high interest rates, or a more-deadly combination of both, the average person suffers most. Inflation hits home as wages remain stagnant or are cut (under ‘fiscal austerity measures’), while costs for consumer goods (such as food and fuel) increase. Increased interest rates drain the remaining resources of consumers, who are largely debt-ridden, and will have to make increased payments on their debts. Such a scenario for an individual debtor (say, a middle class consumer), is likely to play out in a scenario similar to Greece: either they go further into debt to pay interest on old debt (like paying off one credit card with another), thus increasing their future liabilities (kicking the can down the road); or, they default and declare bankruptcy, and come under the tutelage of bank supervision, losing all their assets. In a combination of both inflation and high interest rates, the middle class will become totally impoverished, as they are already a class based entirely on debt.  

The Plutonomy

A 2005 report from Citigroup coined the term “plutonomy,” to describe countries “where economic growth is powered by and largely consumed by the wealthy few,” and specifically identified the U.K., Canada, Australia, and the United States as plutonomies. Keeping in mind that the report was published three years before the onset of the financial crisis in 2008, the Citigroup report stated that, “asset booms, a rising profit share and favourable treatment by market-friendly governments have allowed the rich to prosper and become a greater share of the economy in the plutonomy countries,” and that, “the rich are in great shape, financially.”[140] As the Federal Reserve reported, “the nation’s top 1% of households own more than half the nation’s stocks,” and “they also control more than $16 trillion in wealth — more than the bottom 90%.” The term ‘Plutonomy’ is specifically used to “describe a country that is defined by massive income and wealth inequality,” and that they have three basic characteristics, according to the Citigroup report:

1. They are all created by “disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants... the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time.”

 

2. There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” [Citigroup strategist Ajay] Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.

 

3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.[141]

Kapur, who authored the Citigroup report, stated that there were also risks to the Plutonomy, “including war, inflation, financial crises, the end of the technological revolution and populist political pressure,” yet, “the rich are likely to keep getting even richer, and enjoy an even greater share of the wealth pie over the coming years.”[142]

More recently, Moody’s Analytics reported that, “the top 5 percent of American earners are responsible for 35 percent of consumer spending, while the bottom 80 percent engage in only 39.5 percent of consumer outlays,” while “the top 10 percent of earners received 50 percent of all income, while they accounted for only 22 percent of spending.” Much of their money disappeared into the speculative booms, especially the housing boom.[143]

In February of 2011, Ajay Kapur, the author of the Citigroup report who is now with Deutsche Bank, gave an interview in which he explained that, “the world economy is even more dependent on the spending and consumption of the rich,” and that, “Plutonomist consumption is almost 10 times as volatile that of the average consumer.” He further explained that increased debt levels are a sign of plutonomies:

We have an economy today where a large fraction of the population doesn’t pay federal income taxes and, because of demand for entitlements, we have a system of massive representation without taxation. On the other hand, you have plutonomists who protect their turf and the taxation amounts are not enough to pay for everyone’s demand. So I’ve come to the conclusion that budget deficits are biased toward getting bigger and bigger. Budget deficits are going to become a manifestation of a plutonomy.[144]

The plutonomy is largely characterized by a lack of a consuming and vibrant middle class. This is a trend that has been accelerating for several decades, particularly in North America and Britain, where the middle class population is heavily indebted. The middle class has existed as a consumer class, keeping the lower class submissive, and keeping the upper class secure and wealthy by consuming their products, produced with the labour of the lower class. As a Bank of America-Merrill report noted in 2009, the middle class “is over-leveraged.” The report stated, “the consumer debt problem in the economy really is a debt problem for the middle class. The need to work off a chunk of that debt will sap middle-class families’ spending power for perhaps years to come.” Further:

By contrast, the upper 10% of income earners face a much smaller debt burden relative to income and net worth. Those people should have ample spending power to help fuel an economic recovery.

 

Using 2007 data from the Federal Reserve, BofA Merrill defines the middle class as people in the 40%-to-90% income percentiles. It defines lower-income folks as those in the zero to 40% income percentiles, and the wealthy as those in the top 10%.

 

Lower-income families account for 40% of the population but just 12% of total consumption, BofA Merrill estimates. The middle class is 50% of the population and nearly as large a share of consumption, at 46%.

 

That leaves the wealthy to account for a hefty 42% of consumption.

