10.11.2011
EU leaders have no answers
As Greece and Italy edge closer to the brink, Eddie Ford looks at the latest developments
Last week the Greek drama was centre stage. Panic spread when George Papandreou announced on November 1 that there would be a referendum on the austerity measures demanded by the International Monetary Fund, European Union and European Central Bank in return for the promised tranche of €8 billion bailout money. This was not part of the script. Decidedly off-message.
Obviously, Papandreou’s high -risk move was a desperate attempt to pre-empt mass resistance to yet more vicious attacks on the living standards of the working class by providing a fig-leaf of legitimacy to the troika-imposed austerity regime. Margaret Thatcher, quite correctly as far as communists are concerned, memorably described referendums/plebiscites as a “device of demagogues and dictators” - or, in this case, a beleaguered bourgeois politician seeing his options rapidly run out. Inevitably, and rather ironically, Tory Eurosceptics and others immediately hailed the ‘socialist’ Papandreou as a noble democrat standing up to bullying Brussels bureaucrats: setting an example for the UK to follow. In reality, of course, Papandreou is a member of the state-bureaucratic elite and has no more interest in real democracy than those of his former colleagues - both internally and externally - now railing against him.
Having said that, the response to Papandreou’s referendum gamble just as equally exposes the gaping democratic deficit that lies at the heart of the euro zone - an elite project from above that aims to advance the privileged interests of bourgeois/establishment politicians, Eurocrats, bankers, investors and the minority capitalist class as a whole. Feeling betrayed, angry euro zone leaders - especially the French and German governments - relentlessly piled on the pressure to get Papandreou to abandon his plans. Indeed, acting like control-freaks, Nicolas Sarkozy and Angela Merkel resorted to essentially blackmail tactics against Papandreou - bluntly declaring that any such referendum would also be a vote on Greece’s continued membership of the EU. Therefore, there would be no further bailout money for Greece - inviting almost immediate bankruptcy for the country - until the referendum had been held and the masses had voted ‘correctly’ (ie, ‘yes’). Ditto for any fresh elections that might be held as a result of the current instability gripping Greece. Until the political configuration and programme of the new government was known, and the bailout package formally ratified by parliament, there would be no cash.
Of course, it only took 24 hours for Papandreou to capitulate and unceremoniously dump the referendum idea - terrified by the prospect of Greece crashing not just out of the euro, but out of the EU itself. And maybe standing alongside Albania as proud, ‘independent’ nations forging their own destiny again. Anyway, Papandreou resigned and attempts are still being made - not very successfully at the time of writing - to cobble together a ‘transitional’ or ‘national unity’ government of a technocratic nature that will satisfy the troika and the markets.
According to Jean-Claude Juncker, the president of the euro group, this ‘100-day government’ must sign a “letter of intent” reaffirming their commitment to the programme of bailouts and ‘structural reforms’ demanded by the troika. Be obedient boys and girls. Concretely, this means that post-Papandreou ‘emergency’ government has to ram the troika’s latest €130 billion austerity programme through parliament, draw up next year’s budget and complete negotiations on a bond swap with the banks - all in record time. After which, new elections may be held sometime in February, depending on this or that circumstance.
Needless to say, any government which emerges from those elections - whenever they are eventually held - will be expected to play by the same rules of the game and continue the vicious attacks on the majority of the Greek population. But unfortunately for the troika and the government holed up in Athens, whatever its exact nature turns out to be, the workers’ movement in Greece will undoubtedly keep on fighting.
Italy on the brink?
However, all eyes are now turned to Italy, where a crisis is developing to overshadow the events in Greece. Yes, Silvio Berlusconi survived a vote on November 8 in the lower house of parliament to approve last year’s public accounts - but his coalition won the support of only 308 of the 630 members of the chamber after the opposition deputies boycotted the ballot. Even Berlusconi could see that the writing was on the wall and said he would stand down once the austerity measures contained in the budget had been ratified by the upper house, the senate. When the entire package has fully cleared the legislature, then he will go. Or so Berlusconi has said.
