Posts Tagged ‘bail-outs’

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European contagion

February 9, 2010

It took them a surprisingly long time to move, but as of this morning the speculators have seriously latched onto the Euro:

Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency on fears of a eurozone debt crisis.

As the FT suggests, they’re betting on both the Greek government’s inability to avoid default – or at least devaluation and exit from the Euro – and the subsequent inability of other Euro currencies to withstand ‘contagion’: financial instability spreading from one economy to the next, with country after country pulled into the maelstrom.

Other Euro economies are exposed to Greek upsets through the substantial investments various European financial institutions now hold there. French investors are the biggest, holding $58bn worth of Greek debt at the end of 2008 (on the IMF’s most recent figures), with German investors next on $32.3bn.

UK holdings are more modest, but still very substantial, covering $14.4bn worth of loans. Around a third of Greek government debt, meanwhile, is held by Greek investors. All will take a hit from substantial fiscal turmoil in Greece. And all the big exposures are in Europe.

Major financial institutions can try to get rid of some of this risk by adjusting their portfolio of assets. The real danger is that, in doing so, they will look to dispose of debt securities held in other, smaller Euro economies with weak fiscal positions – Portugal, Ireland and Spain, in particular.

It’s these three that are now causing additional grief for the Euro. A quick glance at the combination of high public debt, and wobbly governments, tells you why the short-sellers are licking their chops. The betting is on one of the PIGS, so-called – Portugal, Ireland, Greece, Spain – going belly-up some time soon.

But it’s Greece that remains the biggest single risk. Revisions to the public debt figures have rattled markets, while the deep spending cuts offered in sacrifice by the newly-elected PASOK government have failed to calm jangled nerves.

If the big banks and the institutional investors pull out of Greece, they can spread financial instability elsewhere – with speculators adding to the chaos, moving colossal volumes of hot money at fantastic speed across national borders. The whole Eurozone – potentially even the Euro project itself – could suddenly appear unstable.

The decade has been generous to the Euro. A benign economic environment, floating atop a giant property-and-finance bubble, kept the show on the road. Those days are long gone.

The deciding factor here, however, is political. Either the Greek government can keep the markets reaonably sweet, holding firm to bigger and bigger promises attacks public services and wages; or the markets will be unconvinced, dragging Greece out of the Euro.

That’s where the EU steps in. The risks of contagion, and the damage to the Euro’s credibility, will no doubt concentrate European finance ministers minds on arranging a bailout. It’s the prospect of a rescue package, rather than some sudden belief in the Greek government’s firm grasp of the axe-handle, that has led to some improvement in the Euro’s position.

The planned cuts are already meeting resistance. Farmers are blockading roads, and thousands of public sector workers are expected to strike tomorrow against the wage freeze.

Serious opposition in Greece to the EU’s austerity package could open the path for resistance across Europe. But successfully fighting off the cuts will also mean building a credible, political opposition to the rule of finance.

(hat-tip to Eugenia for the figures)

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Peering into the gloom

January 25, 2010

Alex Callinicos has provided a brief summary of the state of the world economy, as revealed in recent statistics:

The National Institute for Economic and Social Research (NIESR) released its estimate for Britain’s Gross Domestic Product (GDP). It noted, “GDP fell by 4.8 percent in 2009. This is a bigger fall than in any year of the Great Depression and is Britain’s biggest contraction since 1921…

“The broader picture of the depression is that output fell sharply for 12 months until March and has not changed very much since then, although evidence of a recovery is starting to emerge.”

In other words, the British economy shrank more last year than it did in any one year of the Great Depression of the 1930s.

Callinicos also notes, however, that the future courses of the British and world economies are ‘shrouded in obscurity’.

He’s right to point out the uncertainties. What has happened in the recent past is, by itself, no guide to the future – as Gordon ‘no return to boom and bust’ Brown has discovered. The red faces in the economics mainstream tell their own story.

Nonetheless, stepping back from the statistical picture, it is possible to discern some shapes.

The most obvious is the pressure on the British economy from the vast costs of bailing out the financial system. Any attempt to substantially repay this borrowing within either the four years that Alastair Darling has offered, or the shorter timescale favoured by the Tories, will drag down the rest of the economy.

It represents a huge transfer from those spending money – either us as taxpayers, or the government through services – to those who save money: from those keeping the economy moving, to those hoarding cash.

Both the main parties are committed to repayment, squeezing workers and public services to please the financial markets. But repaying the debt does not necessarily benefit British capitalism in general. Other sections of capital need a robust domestic market to sell their products to – especially if markets overseas remain depressed, and competitive. Most UK companies do not export. If their domestic market is squashed by rising taxes or public spending cuts, they are in trouble.

So whilst all sections of British capital have a belief in the general necessity of keeping the financial markets sweet, the rate at which that debt should be repaid is a different matter.

Too fast, and domestic demand is squashed. Too slow, and the financial markets get jumpy. No-one can know for sure the best rate. And the different sections of British capital all have their own idea.

As the crisis revealed, no major part of British capitalism is prepared to countenance radical steps to overcome this dilemma – Adair Turner’s remarks notwithstanding. When the City of London was on its knees, the priority on all sides was to help it to its feet, through bailouts. No effort was made to seize the economic reins from the City.

Because the banks and the financial institutions were bailed out, and because there has been no real international agreement on how to discipline them in the future, they are liable to behave in exactly the same way as before: taking risks that could undermine the whole economy.

Combine this with the uncertain rate of debt repayment, and you have the potential for major instability. That’s even before considering the potential for resistance to major cuts. Whichever government is in place could run into a brick wall of opposition.

There is a way out of this bind. But it would mean posing a serious economic alternative to the domination of the City. It would mean building a movement able to do this.