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Monthly Archives: December 2011

Clear article by John Lanchester in the London Review of Books on Greek debt and the threat posed by Greece’s default:

Any abrupt form of Greek default, caused by the lenders’ failing to lend or the Greeks’ missing a bond payment, would be what is known as ‘disorderly’, an eventuality that would play out as anything from a mild local spasm to a full-scale continent-wide meltdown, featuring the collapse first of the euro and then of the EU itself. The collapse of Lehman Brothers in September 2008 was one of these ‘credit events’. It is in their nature that they are chaotic and unpredictable, and all the more so because the fundamentals of the economic order, as constituted in 2008, are still intact. Who owns that Greek debt? As I’ve said, mainly French and German banks. Yes, but banks insure their debt via the use of complex financial instruments. Insure it with whom? Don’t know: some of it is insured with British banks as counter-parties to the risk, but that risk will be insured in its turn, so that the identity of the person holding the parcel when its last layer of wrapping comes off is a mystery. That mysteriousness was the thing that made Lehman’s collapse turn instantly into a systemic crisis.

Whilst some EU governments push for further loans and austerity, and further-reaching crisis, non-compliance and resistance within Greece is spreading like wildfire. The Greek people know that they face decades of sever austerity, working harder for less with removed social security, and that the extreme interest rates (5.2%) imposed for the so-called ‘bailout’ loans do not simply provide some insurance for lenders. They are also helping to keep French and German banks in business. Banks which the same EU governments have provided taxpayer-backed guarantees against Greek default to..

“the outstanding Greek debt is mainly owned by French and German banks. This is why the Western European governments are especially keen on the ‘bailout’: it’s helping to keep their banks solvent…

German savings go to German banks to lend to other countries so that they can buy German goods from German companies who then save their earnings in German banks who lend it to … and so on.”

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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.