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State debt and the crisis in the Eurozone

“The fact that almost every state in the world is in debt – and the more powerful it is the bigger the debt – first of all begs the following questions: why have these states permanently contracted debt? Why is it that most of the states in the world were able to pile up their debt over such a long time without any problems? Who are the creditors and why have they readily and increasingly accommodated loans / lent money to the states?”

From the Wine and Cheese appreciation society of greater London. The first of a four part series explaining how state debt functions and its role in the eurozone crisis.

Fantastic This American Life radio show on a ProPublica and NPR investigation into Magnetar, a hedge fund which made billions after helping to create the CDO market, whilst betting on its collapse. Collaterlaised Debt Obligations (CDOs) are the (sub-prime) mortgage backed securities which went toxic and brought down the financial system.

“Magnetar had figured out how dysfunctional the system had become – and was going to exploit that dysfunction.”

Iceland has had a rocky time. All but declared bankrupt, it’s three major private banks nationalised in less than a week. Pressured by the IMF and the European Union to re-pay a $10 billion bail-out equivalent to each of it’s 310,000 citizens paying 100 Euros a month for 15 years with 5.5% interest [1], and $5 billion to Britain and the Netherlands in compensation to those who lost their savings in ‘Icesave’ accounts.

But a refusal to accept that “citizens had to pay for the mistakes of a financial monopoly” drove committed opposition to such a settlement.[2] First the coalition government fell after intense public protest – now known as the ‘Household Revolution’.Then the Icelandic president refused to ratify a repayment plan without a referendum. In a first referendum held in March 2010, 93% voted against repayment, and a second referendum from April 2011 brought back 59% against repayment.[3]

The government launched an investigation, by the Office of the Special Prosecutor (OSP), to seek and prosecute those responsible for the financial crisis. The ex-president of Kaupthingbank, Sigurdur Einarsson, had an Interpol international arrest warrant out for him for some time[4], before returning to Iceland to face interrogation by the OSP.[5] In September 2010, the former Prime Minister, Geir H. Haarde was charged with negligence and mismanagement in the run up to the 2008 economic collapse.[6] With a team of 16, special legislation passed granting it total access to the banks’ records, and a commitment to ‘asset tracking’, [7] the OSP makes Iceland the one country with a concerted programme to prosecute bankers and pursue debt repayment with reclaimed banks’ assets rather than the public purse.

Iceland’s resistance to the IMF and it’s refusal to place the burden of repayment onto citizens who had no control over the banks responsible for the financial crisis is unique. It sits strangely amongst the austerity programmes rolled out across Europe, the cuts to public spending and the privatisations which European populations are repeatedly told are ‘unavoidable’ if we are to re-pay ‘our’ financial-crisis incurred debts. It seems that Iceland has not only adopted the approach of ‘can’t pay, won’t pay’, but of at least attempting to place the burden onto those responsible. Perhaps this tiny country presents a large example to the rest of Europe.

I’d like to recommend two items published on the Transnational Institute’s website as introductory reading on the sovereign debt crisis in Europe.

An article by Maricia Frangakis, titled ‘Greece marks failure of EU integration’, provides a good overview of the situation in Greece.

“The ‘bail-outs’ provided by the EU and the IMF do not solve the problem of over-indebtedness. In fact, they make it worse. This is because the austerity measures to which they are tied intensify the recession of the Greek economy. While GDP is shrinking, the ratio of both the public deficit and debt increase. Further, the ongoing speculation against Greek government bonds keeps increasing the interest rates and therefore the burden of the debt.”

Second an interview with Susan George, by Nick Buxton, gives a wider view of structural problems at the EU level.

“The European Central Bank is the obstacle to success, not the Euro per se. The ECB doesn’t lend to governments but to banks, at 1% or less, and then banks lend to governments—short term Greek and Irish debt has “junk” status and is now priced at 20%.”

Enjoy.

Great article by Ramaa Vasudevan, an economist from Colorado State University, originally published in Dollars & Sense in August 2008, explaining ‘financialisation’: “the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions” (this definition is from University of Massachusetts economist Gerald Epstein).

