Developments in the economic crisis
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?
Austerity
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.
Conclusion
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!