With the negative example of the crisis of the 1930s before them, bourgeois economists and politicians are struggling violently – if in vain – to avoid the “mistakes” of that era. Anxious to blame “mistakes” rather than capitalism itself for the crisis that devastated the capitalist world at that time and blighted millions of lives – leading ultimately to world war – the bourgeois publicists continue to urge the policy makers to take the opposite road from that taken by their forebears. Their forebears, however, just as the bourgeoisie today, twisted their way from one disastrous policy to another in their equally futile attempts to escape their own massive crisis of overproduction.
The focus at the moment is on the situation in Europe which has taken a marked turn for the worse with Ireland being forced in November to apply for support from the EU and the IMF.
Trouble for Ireland
Ireland, despite the fact that its banks had passed all the EU ‘stress tests’ conducted only last July, and despite also the stringent austerity imposed on its people a year ago, found its borrowing costs rising higher, to such an extent that interest payments were no longer affordable. It was in these circumstances that Ireland, like Greece before it, was forced to call on the eurozone fund put together in the wake of Greece’s collapse to support (at a price) eurozone countries that found themselves in trouble. The assistance comes in the form of loans at a rate of interest lower than the market rate, but loans that are nonetheless guaranteed by the lender taking security over the borrower’s most valuable assets. Ireland cannot default in this loan for it would be stripped naked if it did.
As it is, Ireland has, in return for the assistance, been forced to accept humiliating terms. Day to day control of its economy has been handed over to the IMF and the EU after legislation imposing ever worse austerity measures on the population was passed narrowly through the Irish parliament. The Financial Times tells us that: “Dublin will only recover its financial independence if the loans drawn down, reaching up to 70 bn euro, are repaid at an annual average 5.8% interest within 7 years” (see Victor Mallet and David Oakley, ‘No early exit from vicious Spanish debt circle’, 16 December 2010).
On 6 December, Patrick Jenkins and Sharlene Goff wrote (Financial Times, ‘Ireland to speed up shrinking of banks’):
“Ireland will accelerate the pace of shrinking the country’s banks, as a quid pro quo for continued access to emergency European funding.
“The banks will have to sell tens of billions of euros worth of legacy loans in a matter of months, say people briefed on the details of Ireland’s €85bn ($114bn) bail-out by the European Union and the International Monetary Fund.
“’The deleveraging has to go fast. That was part of the deal to keep European Central Bank funding’, said a person involved in the discussions.
“The ECB has been a key supplier of short-term funding to the Irish banks as their plight has worsened in recent months. In October, Ireland’s banks took €130bn of so-called liquidity from the ECB, more than any other eurozone country and up 45 per cent on three months earlier.
“The government is expected to force them to reduce their loan-to-deposit ratios from about 150-160 per cent to 110-120 per cent by 2013. To meet these targets analysts expect Bank of Ireland to have to sell about €20bn of loans, while Allied Irish may have to dispose of a further €15bn.
“One banker said that the deal with the ECB was that €10bn would be sold within the next 12 months, with a similar pace maintained over subsequent years.
“Bankers expect higher quality assets, such as the banks’ prime residential mortgage loans, particularly those based outside Ireland, to be among the first on the block. Bank of Ireland has about €60bn of mortgages, about half of which are based in the UK, while Allied Irish has about €30bn of Irish home loans”.
Quite rightly, “Sinn Fein’s Mary Lou McDonald slammed the EU and the IMF for behaving like loan sharks – extending credit at extortionate rates to pay back German, French and British bondholders who invested in private sector banks. She also condemned the EU and IMF decision to force the 26 County state to pump the last of its wealth and savings – the National Pension Reserve Fund – into its failed banking system as ‘an international scandal’” (Victor Mallet and David Oakley, op.cit.). In other words, to keep Irish capitalism going, the Irish people are being FORCED without any consultation to tender the savings and pensions as security.
