Greek Tragedy or Hope? Lessons from the Global Financial Crisis

By Leonard Gentle · 22 May 2010

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Picture: solidnet Photos
Picture: solidnet Photos

In the streets of Athens, tens of thousands march and protest, unions strike and even sections of the police and public servants join hands against an austerity programme. Daily, we go through a pattern of announcements from European Union (EU) finance ministers, the International Monetary Fund (IMF) and European Central Bank (ECB) promising bailouts and relief from market speculation, only to have the whole thing declared insufficient the next day, while “market jitters” continue to drag the euro down. 

Today we can truly say - much like was said in the famous Manifesto of 1848 - that a “spectre is haunting Europe”. Except, this time it’s the spectre of the collapse of the EU as a grand project with a single currency.

Greece, facing the threat of defaulting on its debt obligations, has been granted a bailout to the tune of nearly one trillion dollars. The ECB has defied its own charter by bailing out a member state, buying Greek bonds to shore up confidence in the country’s ability to pay.

Before the IMF got involved, Greece sought a European bailout solution motivated, of course, by the desire to avoid borrowing from the IMF, which, as every African country knows, is a recipe for disaster. But this has not stopped the EU and the IMF from forcing Greece to restructure anyway. Thus, an EU-IMF austerity programme has been sold to the public as the necessary medicine for the “irresponsible” borrowing of the Greeks. Public sector employees are losing about 30% of their income. Retirement age has been raised to 67, whilst pensioners are losing from 15-30% of their income. Young workers will be paid less money than the minimum wage (about 580 euros). And at the end of the day, in 2014, if everything goes as planned, Greek debt will be 150% (now it is 115%).  

As a member of the eurozone - where monetary policy is determined by the ECB and not individual states - Greece cannot devalue its currency to give itself dollar rents. So instead, it turns on its own people: cutting salaries, raising VAT and promising to cut its budget deficit of 14% by 4% this year.

Interestingly enough, in the IMF-EU demand for austerity measures, there is no talk of cutting the military budget. Greece is the world’s second biggest per GDP spender on military equipment after the USA. Why? Because, along with Turkey, its geopolitical location in respect of the USA’s wars, and proxy wars, in the Middle East and the oil-rich Caucuses makes it a key geographical outpost for military adventures.

The Greek crisis gives a lie to the media talk that the 2008/9 “financial crisis” is over because some major countries, the USA, for example, and South Africa, have emerged from the recession. An immediate cause of this crisis, and stubborn feature, remains the securitisation of debt and the financialisation of capitalism. The recession might be temporarily over, but the structural and systemic causes of that crisis are still with us and the spectre of long-term decline continues.

What is the source of the Greek debt?

When the EU was formed, the Maastricht criterion required member states to have budget deficits of no more than 3% of GDP. This figure of 3% crops up everywhere -- even here in South Africa where it was the figure used in the 1996 GEAR strategy, as a signal to speculators that governments would not crowd out private businesses and will keep borrowing low.     

Greece was, however, hit by two body blows. On the one hand, Greece never had a budget deficit of less than 3% as required when joining the EU. According to economist, William Engdhal, as early as 2001/2, the Greek government was offered a chance to put its liabilities "off the books." Instead of showing a deficit to GDP ranging from 6-8%, as was the case, they were only showing around 3%. In November 2009, it was revealed that through the use of complex derivative instruments, which Goldman Sachs, especially, sold to the Greek government, the actual debt to GDP was 12.7%. The second blow was that Greece, along with all the EU states, got drawn into the massive bailouts paid to offset the 2008/9 global financial crisis.       

The Greek state did not go to banks to borrow money the way you and I may attempt to get a loan to buy a car. For most developed states in the world today, borrowing is now about selling bonds, known as “going to the markets.” Debt is securitised under neoliberal globalisation -- meaning debt can be sold on to others who make money out of speculating on the debt. For instance, in the case of the 2008 sub-prime crisis in the USA, housing debt was repackaged and sold on. 

These days, states sell bonds, which are an undertaking that, at a certain time, the speculator buying the bond will get their money back plus interest. But, by selling on the bonds, the value of the bond varies, and also, states can and do change interest rates, which means that anyone buying bonds is gambling on three things going well: that the state is secure enough to honour final payment; that interest rates will be favourable and that inflation is low (because inflation eats away profits).

In the case of Greek government bonds, corporations, banks, hedge fund holders and speculators bought these bonds - thus lending Greece money - because bonds are a relatively “safe” way of making money. They then gambled on the security of these bonds, betting that Greece would not default on its debt or that the EU, through a bailout, would not allow Greece to default. This is high stakes gambling of the worst order. 

The gamblers may preach free markets, but they are “too big to fail,” and they know this…so they are even more “irresponsible.” If the world were run strictly according to the ideologies of the free marketers then the gamblers would get their just desserts for their risky, irresponsible ventures and lose their money.

The ratings agencies - Standard and Poor’s, Fitch and Moody’s - are also implicated in this casino game. They have become the chief orchestrators of the process. They are the ones advising speculators about where to gamble by rating the security of bonds. The ratings agencies have downgraded their rating of Greek bonds to “junk” status and are thus contributing to the market frenzy of “selling Greek bonds.”

