24.11.2011

Fear and positioning

As the euro zone heads for possible disaster and 'economic Armageddon', writes Eddie Ford, both the US and UK governments have also admitted failure

George Papandreou and Silvio Berlusconi have both gone, replaced by unelected technocratic administrations that directly serve the interest of the bankers and finance capital. Hardly a step forward. Democracy is clearly an optional extra as far as the Eurocrats and capitalist class are concerned. Now Spain has a new government in the form of the rightwing Popular Party (PP) headed by Mariano Rajoy, who won a landslide victory on November 20, thanks to voters’ desperation to see an end to sky-high unemployment and general economic misery.

However, if anyone thought that this flurry of political ‘readjustment’ meant that the crisis in the euro zone was about to be resolved - or at the very least ameliorated to a more manageable level - then they need to radically rethink. In fact, the overall slide towards disintegration and disaster is gathering momentum, as it becomes increasingly apparent that that there is no rescue plan in the offing, nor any white knight saviours on horseback - like China - charging across the horizon.

Greek ‘unity’

Following a meeting in Brussels on November 22 with Jean-Claude Juncker, the president of the Euro Group - which assumes day-to-day political control over the workings of the euro currency - the new Greek prime minister of the interim or ‘unity’ government, Lucas Papademos, informed a press conference that the country needed the next tranche of €8 billion in bailout money from the International Monetary Fund, European Union and European Central Bank troika “no later” than the beginning of December; it just could not wait until mid-December, as previously believed (or hoped). If not, the government goes bust.

But the delay in payment continues. Juncker and his troika colleagues insist that the money will not be authorised until the three parties supporting the emergency government sign a ‘letter of intent’ promising to enforce the vicious austerity measures demanded by the troika - show us you mean it. Papademos has stated that he “expects” the party leaders to “do their duty”. At present, with elections pencilled in for February, the ‘unity’ government consists of the Panhellenic Socialist Movement, New Democracy (ND) and the populist, right-nationalist Popular Orthodox Rally - which, amongst other things, wants to ban all immigration from outside the EU, immediately deport all illegal immigrants, permanently block Turkey’s access to the EU and refuse recognition of Macedonia.

In a display of demagogic brinkmanship, ND leader Antonis Samaras last week stated that, while he was naturally “strongly committed” to a regime of ‘fiscal consolidation’ and ‘structural reforms’, the austerity plan needs to be “revised”. And, being a man of honour, obviously, there was surely no need for Samaras to actually put his name to this ‘letter of intent’ - his word being good enough. Clearly, Samaras wants to sufficiently distance himself from the austerity measures in an attempt to boost ND’s popularity ahead of the elections, whenever they are eventually held, hoping to form a majority government. Then brutally implement the cuts programme, regardless of what he may have said beforehand.

Absolutely no way, just not good enough. European commission president José Manuel Barroso ordered Samaras on November 22 to stop playing “political games” and just do as he was damn well told - giving him a one-week deadline to sign the letter. Apparently, Juncker and his fellow euro zone finance ministers intend to decide at a November 29 meeting in Brussels whether Greece qualifies or not for the next payment.

Meanwhile, the trade unions have called for another 24-hour general strike on December 1, with more action possibly planned for December 7. The Greek working class is not going to meekly wait for the butcher, whatever apron he may be wearing.

Spanish slide

Of course, the appointment of ‘Super’ Mario Monte to the position of Italian prime minister did not magically assuage the markets and government borrowing costs remain dangerously high, with the yields (interest rates) on 10-year bonds currently flat-lining at around 6.5-6.6%. Far too high to be sustainable, even if Fabrizio Saccomanni, director-general of the Bank of Italy, has maintained that Italy could cope with such high borrowing costs - unless, that is, they stayed at these high levels for a “considerable period”. In which case ...

Now, ominously, Spain is replicating the same pattern seen in Italy and Greece - Mariano Rajoy has not stopped the rot. Spain’s 10-year bond yields have reached 6.57% and show every sign of creeping up to the 7.0% figure, an indicator of deep trouble. And the possible need for a bailout. Step forward, contestant number four. Spain’s parlous state was highlighted on November 22 at an auction of short-term debt. Although buyers were found for €2.98 billion of three-month bills, the average interest rate more than doubled to just over 5.11% from almost 2.3% a month earlier - meaning that Spain was paying the highest interest in 14 years to sell short-term debt.

