Greek debt crisis fuels fears of European sovereign default

[Hannah Bell]

New figures from the Greek statistics agency show that the country’s recession deepened in the second quarter. This was the seventh successive quarter registering a decline in economic growth. Growth fell by 1.8 percent, compared to the first three months of the year. This was worse than the 1.5 percent forecast in official estimates. In the first quarter of the year, gross domestic product (GDP) contracted 0.8 percent. Over the second quarter, public consumption declined 8.4 percent and private consumption by 4.2 percent. Over the past year, GDP has fallen by 3.7 percent.

Sinn warned, “We are in the second Greek crisis right now, today. The policy of forced ‘internal devaluation’, deflation, and depression could risk driving Greece to the edge of a civil war. It is impossible to cut wages and prices by 30 percent without major riots”.

Critical to establishing the €110 billion bailout was the fear among European governments that a default by Greece on its debt obligations might result in financial “contagion” in other countries, such as Portugal and Spain. Crucially, the money lent to Greece would go back to pay the banks, particular those in France, Germany and the UK, which collectively hold 80 percent of Greek sovereign debt. The UK is not part of the eurozone, but UK-based banks have lent money to Greece.

“Europe and the IMF are not so much providing Greece with fresh finance but, most of all, shielding the European financial system from up to 200 billion euros of losses that could result from a Greek default. Curiously, almost one quarter of Greek debt is located in the UK (and Irish) financial sector. The obvious beneficiaries of the Euro Area governments’ package are not Greek workers and citizens, who will suffer from severe budget cuts and recession, but financial centres such as the City of London.”

The Greek government hoped that the bailout would safeguard the economy against further pressure from global capital markets. Within the space of a few months, this strategy has already failed...

http://www.wsws.org/articles/2010/sep2010/gree-s14.shtml

[blindpig]

1. The proper response....

The joint meeting of the Secretariats of All Workers’ Militant Front (PAME), Nationwide Antimonopoly Rally of the Self-employed and the small Tradesman (PASEVE), All Farmers’ Militant Rally (PASY), Greek Women Federation (OGE) and Students' Militant Front (MAS), that took place yesterday in Athens, has been a significant step for the joint action and the coordination of employees, owners of small businesses, tradesmen, self-employed, small and medium sized farmers, women and students.

The first joint action of the mass organizations that participate in this initiative is the organisation of nationwide demonstrations on 23 September. The core of these demonstrations is the resistance to the plans of the government to increase the price of heating oil, as well as VAT and electricity rates. The government of PASOK along with the EU and the IMF has launched a permanent barbaric attack against the working class in order to serve the needs of the capital.

PAME, PASEVE and PASY organise on Saturday 11 September another mass rally in Thessaloniki, the second largest city n Greece, on the occasion of the International Trade Fair of Thessaloniki, where the Prime Minister announces every year the new measures in economy, which in fact constitute a new round of anti-labour measures and regulations in favour of the monopolies.

“Only through the struggle for a totally different path of development, namely for the people’s power, can the employees, the self-employed and the poor farmers ensure stable and permanent work, decent wages, satisfaction of their nutritional needs, healthcare, leisure and entertainment, the emancipation of women, the rights of the youth” stressed the mass organizations that struggle against the monopolies’ power. Furthermore, on November 7th regional and local elections will take place in Greece. The lists of “People’s Rally”, which are supported by KKE, are headed by militant forces of PAME, PASY, PASEVE and MAS.

[DoctorK]

3. how do they intend

to have their cake and eat it too?

"The core of these demonstrations is the resistance to the plans of the government to increase the price of heating oil, as well as VAT and electricity rates."

Will marching cause someone to send them heating oil for less than what someone else, somewhere else, will pay?
Greece has run enormous deficits for too long. They have borrowed from the future to increase consumption in the present. The future has arrived, and now they are faced with reducing consumption to pay for the past.

[blindpig]

4. That's a ruling class analysis..

What is going on is a crisis of capitalism with the financial sector leaning on government to bail out their sorry, over-reaching asses. Sound familiar? The difference between Greece and the US is that in Greece the working class is organized and ain't gonna take that shit laying down.

Mebbe after the Cat Food Commission is done we will buy a clue and take a few pages from the Greeks.

[DoctorK]

6. the problem is financing GOVT debt in Greece

"What is going on is a crisis of capitalism with the financial sector leaning on government to bail out their sorry, over-reaching asses. Sound familiar?"

The private sector, meaning individuals with their own savings (in the form of banks in other European countries), are refusing to buy the Greek government's debt without an adequate risk premium. That's why the spread between Greek and German bonds is so high. People expect the Germans, who cut their budget and having a growing economy, to repay money they lend them. There is fear the Greeks won't be able to repay the bonds they're issuing because they've become so indebted (the govt. lied about the scope of its deficits to qualify for the Euro). In short, the government has made promises it cannot pay. It has repeatedly borrowed to pay those promises to the point that it's ability to service that debt is at risk.