But, with or without Berlusconi, Italy finds itself on the brink of financial catastrophe. Rattled by recent developments, the markets have begun to lose confidence in Italy’s ability to pay off its debts. Hence for the last few days, the yield (interest rates) on government bonds had been hovering around the 6.4-6.5% mark - the sort of critical levels seen in Greece, Ireland and Portugal before they requested a bailout. This is despite the fact that from August onwards the ECB bought up billions of euros worth of Italian government bonds so as to raise demand and temporarily forced the interest rates down to a relatively more manageable level of 5.1-5.2%.
The efforts of the ECB appear to have been futile though - a mere finger in the debt dam. By the afternoon of November 9, the yield on governments bonds had soared to 7.45%, the highest since the euro was founded in 1999. Unsustainable and unaffordable. In comparison, Germany’s implied cost of borrowing for 10 years is 1.73%. Just as importantly, 7% represents a line in the sand of both practical and psychological importance to market movers and shakers, and Italy has well and truly crossed it - triggering off a klaxon alarm which loudly announces to the world that it is in deep, deep trouble.
The catalyst for the sudden increase in interest rates seems to have come from the fact that LCH Clearnet, a major City clearing house for buying and settling debt, has asked for a larger margin - or deposit - for trading debt of the euro zone’s third-biggest economy. Or, to phrase it another way, it is demanding more collateral from investors who buy and sell Italian debt. Therefore LCH has hiked the margin that traders must post to insure trade against losses from 6.5% to 11.65% - a huge increase and one that could potentially signal ruination for Italy ... if these levels were allowed to continue.
Forebodingly, LCH’s decision to up the rates is extremely reminiscent of a similar move last year involving Irish debt. On that occasion, after the clearing house increased Irish bond margin requirements, on November 10 2010, the bond yields inevitably surged and Ireland’s financing costs became utterly unsupportable - in turn forcing the government to ask for a bailout on November 22. In the same vein, this year LCH removed Portugal from its single-A basket on March 25. Again, predictably, yields reacted negatively and Portugal had to apply for a bailout on April 6. In other words, what LCH does matters, as it is the largest clearer of fixed-income products (such as bonds) in Europe and as such effectively guarantees the trades that takes place in the market. If LCH becomes concerned that there is an increased risk of default, then investors take note and follow its lead.
Bleakly, the picture is even worse when it comes to Italy’s short-term borrowing costs. The yield on one- and two-year Italian debt is now more than 8%, with an important auction of Italian debt (government bonds) due to take place on November 9. Obviously, under these conditions the return for the government will be substantially diminished - something it cannot afford to happen, quite literally. Revealing the depth of the financial crisis facing Italy, next year the country has to roll over more than €360 billion of debt - and, of course, its ability to do so is now seriously questioned. Furthermore, Italy’s total and combined debt stands at €1.9 trillion, and is getting bigger each day.
Naturally, the markets started to plunge when the news about yield rates came out. Italian stocks dropped 3%, while the benchmark German and French stock indexes fell more than 1%. German and French financial stocks, which are heavily exposed to Greek debt, were worst hit. In the United States, the Dow Jones industrial average fell 254 points, or 2%, to 11,916, in a sharp early sell-off. And so on.
With such developments, you hardly need to be a professional doom-monger to entertain the notion that Italy’s debt is spiralling out of control and it is in danger of defaulting. Contagion on stilts. Never mind about Greece, which looks like small beer now. To prevent this apocalyptic scenario, most analysts calculate that an Italian bailout could cost something in the region of €1.4 trillion - and getting bigger every day. For example, the extra costs incurred by the surging interest rates over the last day or so could alone see the Italian government having to fork out €7.6 billion in extra debt payments. That hurts.
ECB inaction
Clearly, the only financial institutions capable of mounting such a rescue operation are the IMF and the ECB - leaving aside sad fantasies about the Chinese becoming the saviours of the euro zone.
