Tags: European Union, Eurozone, France, Greece, Internnational Monetary Fund, NATO
In the Greek elections on Sunday May 6, 2012, the two main parties that had governed the country since the end of the dictatorship–New Democracy and Pasok–and both of which has subscribed to the stringent austerity measures imposed on Athens for a bailout suffered a stunning set-back. Used to dominating the polls, together they received just one-third of the votes. Two-thirds of the Greek electorate voted for parties–including a neo-Nazi party, Golden Dawn–that rejected the austerity measures, though most Greeks still want to remain within the Eurozone. Alexis Tsipras, the leader of the Syriza coalition of green and left parties that placed second in the elections, and was the big winner declared the austerity plan dead. That is certainly what the Greek voters indicated though the German Chancellor, Angela Merkel and the European Commission President, José Manuel Durão Barroso claimed that agreements are binding and cannot be negotiated after every election. By what perverted logic does this hold: last year, when the stringent bailout conditions were imposed on Greece by the ‘troika’–the European Union, the European Central Bank, and the International Monetary Fund–the then Greek Prime Minister Giorgios Papandreou wanted to hold a referendum. Merkel and French President Nicolas Sarkozy, forced him to rescind the referendum. The bailout agreement, then, was foisted on the Greek people not only without their consent, but on the explicit condition that their consent not be solicited. No such international agreement can have a shred of legitimacy and the Greeks voted, in their millions, to reject it!
It was, Albert Einstein I think who said that the clearest sign of insanity is to persist in doing something that has failed repeatedly. Clearly, austerity programs have not worked. In Greece, unemployment stands at 21 per cent and the OECD estimates that real wages have fallen by 25 per cent in the last two years.According to the IMF, this will be the fifth straight year of recession for Greece to be followed by a year of stagnation. Even if the Greek government were to implement the austerity measures, the IMF estimates that in 2017, the public debt to GDP ratio would be 137 per cent, higher than at the onset of the current crisis. And thus far, IMF projections have been overly optimistic!
None of this should be surprising! After all if incomes are slashed and taxes raised, people are not going to have the resources to buy as many goods and services as they did earlier. This will lead to a contraction of the market and greater unemployment–which in turn will lead to further contractions in demand and the economy will go into a tailspin. Even Antonis Samaras, leader of the conservative New Democracy party and one who adheres to the austerity pact acknowledges that fully a fourth of all Greek companies have closed their doors since 2009 and a further third of the companies do not pay their workers on time!
What is surprising is that by insisting that Greece implement further austerity measures–and even suspend the rights of collective bargaining–the ‘troika’ has excluded Greece’s military expenditures from the scalpel. As Paul Haydon reported in the Guardian:
In 2006, as the financial crisis was looming, Greece was the third biggest arms importer after China and India. And over the past 10 years its military budget has stood at an average of 4% of GDP, more than £900 per person. If Greece is in need of structural reform, then its oversized military would seem the most logical place to start. In fact, if it had only spent the EU average of 1.7% over the last 20 years, it would have saved a total of 52% of its GDP – meaning instead of being completely bankrupt it would be among the more typical countries struggling with the recession.
In the five years to 2010, Greece was the largest customer for Germany’s arms industry. And in 2010, when the first bailout was being negotiated for Greece, Athens spent 7.1 billion euros on arms even as it slashed 1.8 billion in social spending. Daniel Cohn-Bendit, the European member of parliament, even claimed that Papanreou had told him that German and French support for the bailout was specifically linked to continued military spending. In 2010, at 3 percent of its budget on military spending, Athens allocated a higher percentage of its spending to defense than any NATO state other than the United States.
While it is obvious why Germany and France don’t want Greece to cut its defense spending, why are Greek politicians not raising this as an issue?