What you're alluding to as a 'crisis of capitalism' in America was actually a crisis of fractional reserve banking. Fractional reserve banking is fundamentally dishonest, and at its core a confidence game. The biggest mistake the Democrats made was using the full faith and credit of the United States taxpayer to backstop the fraud.

The solution to fractional reserve banking is to end legal tender laws and restore hard money and refuse to bail out firms that are insolvent with tax dollars.

[blindpig]

7. Sounds like the banker's problem to me.

If the Greeks refuse to pay what they gonna do? If the Greek government continues to put the squeeze on the people it is liable to be toppled by people who will tell the bankers to go fuck themselves. Will the Germans invade to secure the assets? We should have told the financiers the same. They are parasites of service only to the capitalists, they produce nothing of value, it takes workers to do that.

[FLPanhandle]

8. If the Greeks refuse to pay, the banks won't loan them money

That'll force an immediate balancing of income to spending. The cuts will be much worse that way.

It's hard to piss of the banks when you need to keep borrowing from them.

[blindpig]

9. Easy answer to that

Nationalize the Greek banks and let them take care of Greece's in country needs.

[friendly_iconoclast]

11. Autarky won't work. Greece is a food-importing nation.

They'll have to pay for that food with euros. No one will lend them euros, and the New Drachma will be Europe's version of the

Zimbabwe dollar.

[DoctorK]

12. not enough money in the 'greek banks'

"Nationalize the Greek banks and let them take care of Greece's in country needs."

You don't seem to understand. Greeks have been living beyond their means and not saving sufficiently to fund the expenditures of their government (Japan has very high government debt, but has also had very high savings rates to fund it without relying on external savings). The Greeks have relied on borrowing from UK, German and French banks (largely).
If they refuse to repay, the people saving money in UK, Germany, and France will refuse to lend them anymore (effectively being robbed of their savings by deadbeat Greeks). That is why the EU 'leaders' stepped in and setup the bail-out plan for Greece. They hoped to staunch the bleeding, and if the Greeks started living within their means, get their loans repaid.
What you're advocating, unwittingly, is the institution of austerity measures that outstrip the government's efforts to reign in spending.
As already noted. If they go back to the Drachma and continue spending the same way they'll have to make room on their notes for a lot of zeros to keep up with the ensuing inflation (which will punish the poor and those who save or lived on fixed incomes the most).

[DoctorK]

2. a distinction between Greece and the US, UK, and Japan

from the article:
"The International Monetary Fund has sought to play down the risk of a nation defaulting on its debt. The IMF said in a September 1 report that “current market indicators of default risk seem to reflect some market overreaction”.

This evaluation was in contradiction to the results of an IMF study that detailed governmental debt sustainability internationally. The study researchers concluded that many countries are now running unsustainable levels of debt and have virtually no “fiscal space”. Fiscal space was defined by the IMF as the difference between the current level of public debt and a debt limit implied by each country’s own record of fiscal adjustment. The fiscal space indices essentially measure how much scope a nation has to borrow from financial institutions before the markets shuts off the supply of funds by demanding unsustainable interest rates.

“In particular, Greece, Italy, Japan, and Portugal appear to have the least fiscal space, with Iceland, Ireland, Spain, the United Kingdom, and the United States also constrained in their degree of fiscal manoeuvre” the study said."

The US, UK, and Japan don't have to risk default, per se. They have their own central banks that can always print money to buy government debt, with the attendant reduction in purchasing power of that money. Greece can't inflate it's problem away because it is a member of the Euro, and does not have control of the ECB.
Greece thereby isn't threatened by hyperinflation, but is constrained by the willingness of people to lend them money.
It sounds like the Greeks are considering a withdrawl from the Euro, and the utilization of inflation to mask the reduction in wages that will result fom their overspending.
Whether they reduce wages, or inflate their currency to achieve the same in a less perceivable way, the reckoning is coming.

[Xolodno]

5. eeessshhh....

It sounds like the Greeks are considering a withdrawl from the Euro, and the utilization of inflation to mask the reduction in wages that will result fom their overspending.
Whether they reduce wages, or inflate their currency to achieve the same in a less perceivable way, the reckoning is coming.


If your the average Greek Joe Gyro and the country goes off the Euro in order to inflate the currency to pay for its debt, what incentive do you have for keeping Greek currency? You will hold on to every euro you get and exchange them to another stable currency as soon as possible. And if a significant portion of the populace did this...ouch. They should have done this as a first course of action, while the populace still had some trust in their government...not when they don't.

[friendly_iconoclast]

10. It's a recipe for hyperinflation. No one in their right mind will want New Drachmas

Zimbabwe on the Med....