A ‘beefed up’ IMF was agreed by the G20 summit held in Cannes last week. More funds will be put at its disposal. Eg, British ‘exposure’ is set to increase from £10 billion to as much as £40 billion. However, non-euro zone members made it clear that they would not act as white knights. The political message is straightforward: euro zone countries have to clear up the mess that the euro zone has become. In short that means the ECB. And yet, as things stand now, that is not going to happen.
The German government is doggedly opposed to the idea of the ECB becoming a lender of last resort - or actually behaving like a national central bank. Merkel and her government fear that an ECB rescue of Ireland, Portugal, Spain ... and Italy would not only be hugely costly, but would have to involve so-called ‘quantitative easing’ on a massive scale. In other words inflation would be allowed to soar with all the negative consequences that follow, not least in terms of social stability.
As everyone knows, the European Financial Stability Facility does not remotely have the fire-power to halt the crisis by purchasing large amounts of Italian government bonds. The EFSF at the moment has €440 billion available, of which roughly half is expected to be consumed by the bailouts of Ireland, Portugal and Greece. So how about Italy as well? Just forget it.
In fact, the EFSF struggled to raise money in a paltry €3 billion auction on November 7. Which just about says it all. In the gloomy opinion of one market analyst, the EFSF is “basically doomed to be worthless” without a ‘beefed up’ ECB standing behind it. Without Germany sacrificing itself in the interests of global capitalism, there are grave doubts among investors about the EU’s scheme to ‘leverage’ the EFSF fund to €1 trillion as a ‘first loss’ insurer of bonds - which to them only seems to concentrate risk, not reduce it.
Even worse, the ECB has strongly hinted that it will not carry on indefinitely purchasing Italian debt - there will have to be structural change - hence Berlusconi’s imminent departure. Fuelling conspiracy theories to the effect that the ECB, under German direction, is bent on recreating the Third Reich. You do not have to buy into the hyperbole, but it is clear that Germany does want a closer union of the euro zone: indeed it has been perfectly open that with monetary union there must come fiscal union. Almost necessarily that means downgrading democracy and imposing the rule of technocrats and bureaucrats. However, at the moment, Germany is in no position to achieve that end: hence the paralysis.
But time is running out. There is near universal consensus that the G20 Cannes summit was a complete failure, if not a fiasco. Coming after the failure that was the Brussels meeting of October 26-27. Within three days, the much-trumpeted Franco-German ‘complete strategy’ solution - the supposed comprehensive package - which caused a temporary surge in share prices, collapsed in a pathetic and ignoble heap.
Therefore, the 50% ‘haircut’ (write-down) that private sector holders of Greek sovereign bonds “voluntarily accepted” - or so we read - was a myth. Truth be told, there was no resolution in terms of coupons, maturities or participation ratios - as was clear to anyone who looked beyond the headlines or examined the small print. Bluntly, the Greek bond-holders’ deal - the triumphant centre-piece of the rescue-plan, was a shallow exercise in PR. A stunt without any substance.
The same goes, of course, for the hypothetically ‘leveraged’ EFSF, it being a mystery - if not a virtual state secret - as to how the bailout mechanism will raise the borrowed funds and exactly who will provide the monies, or collateral, to fund the insurance scheme envisaged. The whole ‘rescue’ machinery cooked up in Brussels, as is now painfully obviously, was a piece of fiction designed to assure to markets.
However, the markets will not buy it - no matter how much the European leaders try to pull the wool over their eyes. Nor will the masses, especially when for them it is all pain and absolutely no gain.
Meanwhile, a further blizzard of grim data has come out of Europe, confirming that most of the region is already on the cusp of recession. Growth has reached a “virtual standstill”, acknowledged the EU commissioner, Olli Rehn. Euro zone retail sales fell 0.7% in September from the month before. German industrial output plunged 2.7%, the steepest drop since the depths of the crisis in January 2009. Factory orders fell 12%. You have to look very hard to find a silver lining.