Delivering its verdict, the Fitch rating agency said the new government must “surprise” the markets with a “radical” fiscal and structural reform programme if it is to “improve expectations” of its “capacity to grow” and in turn cut debt within the confines of the euro zone. Gary Jenkins, head of fixed income at Evolution Securities, commented that it “doesn’t look great” for Spain - or indeed any other ‘periphery’ countries - with the “continuing trend towards ever higher yields to get anything done”; a broader malaise that is afflicting the euro zone as a whole.

Rajoy’s government is now frantically scrambling around to find ways to shorten the paralysing hiatus set to last until mid-December, when the new government is finally able to take formal charge under Spanish law. One top PP official, Miguel Arias Cañete, ventured that the administration will “have to go beyond strictly legal requirements because the markets are not going to wait”. True enough. HSBC strategist Madhur Jha gloomily concludes that the “double whammy” of surging borrowing costs and a slide back into recession risks inflicting “serious damage”, pushing public debt above 86% of GDP over the next three years - it being evident to him that over the last few weeks the “window of opportunity is rapidly closing for Spain and other peripheral countries”, unless something is done to “negate all talk of a euro break-up”.

Now hard rains are falling on Belgium too - the start of the Benelux contagion? Suddenly investors have appeared to lose confidence in a country that has not had an ‘official’ government for 18 months - hence the yield on Belgian 10-year bonds rose to 5.10%, the highest since 2002. Which takes the spread between Belgium’s borrowing costs and Germany’s to around 315 basis points, a euro-era high. There are also added fears about Belgium’s long-term growth prospects after its GDP completely stalled in the third quarter (ie, at an unimpressive 0.0%). Previously, above-average growth had allowed Belgium to put off austerity cuts. You could see why, given that such measures could literally lead to the break-up of the country, with regionalist and separatist tensions running high. Amid continuing deadlock, the caretaker government of Yves Leterme is now in the process of trying to hammer together a budget for 2012, which at the moment looks like the 2011 budget recycled. Not something that enamours the markets. Overall, Belgium now looks like the riskiest sovereign issuer in the euro zone after Portugal, Ireland, Italy, Greece and Spain - the so-called PIIGS.

As time goes by, it becomes painfully obvious that the destiny of Spain, Italy and others - even Belgium - lies almost entirely in the hands of Germany and France, the AAA creditor core, the EU authorities and the ECB; they will decide whether the ‘distressed’ countries get thrown a lifeline or just get pushed further into a downward spiral of austerity, depression and possible economic-social catastrophe. Having said that, it is just as obvious that the sheer size of Spain’s and Italy’s borrowing needs - leaving aside Portugal, Belgium, etc - leads to the logical conclusion that projects to simply enlarge or ‘leverage’ the European Financial Stability Facility are totally inadequate. Instead, the logical deduction is that the ECB and Germany can provide the financial firepower necessary to prevent the euro zone sliding into the abyss, in the process dragging down the entire world economy.

Stability bonds?

Therefore, there has been increased pressure upon Angela Merkel to give some ground on the ECB and the question of Eurobonds - or should we perhaps say “stability bonds”, as recently suggested by Barroso and the EU commissioner, Olli Rehn? For instance, David Cameron in a speech to the UK trade conference on November 10, said that the ECB should now act as the lender of last resort, given that Italy’s “current state is a clear and present danger to the euro zone” and that the “moment of truth” is approaching.

Turning up the heat, Barroso met Merkel on November 22 in a further endeavour to get her to drop her implacable opposition to Eurobonds. His plan is to see the ECB launch a massive quantitative easing programme in order to mop up large quantities of sovereign debt, quickly followed by the creation/introduction of Eurobonds - thus enabling weaker countries, or PIIGS, to borrow with the security of Germany’s credit rating behind them.

However, prospects do not look good. The German government appears to be digging in. So Michael Meister, the finance spokesperson for Merkel’s Christian Democratic Union, asserted that Germany is “sticking” to its current plan for the euro zone crisis - namely, austerity and ‘structural reforms’ as the short-term solution to the crisis, supposedly, along with bank recapitalisation and a swingeing ‘haircut’ (write-down) on Greek debt. For the longer term, it seems that Germany wants changes to the EU treaty so as to bind euro zone members closer together - more union, not less.