Tags: 21st Century Capitalism, Euro, European Union, financial crisis, Germany, Greece, Iceland, Internnational Monetary Fund, Ireland, Libya, NATO, neo-liberalism, Netherlands, Portugal, Spain, United Kingdom, US hegemony, US politics, World-economy
In the midst of the NATO campaign against Libya and the budget deal between Republicans and the Democrats in the US, a far more historically significant event appears to have fallen off the radar. On April 9, 2011, the people of Iceland voted for the second time to reject a government proposal for Iceland taxpayers to repay some €4 billion to the governments of Britain and the Netherlands which had compensated their domestic depositors in the collapsed online bank, Icesave. Initially, the British and Dutch governments had pressured the Iceland government to agree to repay them over fifteen years at a 5.5 percent annual interest–which was estimated to cost each household in the tiny island nation about €45,000 over the period. This was rejected by 91 percent of the voters in a referendum in March 2010. After subsequent negotiations, London and Amesterdam agreed to lower the interest to 3.2 percent and stretch the repayment period to 30 years between 2016 and 2046. The deal was accepted by a large majority of 44 in favor and 16 opposed in the Althingi, Iceland’s parliament, which also rejected a clause to submit the bill to another referendum. Nevertheless, as the President, Olafur Ragnar Grimsson, refused to sign the bill, it was automatically subject to a referendum wherein it was rejected by almost 60 percent of the voters.
The Dutch and British governments–which had used anti-terrorist legislation to seize assets of the failed Icelandic banks–have threatened to scupper Iceland’s application to join the European Union and to take the island nation to court. Reykjavik has insisted that the two governments would get most of their money back and the assets of the Landsbanki bank which set up the Icesave operation would be sold and was expected to realize 90 percent of the Icesave debt. What was at issue in the referendum was not whether London and Amsterdam would be compensated or not–but whether private citizens should be expected to shoulder the burden of repayment of a bank’s debt in which they had no hand in incurring and from which they did not benefit. The threat to take Iceland to court is important because it is to frighten off other states which also face indebtedness due to the financial crisis like Greece, Ireland, and Portugal. It is simply the question of whether the bankers have to bear the burden of the bad loans they have extended.
Iceland is, in fact, a case study of neo-liberalism gone awry. Before the late 1990s, Iceland’s financial sector had been small and the banks were largely government-owned. In 1998, the two leading parties–the Independence Party and the Centre Party–embarked on a privatization of the banking sector, assigning Landsbanki to grandees of the Independence Party and Kaupthing to the Centre Party. A new private bank, Glitnir, was also set up merging several smaller banks. None of these banks had much experience in international finance, but like South Korean banks a decade earlier, these banks tapped into abundant cheap credit and easy capital mobility. Unlike the South Korean banks, their strong ties to political parties, the merger of commercial and investment banking, and low soveriegn debt meant that they got extremely high grades from the credit ratings agencies and as Robert Wade and Silla Sigurgeirsdottir note: “government policy was now subordinated to their ends.”
With the government relaxing mortgage rules to permit loans up to 90 percent of value, the banks rode the wave–by buying shares in each other they inflated share prices and enticed depositors to shift their savings to shares. In less than 10 years after the privatization of banks, Iceland had the fifth highest GDP in the world, 60 percent higher than that of the United States, and the assets of their banks was valued at 800 percent of Iceland’s GDP. As land prices soared, Icelanders loaded up on lower-interest yen- or Swiss-franc debt.
By 2006, Iceland’s current account deficit had soared to 20 percent of its GDP. Late in that year, Landsbanki established an online bank, Icesave, to attract deposits from overseas clients and by offering highly attractive interest rates, it raked in millions of pounds from England, and later millions of euros especially from the Netherlands. This was soon copied by the two other banks. These were established as ‘branches’ rather than as ‘subsidiaries‘ which meant that they were to be supervised by the icelandic Central Bank rather than regulators in Britain or the Netherlands. Because of Iceland’s obligations as a member of the European Economic Area to insure bank deposits, no one thought to worry about whether the Icelandic Central Bank had the capacity to oversee the vastly extended operations of the island’s three major banks.
