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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.

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