Tensions between France and Germany have become especially acute - the former nigh-on desperate for the ECB to take a bigger role in the rescue of the currency union. The nightmare might come true and France could lose its precious triple-A credit status. Already, its government bond yields are climbing at a fairly alarming rate - getting to 3.48%. A bond auction by France on November 24 will be closely watched to gauge the markets’ confidence that the country can sort out its debt situation. Many market analysts have warned that it might not be the steady sale usually expected from a country with a coveted triple-A - it is now all about “fear and positioning”, explained one analysts who works for Citi, the New York-based international financial conglomerate.

Just to make Sarkozy even more jittery, Moody’s rating agency warned that France’s creditworthiness was open to question. In his weekly note, Alexander Kockerbeck - Moody’s investors service analyst - wrote that if the high borrowing costs persist for an extended period it would have “negative credit implications” for France’s triple-A credit outlook. Further elaborating, Kockerbeck sketched out how France faces “significant downside risks”, the chance being that higher taxes and lower spending will “undermine” the economic growth it needs - or is expected to attain - in order to ‘balance the budget’ by 2016, as originally pledged.

Events in Europe are plunging the US administration into despair, fearful of the consequences. After all, a report published by the US commerce department showed that real disposable income fell 2.1% in the third quarter after declining 0.5% in the prior three months and that GDP grew at an annual pace of 2% in the period, down from the previous estimate of 2.5%. Anxious, Barack Obama lambasted EU leaders for suffering from a “problem of political will” - warning that unless they get their act together, then the world is going to continue to see “market turmoil” and instability.

US and UK failure

Yet, in some respects, the US government is in no position to talk, having reached its own impasse. Even though it came as no great surprise, to put it mildly, the 12-member, bipartisan, bicameral Congressional ‘super-committee’ charged with overseeing cuts in the budget deficit finally admitted on November 21 that it had “failed” to come to any agreement on how to reduce the country’s $15 trillion deficit by $1.2 trillion - whether through spending cuts or tax rises or a combination of both.

The Bush-era tax cuts proved to be the kryptonite that defeated the ‘super-committee’. In June 2001, president Bush signed into law one of the most sweeping changes in US tax history - favouring in an obscenely disproportionate way the mega-wealthy. The Republicans on the ‘super-committee’ dug in against any agreement that did not extend the current Bush-imposed income-tax rates. Democrats, on the other hand, held out for higher rates on families with taxable income over $250,000 a year - which for the Republican right made them crazed crypto-communists.

In theory, this predictable failure to reach a consensus means that automatic spending cuts will come into operation in 2013 - amounting to $600 billion over 10 years with regards to the defence budget and domestic spending. Talking tough, Obama has threatened to deploy his presidential veto to prevent the Republicans from blocking these automatic cuts. Financial chaos reigns in Capitol Hill, contributing to the very “market turmoil” that Obama rebuked the EU leaders for inducing by their non-action.

Failure has hit the shores of the UK too. On November 21 David Cameron acknowledged the obvious fact that tackling Britain’s debts was “proving harder than anyone envisaged” - although such an outcome had been precisely “envisaged” by just about every serious commentator. Cameron told the Confederation of British Industry that “we are well behind where we need to be” and that the government does not have a “silver bullet” to return the country to the glorious path of growth - now tell us something we don’t know. To add to the gloom, next week in his autumn statement George Osborne will have no choice but to respond to the latest statistics produced by the Office for Budget Responsibility and cut his forecasts for economic growth both this year and next. Slower growth or no growth, needless to say, ensures that the government receives less money in tax revenues and has to spend more on benefits - therefore government borrowing goes up, not down. Not exactly rocket science, you would think.

Or, to put in plain language, the coalition government has not got a hope of closing the deficit by 2014-15. Some City analysts predict that the chancellor will not eliminate it until 2017-18. Many expect the OBR to cut its growth forecast for this year from 1.7% to about 1% and next year’s forecast is likely to fall to just 0.6% from 2.5% - a huge drop. And all this is based on the best-case scenario, whereby the euro zone does not completely collapse into “economic Armageddon” - using the words of Vince Cable on November 17, when he reminded us that the treasury and the Bank of England are making “contingency plans” for such a calamitous eventuality.

But for all that, like a blind puppy, Cameron was adamant that he was “sticking to plan A” and that reducing the deficit was “line one, clause one and part one” of the government’s strategy for the economy. Given that the overriding priority is to keep the markets sweet and prove your determination to ‘balance the books’ - as the Greek working class know all too well from bitter experience - Osborne could next week signal plans for new cuts after the current spending round ends in 2015. Keep on kicking the working class - until it bites back.