The future looks bleak for Ireland: “It is estimated that the banking debt of this nation, which has a population of only 4.6 million, may be substantially more than 100 bn euros. That is 100,000 million, and rising. When we were at school it amused our science teachers to dazzle us with astronomical statistics – so many myriads of light years, so many zillions of stars – but the numbers that we are being forced to count on our too-few fingers now have nothing to do with the fanciful dimensions of outer space. They represent precisely the breadth and depth of the financial hole into which we have toppled headlong” (John Banville, ‘The debtor of the western world’, New York Times, 18 November 2010).
Ireland’s chances of avoiding sinking into the third world look grim at the moment. For it to survive at all it needs to hang on to its foreign investors, in particular those from the US, who have been delighted at the relatively low rates of pay expected by skilled and literate Irish workers as well as by the low rates of corporation tax exacted by the Irish government. This latter is particularly attractive as it enables US companies to attribute a high proportion of their earnings to Irish operations for tax purposes, avoiding much higher levels of tax in the US. Several companies have therefore warned that if the Irish tax rate goes up they may well pull out. “Ireland is heavily dependent on the US: 600 plus American businesses there employ more than 100,000 people, about 70 per cent of all the jobs supported by the Industrial Development Agency, which promotes inward investment”. Furthermore, “the US accounted for more than half of all the inward investment into Ireland over the past 5 years, according to Ernst & Young”. In fact, US companies “have invested $165 bn in Ireland, more than in Brazil, Russia, India and China put together” (Ed Crooks, ‘US businesses urge Irish to keep low tax’, Financial Times, 26 November 2010).
As is well known, however, the Germans and French feel that low corporation tax rates have been giving Ireland an unfair competitive edge vis a vis their own economic ambitions. If corporation tax in Ireland goes up and, as a result, foreign investors withdraw and economic activity seizes up, then Ireland will be unable to pay its debts, including, it should be said, no inconsiderable debts to French and German banks, to say nothing of the European Central Bank. On the other hand, if, in addition, there is no increase in export income, as seems probable, then it remains hard to see how Ireland is going to be able to service its debts anyway. The burden that will fall on the working class in terms of ever higher taxation and ever lower levels of services and benefits is shocking to contemplate.
We can expect Irish rebellion to be on the cards in the not-too-distant future. There is already a real possibility that the Irish people will opt for a government that takes the attitude ‘Can’t pay, won’t pay’, which besides defaulting on Irish sovereign debt will unilaterally opt out of the eurozone.
Troubles for other European countries
It is clear that it is not only Ireland in Europe which is in deep trouble.
Spain, an economy much larger than Ireland’s, considered by some as ‘too big to bail’, is, along with Portugal, Greece, Italy and even Belgium, finding that the costs of borrowing are increasing sharply. Whereas in November it was still able to borrow at rates of between 2.36-2.65% (depending on length of loan), in December it had to pay 3.45/3.72%. Its banks (some of which failed the ‘stress tests’ that the Irish banks actually passed) are in trouble for much the same reason as Ireland’s are, i.e., the huge sums advanced for the purposes of land purchase and construction during the property boom which has since collapsed. Their problems relate partly to the reduction in prices at which property can be sold, and partly from reluctance to sell at these low prices especially when sale realises a loss that could be avoided if property prices were to recover. This causes liquidity as well as insolvency problems. At any rate, Spanish banks have outstanding loans due to them from property loans amounting to some $580 bn, out of which no fewer than $240 bn are ‘problematic’. According to Victor Mallet in the Financial Times of 14 December, “Spanish commercial banks and unlisted savings banks need about $22.8 bn in extra capital to cope with unrealised losses in their domestic operations” (‘Spanish banks ‘require €17bn’).
Because of the danger posed by this shortfall, the rating agencies have been downgrading Spanish sovereign debt, and threatening to downgrade it still further, which is why Spain is having to pay higher rates of interest in order to maintain its borrowing requirements. Next year Spain will need to raise some €300 bn in conditions where “market prices suggest that there is a one-in-four chance that Spain will default over the next five years”. As Victor Mallet (op.cit) observes:
“One unknown factor is the point at which the Spanish government might decide it makes no financial sense to pay a very high rate of interest … in order to stay in the market”, i.e., when it may decide to default.
