Friday, 16 March 2012 00:00The world held its breath last night. Now it’s exhaling a little, on this Friday morning. As of this moment, enough investors have agreed to swap out their old Greek bonds for new bonds worth less than half the current face value. This will wipe about 100 billion Euros from a Greek debt pile of 350 billion Euros and probably allow Greece to make some upcoming payments.
The world can pretend that this is not an official or “hard” default, even though it’s the very definition of it. Already, markets are rising. Brent crude oil hit its highest price in three years since there will be no global reduction in demand. This week. Greece probably still can’t sustain its debt load for very long.
Americans who have been encouraged, trained, not to question The Decisions of Management, don’t see any connection in their lives to this. But it is neither birth certificates nor birth control nor your first grade teacher’s pension that affect what Long Islanders’ pay for gasoline and flat screens. Bonds, banks and sovereign currencies are in the center ring.
A decade ago, Greek finance officials worked with certain Great Big Banks to create interest-based “credit default swaps” that exponentially grew future debt load. It was a way of getting past legal debt limits while increasing spending on sports stadiums and on American, German and French military weaponry. The Great Big Banks then created the iTraxx SovX Western Europe Index, a marketplace in which traders gamble on these kinds of unfathomable derivatives. The very same banks rushed in and bet against Greece paying its debts, against the obligations they helped create.
And despite apparent massive fraud (encouraging the purchase of a financial product designed to fail, after billions have been sucked out), nobody goes to jail. Main Street, U.S.A., 2008, meet your first cousin, Main Street, Athens, 2009.
The importance of Greece isn’t the size of its economy but the pattern this will set as other countries approach the economic death spiral. There are connections everywhere. Italy is the world’s eighth largest economy. If Italy blows up, all bets are off. Foreign banks have a $2.5 trillion exposure in Greece, Ireland, Portugal and Spain. Hungary could bring down Austria’s banks. Everyone’s worried about Belgium. On and on. Trillions in tricky paper. If the contagion spreads too rapidly, if Europe has currency sell-offs and bank runs, no ocean is wide enough to insulate us.
We never fixed Wall Street. A real stress test might be coming.
The financial sector failed to assess creditworthiness and took enormous risks for short-term profits. We’ve had one crisis after another. Will we finally protect these people from themselves and reimpose the common sense banking rules that gave us stability for decades?
Instead, half of Europe is being reduced to fiscal feudalism. Parts of this latest deal curtail Greek sovereignty and violate its Constitution. The draconian terms seem designed to discourage other countries from demanding their own deal. Greece and Italy are now being run by unelected “technocrats” acceptable to bankers. Their robotic solutions are failing everywhere.
Relentless austerity is making things worse. They “fixed” Greece by driving salaries down, slashing pensions, selling public assets and shifting tax burdens from the top. Hospital budgets have already been cut 40 percent and there are shortages of medicine and bandages, but the military budget hasn’t been touched. Sales taxes increased 23 percent. Electric rates were slashed for corporations but jacked up on farmers. The minimum wage will be cut another 22 percent. Greece’s tax revenues were supposed to rise by 9 percent, but actually went down 7 percent. Greek GDP contracted by 5 percent in the third quarter of 2011, 7 percent in the fourth. The EU now predicts that GDP will fall among its 17 member countries in 2012; in November they were predicting growth of 0.5 percent.
In January, even Standard & Poor’s warned, as they downgraded the bonds of 16 countries, that “a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating.”
You don’t like budget deficits? Neither do I. But we won’t fix anything by knocking the props out from the middle income economy, while ignoring much larger pieces of the puzzle.
Michael Miller is a freelance writer, designer and strategic consultant who has worked in state and local government. Email: email@example.com