This happy bubble burst in September 2008 when Lehman Brothers collapsed, within a fortnight of which the three big Icelandic banks collapsed and by November of that year the krona had fallen from its pre-crisis level of 70 to the euro to 190 to the euro, so sharply cutting the islanders’ purchasing power that the three McDonald’s franchises were forced to close as the cost of importing ingredients made the price of burgers prohibitive! The country’s stock market lost 98 percent of its value! If ever there was a definition of crisis, this was it. It was the first time in over 30 years that a ‘developed’ state had to seek assistance from the International Monetary Fund.
In the light of all this, Iceland’s voters have had the courage to face up to the crisis. It was the first country to kick out the government which had failed so spectacularly. Unlike its neighbor in the North Atlantic–Ireland which underwrote its own banking collapse and loader every household with €80,000 in debt–Iceland let the three banks go under and they imposed capital controls to prevent the flight of capital. Though unemployment in Iceland today is 7.5 percent in Iceland–up from 2 percent in 2002–but just over half of Ireland’s 13.6 percent. Though the krona lost almost half its value, inflation is down sharply and without having to pay back foreign creditors, its government finances are in much better shape than those of Greece, Ireland, or Portugal.
Tags: 21st Century Capitalism, Argentina, Global South, Internnational Monetary Fund, Latin America, World-economy
It is not surprising that stock markets responded to the sudden and untimely death of former Argentine President, Nestor Kirchner on Wednesday October 27, 2010 by a strong rally. Elected President in 2003, Kirchner was responsible for steering Argentina out of its pervasive debt crisis.
The immediate trigger to the crisis of 2001-02 was the refusal of the International Monetary Fund (IMF) to release a $1.3 billion loan that had already been approved to finance the Latin American state’s $142 billion external debt on the argument that the government of the then-president Fernando De La Rua had not cut government expenditures to levels demanded by the IMF. This was despite the fact that the government had already privatized social security and so stringently cut allocations to the provinces that many of them had had to resort to issuing their own scips.
That the Argentine government could not cut expenditures further was due to the fact that some 18 percent of the population was unemployed and a further 18 percent were underemployed. Following the withholding of the IMF loan, the government restricted withdrawals from private bank accounts to $250 a week–a move that resulted in massive demonstrations that drove the De La Rua out of office. This was followed by a period of deep political and economic stability with a sovereign debt default, a failed attempt to issue a new non-convertible currency, and a succession of four presidents in less that eighteen months before Kirchner was elected President in 2003.
Immediately on assuming office, Kirchner served notice that he was not going to accept the dictates of the IMF which were designed to favor foreign creditors and defaulted on loan payments to the IMF in September 2003–something that only “failed” states had done before because all others feared that the IMF could cut off lines of credit. Instead, Kirchner drove a tough bargain with international creditors arguing that since most of the loans were incurred by the private sector, these should not be socialized. Eventually, he struck a deal agreeing to pay 30 cents on the dollar.
After contracting for three months after the default, the economy grew at an annual rate of 8 percent, raising some 11 million, or 28 percent of the population out of poverty. This was done by the Kirchner government pursing a competitive and stable exchange rate, carefully monitoring interest rates, price controls, and targeted spending to benefit urban populations. In 2006, Kirchner announced that his government would use over a third of its foreign exchange reserves to pay off its debt to, and end its dependency on, the IMF: there is “no way in hell” that Argentina would return to the IMF, he said. He was able to quickly replenish Argentina’s foreign exchange reserves since Venezuela agreed to buy over $2.4 billion in Argentinian bonds.
Kirchner’s policies then also had a regional impact as he joined with Venezuela’s Hugo Chavez, Ecuador’s Rafael Correa, Bolivia’s Evo Morales, and Brazil’s Luiz Inacio Lula da Silva in streering Latin America away from neo-liberal policies that saw an end to Washington’s plans for a “Free Trade for the Americas.”
By flouting neoliberal orthodoxy, Kirchner was able to lift the Argentine economy and especially to lift millions of people from poverty by refusing to socialize private debt and refusing to succumb to pressures to further privatize and de-regulate the economy. After his term in office, his influence continued as his wife, Cristina Fernandez de Kirchner succeeded him as president, and was widely expected to let him stand again for the presidency in elections scheduled for 2011. Hence the stock market rally was in anticipation of the end or the era of Kirchners.