If Spain is in trouble, it is certainly not the only one. If there is a 25% probability of Spain defaulting some time in the next 5 years, “For Greece, there is a probability of more than 50 per cent, and for Ireland and Portugal more than 30%,according to credit default swap prices [i.e., the cost of insuring against default]” (Victor Mallet, ibid.).
In the eurozone as a whole governments in 2011 will have to repay or refinance no less that €560 bn, which is some €45 bn more than in 2010. €100 bn are due for issue in January alone.
Factors that may keep interest rates down
An interesting factor that has begun to intervene to counter the rising trend of interest rates on sovereign debt is the willingness of China to invest some part of its massive trade surpluses in the purchase of European bonds. According to Jamil Anderlini and Peter Siegel (‘China extends help to tackle euro crisis, Financial Times, 22 December 2010), “Beijing has emerged as one of the more enthusiastic backers of distressed European sovereign debt in recent months”. No less a person than China’s president, Hu Jintao, said during a trip to Portugal in November that his country would take ‘concrete measures’ to help Portugal – which is taken to mean that China will purchase Portuguese bonds. And in October Wen Jiabao, China’s prime minister, in Athens undertook to purchase Greek bonds and increase foreign investment in the country. China has also contributed in generous amounts to the European bail-out fund. Jamil Anderlini and Peter Siegel (op.cit.) comment that “The EU is China’s biggest export market, with two-way trade valued at $434bn in the first 11 months [of 2010], and Beijing has a strong interest in supporting regional stability”.
These huge purchases – on the part of China and, as we shall see, the European Central Bank, and the undoubted ability of both to make further enormous purchases as necessary – may also be of some value in undermining the noxious influence on already-damaged markets of those such as hedge funds who are able to manipulate markets through the sheer size of their investments, thereby operating with loaded dice in the speculations of casino capitalism, to the advantage of the parasitic billionaires who provide them with the bulk of their investment funds.
Recent developments in the role of the European Central Bank
In this context it is interesting to see that the European Central Bank – no less – has been engaging in what one might term as ‘counter’ market manipulation against the speculators:
“It is the battle that could well determine the fate of the euro.
“On one side is the European Central Bank, which is spending billions to prop up Europe’s weak-kneed bond markets and safeguard the common currency.
“On the other side are hedge funds and big financial institutions that are betting against those same bonds and, by extension, against the central bank, that mighty symbol of Europe’s monetary union.
“Since May, when the Greek debt crisis exploded, the European Central Bank has bought an estimated $69 billion of Greek and other government bonds. It has also indirectly injected hundreds of billions dollars into weak banking systems in Greece and Ireland.
“But the speculators keep coming back. After the bond purchases fell to zero in October, the central bank waded back into the market aggressively last week, buying about $2 billion of debt securities, mostly Irish and Portuguese securities, traders said.
“Already, the central bank owns about 17 percent of the combined debt of Greece, Ireland and Portugal, Goldman Sachs estimates. Yet in the bank’s mano a mano with the bond market, psychology could be more important than money. No single hedge fund, after all, can hope to outgun the central bank.” (Graham Bowley and Jack Ewing, ‘Central bank and financiers fight over fate of the Euro’, New York Times, December 7, 2010).
David Oakley and Ralph Atkins confirm:
“The ECB revealed on Monday [13 December 2010] that it had spent €2.67 billion [in one week!] buying bonds … its bond purchases helped stabilise the Portuguese and Irish bond markets. Portuguese bond yields have fallen nearly 1 percentage point to 6.30 since the end of November, whilst Irish bond yields have fallen by a similar amount, to 8.08%.” (‘ECB bond buying hits highest level since June’, Financial Times, 14 December 2010).