Vasudevan argues that traditional conceptions of finance as the ‘mediator’ of capital – ensuring its allocation to production within the ‘real economy’ – have been dramatically transformed by processes of financialisation. Instead, finance increasingly operates to transform “future streams of income (from profits, dividends, or interest payments) into a tradable asset like a stock or a bond.” For example, the packaging of multiple mortgage contracts into a new financial asset (a collateralised debt obligation) which is sold to investors – who hav essentially invested into the future income stream of the household who have taken out the mortgage contract. This has elevated the economic, political and social power of ‘rentiers’ (those who make profit from ownership not production):

“The arena of finance can at times appear to be merely a casino—albeit a huge one—where everyone gets to place her bets and ride her luck. But the financial system carries a far deeper significance for people’s lives. Financial assets and liabilities represent claims on ownership and property; they embody the social relations of an economy at a particular time in history. In this sense, the recent process of financialization implies the increasing political and economic power of a particular segment of the capitalist class: rentiers. Accelerating financial transactions and the profusion of financial techniques have fuelled an extraordinary enrichment of this elite.”

Secondly, financialisation means increased consumer debt – “credit as an individualistic means of addressing wage stagnation” – which results in a form of “social coercion that erodes working-class solidarity”.

Read the full article here.

David Runciman examines Nicholas Shaxson’s Treasure Islands: Tax Havens and the Men who Stole the World in the London Review of Books.

“Shaxson’s book explains how and why London became the centre of what he calls a ‘spider’s web’ of offshore activities (and in the process such a comfortable home for the likes of Saif Gaddafi). It is because offshore is the offshoot of an empire in decline. It perfectly suited a country with the appearance of grandeur and traditionally high standards, but underneath it all a reek of desperation and the pressing need for more cash…”

“…the rise of the City [of London] as the favourite place for foreigners to park their money, no matter who they were or where it came from, is related to imperial decline. After the Second World War, sterling still financed much of global trade, but the British economy was no longer able to sustain the value of the pound against the dollar. In the aftermath of Suez, which caused a run on the pound, the government attempted to impose curbs on the overseas lending of London’s merchant banks. The response of the banks, with the connivance of the Bank of England, was to shift their international lending into dollars. The result was the creation of the so-called ‘Eurodollar market’ – which was effectively an offshore haven. Because the trade was happening in dollars, the British saw no need to tax or regulate it; because it was happening in London, the Americans had no means to tax or regulate it.”

See here for the full article.

A new report by Spinwatch, titled ‘How Goldman Sachs Rigs the Game’, has been published. Revealing multiple links between the investment bank and the Conservative Party, the report exposes how the extensive lobbying activities of Goldman Sachs both in the UK and at the EU has allowed it to capture politicians and political processes to its own destructive advantage.

Interesting Daily Mirror investigation, added to by Ann Pettifor’s investigation of the ‘bank-owned-state’, details the banking and finance backgrounds, and continuing employment, of Tory MPs and peers.

“Altogether there are more Tory MPs who have been on the banks’ payroll than the total number of Lib Dem politicians.” 134 of the 498 Tory MPs and peers “have been or are employed in the financial sector”.

And we are supposed to be surprised that the government fails to restrict bankers bonuses? Or indeed takes any longer-term, substantial, effective, world-changing action to reign in the destructive power of the banking and finance sector…?

The ethical bank? The Co-op Bank and aviation

Article from the Manchester Mule which reveals the Co-operative bank’s provision of £40 million over the next five years to the Manchester Airports Group. The bank prides itself on its ‘Ethical Investment Policy’ which places the prevention of climate change at its heart. Manchester Airport is responsible for 5 million tonnes of carbon dioxide emissions every year which will increase if plans to expand the airport and double passenger numbers by 2030 go ahead. These plans will result in the demolition of local homes.

So to that part of the population who are working, austerity means some will be working harder, longer, some will be working less, and shorter, but all will be reproducing a lesser social basis for reproduction. All that was substantial will become marginal, and the marginal will become substantially greater.

For that part of the population retired and receiving a pension, fewer will retire; fewer will receive pensions, those that do will receive less.

For that part of the population born into poverty, deprived of a basic, necessary education, of proper medical care, even more will be born into greater poverty. Even more will be cheated of and by an even poorer education. Even more will be excluded from already inadequate medical care.

All value must be devalued. “Everything must go!” is the slogan of this bourgeoisie’s staying in business forced liquidation sale.

Essential reading at The Wolf Report

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