 

In terms of their debt burdens, neither lower-income families nor the wealthy are constrained the way the middle class is constrained, the report asserts.[145]

The report further asserted that, “the middle-class has suffered more than the wealthy from the housing crash because middle-class families tended to rely more on their homes to build savings through rising equity. Also, the wealthy naturally had a much larger and more diverse portfolio of assets -- stocks, bonds, etc.”[146]

In short, when the day comes where the rest of the industrialized world falls into the same trap as Greece, the middle class will be pushed down into the lower class, and a global socio-economic plutonomy will emerge. The middle class cannot survive the perfect storm of fiscal austerity, increased interest rates, inflation and ‘Structural Adjustment.’ We are entering a global age of austerity, where our political leaders commit social genocide for the benefit of the global banks, and at the behest of the institutions that represent them. The IMF and other supranational institutions increase their own powers and authority in order to punish and impoverish large populations. What has been done to the ‘Third World’ – the ‘Global South’ – over the past several decades is now being done to us, in the industrialized North.

In Conclusion

In the face of this massive global social, political, and economic crisis, the reaction of the world’s elite is to further centralize power structures on a global scale, to further remove power from the rest of humanity and move it upwards to a tiny elite. This not only creates massive disparity and inequality, but it establishes the conditions for an incredibly radicalized, restless, and angry world population. As such, the centralized global power structures that elites seek to strengthen and build anew will ultimately be authoritarian, oppressive, and dehumanizing. This is so because the social unrest resulting from this massive global impoverishment will make the apparatus of oppression necessary in order to secure and maintain those very power structures. In short, if the elite do not become oppressive and totalitarian, they will lose their grip on power in the face of massive global social unrest. This will require brutal wars of domination abroad, and ruthless techno-social systems of oppression at home.

The people of the world are faced with a great challenge, unlike any other faced in all of human history. The only way out is realizing that the struggle of one is the struggle of all: freedom for all, or freedom for none. Of course, a true global resistance is a long way down the road. There still remain diverse disputes and ideological differences which maintain disunity. The challenge, then, is to find the common ground for all people, and to move forward despite ideological or other differences, and to work together to find a solution. This is no small challenge.

We will likely see the proliferation of many new ideologies and indeed even a ‘global philosophical revolution’ of sorts, which may seek to unite humanity under the banner of a new human understanding. Such a philosophy would run counter to the elite-driven philosophy focused on power-centralization and global domination, and would – in order to be legitimate – draw from a great many philosophical, theoretical and even spiritual disciplines and beliefs. As such, it is perhaps important to not revert to old – tried and tested – ideological doctrines as the one and only “solution.” For example, there are growing nationalist movements in reaction to the elite-driven doctrine of ‘globalism’, notably in the United States. For a true step forward, we must remain open to and in fact encourage a proliferation of new ideas instead of reverting to the old; to learn from both the failures and successes of old ideas, instead of holding on to a myth of ‘what was’, such as the ‘idea’ of a wonderful, prosperous America for all. This era never truly existed in America’s history, yet the myth remains strong, and is a fundamental driving force behind the resurgent nationalist movement. As such, for many in the anti-globalist movement, criticism of nationalism is instantly thrown into the camp of support for globalism, not allowing room for a critique of both. This is a dangerous situation – ideologically and politically – as true change can only come from self-reflection and understanding. There needs to be room left for new ideas, otherwise we will simply revert to repeating old mistakes.

Indeed, we are entering perhaps the most important historic era in the human story thus far. The notion that there will not be new ideas, philosophies, ideologies and beliefs runs counter to the historical fact that times of social upheaval and rapid political transformation often give rise to new ideas and philosophies. This time around, the world is globalizing, not only in terms of power structures, but also in terms of ideational structures. In this sense, while the elite have never had such an opportunity to impose control over all of humanity, all of humanity has never had such an opportunity to effect an exchange of ideas and information among each other, and thus, solidify a common philosophical solidarity, and ultimately, re-take control of the world, itself.

Reprinted from Global Research. The article with footnotes is available here.

Andrew Gavin Marshall is an independent researcher and writer based in Montreal, Canada, writing on a number of social, political, economic, and historical issues. He is co-editor of the book, “The Global Economic Crisis: The Great Depression of the XXI Century.” His website is http://www.andrewgavinmarshall.com Andrew G. Marshall is a frequent contributor to Global Research. Global Research Articles by Andrew G. Marshall

© Copyright Andrew G. Marshall , Global Research, 2011

Disclaimer: The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of the Centre for Research on Globalization. The contents of this article are of sole responsibility of the author(s). The Centre for Research on Globalization will not be responsible or liable for any inaccurate or incorrect statements contained in this article.


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Comments

Henry Gordon
21 Jul 11, 16:25
European Debtor countries

Rather than throwing money at the problem those who are being asked to bail out these countries should take over their assets and run them profitably which they are clearly not capable of doing.


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