This will have delivered a slap in the face to any hedge funds who were betting against the Portuguese and Greeks through purchase of credit default swaps (insurance bonds) whose price they believe would rise as default becomes more likely as interest rates rise.
There are nevertheless those who believe that the ECB is playing with fire:
“Since the European sovereign debt crisis threatened to destabilise the eurozone in May, the European Central Bank has taken a disproportionate share of the firefighting burden while politicians have struggled to reach agreement on how to prop up the monetary union.
“Many dodgy assets have come on to the ECB balance sheet as a result of its bond purchasing programme. Now, with Ireland under pressure, the ECB is clearly concerned that Irish banks have taken around a quarter of the emergency liquidity it has provided. Are there genuine grounds for concern about its solvency?
“On the face of it the balance sheet of the eurosystem – the consolidated balance sheet of the ECB and the national central banks of the eurozone – would look racy even to a high-rolling hedge fund manager. Liabilities of €1,886bn are equivalent to more than 24 times the capital. Put another way, a fall of only 4.3 per cent in the value of the assets would wipe out share capital and reserves, and that is without marking its emergency bond purchases to market.
“The ECB’s own balance sheet is a little less weak, with liabilities standing at more than 21 times capital. But that scarcely changes the picture. It would not take much to push the eurosystem into technical insolvency if it is not there already.
“There is no escaping the fact that the equity is very slender in relation to the credit risk arising from the ECB’s lender of last resort operations and the poor quality collateral it has been obliged to accept since the financial crisis began.” (John Plender, ‘Eurozone lifeboat strains under pressure of bail-outs’, Financial Times, 17 November 2010).
While Mr Plender would quite confidently state that European states would not allow the ECG to fail, in the current economic turmoil anything seems possible. After all, who would have thought Lehman Brothers would have been allowed to fail?
Meanwhile, government after government is imposing austerity on the masses of the people – lowering wages, increasing taxes, reducing public services and welfare benefits – as they attempt to reduce their indebtedness. Any government that contemplates attempting to swim against this noxious tide is brought into line by the bond markets. Hungary, for instance, apparently believes it can resist austerity and is proposing to boost growth through income tax cuts. It would seem that only the US can get away with that! In Hungary’s case, the government’s policies “prompted Moody’s to cut Hungary’s sovereign rating by two steps to its lowest investment grade” and some time in 2011 Hungary’s bonds will probably be reduced to junk status. This will make interest payments on its not inconsiderable public debt soar into unaffordability, making austerity the only option for meeting payments.
Of course the bourgeoisie is well aware that all this austerity makes matters worse. It does so by further impoverishing the masses at a time of crisis that was in the first place caused by the low purchasing power of the masses in relation to the mass of goods and services surging from capitalist production.
But what alternative can there be to cuts?
The only way out of the crisis that the bourgeoisie of any country can perceive is to increase its competitivity in relation to other bourgeois, which means cutting its costs. Cutting wages and social benefits of the masses is one way of doing this. Cutting interest payments and loan repayments to creditors from other countries is of course another way. A third way is allowing the national currency to depreciate, although this would only be contemplated in extreme emergencies.
Komal Sri-Kumar writing in the Financial Times of 14 December, argues against spending cuts as counterproductive, purporting to draw lessons from history:
“In August 1982, Mexico was the first to declare that it could not make principal and interest payments as scheduled. Brazil, Argentina and most of the region followed. The IMF and the US Treasury attempted to defuse the debt contagion by imposing austerity and adding to the countries’ debt. However, the situation worsened with sharp devaluations and a deep recession. The ratio of Mexico’s net public debt to GDP surged from 34 per cent in 1981 to 81 per cent by 1986.”
Likewise in the case of Greece which, having been forced to resort to heavy austerity, is now in a worse position than before with its bonds having risen to an incredible 11.5%. Sri Kumar concludes therefore:
“The Latin American experience also suggests that there will be adverse implications for European debt and equity markets. The deterioration in debt ratios will discourage voluntary lending to the affected eurozone countries and, in the absence of functioning capital markets, those governments will become permanent supplicants for official aid. Poor economic growth prospects will dampen equity market performance as well since an increasing percentage of savings will be destined toward debt service rather than domestic investments. The vicious cycle of austerity, declining GDP and worsening debt ratios means that there will be no self-correcting cure for the malaise in debt and equity markets.” (‘LatAm lessons for eurozone to avoid lost decade’, Financial Times, 14 December 2010).