Who are the principle gamblers on Greece? Mainly, German and French banks. They are the ones who stand to lose the most by a Greek default. They are also, understandably, the ones at the centre of moves in the EU to bail out Greece, although Germany’s position is contradictory. On the one hand, German banks do not want to lose their money, but on the other, Germany is Europe’s biggest exporter. A lower exchange rate for the euro against the dollar immediately makes German exporters gain billions of surplus euros. So the Germans have been in no great hurry to bolster the euro.         

France has been at the centre of trying to protect the EU and the euro. Sarkozy, the most free-market, rightwing, French president for years, actually played a high stakes gamble. France threatened to leave the euro if Germany didn’t support a Greek bailout. This, not really to pull out of the euro, but to force Germany to assist with the bailout.

And now the ECB has decided to bail out Greece by buying bonds with a treasure chest of US$780bn. In return, Greece has to reduce its budget deficit drastically. The ECB buyout of bonds is in effect a form of what has come to be known as “quantitative easing”, essentially printing money. This notion of printing money is, of course, well known in Africa and is the measure for which Zimbabwe’s Robert Mugabe was roundly condemned. 

All of this is to keep the bondholders happy and to allow the speculators to thump their chests that they bet cleverly. But the bailouts are by definition only stopgaps. Whilst assuaging the speculators, they are actually increasing Greece’s debt.

What are the consequences?

Greece will default at some stage. The only questions are: will it do so alone? And what will the consequences be for the euro and the EU? There is talk of even expelling Greece and staggering on with a smaller EU. But the spread of the contagion via the PIIGS (Portugal, Italy, Ireland, Greece and Spain) and the standoff between France and Germany does not inspire confidence in such a scenario. 

Spain and Portugal have even more sovereign debt than Greece. Italy and Britain are also vulnerable (the USA, of course, has the largest debt of them all but no one is betting against them defaulting). Spain and Portugal’s bonds have also been downgraded by Standard & Poor’s and both have announced undertakings to cut their budget deficits. In fact, the speculators were betting precisely that the threat of a contagion would force the EU to bail the PIIGS out.

But by so betting, the speculators are actually unleashing the very thing they fear. That the debt burden and the popular resistance to the austerity cuts may force these states to default and thereby make the bonds they hold worthless.

As regards South Africa, the EU crisis has had conflicting effects on our country, reflecting our contradictory insertion in the world. On the one hand, as South Africa’s second biggest export market (China has overtaken it), the EU crisis threatens demand for our exports. This is compounded by the falling euro against the dollar and the rand, which makes imports into the EU more expensive. This is also reflected in some resource-based South African companies’ shares declining.

But, we now live in the era of financialised capitalism -- a world of stock and bond speculation, which has long de-linked from the trade in goods. And in this world, speculative money moves towards opportunities in what is called “emerging markets.” In this regard, the EU crisis continues the trend of speculators borrowing in the EU, where interest rates are negligible and buying bonds in South Africa, where, despite some cuts, interest rates remain very high by current global standards. And when these become “risk averse,” they buy gold -- so the gold price is exceeding even its own recent record heights. All of these money movements are reflected in the demand for South Africa’s currency and therefore the high value of the rand.                

This is, of course, not a sustainable scenario for South Africa and we would be well advised to study the case of Argentina in 2001/2 where such hot money inflows rapidly reversed, leaving the country in virtual overnight collapse.

Politically, the Greek crisis has strengthened the hand of neoliberals in South Africa (including the ANC government) with the sentiment that we should all be grateful to Trevor Manuel for tight discipline during his regime, which saved us from the spectre of Greek-like debt.

Many here would say, “There but for the grace of Trevor go we!” This would be wrong. The very thing that makes South Africa apparently strong now - the strength of its bonds - is what puts South Africa’s debt at the mercy of the markets. This external debt has risen to $80 billion, triple what Nelson Mandela inherited in 1994. What the Greek crisis should teach us is that such exposure to the bond market is to be vulnerable to a harsh world of speculators who can bet on your very oblivion as a way of making money.

The default of Greece may be certain; the end of the euro may be on the cards, but by no means certain; the implosion of the EU is not an impossible scenario. But whether this is the source of a revival in progressive politics and a renewed fighting spirit in the working class, or whether the implosion is in the form of festering reactionary conflict, are, in the abstract, equally likely scenarios.

Recent waves of African, Muslim and Eastern migrants into Italy and Greece have spawned xenophobia and rightwing, crypto-fascist parties. All of these issues are sources of reaction and potentially internecine violence that can be unleashed by a dramatic decline of living standards across Europe and may even be used by beleaguered governments as a counter to the tide of popular resistance now coming out on the streets of Greece.

The parallels with Africa are clear: The collapse of African currencies, infrastructure and governance brought about by the structural adjustment programmes of the IMF imposed in the interest of ensuring debt repayment, led to the collapse of functioning states and the internecine wars in Somalia, Rwanda and the Great Lakes. We should never wish such a future onto our European friends.

The key to which scenario pans out, lies with those fighting in the streets of Athens, and soon, in Spain and Portugal. If we want to see a Europe emerge from this crisis as something that can also revive and inspire an engaged citizenry in a very vulnerable South Africa, then we should all be rooting for the Greeks. That is something we should bear in mind for the World Cup.      

Gentle is the director of the International Labour Research and Information Group (ILRIG), an NGO that produces educational materials for activists in social movements and trade unions.

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