What is advocated instead is requiring creditors to take ‘haircuts’, i.e., to force them to accept lower rates of interest, payment over a longer period of time and/or reduction of the capital sum to be repaid. However, like all bourgeois ‘solutions’ to the crisis, this is not a solution at all!
“An oft-made assumption is that governments can renegotiate with their creditors the terms and conditions of their debt instruments without this having major repercussions on the rest of the economic and financial system. This assumption is largely based on the experience of developing countries with underdeveloped financial systems and mainly foreign creditors. What is generally not well understood is that, in advanced economies, public debt is the cornerstone of the financial system and an important component of the savings held by citizens.
“As recent events have shown, the simple fear of a default or of a restructuring of public debt would endanger the soundness of the financial system, triggering capital flight. Without public support, the liabilities of the banking system would ultimately have to be restructured as well, as was done for example in Argentina with the ‘corralito’ (freezing of bank accounts). This would lead to a further loss of confidence and make a run on the financial system more likely. Administrative control measures would have to be taken and restrictions imposed. All these actions would have a direct effect on the financial wealth of the country’s households and businesses, producing a collapse of aggregate demand. Taxpayers, instead of having a smaller burden of public debt to bear, would end up with an even heavier one.
“Many commentators fail to realise that the main impact of a country’s default is not on foreign creditors, but on its own citizens, especially the most vulnerable ones. They would suffer the consequences most in terms of the value of their financial and real assets.” (Lorenzo Bini Smaghi, ‘Europe cannot default its way back to health’, Financial Times, 17 December 2010).
This is correct. Of course, it is undeniable that relieving Latin American countries of part of their debt burden did assist in the recovery of many of them, especially Brazil. Also important, however, were (a) the fact that, because land and labour were very cheap, investors began to flock there to generate economic activity and (b) the fact that at the time there were markets able and willing to absorb their products. Nowadays the shrinking market is saturated with the products of these low- cost countries, making it much harder for the various cost-cutting exercises of the European bourgeoisie to bear fruit in terms of capturing new markets.
Quantitative easing, which really amounts to allowing the purchasing power of a currency to fall, which has the effect of making exports cheaper while imports are more expensive, is no solution either. Currency depreciation tried by both the US and the UK with a view to making their products more competitive (while both strenuously denounce China for not taking measures artificially to appreciate its currency) is not proving a great success. According to Philip Stephens in the Financial Times of 23 November, (‘An Irish crisis and a British nightmare’), the Bank of England’s “monetary policy committee has all but suspended its inflation target”.
“That said, the MPC has made an intelligent choice. Competitive austerity may be the current European fashion, but growth is the sine qua non of successful repair of the public finances. Governments cannot deflate their way back to budget balance – a proposition that Ireland’s latest austerity package may yet test to destruction.
“What the policymakers do not say is that they have simply chosen higher inflation over more direct ways of taking money from consumers.”
In other words, inflation reduces the purchasing power of both individuals and governments just as effectively as actual wage and budget cuts. It is perfectly clear that currency depreciation is no recipe for recovery if it cannot lead to the capture of markets, which in the present situation of crisis seems difficult.
Whichever way the bourgeoisie looks, and whichever way bourgeois politicians try to convince the proletariat that there is escape from crisis under the conditions of capitalism, the fact is that there is no cure for capitalist crisis. After destroying millions of lives, and setting back civilization by several decades, it will eventually burn itself out for the whole process to start again, unless in the wars that inter capitalist contradictions invariably generate the ecology of our planet is damaged beyond repair.
Humanity is screaming out for proletarian revolution before it is too late!